Credit risk

About: Credit risk is a research topic. Over the lifetime, 18595 publications have been published within this topic receiving 382866 citations.

‘Lending by numbers’: credit scoring and the constitution of risk within American consumer credit

Abstract: This paper examines how statistical credit-scoring technologies, sanctioned by the state in the interests of promoting equality, became applied by lenders to the problem of controlling levels of default within American consumer credit. However, these technologies, constituting consumers as ‘risks’, are themselves seen to be problematic, subject to their own conceived sets of methodological, procedural and temporal risks. Nevertheless, as this article will show, such technologies have increasingly been applied to other areas of consumer lending, thus interpreting a wider array of operational contingencies in terms of risk. Finally, it is argued that, since the 1980s, the constitution of credit consumers as risks has been deployed to new ends through technologies of ‘profit scoring’ and new practices of ‘risk pricing’.

Comparative Credit Risk in Islamic and Conventional Banks

Abstract: This study considers whether Islamic banks and conventional banks have different levels of credit risk. One problem with existing research in this area is the dominance of accounting information to assess credit risk, and this could be especially misleading in the case of Islamic banking. Using Merton’s distance-to-default (DD) model, a market-based credit risk measure, we evaluate the credit risk of 156 conventional banks and 37 Islamic banks across 13 countries between 2000 and 2012. We also calculate the accounting information-based Z-score and nonperforming loan (NPL) ratio for the purpose of comparison. Our results show that Islamic banks have significantly lower credit risk than conventional banks when measuring credit risk with the DD. In contrast, and as expected, Islamic banks exhibit much higher credit risk using the Z-score and NPL ratio. Overall, the findings suggest that the methodology used plays a significant role in assessing the apparent credit risk of Islamic banks.

The Cross‐Section of Credit Risk Premia and Equity Returns

Abstract: We explore the link between a firm's stock returns and credit risk using a simple insight from structural models following Merton (1974): risk premia on equity and credit instruments are related because all claims on assets must earn the same compensation per unit of risk. Consistent with theory, we find that firms' stock returns increase with credit risk premia estimated from CDS spreads. Credit risk premia contain information not captured by physical or risk-neutral default probabilities alone. This sheds new light on the �distress puzzle��the lack of a positive relation between equity returns and default probabilities�reported in previous studies.

Credit risk modeling with affine processes

Abstract: This article combines an orientation to credit risk modeling with an introduction to affine Markov processes, which are particularly useful for financial modeling. We emphasize corporate credit risk and the pricing of credit derivatives. Applications of affine processes that are mentioned include survival analysis, dynamic term-structure models, and option pricing with stochastic volatility and jumps. The default-risk applications include default correlation, particularly in first-to-default settings. The reader is assumed to have some background in financial modeling and stochastic calculus.

Distance Still Matters: Evidence from Municipal Bond Underwriting

Abstract: Using a sample of municipal bond offerings, I find that “local” investment banks have substantial comparative and absolute advantages over nonlocal counterparts--locals charge lower fees and sell bonds at lower yields. Local investment banks’ strongest comparative advantage is at underwriting bonds with higher credit risk and bonds not rated by rating agencies. These findings suggest that high-risk bonds and nonrated bonds are more difficult to evaluate and market, and that investment banks with a local presence are better able to assess “soft” information and place difficult bond issues.