In this letter we discuss the Credit Default Swap (CDS) market for European, Indian and US CDS entities during the financial crisis starting in 2007 using empirical First Significant Digit (FSD) distributions. We find out that on a time aggregated level the European and the US market obey empirical FSD distributions similar to the theoretical ones. Surprising differences are observed in the development of the FSD distributions between the US and the European market. While the FSD distribution of the US derivative market behaves nearly constant during the last financial crisis, we find huge fluctuations in the FSD distributions in the European market. One reason for these differences might be the possibility of a strategic default for US companies due to Chapter 11 and avoided contagion effects. / Series: Research Report Series / Department of Statistics and Mathematics

Default in commercial obligations and its consequences Summary I chose the topic default in commercial obligations and its consequences because I would like to be devoted primarily in private law in my future career and I consider the deal with this topic in detail very useful. Default in commercial obligations is very common phenomenon. It can cause huge problems in the economic situation of the subjects that are within the applicability of the Commercial Code. It is necessary to govern the consequences of default to mitigate the impact of a breach of an obligation on parties of the commercial obligations and to punish the party that breaches an obligation. Also the legislation compel the parties to a contract to fulfil their obligations. The purpose of my thesis is to analyze the topic default in commercial obligations and its consequences, draw attention to some deficiency of the legal regulation and to suggest an amendment of legislation. The thesis is composed of two chapters. Chapter One deals with concept and nature of default in commercial obligations, it consists of two parts. First describes the conception of debtor in default and second conception of creditor in default. Chapter Two is concerned with the consequences of the default and it is subdivided into seven parts. Each part focuses on...

In order to address the deficiencies in the banking regulation revealed by the recent financial crisis the Basel III introduces two minimum standards for funding liquidity, Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). The goal of this thesis is to analyze whether the NSFR is defined optimally or whether the Basel Committee on Banking Supervision (BCBS) will be forced to relax NSFR conditions similarly as happened by the LCR. Based on the approximation of the NSFR between 2007 and 2012 for a sample of 3 128 European banks we test the ability of banks to satisfy the NSFR. Our results suggest that the European banks have not started to converge to the NSFR yet. Despite this fact they should not have problems with meeting this requirement as 40.3% of banks in our sample would have already satisfied the NSFR in 2011. A Probit model analysis suggests that the NSFR requirement will decrease the probability of bank defaults and therefore increase the stability of the banking sector in the future which proves that the NSFR is correctly specified. Moreover, a simple stress testing shows that the stability of the system would not be improved anymore if the NSFR was defined more strictly. The current version of the NSFR therefore seems to be optimal and in our opinion should be...

"Cross-Border Contagion in the Banking Sector: The Case of Nordic Countries" by Lina Baronaite Abstract: The objective of the thesis is to estimate the degree of cross-border contagion among the Nordic banking sectors. It analyzes a sample of sixteen largest listed Nordic banks from January 2004 to January 2014. Using a multinomial logit model we test whether there is any degree of contagion among the four banking sectors, whether it is more pro- nounced for larger banks and whether the recent financial crisis has exacerbated it. Our results are in line with similar studies conducted for other countries. In particular, we find that a shock in one bank- ing sector is positively associated with an increase in shocks in another banking sector. Second, these shocks are larger and more significant for larger and more active international banks. Finally, the effect of the recent financial crisis has ambiguous effects on the cross-sectoral banking contagion. It appears that contagious links between some sec- tors weakened (Sweden and Denmark, Sweden and Finland). Other economies (Sweden and Norway) on the contrary became more depen- dent on each other. The results are robust to a wide variety of changes in specifications.

<p>I study local shocks to consumer credit supply arising from the opening</p><p>of bank-related retail stores. Bank-related store openings coincide with</p><p>sharp increases in credit card placements in the neighborhood of the</p><p>store, in the months surrounding the store opening, and with the bank</p><p>that owns the store. I exploit this relationship to instrument for new</p><p>credit cards at the individual level, and find that obtaining a new</p><p>credit card sharply increases total borrowing as well as default risk,</p><p>particularly for risky and opaque borrowers. In line with theories of</p><p>default externality, I observe that existing lenders react to the</p><p>increased consumer borrowing and associated riskiness by contracting</p><p>their own supply. In particular, in the year following the issuance of a</p><p>new credit card, banks without links to stores reduce credit card limits</p><p>by 24-51%, offsetting most of the initial increase in total credit</p><p>limits.</p> / Dissertation

The objective of this project is to investigate and model the quantitative connection between market prices of credit default swaps and the market perceived probability and timing of default by the underlying borrower. We quantify the credit risk of a borrower in a two-way relationship: calculate the term structure of default probabilities from the market prices of traded CDSs and calculate prices of CDSs from the probability distribution of the time-to-default.

