NCCR FINRISK

Displaying 1-23 of 23 results

  • White Papers // Jun 2011

    The Persistent Negative CDS-Bond Basis During The 2007/08 Financial Crisis

    This papers studies price discrepancies between CDS and bonds spreads, i.e. the basis, for a sample of investment-graded US firms. In normal market conditions the basis is approximately zero. During the crisis 2007/08, due to funding liquidity shortage and increased risk in the financial sector, which exposes protection buyers to...

    Provided By NCCR FINRISK

  • White Papers // Jun 2011

    The Effect Of Proactive Adaptation On Green Investment

    Climate change is one of the greatest challenges facing our planet in the foreseeable future and despite the urgency of the situation global GHG emissions are still increasing. In this paper, and since future climate changes appear now unavoidable to some extent, adaptation measures have recently gained a new political...

    Provided By NCCR FINRISK

  • White Papers // Jun 2011

    Investing In A Global World

    The authors examine active retail mutual funds and institutional products with a mandate to invest in international equity markets between 1991 and 2009. Using global and regional factor models, they find no reliable evidence of alphas in the aggregate or on average. The right tail of the distribution contains some...

    Provided By NCCR FINRISK

  • White Papers // Feb 2011

    Variance Risk, Financial Intermediation, And The Cross-Section Of Expected Option Returns

    The authors explore the pricing of variance risk by decomposing stocks' total variance into systematic and idiosyncratic return variances. While systematic variance risk exhibits a negative price of risk, common shocks to the variances of idiosyncratic returns carry a large positive risk premium. This implies investors pay for insurance against...

    Provided By NCCR FINRISK

  • White Papers // Jan 2011

    Financial Integration, Capital Misallocation And Global Imbalances

    The paper shows that in a stylized model with two countries, characterized by different levels of financial development, the following facts can be replicated: persistent current account surpluses and high TFP growth in China. Because of liquidity shocks and credit constraints, investment by entrepreneurs with long-term projects is depressed. The...

    Provided By NCCR FINRISK

  • White Papers // Nov 2010

    Risk-Taking Incentives, Governance, And Losses In The Financial Crisis

    This paper studies the extent to which risk-taking incentives of CEOs and other governance features in a range of years prior to the recent financial crisis were related to the write-downs of U.S. financial institutions during the crisis. The authors document that institutions whose CEOs had particularly strong risk-taking incentives,...

    Provided By NCCR FINRISK

  • White Papers // Nov 2010

    The Relationship Between Credit Default Swap And Cost Of Equity Capital

    The authors want to assess the relationship between the equity and the debt cost of capital. Using a very simple dividend discount model they compute the implied discount rate and they compare it with the corresponding premium on the corporate credit default swap using a cointegration approach. They demonstrated the...

    Provided By NCCR FINRISK

  • White Papers // Nov 2010

    Consistent Valuation Of Project Finance And LBO's Using The Flows-To-Equity Method

    A common method of valuing the equity in leveraged transactions is the flows-to-equity method whereby the free cash flow available to equity holders is discounted at the cost of equity. This method uses a standard definition of equity free cash flow, but the cost of equity varies over time as...

    Provided By NCCR FINRISK

  • White Papers // Aug 2010

    Capital Supply Uncertainty, Cash Holdings, And Investment

    The authors develop a model of real investment and cash holdings in which firms face uncertainty regarding their ability to raise funds in the capital markets and have to search for investors when raising outside capital. They provide an explicit characterization of the optimal investment, cash management, and dividend policies...

    Provided By NCCR FINRISK

  • White Papers // Jun 2010

    Optimal Securitization With Heterogeneous Investors

    The authors solve the problem of optimal securitization for an issuer facing heterogeneous investors with arbitrary time and risk preferences. They show that the optimal securitization is characterized by multiple nonlinear tranches, and each investor gets a portfolio of these tranches. In particular, when all agents have CARA utilities, the...

    Provided By NCCR FINRISK

  • White Papers // Jun 2010

    Money And Liquidity In Financial Markets

    The authors argue that there is a connection between the interbank market for liquidity and the broader financial markets, which has its basis in demand for liquidity by banks. Tightness in the interbank market for liquidity leads banks to engage in what they term "Liquidity pull-back," which involves selling financial...

