Credit derivatives are among the most criticized financial instruments in the current credit crises. Given their short history, finance professionals are still researching to discover effective ways to reduce the mark-to-market (MTM) volatility in credit derivatives, especially in turbulent market conditions. Many credit portfolios have been struggling to find out appropriate tools and techniques to help them navigate the current credit crises and hedge mark-to-market volatility in their portfolios. In this study we provide a tool kit to help reduce the pricing fluctuations in structured credit portfolios utilizing data analysis and statistical methods. In Chapter One we provide a snapshot of credit derivatives market by summarizing different types of credit derivatives; including single-name credit default swaps (CDS), market credit indices, bespoke portfolios, market index tranches, and bespoke tranches (synthetic CDOs). In Chapter Two we illustrate a method to calculate a stable hedge ratio (beta) by combining industry practices and statistical techniques. Choosing an appropriate hedge ratio is critical for funds that desire to hedge mark-to-market volatility. Many credit portfolios suffered 40%-80% market value losses in 2008 and 2009 due to the mark-to-market volatility in their long positions. In this chapter we introduce ten different betas in order to hedge a long bespoke portfolio by liquid market indices. We measure the effectives of these betas by two measures: Stability and mark-to-market volatility reduction. Among all betas we present, we deduct that the following betas are appropriate to be used as hedge ratios: Implied Beta, Quarterly Regression Beta on Spread Levels, Yearly Regression Betas on Spread Levels, Up Beta, and Down Beta. In Chapter Three we analyze the risk factors that impact the MTM volatility in CDS tranches; namely Spread Risk, Correlation Risk, Dispersion Risk, and Curve Risk. We focus our analysis in explaining the risks in the equity tranche as this is the riskiest tranche in the capital structure. We show that all four risks introduced are critical in explaining MTM volatility in equity tranches. We also perform multiple regression analysis to show the correlations between different risk factors. We show that, when combined, spread, correlation, and dispersion risks are the most important risk factors in analyzing MTM fluctuations in equity tranche. Curve risk can be used as an add-on risk to further explain local instances. After understanding various risk factors that impact the MTM changes in equity tranche, we put this knowledge to work to analyze two instances in 2008 in which we experienced significant spread widening in equity tranche. Both examples show that a good understanding of the risks that drive MTM changes in CDS tranches is critical in making informed trading decisions. In Chapter Four we focus on two topics: Portfolio Stratification and Index Selection. While portfolio stratification helps us better understand the composition of a portfolio, index selection shows us which indices are more suitable in hedging long bespoke positions. In stratifying a portfolio we define Class-A as the widest credits, Class-B as the middle tier, and Class-C as the tightest credits in a credit portfolio. By portfolio stratification we show that Class-A has significant impact on the overall portfolio. We use five different risk measures to analyze different properties of the three classes we introduce. The risk measures are Sum of Spreads (SOS), Sigma/Mu, Basis Point Volatility (BPVOL), Skewness, and Kurtosis. For all risk measures we show that there is high correlation between Class-A and the whole portfolio. We also show that it is critical to monitor the risks in Class-A to better understand the spread moves in the overall portfolio. In the second part of Chapter Four, we perform analysis to find out which credit index should be used in hedging a long bespoke portfolio. We compare four credit indices for their ability to track the bespoke portfolio on spread levels and on spread changes. Analysis show that CDX.HY and CDX IG indices fits the best to hedge our sample bespoke portfolio in terms of spread levels and spread changes, respectively. Finally, we perform multiple regression analysis using backward selection, forward selection, and stepwise regression methods to find out if we should use multiple indices in our hedging practices. Multiple regression analysis show that CDX.HY and CDX.IG are the best candidates to hedge the sample bespoke portfolio we introduced.

