Reference Entity Research Articles

Liquidity and Counterparty Risk in OTC Markets

I study dispersion of CDS premia in a theoretical over-the-counter (OTC) economy. Agents have heterogeneous expectations about counterparty and reference entity default rates. In equilibrium, spreads of CDS contracts vary based on counterparty characteristics even if reference entity risk is fixed. Price distortions from counterparty risk are more pronounced in markets with less liquidity. Heterogeneous beliefs imply agents do better than break-even from trade in expectation. I derive an equilibrium pricing kernel that allocates expected gains from trade between counterparties based on their beliefs and relative bargaining power. The model suggests central clearing counterparties will have more impact on prices in markets that are less liquid. I show the widely-used risk-neutral CDS spread is a special case of the spread obtained in the search model.

A Model for Dependent Defaults and Pricing Contingent Claims with Counterparty Risk

This paper presents a new, intuitive but mathematically powerful model of dependent defaults and derives a general framework for pricing products whose values depend on credit correlation between the counterparty and the reference entity. The dependence framework is a natural extension of the Gaussian factor approach, which can be applied in the context of reduced form credit risk models, allowing i.a. for stochastic hazard and recovery rates. The prices of plain vanilla credit default swaps, first-to-default swaps and default swaptions are derived as particular examples.

The notion of diversity in graphical entity summarisation on semantic knowledge graphs

Given an entity represented by a single node q in semantic knowledge graph D, the Graphical Entity Summarisation problem (GES) consists in selecting out of D a very small surrounding graph S that constitutes a generic summary of the information concerning the entity q with given limit on size of S. This article concerns the role of diversity in this quite novel problem. It gives an overview of the diversity concept in information retrieval, and proposes how to adapt it to GES. A measure of diversity for GES, called ALC, is defined and two algorithms presented, baseline, diversity-oblivious PRECIS and diversity-aware DIVERSUM. A reported experiment shows that DIVERSUM actually achieves higher values of the ALC diversity measure than PRECIS. Next, an objective evaluation experiment demonstrates that diversity-aware algorithm is superior to the diversity-oblivious one in terms of fact selection. More precisely, DIVERSUM clearly achieves higher recall than PRECIS on ground truth reference entity summaries extracted from Wikipedia. We also report another intrinsic experiment, in which the output of diversity-aware algorithm is significantly preferred by human expert evaluators. Importantly, the user feedback clearly indicates that the notion of diversity is the key reason for the preference. In addition, the experiment is repeated twice on an anonymous sample of broad population of Internet users by means of a crowd-sourcing platform, that further confirms the results mentioned above.

The Network Structure of the CDS Market and its Determinants

This paper analyzes the network structure of the credit default swap (CDS) market, using a unique sample of counter-parties’ bilateral notional exposures to CDS on 642 sovereign and financial reference entities. We study the network structure, similarly to the literature on interbank and payment systems, by computing a variety of network metrics at the aggregated level and for several sub-networks. At a reference entity level, we analyze the determinants of some key network properties for large reference entities. Our main results, obtained on a sub-sample of 191 reference entities, are the following. First, the CDS network shows topological similarities with the interbank network, as we document a “small world” structure and a scale-free degree distribution for the CDS market. Second, there is considerable heterogeneity in the network structures across reference entities. In particular, the outstanding debt volume and its structure (maturity, collateralization), the riskiness, the type (sovereign/financial) and the location (European/non-European) of reference entities significantly influence the size, the activity and the concentration of the CDS exposure network. For instance, the network on a high-volatility reference entity is typically more active, larger in size and less concentrated.