    Provided By NCCR FINRISK

  • White Papers // May 2010

    Economic Uncertainty, Disagreement, And Credit Markets

    Using a structural credit risk model with heterogeneous beliefs, this paper derives testable implications for the role of common and firm specific components of economic uncertainty in the determination of equilibrium credit spreads and asset prices. In an economy where agents with different subjective perception of economic uncertainty disagree about...

    Provided By NCCR FINRISK

  • White Papers // May 2010

    Credit Supply And Corporate Policies

    This paper develops a model of corporate investment and financing decisions that differs from previous contributions by recognizing that firms face uncertainty regarding their future access to credit markets and may have to search for creditors when raising debt financing. The authors show that accounting for credit supply uncertainty is...

    Provided By NCCR FINRISK

  • White Papers // May 2010

    Credit Supply And The Price Of Housing

    The authors show that since 1994, branching deregulations in the U.S have significantly affected the supply of mortgage credit, and ultimately house prices. With deregulation, the number and volume of originated mortgage loans increase, while denial rates fall. But the deregulation has no effect on a placebo sample, formed of...

    Provided By NCCR FINRISK

  • White Papers // Feb 2010

    Corporate Investment And Financing Under Asymmetric Information

    The authors develop a dynamic model of corporate investment and financing decisions in which corporate insiders have superior information about the firm's growth prospects. They show that firms with positive private information can credibly signal their type to outside investors using the timing of corporate actions and their debt-equity mix....

    Provided By NCCR FINRISK

  • White Papers // Jan 2010

    Short Selling Regulation After The Financial Crisis - First Principles Revisited

    This paper examines the recent regulatory developments with regard to short selling. Short selling regulation is an important factor in firm governance because it affects the way in which firms are subject to market discipline. As the financial crisis has attracted regulators' notice to short selling once again, it is...

    Provided By NCCR FINRISK

  • White Papers // Nov 2009

    Evolutionary Finance And Dynamic Games

    The paper examines a game-theoretic evolutionary model of an asset market with endogenous equilibrium asset prices. Assets pay dividends that are partially consumed and partially reinvested. The investors use general, adaptive strategies (portfolio rules), distributing their wealth between assets, depending on the exogenous states of the world and the observed...

    Provided By NCCR FINRISK

  • White Papers // Aug 2009

    Robust Linkages Between CDS And Credit Spreads

    The authors propose a new statistical technique, namely the wild bootstrap base method, to study the relationship between the CDS and the bond credit spreads. The finite sample properties of this statistical methodology are studied in several numerical experiments. They next apply this technique to a large sample of US...

    Provided By NCCR FINRISK

  • White Papers // Jul 2009

    The Less You Know, The More You Are Afraid Of? A Survey On Risk Perception Of Investment Products

    The authors conducted a survey on risk perception of investment products in the German-speaking area of Switzerland. Unlike the typical two-factor structure documented in the previous literature, they found that the knowledge-related scales were highly correlated with the risk-related scales, whereas the correlation between perceived risk and historical risk measures...

    Provided By NCCR FINRISK

  • White Papers // Jun 2009

    Credit Migration Risk Modelling

    The authors consider the modelling of credit migration risk and the pricing of migration derivatives. To construct a Point-In-Time (PIT) rating migration matrix as the underlying value for derivative pricing they show first that the Affine Markov Chain models is not sufficient to generate PIT migration matrices in both, an...

    Provided By NCCR FINRISK

  • White Papers // Jun 2009

    A Credit Risk Model Incorporating Microstructural Dependencies And Stochastic Recovery

    A credit risk model for determining aggregated portfolio losses is suggested. Beside the common macrostructural dependencies between asset and recovery value, the authors incorporate possible inter-firm relations among the obligors of the portfolio. Through this channel they also establish related default probabilities and correlation between probability of default and loss...

    Provided By NCCR FINRISK

  • White Papers // Dec 2008

    The Dynamics Of Investment And Financing Under Asymmetric Information

    This paper develops a tractable real options framework to analyze the effects of asymmetric information on investment and financing decisions when firms require external funds to finance investment. The authors' analysis shows that corporate insiders can signal their private information to outside investors using the timing of investment and/or the...

    Provided By NCCR FINRISK

  • White Papers // Nov 2008

    Probability Misestimation And Preferences In Financial Investment Decision

    The authors study the influence of systematic probability misestimation on complex financial investment decisions on the context of structured financial products. Structured products have in recent years become more and more complex. They study the question whether this complexity might be a sophisticated method to exploit systematic biases in probability...

