Credit risk

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

Deviations from Covered Interest Rate Parity

Abstract: We find that deviations from the covered interest rate parity (CIP) condition imply large, persistent, and systematic arbitrage opportunities in one of the largest asset markets in the world. Contrary to the common view, these deviations for major currencies are not explained away by credit risk or transaction costs. They are particularly strong for forward contracts that appear on banks' balance sheets at the end of the quarter, pointing to a causal effect of banking regulation on asset prices. The CIP deviations also appear significantly correlated with other fixed income spreads and with nominal interest rates.

MBS Ratings and the Mortgage Credit Boom

Abstract: We study credit ratings on subprime and Alt-A mortgage-backed-securities (MBS) deals issued between 2001 and 2007, the period leading up to the subprime crisis. The fraction of highly rated securities in each deal is decreasing in mortgage credit risk (measured either ex ante or ex post), suggesting that ratings contain useful information for investors. However, we also find evidence of significant time variation in risk-adjusted credit ratings, including a progressive decline in standards around the MBS market peak between the start of 2005 and mid-2007. Conditional on initial ratings, we observe underperformance (high mortgage defaults and losses and large rating downgrades) among deals with observably higher risk mortgages based on a simple ex ante model and deals with a high fraction of opaque low-documentation loans. These findings hold over the entire sample period, not just for deal cohorts most affected by the crisis.

Determinants of Default in P2P Lending

Abstract: This paper studies P2P lending and the factors explaining loan default. This is an important issue because in P2P lending individual investors bear the credit risk, instead of financial institutions, which are experts in dealing with this risk. P2P lenders suffer a severe problem of information asymmetry, because they are at a disadvantage facing the borrower. For this reason, P2P lending sites provide potential lenders with information about borrowers and their loan purpose. They also assign a grade to each loan. The empirical study is based on loans’ data collected from Lending Club (N = 24,449) from 2008 to 2014 that are first analyzed by using univariate means tests and survival analysis. Factors explaining default are loan purpose, annual income, current housing situation, credit history and indebtedness. Secondly, a logistic regression model is developed to predict defaults. The grade assigned by the P2P lending site is the most predictive factor of default, but the accuracy of the model is improved by adding other information, especially the borrower’s debt level.

Credit risk drivers: Evaluating the contribution of firm level information and of macroeconomic dynamics

Abstract: Understanding if credit risk is driven mostly by idiosyncratic firm characteristics or by systematic factors is an important issue for the assessment of financial stability. By exploring the links between credit risk and macroeconomic developments, we observe that in periods of economic growth there may be some tendency towards excessive risk-taking. Using an extensive dataset with detailed information for more than 30 000 firms, we show that default probabilities are influenced by several firm-specific characteristics. When time-effect controls or macroeconomic variables are also taken into account, the results improve substantially. Hence, though the firms’ financial situation has a central role in explaining default probabilities, macroeconomic conditions are also very important when assessing default probabilities over time.

Precautionary Hoarding of Liquidity and Interbank Markets: Evidence from the Subprime Crisis

Abstract: We study the liquidity demand of large settlement banks in the UK and its effect on the money markets before and during the subprime crisis of 2007-08. We find that the liquidity demand of large settlement banks experienced a 30% increase in the period immediately following August 9 2007, the day when money markets froze, igniting the crisis. Following this shift, liquidity demand had a precautionary nature in that it rose on days of high payment activity and for banks with greater credit risk. This caused over- night interbank rates to rise, an effect virtually absent in the precrisis period.