Assessing Contagion Risks from the CDS Market

The authors assess the risk of contagion stemming from credit default swap (CDS) exposures. Based on a unique dataset provided both by the Depository Trust and Clearing Corporation and the European Securities and Markets Authority, they analyse the main features of the CDS market for European reference entities. They find that activity in this market is concentrated on a group of bank-type global derivative dealers, which they refer to as “super-spreaders”, given their high level of interconnectedness. The authors then carry out contagion analyses which tend to show that domino effects in the network of direct CDS exposures are unlikely to generate big disasters. Nevertheless significant contagion effects can arise from direct exposures to underlying assets, such as government bonds, or also from margin calls and collateral requirements generated by portfolios losses in correlated assets. Overall, contagion effects therefore arise more from indirect Interconnectedness than from direct contractual links among market participants. The paper draws some tentative policy lessons for monitoring and mitigating contagion risks and raises some issues regarding on-going discussions on over-the-counter derivatives.

Measuring Abnormal Credit Default Swap Spreads

This paper examines the size and power of test statistics designed to detect abnormal changes in credit risk as measured by credit default swap (CDS) spreads. In a spirit similar to that of Brown and Warner (1980, 1985) and Bessembinder et al. (2009), we follow a simulation approach to examine the statistical properties of normal and abnormal CDS spreads and assess the performance of normal return models and test statistics. Using daily CDS data, we nd that parametric test statistics are generally inferior to non-parametric tests, with the rank test performing best. Some of the classical normal return models, such as the market model, are found to be poorly specied. A CDS factor model based on factors identied in the empirical literature is generally well specied and more powerful in detecting abnormal performance. If factor information is not available, a simple mean-adjusted approach should be used. Finally, we examine performance in the presence of event-induced variance increases and bootstrapped p-values. Our inferences hold for US and European CDS data and are not aected by reference entity credit quality.

CDS Pricing Under Basel III: Capital Relief and Default Protection

Basel III introduces new capital charges for CVA. These charges, and the Basel 2.5 default capital charge can be mitigated by CDS. Therefore, to price in the capital relief that CDS contracts provide, we introduce a CDS pricing model with three legs: premium; default protection; and capital relief. If markets are complete, with no CDS bond basis, then CDSs can be replicated by taking short positions in risky floating bonds issued by the reference entity and a riskless bank account. If these conditions do not hold, then it is theoretically possible that the capital relief that CDSs provide may be priced in. Thus our model provides bounds on the CDS-implied hazard rates when markets are incomplete. Under simple assumptions we show that 20% to over 50% of observed CDS spread could be due to priced in capital relief. Given that this is different for IMM and non-IMM banks will we see differential pricing?

CDS volatility: the key signal of credit quality

This paper investigates the role of CDS volatility in providing information concerning the credit quality of a company. In Castellano and D’Ecclesia (J. Financ. Decis. Mak. 2:27, 2011) a first analysis of how CDS quotes respond to rating announcements is provided and it showed that market participants do not rely much on Rating Agencies, especially during periods characterized by very high volatility, i.e. during a financial crisis. Here, a more accurate analysis of the CDS’s ability to provide timely information on the creditworthiness of reference entities is performed, estimating the volatility of CDS quotes by using Exponential GARCH(1,1) models. The event study methodology is applied to a sample of CDS quotes for US and European markets, over the period 2004–2009. Results provide an accurate understanding of market behavior in the presence of news released by Rating Agencies. Overall, market participants seem to provide timely reactions around the event date and we show that the key element of signaling is represented by the changing volatility in CDS quotes, before and after the rating event.

Entity Synonyms for Structured Web Search

Nowadays, there are many queries issued to search engines targeting at finding values from structured data (e.g., movie showtime of a specific location). In such scenarios, there is often a mismatch between the values of structured data (how content creators describe entities) and the web queries (how different users try to retrieve them). Therefore, recognizing the alternative ways people use to reference an entity, is crucial for structured web search. In this paper, we study the problem of automatic generation of entity synonyms over structured data toward closing the gap between users and structured data. We propose an offline, data-driven approach that mines query logs for instances where content creators and web users apply a variety of strings to refer to the same webpages. This way, given a set of strings that reference entities, we generate an expanded set of equivalent strings (entity synonyms) for each entity. Our framework consists of three modules: candidate generation, candidate selection, and noise cleaning. We further study the cause of the problem through the identification of different entity synonym classes. The proposed method is verified with experiments on real-life data sets showing that we can significantly increase the coverage of structured web queries with good precision.

