Credit Equity Research Articles

From bias to balance: Integrating DEI in AI-driven financial systems to promote credit equity

From bias to balance: Integrating DEI in AI-driven financial systems to promote credit equity

Empirical Study of Home Equity Credit With Special Reference to Union Bank of India

Empirical Study of Home Equity Credit With Special Reference to Union Bank of India

Financing the Newsvendor with Equity or Trade Credit

Financing the Newsvendor with Equity or Trade Credit

Challenges that Early Career Researchers Face in Academic Research and Publishing

the academic community. Yet, in some respects, they occupy a selectively inferior niche due to structural constraints, as well as personal and professional limitations. ECRs, who are at an initial stage of their careers, face multiple challenges in research and publishing due to a relative lack of experience. These may make them vulnerable to abuse and cause stress and anxiety. Those challenges may have been amplified in the COVID-19 era. ECRs' efforts may unfairly boost the reputation of their mentors and/or supervisors (Matthew Effect), so greater credit equity is needed in research and publishing. This opinion paper provides a broad appreciation of the struggles that ECRs face in research and publishing. This paper also attempts to identify extraneous factors that might make ECRs professionally more vulnerable in the COVID-19 era than their established seniors. ECRs may find it difficult to establish a unique career path that embraces creativity and accommodates their personal or professional desires. This is because they may encounter a rigid research and publishing environment that is dominated by a structurally determined status quo. The role of ECRs' supervisors is essential in guiding ECRs in a scholarly volatile environment, allowing them to adapt to it. ECRs also need to be conscientious of the constantly evolving research and publishing landscape, the importance of open science and reproducibility, and the risks posed by spam and predatory publishing. Flexibility, sensitivity, creativity, adaptability, courage, good observational skills, and a focus on research and publishing integrity are key aspects that will hold ECRs in good stead on their scientific career path in a post-COVID-19 era.

Mixed financing strategies for capital-constrained retailer in the Chinese financial market

Retailers in supply chains usually deal with the problem of capital shortage by obtaining financing from the Chinese financial market. Examining the financing requirement of capital-constrained retailers, this paper studies the optimal decisions of the supplier and retailer in the supply chain, who are both risk-neutral decision-makers under wholesale price contracts. We assume that the retailer may obtain financing from a bank, the supplier and investors. Thus, the retailer can adopt two mixed financing modes: mixed financing of a bank and equity credit and mixed financing of trade and equity credit. We obtain equilibrium decisions under the two financing modes. By comparing the equilibrium results, we find that the mixed financing of trade and equity credit exhibits the only financing equilibrium. A Pareto interval of the wholesale price exists such that both the supplier and retailer can obtain higher profits with the mixed financing of trade and equity credit than the mixed financing of bank and equity credit. Finally, we present a numerical analysis to support our results.

The Business Case for Investing in Place-Based Public Health Initiatives

The Business Case for Investing in Place-Based Public Health Initiatives

Equity Trading Activity and Credit Spread Shock

This study investigates how equity trading activity dynamically responds to credit spread shock. Based on the analysis of monthly data from 1925M1 to 2013M7, equity trading activity, using share volume turnover as a proxy, significantly drops following the shock to credit spread. The results from the Granger-causality test show that credit spread Granger-causes equity trading activity to drop. The variance decomposition results indicate that credit spread forecasts about 1.77%, 2.25% and 4.22% of equity trading activity at the 3-month, 6-month and 12-month horizons, respectively.

Jump and Cojump Risk in Subprime Home Equity Derivatives

I analyze the jump frequency in the ABX index of subprime home equity credit default swaps and CME housing futures. Jumps begin to appear prior to 2007, but are more pronounced in the housing futures than the ABX. I can explain nearly 85% of the jumps from news and the housing futures. A 20 point slope in the housing futures curve leads to an expected jump of -1:4% in the BBB- ABX.

Recovering survival probabilities from equity option prices and credit default swap spreads

Recovering survival probabilities from equity option prices and credit default swap spreads

Bank Risk Factors and Changing Risk Exposures in the Pre- and Post-financial Crisis Periods: An Empirical Study for India

In this study, we measure and analyse the time-varying nature of risk exposures for the Indian banking industry using weekly bank-level data from 23 October 2004 to 1 August 2014. We extend the literature by studying credit, equity, interest rate and exchange rate risks following a more comprehensive framework. The study finds evidence that the risk exposures are time varying in nature and differ across banks with different characteristics. Equity risk and credit risk increase post the global financial crisis (GFC) while interest rate and exchange rate risk gets reduced. The capital market has a favourable view of small-sized, well-capitalized, well-diversified private sector banks. Furthermore, the results also show that asset size and ownership structure offer relevant information for differentiating banks regarding their riskiness. Large banks have more equity risk exposure; public sector banks have higher credit risks while private sector banks have greater interest rates and exchange rate risk exposure. The study offers valuable insights for the regulators, supervisors, policymakers, banking industry, bank managers, investors and academia. The main contribution is a better understanding of sources of banks’ risks and needs to enhance the supervisory process in the Basel framework.

An Empirical Analysis on Relationship between OTC Individual Equity Options and Credit Spread in Korea

An Empirical Analysis on Relationship between OTC Individual Equity Options and Credit Spread in Korea

Joint liability lending and credit risk: Evidence from the home equity market

Using a unique dataset of home equity credit contracts, we examine the benefits of joint liability lending. Our results show that the risk of default for joint borrowers with similar risk scores is significantly lower than the risk associated with single borrowers. However, when joint borrowers have divergent risk scores, the risk of default is higher than single borrowers. Our results indicate that the lower risk associated with joint liability is largely dependent upon the similarity of risk characteristics (profiles) of the joint borrowers. Our results suggest that joint liability lending per say does not reduce credit risk.