The purpose of this study was to create a profile of the mortgage default clientele at the Utah State University Family Life Center, Housing and Financial Counseling (FLC HFC) and to examine how clientele were utilizing the counseling services. Demographic and mortgage variables were used to create the profile of clientele and examine the utilization of services. Specific variables key to the study included: loan type, time of delinquency when clients sought counseling, how clients were referred to the FLC HFC, and the point in counseling when an outcome was achieved (keeping the home or losing the home to foreclosure). The sample consisted of all closed mortgage default cases at the FLC HFC (N = 213) and covered the years between July 1999 and September 2004. Descriptive statistics were used to create a profile of clients and survival analysis was used to examine the utilization of services. Clientele were on average 36 years old, married, had 2.3 dependents, and were Caucasian. The majority of clientele had no savings, was behind on other debt, reported a reduction in income or job Joss as the cause of default, and sought counseling early on in the delinquency. Clients reaching an outcome of counseling in one to four appointments were statistically significantly different than those reaching an outcome in five or more appointments. Tn the context of survival analysis, clients were divided into three groups: survival (positive outcome of counseling), foreclosure/bankruptcy (negative outcome of counseling), or lost-to-follow up. The findings indicate that clientele with government loans use the services more than clientele with conventional loans. Among the clientele who kept their home, there were no statistically significant differences by Joan type. The FLC HFC can use this information to better tailor the services offered to mortgage default clientele.

This thesis examines the determinants of corporate performance and likelihood of default of Jordanian publicly listed companies. Despite the large body of work that has investigated the determinants of corporate performance and default, no comprehensive study has emerged in an emerging market. Indeed, most of the empirical research on corporate performance and failure has been conducted in the developed markets such as the USA and the UK. This is the first rigorous and comprehensive study to examine empirically the determinants of corporate performance and failure of the publicly listed companies in an emerging market of Jordan. Also, it is the first study to present evidence on the determinants of corporate performance and failure in the Jordanian market using microeconomic and macroeconomic variables. Another objective of the research is to investigate the effect of the two financial systems on corporate health, since two banking systems operate in Jordan. It is also the objective of this thesis to investigate the effects of external shocks on Jordanian corporate performance and failure, especially those occurring within the Middle East region such as the Gulf Crisis 1990-1991 and the outbreak of the Intifadah in September 2000. Our study uses time-series and cross-sectional data of the publicly traded companies on the Amman Stock Exchange over the period 1989-2003. The study examines the determinants of capital structure and corporate performance using the random effects model and the pooled ordinary least squares (OLS) regression method. The study also examines the determinants of corporate failure (default) using the Logit model. A firm’s tangibility is found to have a positive and significant impact on a firm’s capital structure, while it has a negative impact on the short-term debt to total assets ratio. Firm profitability, liquidity, and stock market activity are found to have a negative and significant impact on a firm’s capital structure. The analyses show that a firm’s capital structure is negatively and significantly related to corporate performance, but positively and significantly related to its failure. The Gulf Crisis 1990-1991 had a positive impact on corporate performance, while the outbreak of Intifadah had a negative effect on corporate performance. The study also highlighted the importance of industrial sectors in determining corporate performance. Ownership concentration measured by the largest five shareholders was found to be positively and significantly related to corporate failure in both the cross-sectional sample and the panel data sample. The analysis also found that there is a non-linear relationship between a firm’s performance value and ownership structure. Another important finding is that Islamic banks' credit has an important and significant impact in increasing a firm’s performance measure return on assets (ROA). Unexpected changes in interest rates are found to be negatively and significantly related to corporate default (failure). This implies that corporate performance and distress, or insolvency, are affected by their capital structure, ownership structure, cash flow, and macroeconomic variables. / Doctor of Philosophy (PhD)