Concordancia diagnóstica de la citología, el legrado y la biopsia respecto al estudio histopatológico del espécimen de resección quirúrgica para lesiones premalignas del cérvix en pacientes posmenopáusicas de la ESE Clínica “Maternidad Rafael Calvo” de Cartagena de Indias, Colombia, 2007-2011

Objetivo: determinar la concordancia diagnóstica de la citología, el legrado endocervical y la biopsia para lesiones premalignas del cérvix en pacientes posmenopáusicas respecto al estudio histopatológico del espécimen de resección quirúrgica.Materiales y métodos: estudio de concordancia diagnóstica de conformidad. A partir de la base de datos del servicio de patología de la ESE Clínica “Maternidad Rafael Calvo”, entidad de referencia en cirugía ginecológica, patología cervical y colposcopia para la población de bajo nivel socioeconómico del régimen de salud subsidiado en Cartagena de Indias, Colombia, entre los años 2007 y 2011, fueron seleccionados todos los reportes de estudios histopatológicos de conización o histerectomía de pacientes mayores de 56 años que documentaran como motivo quirúrgico diagnósticos preoperatorios citológicos o histológicos de lesiones premalignas para valorar su grado de acuerdo mediante el coeficiente Kappa; además, se estimó su valor predictivo positivo (VPP).Resultados: se estudiaron 75 casos con un promedio de 63 años (rango: 57-77), estos corresponden a estudios de resección quirúrgica de 41 conizaciones y 34 histerectomías. La prevalencia de lesiones premalignas o malignas en el estudio histopatológico del espécimen de resección fue del 39%.La concordancia diagnóstica para lesiones premalignas del cérvix en pacientes posmenopáusicas, respecto al estudio histopatológico en espécimen de resección quirúrgica fue: legrado endocervical: 0,056; biopsia: 0,090. La concordancia entre la citología y la patología quirúrgica no fue estimable. El VPP de los hallazgos en estos estudios osciló entre 0 y 52,6%.Conclusión: para el diagnóstico de lesiones cervicales premalignas en pacientes posmenopáusicas la concordancia con el estudio histopatológico del espécimen de resección quirúrgica es leve para estudios histológicos (biopsia y legrado endocervical), siendo mejor en biopsia. El VPP de estos estudios es mejor para lesiones de alto grado respecto a las de bajo grado.

Unilateral Counterparty Risk Valuation for CDS Under a Regime Switching Interacting Intensities Model

We consider the credit valuation adjustment (CVA) of credit default swap under an interacting intensities model. The default intensities of the protection seller and the reference entity are both influenced by an external shock event. The arrival of the shock event is a regime switching Poisson process, which is a special case of Cox processes. We give the explicit formula for the CVA of the credit and examine the regime switching effect on the premium and the CVA.

ARBITRAGE‐FREE BILATERAL COUNTERPARTY RISK VALUATION UNDER COLLATERALIZATION AND APPLICATION TO CREDIT DEFAULT SWAPS

We develop an arbitrage‐free valuation framework for bilateral counterparty risk, where collateral is included with possible rehypothecation. We show that the adjustment is given by the sum of two option payoff terms, where each term depends on the netted exposure, i.e., the difference between the on‐default exposure and the predefault collateral account. We then specialize our analysis to credit default swaps (CDS) as underlying portfolios, and construct a numerical scheme to evaluate the adjustment under a doubly stochastic default framework. In particular, we show that for CDS contracts a perfect collateralization cannot be achieved, even under continuous collateralization, if the reference entity’s and counterparty’s default times are dependent. The impact of rehypothecation, collateral margining frequency, and default correlation‐induced contagion is illustrated with numerical examples.