Revisiting the Credit–Equity Power Relationship

The credit–equity power relationship is an empirical parameterization of credit default swap (CDS) spreads by stock prices that is characterized by its credit–equity elasticity parameter and that is popular among practitioners involved in capital structure arbitrage quantitative strategies. This article provides a theoretical foundation for the credit–equity elasticity involving the financial leverage of the company. After underscoring the weaknesses of a calibrating approach relying exclusively on econometrics, the article highlights the practical relevance of this fundamental result in terms of credit–equity calibration.

Banking Stress Test Effects on Returns and Risks

We investigate the effects of the announcement and the disclosure of the clarification, methodology, and outcomes of the US banking stress tests on banks' equity prices, credit risk, systematic risk, and systemic risk during the 2009-13 period. We find only weak evidence that stress tests after 2009 affected equity returns of large US banks. In contrast, CDS spreads declined in response to the disclosure of stress test results. We also find that bank systematic risk, as measured by betas, declined in some years after the publication of stress test results. Our evidence suggests that stress tests affect systemic risk.

Exponential Lévy Models Extended by a Jump to Default

This article proposes a new dynamically consistent framework for joint valuation of equity derivatives and credit products, in which uncertainty of the economy is represented by Lévy processes. In the framework, the pre-default stock price of a given firm is presented by an extended exponential Lévy model, while the default arrival rate is presented by the Cox proportional hazard model with stochastic covariates driven by Lévy processes. Under the model, we find the solution of the pricing generator for evaluating equity and credit derivatives, and we derive the pricing formulas of equity call options and credit default swaps by utilizing the pricing generator. In the numerical examples, setting the variance gamma (VG) process and the Brownian motion as driving factors of the model, we compute term structure of credit default swaps and equity implied volatility skews. We also examine the impact of the convexity adjustment on term structure of credit spreads both analytically and numerically.

Equity Market Liberalization, Credit Constraints and Income Inequality

Abstract This paper provides compelling evidence that equity market liberalization, as the most efficient way to smooth financial market frictions such as credit constraints, can alleviate persistent cross-dynastic income inequality by promoting increased human capital accumulation. The authors examine the effect of equity market liberalization on inequality by using data from 72 countries for 1980–2006. Their measured effect is robust to alternative measures of equity market liberalization. Finally, The authors show that foreign equity flows benefit initially lessactive stock markets more than the active ones, providing evidence that foreign equity flows act as a substitute for domestic financial markets. This finding emphasizes the possibility of reducing inequality and poverty through equity market liberalization.

Market Discipline and Bank Risk

This paper empirically examines the impact of market discipline on bank risk taking. Using a sample of 321 financial institutions from the Group of Seven nations (G7) comprising Canada, France, Germany, Italy, Japan, the UK, and the US, over the period 1996-2010, our findings suggest that market discipline helps reduce equity risk and credit risk of banks. We also find that the negative impact of market discipline on bank risk is stronger: in the presence of a risk-adjusted insurance premium, as bank capital increases and in the post-global financial crisis period. The results are robust to alternative estimation techniques.

Limited arbitrage between equity and credit markets

We document that short-horizon pricing discrepancies across firms' equity and credit markets are common and that an economically significant proportion of these are anomalous, indicating a lack of integration between the two markets. Proposing a statistical measure of market integration, we investigate whether equity–credit market integration is related to impediments to arbitrage. We find that time variation in integration across a firm's equity and credit markets is related to firm-specific impediments to arbitrage such as liquidity in equity and credit markets and idiosyncratic risk. Our evidence provides a potential resolution to the puzzle of why Merton model hedge ratios match empirically observed stock-bond elasticities (Schaefer and Strebulaev, 2008) and yet the model is limited in its ability to explain the integration between equity and credit markets (Collin-Dufresne, Goldstein, and Martin, 2001).

How Did the US Housing Slump Begin? Role of the 2005 Bankruptcy Reform

Most analyses of the recent financial crisis in the US focus on the consequences of the dramatic slump in housing prices that started in the mid-2000s, which led to rising mortgage defaults, shrinking home equity credit and liquidity in the banking system. Yet these accounts do not explain what caused the reversal of housing price growth in the first place. This paper argues that the passage of the 2005 Bankruptcy Reform Act (BAPCPA) contributed significantly to the reversal. The reform generated negative wealth effects for a category of homeowners, lowering prices of their homes, which spread via a process of contagion to the prices of other homes. Evidence consistent with this hypothesis is provided: changes in housing prices and mortgage interest rates at the MSA level following the reform were significantly correlated with BAPCPA-exposure. The results are robust to controls for the size of the pre-2005 price growth, local unemployment rates, rates of new home construction and home vacancies, apart from MSA, house and year dummies.

Jumps and Cojumps in Subprime Home Equity Derivatives

Mizrach analyzes the jump frequency in the MarketABX.HE Index of subprime home equity credit default swaps and CME housing futures. Jumps began to appear prior to 2007. The jumps are more pronounced in housing futures than in the ABX index. He explains nearly 85% of the jumps from news and housing futures.A 20-point slope in the housing futures curve leads to an expected jump of -1.4% in the BBB– ABX index.