The legal operationalisation of ecological sustainability concerns all levels of legal control. The ensuring of full biodiversity is an indispensible component of ecological sustainability. At the same time, biodiversity losses continue to be a serious problem in many regions of the world. The international community has responded to this dilemma by strengthening international biodiversity law as well as agreeing upon a particular biodiversity target. The aim is to reduce biodiversity losses at all levels by the year 2010. From a legal point of view this seems unproblematic. When, however, the international legal order is viewed as an overarching control system, composed of several multi-levelled and interacting international and national legal systems (controlling programs), questions on whether the order can actually work for biodi-versity seem inevitable. By applying and developing further environmental law methodology (ELM) the study argues that some fundamental principles of the international legal order are either diminishing or counteracting the possible realisation of ecological sustainabil-ity and the 2010 biodiversity target of halting and reversing the biodiversity loss. This, as will be argued, is due to rule of law and to how the default actually functions in the international legal system. In line with the above, the prime objective of the study is to develop and elaborate a theory framework on which the theory of the significance of the default is based; second, to evaluate and discuss some fundamen-tal principles of the international legal order and international biodiversity law in the light of the theory, and finally to evaluate and discuss the possible realisation of ecological sustainability and the 2010 target. The study’s method is to a certain extent pluralistic, but it is basically an adapted version of ELM.

This paper explores the relationship between presidential elections and sovereign credit default swap (CDS) returns, as well as, equity returns in the Latin American countries, Argentina, Brazil, Chile and Mexico. In particular, this paper tests whether or not presidential elections, which potentially represent political uncertainty and risk, affect sovereign CDS returns. I also analyze stock returns during the elections of each country to establish benchmarks that I compare to the CDS returns. Specifically, I evaluate the movement of CDS and equity adjusted returns (i.e. returns measured as deviations from average returns) over 7 presidential elections from 2005 to 2011. The baseline panel regression did not find statistical significance in the dummy election coefficients, but did find significance in the equity intercept coefficient at the 10 percent level. This result suggests that, on average, adjusted equity returns were higher during election periods than adjusted equity returns outside of election periods. I discuss the implications of these results later in the paper.

In a firm level matched sample of 499 firms we examine the information flow between stocks and the credit default swap (CDSs) over a period of January 2004 to December 2008. Our study confirms the general findings of previous studies that the information generally flows from equity market to CDS market. However, for a much smaller number of firms we also find that information also flows from the CDS to its stock. A major advantage of our sample period is that it allows us to examine the information flow before and during the crisis. This paper makes two contributions. We document that the firms for which the information flows from the CDS to its stock increases by almost tenfold during the crisis. The current crisis is often referred as a credit crisis, so this finding is consistent with what is expected of CDSs. The major contribution of this paper is that it identifies the firm specific factors that influence the information flow across the two markets. We show that characteristics such as asset size, profitability, and industry, amongst others, play an important role in determining information flow.

This dissertation consists of three independent essays in macroeconomics. The first essay studies the transition to a low carbon economy using an extension of the neoclassical growth model featuring endogenous energy efficiency, exhaustible energy and explicit climate-economy interaction. I derive the properties of the laissez faire equilibrium and compare them to the optimal allocations of a social planner who internalizes the climate change externality. Three main results emerge. First, the exhaustibility of energy generates strong market based incentives to improve energy efficiency and reduce CO2 emissions without any government intervention. Second, the market and optimal allocations are substantially different suggesting a role for the government. Third, high and persistent taxes are required to implement the optimal allocations as a competitive equilibrium with taxes. The second essay focuses on coal fired power plants (CFPP) - one of the largest sources of CO2 emissions globally - and their generation efficiency using a macroeconomic model with an embedded CFPP sector. A key feature of the model is the endogenous choice of production technologies which differ in their energy efficiency. After establishing four empirical facts about the CFPP sector, I analyze the long run quantitative effects of energy taxes. Using the calibrated model, I find that sector-specific coal taxes have large effects on generation efficiency by inducing the use of more efficient technologies. Moreover, such taxes achieve large CO2 emissions reductions with relatively small effects on consumption and output. The final essay studies the procyclicality of fiscal policy in developing countries, which is a well-documented empirical observation seemingly at odds with Neoclassical and Keynesian policy prescriptions. I examine this issue by solving the optimal fiscal policy problem of a small open economy government when the interest rates on external debt are endogenous. Given an incomplete asset market, endogeneity is achieved by removing the government's ability to commit to repaying its external obligations. When calibrated to Argentina, the model generates procyclical government spending and countercyclical labor income tax rates. Simultaneously, the model's implications for key business cycle moments align well with the data.

