We investigate whether the spread of corporate debt contacts can be explained by their ultimate recovery rates. Using the actual realized recovery rates of defaulted debt instruments issued in the US from 1962 to 2007, we find that recovery rate is reflected in the spread at issuance, and that...

Basel II adopting banks estimate and validate Long-Run Probability of Default (LRPD) for each of their Internal Risk Ratings (IRRs). In this study, we examine alternative methodologies in estimating and validating LRPD. We propose the maximum likelihood estimators incorporating both...

In order to comply with the Advanced Internal Rating-Based (IRB) approach of Basel II, financial institutions need to estimate the economic loss given default (LGD) of their instruments in order to compute the minimum regulatory capital requirement under Pillar I of the accord. One of the key...

Basel II implementation requires the estimations of probability of default (PD) and migration rate under hypothetical or historically observed stress scenarios. Typically, financial institutions first forecast selected macroeconomic variables under these stress scenarios and then estimate the...

We examine the effects of daily return compounding, financing costs, and management factors on the performance of leveraged exchange-traded funds (LETFs) over various holding periods. We propose a new method to measure LETFs’ tracking errors that allows us to disentangle these effects. Our...

Purpose – The purpose of this paper is to provide a brief review of three strands of the literature on exchange-traded funds. Design/methodology/approach – The paper starts with a review of the history of the growth of exchange-traded funds and their characteristics. The paper then examines...

We find suggestive evidence that emotional balance has an impact on probability weighting incremental to demographic controls. Specifically, low negative affectivity (implying high emotional balance) tends to be a characteristic of those whose probability weighting functions exhibit lower...