Topic
Credit risk
About: Credit risk is a research topic. Over the lifetime, 18595 publications have been published within this topic receiving 382866 citations.
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01 Nov 2010
TL;DR: In this article, a dynamic capital structure model that demonstrates how business-cycle variations in expected growth rates, economic uncertainty, and risk premia influence firms' financing and default policies is presented.
Abstract: I build a dynamic capital structure model that demonstrates how business-cycle variations in expected growth rates, economic uncertainty, and risk premia influence firms' financing and default policies. Countercyclical fluctuations in risk prices, default probabilities, and default losses arise endogenously through firms' responses to the macroeconomic conditions. These comovements generate large credit risk premia for investment grade firms, which helps address the "credit spread puzzle" and "under-leverage puzzle" in a unified framework. The model generates interesting dynamics for financing and defaults, including "credit contagion" and market timing of debt issuance. It also provides a novel procedure to estimate state-dependent default losses.
514 citations
TL;DR: This article showed that the bulk of sovereign yield spreads are explained by differences in credit quality, though liquidity plays a nontrivial role, especially for low credit risk countries and during times of heightened market uncertainty.
Abstract: Do bond investors demand credit quality or liquidity? The answer is both, but at different times and for different reasons. Using data on the Euro-area government bond market, which features a unique negative correlation between credit quality and liquidity across countries, we show that the bulk of sovereign yield spreads is explained by differences in credit quality, though liquidity plays a nontrivial role, especially for low credit risk countries and during times of heightened market uncertainty. In contrast, the destination of large flows into the bond market is determined almost exclusively by liquidity. We conclude that credit quality matters for bond valuation but that, in times of market stress, investors chase liquidity, not credit quality.
513 citations
TL;DR: In this article, the authors investigated risk and stability features of Islamic banking using a sample of 553 banks from 24 countries between 1999 and 2009 and found that small Islamic banks that are leveraged or based in countries with predominantly Muslim populations have lower credit risk than conventional banks.
Abstract: This paper investigates risk and stability features of Islamic banking using a sample of 553 banks from 24 countries between 1999 and 2009. Small Islamic banks that are leveraged or based in countries with predominantly Muslim populations have lower credit risk than conventional banks. In terms of insolvency risk, small Islamic banks also appear more stable. Moreover, we find little evidence that Islamic banks charge rents to their customers for offering Sharia compliant financial products. Our results also show that loan quality of Islamic banks is less responsive to domestic interest rates compared to conventional banks.
491 citations
TL;DR: In this article, the authors present a model of incentive-compatible loan sales that allows for implicit contractual features between loan sellers and loan buyers, and test for the presence of these features using a sample of over 800 recent loan sales.
489 citations
TL;DR: In this article, the authors developed a distress prediction model specifically for the SME sector and analyzed its effectiveness compared to a generic corporate model, considering the fundamental role played by small and medium sized enterprises (SMEs) in the economy of many countries and the considerable attention placed on SMEs in the new Basel Capital Accord.
Abstract: Considering the fundamental role played by small and medium sized enterprises (SMEs) in the economy of many countries and the considerable attention placed on SMEs in the new Basel Capital Accord, we develop a distress prediction model specifically for the SME sector and to analyze its effectiveness compared to a generic corporate model. The behavior of financial measures for SMEs is analyzed and the most significant variables in predicting the entities' credit worthiness are selected in order to construct a default prediction model. Using a logit regression technique on a panel of over 2,000 US firms (with sales less than $65 million) over the period 1994-2002, we develop a one-year default prediction model. This model has an out of sample prediction power which is almost 30% higher than a generic corporate model. An associated objective is to observe our model's ability to lower bank capital requirements considering the new Basel Capital Accord's rules for SMEs.
488 citations