Credit Default Swaps have become a large part of financial markets and recently the center of debate between academics and regulators alike. Transferring the techniques to measure information flow between the CDS market and stock markets presented by Acharya and Johnson (2007), this paper looks at the relationship between a countries sovereign CDS spread level and its predominate stock exchange. Under the back drop of the Greek Credit Crisis in Spring of 2010 I measure contagion effects in the Euro Zone comparing the level of Granger causality significance between the stock and CDS market. I find that the greatest information flow from the CDS market to the stock market is during credit shocks or times of high credit distress. My results also point to the significance of the contagion effect in the CDS market but not in the stock market.

This dissertation consists of three independent essays in macroeconomics. The first essay studies the transition to a low carbon economy using an extension of the neoclassical growth model featuring endogenous energy efficiency, exhaustible energy and explicit climate-economy interaction. I derive the properties of the laissez faire equilibrium and compare them to the optimal allocations of a social planner who internalizes the climate change externality. Three main results emerge. First, the exhaustibility of energy generates strong market based incentives to improve energy efficiency and reduce CO2 emissions without any government intervention. Second, the market and optimal allocations are substantially different suggesting a role for the government. Third, high and persistent taxes are required to implement the optimal allocations as a competitive equilibrium with taxes. The second essay focuses on coal fired power plants (CFPP) - one of the largest sources of CO2 emissions globally - and their generation efficiency using a macroeconomic model with an embedded CFPP sector. A key feature of the model is the endogenous choice of production technologies which differ in their energy efficiency. After establishing four empirical facts about the CFPP sector, I analyze the long run quantitative effects of energy taxes. Using the calibrated model, I find that sector-specific coal taxes have large effects on generation efficiency by inducing the use of more efficient technologies. Moreover, such taxes achieve large CO2 emissions reductions with relatively small effects on consumption and output. The final essay studies the procyclicality of fiscal policy in developing countries, which is a well-documented empirical observation seemingly at odds with Neoclassical and Keynesian policy prescriptions. I examine this issue by solving the optimal fiscal policy problem of a small open economy government when the interest rates on external debt are endogenous. Given an incomplete asset market, endogeneity is achieved by removing the government's ability to commit to repaying its external obligations. When calibrated to Argentina, the model generates procyclical government spending and countercyclical labor income tax rates. Simultaneously, the model's implications for key business cycle moments align well with the data.

Despite the recognized importance of the bond rating industry, little academic work has been done to investigate the determinants of the standards these firms employ to assign credit ratings to individual firms. There is an ongoing debate in the literature arguing whether the decline in the percentage of highly rated firms is because rating standards have become more stringent over time or whether the credit quality of firms in the economy has declined. We investigate this question in this dissertation. Our first contribution is to address several empirical problems in prior literature. This study uses a combination of structural models of default and econometric model of ratings to study the determinants of rating standards and, by doing so, overcome the earlier methodological shortcomings. Our second contribution is to test new theory which hypothesizes that the standards of a rating agency are conditional upon the distribution of default risk in the economy at the time. The results are robust no matter which structural models of default we employ. The evidence suggests the standards are relative to the default risk distribution and there has been a secular increase in the stringency in the assignment of ratings over time. A third way we extend the literature is by examining the accuracy of the assignment of ratings. Theoretical models suggest rating agencies have incentives to purposefully add noise to the assignment of ratings. We conduct an empirical analysis of the classification errors using receiver operating characteristic analysis. The results suggest that error rates have decreased at the extreme ends of the rating spectrum (AAA vs. AA and below; B and below vs. BB and above) over time while it has increased in the middle rating categories. This error rate is directly related to the distribution of default risk across firms at any point in time. These findings not only strengthen our result that standards are relative and time varying, but also suggest there is more noise in the assignment of ratings at exactly the time when there is more uncertainty regarding the credit risk of firms in the economy – i.e., during a credit crisis.