Nader Naifar

The determinants of credit default swap rates: an explanatory study

The aim of this paper is to explain empirically the determinants of credit default swap rates using a linear regression. We document that the majority of variables, detected from the credit risk pricing theories, explain more than 60% of the total level of credit default swap. These theoretical variables are credit rating, maturity, riskless interest rate, slope of the yield curve and volatility of equities. The estimated coefficients for the majority of these variables are consistent with theory and they are significant both statistically and economically. We conclude that credit rating is the most determinant of credit default swap rates.

Credit‐default swap rates and equity volatility: a nonlinear relationship

Purpose – The aim of this paper is to study the impact of equity returns volatility of reference entities on credit-default swap rates using a new dataset from the Japanese market. Design/methodology/approach – Using a copula approach, the paper models the different relationships that can exist in different ranges of behavior. It studies the bivariate distributions of credit-default swap rates and equity return volatility estimated with GARCH (1,1) and focus on one parameter Archimedean copula. Findings – First, the paper emphasizes the finding that pairs with higher rating present a weaker dependence coefficient and then, the impact of equity returns volatility on credit-default swap rates is higher for the lowest rating class. Second, the dependence structure is positive and asymmetric indicating that protection sellers ask for higher credit-default swap returns to compensate the higher credit risk incurred by low rating class. Practical implications – The paper has several practical implications that are of value for financial hedgers and engineers, loan market participants, financial regulators, government regulators, central banks, and risk managers. Originality/value – The paper also illustrates the potential benefits of equity returns volatility of reference entities as a proxy of default risk. These simplifications could be lifted in future research on this theme.

Modelling dependence structure with Archimedean copulas and applications to the iTraxx CDS index

In this paper we model the dependence structure between credit default swap (CDS) and jump risk using Archimedean copulas. The paper models and estimates the different relationships that can exist in different ranges of behaviour. It studies the bivariate distributions of CDS index spreads and the kurtosis of equity return distribution. To take into account nonlinear relationships and different structures of dependency, we employ three Archimedean copula functions: Gumbel, Clayton, and Frank. We adopt nonparametric estimation of copula parameters and we find an extreme co-movement of CDS and stock market conditions. In addition, tail dependence indicates the extreme co-movements and the potential for a simultaneous large loss in stock markets and a significant default risk. Ignoring the tail dependence would lead to underestimation of the default risk premium.

Sukuk spreads determinants and pricing model methodology

The investment concept of sukuk was created as an alternative to conventional bonds since interest-bearing instruments are prohibited under Islamic law. Sukuk (commonly referred to Islamic bonds) represent a proportional ownership of tangible assets or a pool of assets. However, the key to understanding these instruments as a financial innovation is to focus on their pricing and risk characteristics. The challenge for sukuk issuing entities becomes to provide an efficient pricing model, which is compliant with Islamic law principles. The aims of this paper are two-fold. Firstly, we explore empirically the determinants of sukuk yield spreads and we describe within a coherent empirical framework the economic implications of the links between sukuk yield spreads, stock market conditions and macroeconomic variables; Secondly, we provide a methodology for estimating the fair price of sukuk in the presence of default risk. This paper presents the first empirical study for the determinants of sukuk spreads using available data and it has several practical implications that are of value for investors, risk managers and the development of Islamic financial markets.

Do Islamic Bond (Sukuk) Prices Reflect Financial and Policy Uncertainty? A Quantile Regression Approach

ABSTRACT We studied the relationship between Islamic bond (sukuk) prices and financial and policy uncertainty conditions using a quantile regression approach. Our empirical results for the period 2010–2014 show that US bond prices had a negative impact and causality effects on sukuk prices, whereas European Monetary Union bond prices only co-moved with sukuk prices. We also show that financial uncertainty had a negative effect that was limited to intermediate sukuk quantiles; moreover, sukuk prices were not affected by economic policy uncertainty or stock market returns. Therefore, although Islamic bonds are distinctive assets, their price dynamics are dependent on other bond-related asset prices and so incorporate financial market uncertainty.

