Mascia Bedendo

Sovereign and Corporate Credit Risk: Evidence from the Eurozone

We study the impact of sovereign risk on the credit risk of the non-financial corporate sector in the Eurozone using credit default swap data. We show that an increase in sovereign risk is associated with a statistically and economically significant increase in corporate credit risk and, hence, firms’ borrowing costs. A deterioration in a country’s credit quality affects more adversely firms that are more likely to benefit from government aid, those whose sales are more concentrated in the domestic market, and those that rely more heavily on bank financing. Our findings suggest that government guarantees, domestic demand, and credit markets are important credit risk transmission mechanisms.

Market and Model Credit Default Swap Spreads: Mind the Gap!

Structural models of default establish a relation across the fair values of various asset classes (equity, bonds, credit derivatives) referring to the same company. In most circumstances such relation is verified in practice, as different financial assets tend to move in the same direction at similar speed. However, occasional deviations from the theoretical fair values occur, especially in times of financial turmoil. Understanding how the dynamics of the theoretical fair values of various assets compares to that of their market values is crucial to a number of market participants. This paper investigates whether a popular structural model, the CreditGrades approach proposed by Finger (2002), Stamicar and Finger (2005), succeeds in explaining the dynamic relation between equity/option variables and Credit Default Swap (CDS) premia at individual company level. We find that CDS model spreads display a significant correlation with CDS market spreads. However, the gap between the two is time varying and widens substantially in times of financial turbulence. The analysis of the gap dynamics reveals that this is partly due to episodes of decoupling between equity and credit markets, and partly due to shortcomings of the model. Finally, we observe that model spreads tend to predict market spreads.

Credit Derivatives versus Loan Sales: Evidence from the European Banking Market

This valuable book discusses in detail, through a blend of theory and empirical research, the processes of innovation and the diffusion of new financial instruments.

A PARSIMONIOUS CONTINUOUS TIME MODEL OF EQUITY INDEX RETURNS: INFERRED FROM HIGH FREQUENCY DATA

In this paper we propose a continuous time model capable of describing the dynamics of futures equity index returns at different time frequencies. Unlike several related works in the literature, we avoid specifying a modela prioriand we attempt, instead, to infer it from the analysis of a data set of 5-minute returns on the S&P500 futures contract. We start with a very general specification. First we model the seasonal pattern in intraday volatility. Once we correct for this component, we aggregate intraday data into a daily volatility measure to reduce the amount of noise and its distorting impact on the results. We then employ this measure to infer the structure of the stochastic volatility model and of the leverage component, as well as to obtain insights on the shape of the distribution of conditional returns. Our model is then refined at a high frequency level by means of a simple nonlinear filtering technique, which provides an intraday update of volatility and return density estimates on the basis of observed 5-minute returns. The results from a Monte Carlo experiment indicate that a sample of returns simulated according to our model successfully replicates the main features observed in market returns.

Reputational Shocks and the Information Content of Credit Ratings

There has been much scrutiny of the Credit Rating Agencies’ (CRAs) flawed ratings of structured products in the build-up to the financial crisis. Our study examines whether the ‘credit rating crisis’ altered the information effects of their traditional product, corporate bond ratings. Using an event study, we analyze the Credit Default Swap (CDS) market’s response to rating announcements by Moody’s between September 2004 and December 2009. Our results demonstrate that CDS price effects were considerably greater in the pre-crisis era, and document a possible spillover effect of reputational damage onto the bond rating services of the CRAs.

Cultural Preferences and Firm Financing Choices

We document significant differences in the financing structures of small firms with managers of diverse cultural backgrounds. To isolate the effect of culture, we exploit cultural heterogeneity within a geographical area with shared regulations, institutions, and macroeconomic cycles. Our findings suggest significant cultural differences in the preference toward debt funding and in the use of formal and informal sources of financing (bank loans and trade credit). Our results are robust to alternative explanations based on potential differences in credit constraints and in the distribution of cultural origins across industries, trading partners, and headquarters locations.

Cultural Preferences and the Choice between Formal and Informal Financing

This paper documents significant differences in the financing structure of small firms with managers of diverse cultural backgrounds. To separate the effect of culture from other factors that affect the financing structure of firms, we exploit cultural heterogeneity within a geographical area with shared regulations, institutions, and macroeconomic cycles. Our findings suggest that there exist significant differences in the culturally embedded preferences towards the use of formal and informal sources of financing (bank loans and trade credit). Our results are robust to alternative explanations based on potential differences in credit constraints and in the distribution of cultural origins across industrial sectors, trading partners, and headquarters location.