Thesis advisor: Philp E. Strahan / This dissertation is comprised of three essays which examine the interactions among credit market innovation, corporate finance, and information intermediaries. In the first essay, I study the role of credit default swaps (CDS) in reducing credit supply frictions for corporate borrowers. I find that firms whose CDS is included in a major CDS index--the CDX North American Investment Grade index--have significantly lower cost of debt, and in response rely more heavily on debt for external financing. To address the potential endogeneity of index addition, I use a regression discontinuity design by exploiting the index inclusion rule, which allows me to compare firms that are just above and below the index inclusion cutoff. I show that index inclusion improves the liquidity of underlying single-name CDSs, which enables constituent firms' debtholders to better hedge their credit risk exposure. My findings suggest that CDS market benefits investment-grade borrowers by alleviating the supply-side frictions in credit markets. In the second essay, we investigate the role of proxy advisory firms in shareholder voting. Proxy advisory firms have become important players in corporate governance, but the extent of their influence over shareholder votes is debated. We estimate the effect of Institutional Shareholder Services (ISS) recommendations on voting outcomes by exploiting exogenous variation in ISS recommendations generated by a cutoff rule in its voting guidelines. Using a regression discontinuity design, we find that in 2010-2011, a negative ISS recommendation on a say-on-pay proposal leads to a 25 percentage point reduction in say-on-pay voting support, suggesting strong influence over shareholder votes. We also use our setting to examine the informational role of ISS recommendations. In the third essay, I examine how Moody's ratings have responded to the introduction of Credit Default Swap (CDS) market--an important innovation in credit markets in the past decade. I find that ratings quality of CDS firms, measured as default predictive power, improved significantly after the onset of CDS trading, consistent with a disciplining role of the CDS market. I show that ratings become more accurate in terms of less failure to warn (i.e. rating a defaulter too high) which is not accompanied by a rise of false alarms. In addition, rating downgrades are significantly more likely to be preceded by negative outlook or a watch for downgrade. The results are robust to controlling for the endogeneity of CDS trading. Overall, the evidence suggests that, in response to the CDS market developments, Moody's ratings become better at differentiating bad issuers from good ones as opposed to a "cookie-cutter'' approach to more conservative ratings. / Thesis (PhD) — Boston College, 2016. / Submitted to: Boston College. Carroll School of Management. / Discipline: Finance.

Thesis advisor: Utku Unver / This dissertation consists of three essays in microeconomic theory: two focusing on insurance theory and one on matching theory. The first chapter is concerned with catastrophe insurance. Motivated by the aftermath of hurricane Katrina, it studies a strategic model of catastrophe insurance in which consumers know that they may not get reimbursed if too many other people file claims at the same time. The model predicts that the demand for catastrophe insurance can ``bend backwards'' to zero, resulting in multiple equilibria and especially in market failure, which is always an equilibrium. This shows that a catastrophe market can fail entirely due to demand-driven reasons, a result new to the literature. The model suggests that pricing is key for the credibility of catastrophe insurers: instead of increasing demand, price cuts may backfire and instead cause a ``race to the bottom.'' However, small amounts of extra liquidity can restore the system to stable equilibrium, highlighting the importance of a functioning reinsurance market for large risks. These results remain robust both for expected utility consumer preferences and for expected utility's most popular alternative, rank-dependent expected utility. The second chapter develops a model of quality differentiation in insurance markets, focusing on two of their specific features: the fact that costs are uncertain, and the fact that firms are averse to risk. Cornerstone models of price competition predict that firms specialize in products of different quality (differentiate their products) as a way of softening price competition. However, real-world insurance markets feature very little differentiation. This chapter offers an explanation to this phenomenon by showing that cost uncertainty fundamentally alters the nature of price competition among risk-averse firms by creating a drive against differentiation. This force becomes particularly pronounced when consumers are picky about quality, and is capable of reversing standard results, leading to minimum differentiation instead. The chapter concludes with a study of how the costs of quality affect differentiation by considering two benchmark cases: when quality is costless and when quality costs are convex (quadratic). The third chapter focuses on the theory of two-sided matching. Its main topic are inefficiencies that arise when agent preferences permit indifferences. It is well-known that two-sided matching under weak preferences can result in matchings that are stable, but not Pareto efficient, which creates bad incentives for inefficiently matched agents to stay together. In this chapter I show that in one-to-one matching with weak preferences, the fraction of inefficiently matched agents decreases with market size if agents are sufficiently diverse; in particular, the proportion of agents who can Pareto improve in a randomly chosen stable matching approaches zero when the number of agents goes to infinity. This result shows that the relative degree of the inefficiency vanishes in sufficiently large markets, but this does not provide a "cure-all'' solution in absolute terms, because inefficient individuals remain even when their fraction is vanishing. Agent diversity is represented by the diversity of each person's preferences, which are assumed randomly drawn, i.i.d. from the set of all possible weak preferences. To demonstrate its main result, the chapter relies on the combinatorial properties of random weak preferences. / Thesis (PhD) — Boston College, 2012. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

