Michela Scatigna

A Ratings-Based Approach to Measuring Sovereign Risk

We propose a new approach to measuring sovereign default risk. We use sovereign credit ratings and historical default rates provided by credit rating agencies to construct a measure of ratings-implied expected loss. We compare our measure of expected loss from sovereign defaults with stand-alone credit ratings and also examine its relationship with credit default swap spreads. We show that our measure is more informative for measuring sovereign risk. We re-examine the fundamental determinants of sovereign risk and find further evidence to support the debt intolerance and original sin explanations for country risk. This study contributes an improved understanding of the value of sovereign credit rating teams in assessing the long-term country risks accompanying emerging market investments. Copyright

Diversification and bank profitability: a nonlinear approach

Using information on 98 internationally active banks headquartered in 27 countries over the period 1994–2012, we analyse the nonlinear link between income diversification (defined as noninterest income to total income) and bank return on assets (ROA). The main result is that income diversification is positively correlated with bank profitability only up to a certain degree (30% of the diversification ratio). Diversification benefits for global systemically important banks (GSIBs) are less sizable and significant, especially when we use volatility-adjusted return as a measure of bank profitability.

Property Prices and the Real Sector: Comovements in European Markets

The paper establishes stylised facts about residential and commercial property prices focusing on 12 European markets over the sample 1984-2013. Using the measure of dynamic correlation and cohesion we look at the medium and long-term dynamics in the real estate markets. We investigate how do comovements within real estate cycles relate to comovements within cycles of real activity variables over time.