    Provided By NCCR FINRISK

  • White Papers // Jun 2011

    The Effect Of Proactive Adaptation On Green Investment

    Climate change is one of the greatest challenges facing our planet in the foreseeable future and despite the urgency of the situation global GHG emissions are still increasing. In this paper, and since future climate changes appear now unavoidable to some extent, adaptation measures have recently gained a new political...

    Provided By NCCR FINRISK

  • White Papers // May 2010

    Economic Uncertainty, Disagreement, And Credit Markets

    Using a structural credit risk model with heterogeneous beliefs, this paper derives testable implications for the role of common and firm specific components of economic uncertainty in the determination of equilibrium credit spreads and asset prices. In an economy where agents with different subjective perception of economic uncertainty disagree about...

    Provided By NCCR FINRISK

  • White Papers // Jun 2009

    A Credit Risk Model Incorporating Microstructural Dependencies And Stochastic Recovery

    A credit risk model for determining aggregated portfolio losses is suggested. Beside the common macrostructural dependencies between asset and recovery value, the authors incorporate possible inter-firm relations among the obligors of the portfolio. Through this channel they also establish related default probabilities and correlation between probability of default and loss...

    Provided By NCCR FINRISK

  • White Papers // Jun 2009

    Credit Migration Risk Modelling

    The authors consider the modelling of credit migration risk and the pricing of migration derivatives. To construct a Point-In-Time (PIT) rating migration matrix as the underlying value for derivative pricing they show first that the Affine Markov Chain models is not sufficient to generate PIT migration matrices in both, an...

    Provided By NCCR FINRISK

  • White Papers // Aug 2009

    Robust Linkages Between CDS And Credit Spreads

    The authors propose a new statistical technique, namely the wild bootstrap base method, to study the relationship between the CDS and the bond credit spreads. The finite sample properties of this statistical methodology are studied in several numerical experiments. They next apply this technique to a large sample of US...

    Provided By NCCR FINRISK

  • White Papers // May 2010

    Credit Supply And Corporate Policies

    This paper develops a model of corporate investment and financing decisions that differs from previous contributions by recognizing that firms face uncertainty regarding their future access to credit markets and may have to search for creditors when raising debt financing. The authors show that accounting for credit supply uncertainty is...

    Provided By NCCR FINRISK

  • White Papers // May 2010

    Credit Supply And The Price Of Housing

    The authors show that since 1994, branching deregulations in the U.S have significantly affected the supply of mortgage credit, and ultimately house prices. With deregulation, the number and volume of originated mortgage loans increase, while denial rates fall. But the deregulation has no effect on a placebo sample, formed of...

    Provided By NCCR FINRISK

  • White Papers // Nov 2010

    The Relationship Between Credit Default Swap And Cost Of Equity Capital

    The authors want to assess the relationship between the equity and the debt cost of capital. Using a very simple dividend discount model they compute the implied discount rate and they compare it with the corresponding premium on the corporate credit default swap using a cointegration approach. They demonstrated the...

    Provided By NCCR FINRISK

  • White Papers // Nov 2008

    Probability Misestimation And Preferences In Financial Investment Decision

    The authors study the influence of systematic probability misestimation on complex financial investment decisions on the context of structured financial products. Structured products have in recent years become more and more complex. They study the question whether this complexity might be a sophisticated method to exploit systematic biases in probability...

    Provided By NCCR FINRISK

  • White Papers // Dec 2008

    The Dynamics Of Investment And Financing Under Asymmetric Information

    This paper develops a tractable real options framework to analyze the effects of asymmetric information on investment and financing decisions when firms require external funds to finance investment. The authors' analysis shows that corporate insiders can signal their private information to outside investors using the timing of investment and/or the...

    Provided By NCCR FINRISK

  • White Papers // Jan 2010

    Short Selling Regulation After The Financial Crisis - First Principles Revisited

    This paper examines the recent regulatory developments with regard to short selling. Short selling regulation is an important factor in firm governance because it affects the way in which firms are subject to market discipline. As the financial crisis has attracted regulators' notice to short selling once again, it is...

    Provided By NCCR FINRISK

  • White Papers // Nov 2009

    Evolutionary Finance And Dynamic Games

    The paper examines a game-theoretic evolutionary model of an asset market with endogenous equilibrium asset prices. Assets pay dividends that are partially consumed and partially reinvested. The investors use general, adaptive strategies (portfolio rules), distributing their wealth between assets, depending on the exogenous states of the world and the observed...