The impact of counterparty risk on credit default swap pricing dynamics

As observed throughout the financial crisis in 2008 CDS contracts are not only exposed to the credit risk of the underlying reference entity but also to the counterparty risk of the protection seller. Conducting a panel regression analysis based on CDS contracts from 2004 to 2009 in Europe and North America for 198 reference entities we find that market-oriented counterparty risk measures are reflected in the pricing of CDS contracts. The impact of counterparty risk is decreasing with a higher creditworthiness of the underlying reference entity. We show that counterparty risk has been incorporated in the CDS spreads for North American reference entities already prior to the financial crisis, whereas for European reference entities the pricing impact only intensified with the outbreak of the financial crisis in September 2008. Market-based counterparty risk measures have a higher impact on the pricing of CDS contracts as compared to measures relying on the correlation structures of asset returns of reference entities and CDS counterparties.

Valuation of Credit Default Swaps with Wrong Way Risk – Model Implementation and a Computational Tune-Up

In their work, Brigo and Capponi (2010) introduce a numerical approach for calculating credit valuation adjustments (CVA) for credit default swaps (CDS). In contrast to previous research, they consider the default of the party doing the calculation, and its correlation to the defaults of the counterparty and the reference entity. Assuming bilateral counterparty credit risk, this approach generates symmetric and arbitrage free CVA. The most elaborate part of this computation is the generation of the default probability structure of the reference entity conditional on the default of either the investor or the counterparty. Brigo and Capponi (2010) suggest the use of the Fractional Fourier Transformation (FRFT) technique for this purpose. In this paper, we introduce the precise and practical algorithm for this numerical approach and display the steps needed for the FRFT technique. In addition, we offer a computational tune-up for the calculation of the conditional value of the CDS through a lognormal approximation. Throughout a variety of examples we show that this robust approximation delivers satisfying results, while requiring less computational power and less excessive implementation than the FRFT approach.

A 6D space framework for the description of distributed systems

This paper proposes a six-dimensional (6D) space framework and an appropriate reference entity for the description of organizations and realization of identifiable matter. The aim was to compose and present a new differentiable and well-structured syntactic reference entity on the basis of a general 4D space-time system. The entity should be visual, capable of providing people who develop, integrate or analyse distributed motional applications with basic means for navigation and adequate comprehension of motion. The common length, width and height dimensions determine the 3D subspace for definition of the geographic points of the motional concept. Time and the newly- founded content and merit dimensions together form a 3D realization space that inherently describes existence of motion outside the geographic points. The content dimension is used to declare the quantitative values of the quantities and properties of motion. The merit dimension is used to declare the qualities of quantities and properties. The transformation in the dynamic realization space is defined by the named quantities and properties. The time dimension is used to define the dynamic channels for the valuable content of a named quantity or a property of motion. The temporal content values of the named quantities and properties of matter are defined at the geographic points. Symbolic names of the axes of the new 6D axis system are: length, width, height, time, and the newly introduced content and merit. An ontology is proposed by the author to define the hierarchy of the merital names. The content axis uses the basic hierarchy with Arabic numerals to define the quantitative values of the quantities (properties). The 6D axis system that is semantically interpreted as a syntactic reference item is universally usable to describe the motion of a distributed concept, a model or a real entity, including transformation between different qualities of motion. Potential usage of the new 6D axis system together with the ontology is described. An example in the field of electrical engineering and industrial automation technology is presented. A visual user interface is discussed.

A Joint Non-Parametric Approach to the Decomposition of Bond Yields and CDS Spreads: Application of Eurozone Market Data

In this paper we develop a joint non-parametric approach to the problem of the decomposition of bond yields and CDS spreads. The proposed approach is essentially an infinite-dimensional modification of the Heath-Jarrow-Morton framework and is general enough to capture even very non-trivial shapes of the yield and hazard-rate curves. The approach allows us to jointly estimate entire term structures of yields, hazard rates, and liquidity premiums, no matter what shapes they take. We apply the developed methodology to data on major Eurozone sovereign borrowers and consider the most recent period of the Eurozone debt crisis. Our data set includes instruments with maturities from 6 months to 30 years. As a result, we found several interesting interaction effects between those components in terms of term structure. Treating the bond-CDS basis as a measure of the cross-market liquidity spread, we find that cross-market liquidity evolves in a rather non-trivial and pronounced manner. As the credit quality of the reference entity deteriorates, the liquidity of the CDS market dries up, starting from longer terms.

