This study empirically examines the impact of the interaction between market and default risk on corporate credit spreads. Using credit default swap (CDS) spreads, we find that average credit spreads ...decrease in GDP growth rate, but increase in GDP growth volatility and jump risk in the equity market. At the market level, investor sentiment is the most important determinant of credit spreads. At the firm level, credit spreads generally rise with cash flow volatility and beta, with the effect of cash flow beta varying with market conditions. We identify implied volatility as the most significant determinant of default risk among firm-level characteristics. Overall, a major portion of individual credit spreads is accounted for by firm-level determinants of default risk, while macroeconomic variables are directly responsible for a lesser portion.
Credit Contagion from Counterparty Risk JORION, PHILIPPE; ZHANG, GAIYAN
The Journal of finance (New York),
October 2009, Volume:
64, Issue:
5
Journal Article
Peer reviewed
Standard credit risk models cannot explain the observed clustering of default, sometimes described as "credit contagion." This paper provides the first empirical analysis of credit contagion via ...direct counterparty effects. We find that bankruptcy announcements cause negative abnormal equity returns and increases in CDS spreads for creditors. In addition, creditors with large exposures are more likely to suffer from financial distress later. This suggests that counterparty risk is a potential additional channel of credit contagion. Indeed, the fear of counterparty defaults among financial institutions explains the sudden worsening of the credit crisis after the Lehman bankruptcy in September 2008.
The Credit Card Act of 2009 reflects increased public policy concern about the risky credit behaviors of young adults. This act promotes increased responsibility of parents and implies that young ...adults must acquire financial knowledge and practice responsible financial behaviors. This study addresses this public issue by investigating the psychological processes underlying young adults' risky credit card behaviors and the role of parents and financial knowledge in the financial behavior of young adults. A conceptual model based on an extension of the theory of planned behavior is proposed. The authors collected data from a sample of first-year students at a major public university. The results show that both parental norm and parental socioeconomic status are important factors that influence students' risky credit behaviors. Furthermore, subjective financial knowledge does more to prevent risky credit behaviors than objective financial knowledge. Finally, behavioral intention is the most important factor in preventing risky credit behaviors and credit card debt accumulation. The authors draw on their findings to provide public policy implications.
Using account-level credit card data from six major commercial banks from January 2009 to December 2013, we apply machine-learning techniques to combined consumer tradeline, credit bureau, and ...macroeconomic variables to predict delinquency. In addition to providing accurate measures of loss probabilities and credit risk, our models can also be used to analyze and compare risk management practices and the drivers of delinquency across banks. We find substantial heterogeneity in risk factors, sensitivities, and predictability of delinquency across banks, implying that no single model applies to all six institutions. We measure the efficacy of a bank's risk management process by the percentage of delinquent accounts that a bank manages effectively, and find that efficacy also varies widely across institutions. These results suggest the need for a more customized approached to the supervision and regulation of financial institutions, in which capital ratios, loss reserves, and other parameters are specified individually for each institution according to its credit risk model exposures and forecasts.
DO WOMEN PAY MORE FOR CREDIT? EVIDENCE FROM ITALY Alesina, Alberto F.; Lotti, Francesca; Mistrulli, Paolo Emilio
Journal of the European Economic Association,
01/2013, Volume:
11, Issue:
Supp.1
Journal Article
Peer reviewed
Open access
By using a unique and large data set on loan contracts between banks and microfirms, we find robust evidence that women in Italy pay more for credit than men, although we do not find any evidence ...that women borrowers are riskier than men. The male/female differential remains even after controlling for a large number of characteristics of the type of business, the borrower, and the structure of the credit market. The result is not driven by lack of credit history, nor by women using a different type of bank than men, since the same bank charges different rates to male and female borrowers.
This paper estimates the impact of credit rationing on firms' export. We use detailed survey data from Italian manufacturing firms that provide a firm-specific measure of credit rationing based ...directly on firms' responses to the survey rather than indirectly on firms' financial statements. After controlling for productivity and other relevant firm attributes, and accounting for the endogeneity of credit rationing, we find that the probability of exporting is 39% lower for rationed firms and that rationing reduces foreign sales by more than 38%. While credit rationing also appears to depress domestic sales, its impact on foreign sales is significantly stronger. The analysis also suggests that credit rationing is an obstacle to export especially for firms operating in high-tech industries and in industries that heavily rely on external finance.
We document a link between U.S. credit supply and rising personal bankruptcy rates. We exploit the exogenous variation in market contestability brought on by banking deregulation—the relaxation of ...entry restrictions in the 1980s and 1990s—at the state level. We find deregulation explains at least 10% of the rise in bankruptcy rates. We also find that deregulation leads to increased lending, lower loss rates on loans, and higher lending productivity. Our findings indicate that increased competition prompted banks to adopt sophisticated credit rating technology, allowing for new credit extension to existing and previously excluded households.
In this paper, we use a DSGE model to study the passive and time-varying implementation of macroprudential policy when policymakers have noisy and lagged data, as commonly observed in lowincome and ...developing countries (LIDCs). The model features an economy with two agents; households and entrepreneurs. Entrepreneurs are the borrowers in this economy and need capital as collateral to obtain loans. The macroprudential regulator uses the collateral requirement as the policy instrument. In this set-up, we compare policy performances of permanently increasing the collateral requirement (passive policy) versus a time-varying (active) policy which responds to credit developments. Results show that with perfect and timely information, an active approach is welfare superior, since it is more effective in providing financial stability with no long-run output cost. If the policymaker is not able to observe the economic conditions perfectly or observe with a lag, a cautious (less aggressive) policy or even a passive approach may be preferred. However, the latter comes at the expense of increasing inequality and a long-run output cost. The results therefore point to the need for a more careful consideration toward the passive policy, which is usually advocated for LIDCs.
PDF