    Provided By NCCR FINRISK

  • White Papers // Feb 2010

    Corporate Investment And Financing Under Asymmetric Information

    The authors develop a dynamic model of corporate investment and financing decisions in which corporate insiders have superior information about the firm's growth prospects. They show that firms with positive private information can credibly signal their type to outside investors using the timing of corporate actions and their debt-equity mix....

    Provided By NCCR FINRISK

  • White Papers // Nov 2010

    Risk-Taking Incentives, Governance, And Losses In The Financial Crisis

    This paper studies the extent to which risk-taking incentives of CEOs and other governance features in a range of years prior to the recent financial crisis were related to the write-downs of U.S. financial institutions during the crisis. The authors document that institutions whose CEOs had particularly strong risk-taking incentives,...

    Provided By NCCR FINRISK

  • White Papers // Jun 2010

    Money And Liquidity In Financial Markets

    The authors argue that there is a connection between the interbank market for liquidity and the broader financial markets, which has its basis in demand for liquidity by banks. Tightness in the interbank market for liquidity leads banks to engage in what they term "Liquidity pull-back," which involves selling financial...

    Provided By NCCR FINRISK

  • White Papers // Nov 2010

    Consistent Valuation Of Project Finance And LBO's Using The Flows-To-Equity Method

    A common method of valuing the equity in leveraged transactions is the flows-to-equity method whereby the free cash flow available to equity holders is discounted at the cost of equity. This method uses a standard definition of equity free cash flow, but the cost of equity varies over time as...

    Provided By NCCR FINRISK

  • White Papers // Jun 2011

    The Persistent Negative CDS-Bond Basis During The 2007/08 Financial Crisis

    This papers studies price discrepancies between CDS and bonds spreads, i.e. the basis, for a sample of investment-graded US firms. In normal market conditions the basis is approximately zero. During the crisis 2007/08, due to funding liquidity shortage and increased risk in the financial sector, which exposes protection buyers to...

    Provided By NCCR FINRISK

  • White Papers // Jan 2011

    Financial Integration, Capital Misallocation And Global Imbalances

    The paper shows that in a stylized model with two countries, characterized by different levels of financial development, the following facts can be replicated: persistent current account surpluses and high TFP growth in China. Because of liquidity shocks and credit constraints, investment by entrepreneurs with long-term projects is depressed. The...

    Provided By NCCR FINRISK

  • White Papers // Feb 2011

    Variance Risk, Financial Intermediation, And The Cross-Section Of Expected Option Returns

    The authors explore the pricing of variance risk by decomposing stocks' total variance into systematic and idiosyncratic return variances. While systematic variance risk exhibits a negative price of risk, common shocks to the variances of idiosyncratic returns carry a large positive risk premium. This implies investors pay for insurance against...

    Provided By NCCR FINRISK

  • White Papers // Jul 2009

    The Less You Know, The More You Are Afraid Of? A Survey On Risk Perception Of Investment Products

    The authors conducted a survey on risk perception of investment products in the German-speaking area of Switzerland. Unlike the typical two-factor structure documented in the previous literature, they found that the knowledge-related scales were highly correlated with the risk-related scales, whereas the correlation between perceived risk and historical risk measures...

    Provided By NCCR FINRISK

  • White Papers // Jun 2010

    Optimal Securitization With Heterogeneous Investors

    The authors solve the problem of optimal securitization for an issuer facing heterogeneous investors with arbitrary time and risk preferences. They show that the optimal securitization is characterized by multiple nonlinear tranches, and each investor gets a portfolio of these tranches. In particular, when all agents have CARA utilities, the...

    Provided By NCCR FINRISK

  • White Papers // Aug 2010

    Capital Supply Uncertainty, Cash Holdings, And Investment

    The authors develop a model of real investment and cash holdings in which firms face uncertainty regarding their ability to raise funds in the capital markets and have to search for investors when raising outside capital. They provide an explicit characterization of the optimal investment, cash management, and dividend policies...

    Provided By NCCR FINRISK

  • White Papers // Jun 2011

    Investing In A Global World

    The authors examine active retail mutual funds and institutional products with a mandate to invest in international equity markets between 1991 and 2009. Using global and regional factor models, they find no reliable evidence of alphas in the aggregate or on average. The right tail of the distribution contains some...

    Provided By NCCR FINRISK