Tor Jacobson

Bank lending policy, credit scoring and value-at-risk

In this paper we apply a bivariate probit model to investigate the implications of bank lending policy. In the first equation we model the bank´s decision to grant a loan, in the second the probability of default. We confirm that banks provide loans in a way that is not consistent with default risk minimization. The lending policy must thus either be inefficient or be the result of some other type of optimizing behavior than expected profit maximization. Value at Risk, being a value weighted sum of individual risks, provides a more adequate measure of monetary losses on a portfolio of loans than default risk. We derive a Value at Risk measure for the sample portfolio of loans and show how analyzing this can enable financial institutions to evaluate alternative lending policies on the basis of their implied credit risk and loss rate, and make lending rates consistent with the implied Value at Risk.

Are Real Wages and Unemployment Related

In this paper we propose an alternative method for investigating the sources behind the behavior of real wages and unemployment. The statistical model we study is a certain structural error correction model, a so called common trends model, which has become popular in the empirical growth/business cycle literature. The system consists of real output, employment, unemployment and the product real wage and two exogenous stochastic variables, a tax wedge and a currency basket index. Based on quarterly Swedish data (1965-90) we find evidence supporting a short run but not a medium or long run relation.

Trade Credit and the Propagation of Corporate Failure: An Empirical Analysis

We quantify the importance of trade credit chains for the propagation of corporate bankruptcies. Our results show that trade creditors (suppliers) that issue more trade credit are more exposed to trade debtor (customer) failures, both in terms of the likelihood of experiencing a debtor failure and the loss given failure. We further document that the credit loss invoked by a debtor failure imposes a substantially enhanced bankruptcy risk on the creditors. The propagation mechanism is mitigated for creditors that are less levered, cash rich, and highly profitable, and enhanced in R&D intense industries and during economic downturns.

Long-run relations between private and public sector wages in Sweden

Using a maximum likelihood cointegration approach we find two long-run relationships between central government, local government, and private sector wages in Sweden. This means that there is one common trend for the three sectoral wages. Private sector wages are weakly exogenous for the estimation of the long-run relationships. This suggests that the private sector is the wage leader. Testing linear restrictions on the estimated cointegrating space, we reject stationarity for the three relative wages using likelihood ratio-tests. The hypotheses of homogeneity for the two cointegrating vectors, i.e., that wages do not diverge in the long run, is also rejected.

Capital Charges under Basel II: Corporate Credit Risk Modelling and the Macro Economy

The Internal Ratings Based (IRB) approach for capital determination is one of the cornerstones in the proposed revision of the Basel Committee rules for bank regulation. We evaluate the IRB approach using historical business loan portfolio data from a major Swedish bank for the period 1994 to 2000. First, we estimate a duration model that takes into account both company, loan related and macroeconomic variables. Next, we obtain a Value-at-Risktype (VaR) credit risk measure, by model-based simulations. Moreover, we study how both the bank’s credit risk and bu.er capital changes over time (had the bank been subject to the proposed rules). This approach allows us to (i) make individual forecasts of default risk conditional on company, loan and macro variables, (ii) study portfolio credit risk over time, (iii) assess to what extent the new Accord will achieve its main objective of increasing credit risk sensitivity in minimal capital charges, and (iv) compare current capital requirements to those under the proposed system. Our results show that macro conditions have great explanatory power in predicting default risk and calculating credit risk. The IRB approach, although sensitive to the choice of some horizon parameters, is an achievement in the intended direction.

Inflation, exchange rates and PPP in a multivariate panel cointegration model

New multivariate panel cointegration methods are used to analyze nominal exchange rates and prices in four major economies in Europe: France, Germany, Italy and the United Kingdom for the post-Bretton Woods period. We test for purchasing power parity (PPP) between these four countries and find that the theoretical PPP relationship does not hold. However, the estimated unrestricted relationship is found to be remarkably close to the theoretical one (1, −1.5, 0.9 instead of 1, −1,1). Relevant asymptotic results are stated, proved, and evaluated using Monte Carlo simulations. The asymptotic results are general and may hence be used in similar empirical contexts using the same model structure. Parametric bootstrap inference is used in order to deal with test size distortions. Copyright Royal Economic Society 2008

Taking the Twists into Account: Predicting Firm Bankruptcy Risk with Splines of Financial Ratios

We demonstrate improvements in predictive power when introducing spline functions to take account of highly non-linear relationships between firm failure and earnings, leverage, and liquidity in a logistic bankruptcy model. Our results show that modeling excessive non-linearities yields substantially improved bankruptcy predictions, on the order of 70 to 90 percent, compared with a standard logistic model. The spline model provides several important and surprising insights into non-monotonic bankruptcy relationships. We find that low-leveraged and highly profitable firms are riskier than given by a standard model. These features are remarkably stable over time, suggesting that they are of a structural nature.

Dormancy risk and expected profits of consumer loans

Abstract A bank that lends money to a household faces two types of risk. Frequently mentioned is the risk of default. Seldom referred to is the risk of an early redemption of the loan – leading to dormancy. In this paper, we model the transition of consumer loans from an active to a dormant state. To this end, we use data on 4786 individuals who were granted credit by a Swedish lending institution between September 1993 and August 1995 and estimate a semi-parametric duration model. We analyze the factors that determine the time to maturity on consumer loans and investigate the ability of the model to match the maturities observed in the data. Moreover, we derive the distribution of conditional expected durations of loans and show how a loan application can be evaluated by calculating its expected profit.

Modeling unemployment duration in a dependent competing risks framework: identification and estimation

Three Mixed Proportional Hazard models for estimation of unemployment duration when attrition is present are considered. The virtue of these models is that they take account of dependence between failure times in a multivariate failure time distribution context. However, identification in dependent competing risks models is not straightforward. We show that these models, independently derived, are special cases of a general frailty model. It is also demonstrated that the three models are identified by means of identification of the general model. An empirical example illustrates the approach to model dependent failure times.

Growth, Saving, Financial Markets, and Markov Switching Regimes

We report evidence that the relation between the financial-sector share, private saving, and growth in the United States in 1948-96 is characterized by several regime shifts. The finding is based on vector autoregressions on quarterly data that allow for Markov switching regimes. The evidence may be interpreted as support for a hypothesis that the relation between financial development and growth evolves in a stepwise fashion. Theoretical models in which structural financial developments entail fixed costs imply such stepwise patterns. The estimated variable relations are roughly consistent with the patterns to be expected from such models, although our data do not admit definite conclusions. The timing of the shifts coincides with changes in regulation and in the financial-market structure.