We explore an inconsistency in the Basel Committee's Internal Ratings Based (IRB) rules: the IRB rules on corporate loans were calibrated to loan-level data, while the IRB rules on small business loans were calibrated with little, if any, information on small business loans. We argue that the...

We explore an inconsistency in the Basel Committee's Internal Ratings Based (IRB) rules: the IRB rules on corporate loans were calibrated to loan-level data, while the IRB rules on small business loans were calibrated with little, if any, information on small business loans. We argue that the...

In this paper, we investigate the importance of different loss functions when estimating and evaluating option pricing models. Our analysis shows that it is important to take into account parameter uncertainty, since this leads to uncertainty in the predicted option price. We illustrate the...

In this paper we investigate the ability of different models to produce useful VaR-estimates for exchange rate positions. We make a distinction between models that include sophisticated tail properties and models that do not. The former type of models often leads to too extreme VaR-estimates,...

Do large credit risk shocks spillover to small businesses and affect their real economic activity? Using information on small business credit risk, we find that small businesses experience increased default and bankruptcy rates following a shock to a customer industry. On an industry level, the...

In this paper we propose a new security, the Call Option Enhanced Reverse Convertible (COERC). The security is a form of contingent capital, i.e. a bond that converts to equity when the market value of equity or capital falls below a certain trigger. The conversion price is set significantly...

This paper introduces, analyzes, and values a new form of contingent convertible (CoCo), a Call Option Enhanced Reverse Convertible (COERC). Issued as a bond, it converts to new shareholders' equity if a bank's market value of capital falls below a pre-specified trigger. The COERC avoids the...