Further evidence on international Islamic and conventional portfolios diversification under regime switching

ABSTRACT This article investigates the comparative performance of International Islamic and conventional portfolio diversification across different financial market regimes and provides an optimal choice from an American investor’s viewpoint during the period 2002–2014. Using a bootstrap-based stochastic dominance (SD) test and monthly MSCI prices of Islamic stock market indices and their conventional counterparts in 38 countries from North and Latin America, Europe and Asia-Pacific regions, we find that SD relationships between Islamic and conventional optimal-diversified portfolios change systematically according to investment region and market regime. Essentially, for all regimes, US investors are indifferent between Islamic diversification and its conventional counterpart, which implies that arbitrage diversification opportunities are rare and short lived in all regions. However, across all regions, especially in a crisis regime, Islamic portfolio diversification can be a good substitute for conventional diversification. Islamic portfolio diversification in North and Latin America, Europe and Global regions is an optimal choice for the risk-averse American investors. Finally, results imply that portfolio diversification among Islamic market indices can be a good hedge, offering investors superior investment alternatives during any financial meltdown or economic slowdown due to the conservative nature of Sharia-compliant investments.

Copula based simulation procedures for pricing collateralised debt obligations

The aim of this paper is to study the impact of structure of dependency on the pricing of multi-name credit derivatives such as collateralised debt obligations (CDO). The correlation between names defaulting has an effect on the value of the basket credit derivatives. We present a copula based simulation procedure for pricing CDO under different structure of dependency and assessing the influence of different price drivers (correlation, hazard rates and recovery rates) on modelling portfolio losses. Gaussian copulas and Monte Carlo simulation are widely used to measure the default risk in basket credit derivatives. Many studies have shown that many distributions have fatter tails than those captured by the normal distribution. We use distributions with fat tails such as the t-student distribution. The paper has several practical implications that are of value for financial hedgers and engineers, financial regulators, central banks, and financial risk managers.

Assessing government spending efficiency and explaining inefficiency scores: DEA-bootstrap analysis in the case of Saudi Arabia

Abstract The recent Saudi Arabia’s “Vision 2030” including the National Transformation Plan has renewed the debate on the efficiency of government spending. The aim of this paper was twofold. First, to measure the relative efficiency of Saudi Arabia’s public spending over the period 1988–2013 using non-parametric approach. Second, to explain the inefficiency scores using a DEA-Bootstrap analysis by incorporating environmental variables. The empirical results show that, on average, the public spending is inefficient, implying that Saudi Arabia can improve their performance on health, education and infrastructure without increasing spending. The empirical explanation of the inefficiency scores using a DEA-Bootstrap analysis shows that the unemployment and broad money negatively impact government expenditure mainly in the case of infrastructure and health. Our findings can be useful for policymakers in order to set out a structural adjustment plan to improve the efficiency level for education, health and infrastructure expenditures.

A quantile regression approach and nonlinear analysis with Archimedean copulas to explain the movements of residential real estate prices

The primary objective of this paper is to explain the determinants of residential real estate prices in the largest real estate market in the oil-rich Gulf Cooperation Council (GCC) countries. We employ linear quantile regression analysis to investigate the impact of financial market conditions (stock market returns and volatility), key monetary policy, and macroeconomic variables (including short term interest rates, inflation rates, and crude oil prices) on the residential real estate price dynamics. The secondary objective of this paper is to investigate the nonlinear relationships among variables through the use of two different Archimedean copulas with upper and lower tail dependence. The empirical results consistently demonstrate that only the residential real estate index-inflation rate relationship is statistically significant for all quantiles. We also find a nonlinear relationship among stock market returns, crude oil prices, and the residential real estate index, where the dependence structure is asymmetric and orients toward the upper side of the distribution. This study has significant implications for the analysis of real estate markets, investors, portfolio managers and policy makers.

Explaining IPOs Underpricing in the Tunisian Market

This article tests four hypotheses (signalling, market tendency, market characteristics and the ex ante uncertainty and information asymmetry) to explain the initial public offerings (IPOs) underpricing in the Tunisian market. Most of the empirical studies focus mainly on developed markets and only a few studies analyse the climates of IPOs in emerging markets. The Tunisian business environment is motivating because of the institutional reforms that have been successfully implemented since 1994. The study analyses all the Tunisian IPOs from March 1992 to April 2008 in order to explain underpricing in IPOs. The findings show that IPOs underpricing is mainly explained by the signalling and the market characteristics hypotheses. The phenomenon of underpricing in IPOs is important for portfolio managers who are expected to make optimal (value-maximising) financing choices. Also, results of this study provide insight into the business environment in the case of the Tunisian market.