The Basel capital is a “margin” requirement imposed by regulators to cushion banks against extreme falls in prices of assets held, and is often a function of value-at-risk (VaR). The way banks adjust their balance sheets to maintain the requirement is equivalent to leverage targeting that...

In this article, we first construct the empirical measure of spread (EMS) to capture the dynamics of quoted CDS spreads. It is the measure of creditworthiness of a company derived from the asset model in Egami and Kevkhishvili [2017]. We then use the information provided by the EMS to derive a...

Recent crises have emphasized the tail risks present in corporate credit markets. Using credit default swap (CDS) data across maturities, we document two patterns. First, while the CDS term structure is generally upward sloping, financially constrained firms exhibit a negative slope. Second,...

Recent global crises have brought to light the risks that corporate credit markets are exposed to, particularly in the tails of the distribution. Using firm-level, credit default swap (CDS) data across maturities, we discuss two stylized facts. First, while the term structure of credit spreads...

In almost every financial market crisis we can observe widening credit spreads, especially in the last years during the subprime and sovereign debt crisis. But what exactly drives the credit spread? This paper will outline static components, i.e. default risk, liquidity, risk and the relative...

This paper examines the relation between industry competition, credit spreads, and levered equity returns. I build a quantitative model where firms make investment, financing, and default decisions subject to aggregate and idiosyncratic risk. Firms operate in heterogeneous industries that differ...

Accessing and managing credit risk has been a major area of interest and concern for both academics, practitioners and regulators, particularly in the afterwards of the recent 2008 financial crisis. Moreover, the effective management of credit risk is a challenge faced by any banking and...

We merge the literature on downside return risk and liquidity risk and introduce the concept of extreme downside liquidity (EDL) risks. The cross-section of stock returns reflects a premium if a stock's return (liquidity) is lowest at the same time when the market liquidity (return) is lowest....

We assess the impact of contingent convertible (CoCo) bonds and the wealth transfers they imply conditional on conversion on the risk-taking behaviour of the issuing bank. We also test for regulatory arbitrage: do banks try to maintain risk-taking incentives by issuing CoCo bonds, when...

Credit risk measurement and management become more important in all financial institutions in the light of the current financial crisis and the global recession. This particularly applies to most of the complex structured financing forms whose risk cannot be quantified with com-mon rating...