Does the Tail Wag the Dog? The Effect of Credit Default Swaps on Credit Risk

Concerns have been raised, especially since the global financial crisis, about whether trading in credit default swaps (CDS) increases the credit risk of the reference entities. We use a unique, comprehensive sample covering 901 CDS introductions on North American corporate issuers between June 1997 and April 2009 to address this question. We present evidence that the probability of credit rating downgrade and the probability of bankruptcy both increase after the inception of CDS trading. The effect is robust to controlling for the endogeneity of CDS introduction, i.e., the possibility that firms with upcoming deterioration in creditworthiness are more likely to be selected for CDS trading. We show that the CDS-protected lenders' reluctance to restructure is the most likely cause of the increase in credit risk. We present evidence that firms with relatively larger amounts of CDS contracts outstanding, and those with more No Restructuring contracts, are more likely to be adversely affected by CDS trading. We also document that CDS trading increases the level of participation of bank lenders to the firm. Our findings are broadly consistent with the predictions of the empty creditor model of Bolton and Oehmke (2011).

Estimating the Joint Probability of Default Using CreditDefault Swap and Bond Data

Systemic default risk—that is, the risk of the simultaneous default of multiple institutions—has caused great concern in the recent past. The aim of this article is to estimate the joint probability of default for multiple financial institutions. Both bond and credit derivative markets convey information on the default process: The former provides information on the marginal, the latter, on the joint default probabilities. We consider the corporate bond and the credit default swap (CDS) markets. The over-the-counter nature of the CDS market implies the presence of counterparty risk, or the risk that the protection seller will fail to fulfill its obligations. The counterparty risk is reflected in the CDS price through the joint default probability of the reference entity and the protection seller. Applying a no-arbitrage argument, we extract from market data forward-looking joint default probabilities of financial institutions operating in the CDS market from January 3, 2005–Mar 15, 2010.

Spread Risk Premia in Corporate Credit Default Swap Markets

The spread risk premium component of credit default swap (CDS) spreads represents a compensation demanded by protection sellers for future changes in CDS spreads caused by unpredictable fluctuations in the reference entity’s risk-neutral default intensity. This paper defines and estimates a measure of the spread risk premium component in CDS spreads of a sample of European investment-grade firms by using a stochastic intensity credit model. Our results show that, on average, investors demand a positive premium for such mark-to-market risks. After controlling for CDS market conditions, like liquidity and supply/demand effects, a panel data analysis of the estimated spread risk premia reveals among other things a significant positive impact of event risk captured by the overall stock market volatility and of investors’ appetite for exposure to credit markets as reflected by the overall CDS market.

Credit default swaps with and without counterparty and collateral adjustments

We present an affine jump-diffusion framework for calculating the prices of credit default swaps (CDSs) with and without credit value adjustments (CVA) to account for counterparty risk. Computing CVA for credit derivatives is a particularly challenging problem because the likelihood of counterparty default is typically highly correlated with the size of the exposure. We show that in order to generate sufficient correlation to capture this so-called wrong-way risk, simultaneous jumps in the credit spreads of buyer, seller and reference entity are required. We illustrate this with relevant numerical examples. Closed-form expressions for the CVA in this framework are obtained in the limit of pure diffusion, and an expansion of the Green function in powers of the jump intensity is applicable in the general case. We also present a finite difference scheme for the general solution of the relevant partial integro-differential equation and an efficient Monte Carlo scheme applicable to the problem of evaluating CVA on an arbitrarily large portfolio of CDS.