Credit Default Swaps (CDS) instruments - as an indicator of credit risk - were one of the most prominent innovations in financial engineering. Very limited literature existed on the drivers of CDS spreads before the financial crisis due to the opacity of this market and its lack of transparency. First, this thesis investigates the drivers of CDS spread in the UK banking sector, by considering the role of the housing market, over the period of 2004-2011. I find that, in the long-run, house price dynamics were the main factor contributing to wider CDS spreads. In addition, I show that a rise in stock prices lead to higher availability of capital and therefore increased bank borrowing activities, which led to lower credit risk. Furthermore, findings show that with higher aggregate bank liquidity, banks tend to grant more loans to low-income consumers, thus increasing bank credit risk. In addition, in the short-run, I employ the Structural VAR by imposing short-run restrictions to identify the five shocks arising from the CDS spread, the house price index, the yield spread, the TED spread, and the FTSE100. The SVAR findings indicate that a positive shock to house prices significantly increases the CDS spread in the medium-term, in the UK banking sector. In addition, apart from its own shock, the house price shock explains a big part of the variance (nearly 20%) in CDS spread. These results remained robust even after changing the ordering of the variables in the Structural VAR. Second, considering the bank-level factors across 30 countries and 115 banks, I find most significant bank-level drivers of the CDS spread were asset quality, liquidity and the operations income ratio. As such, banks with better asset quality, high levels of liquidity and operations income ratio were subject to lower CDS spreads and credit risk. Furthermore, larger banks were found to be more risky than smaller banks. We have conducted the U-test and our results indicate the presence of a U-shape relationship between bank size and bank CDS spread. It should be noted that in order to ensure that our results are robust, we used several estimation frameworks, including the FE, RE and alternative Generalized Method of Moments (GMM) approaches, which all prove the existence of a U-shape relationship between the CDS spread and bank size. In addition, we find a threshold level of bank size, which shows that banks growing beyond this point are subject to wider CDS spreads. Finally, I consider the difference in financial systems at country-level and regulatory structures at bank-level, in a panel setting, over the period of 2004-2011. At country-level, my findings directly link financial deepening to higher credit risk, reflecting a sign of credit bubble. Besides, at bank-level, I confirm my previous findings whereby asset quality, liquidity and operations income remain significant drivers of the CDS spread.

Rising inequality affects the dynamics of macroeconomic variables both at home and abroad. Abroad, rising inequality causes an over-accumulation of foreign assets, creating persistent current account deficits. Inequality leads to rises in government transfers, and if raising tax revenue through a progressive income tax system is increasingly costly, sovereign nations could accumulate on debt and increase their default risk. At home, rising inequality in income increases household debt accumulation, which increases the probability of a household default crisis. This thesis examines the mechanisms behind the relationship between rising inequality and the above macroeconomic variables, and offers some policy recommendations. In the first chapter, I examine the relationship between top income inequality and the current account. Using panel error correction methods I observe a long-run relationship between rising top income shares and falling current account conditional on highly progressive income tax systems. Since tax revenues rise with top income inequality if marginal income taxes are progressive, the negative conditional relationship appears either if fiscal revenues are transferred to households who become more avid consumers, or if government expenditure increases along the inequality trend. I incorporate these findings into a dynamic general equilibrium model to study the effects of the top and bottom income tax cuts on the current account and fiscal balance. As the income share at the top rises, a tax cut at the margin to them improves the current account, since top income households are generally savers, but hurts the fiscal balance through revenue reduction. On the other hand, a bottom tax cut lowers the current account balance but does not have much of an adverse impact on the fiscal balance. In the second chapter, I examine how inequality increases the probability of sovereign default by studying the Latin American default episodes of the early 1980s. The sovereign borrows for the purposes of redistribution and to cover government expenditure. Default on sovereign bonds occur when the one time increase in utility of poor households due to higher transfers outweighs the risk of remaining in autarky for an extended period of time, and the resource cost of raising revenue through a more progressive income tax system becomes too high. In the third chapter, I examine how accumulation of household debt contributes to the probability of household crisis, which leads to an initial decrease in inequality but a persistent rise afterwards. Idiosyncratic increases in the income of impatient households increase their borrowing due to the rise in consumption of durable goods, but act as a pecuniary externality on other impatient households by driving up the interest rate. As a result the risk of an economy wide crisis rises. Inequality in income and wealth has significant implications for the dynamic decision making of households and governments, and widening inequality often leads to the accumulation of debt for households and governments alike. Knowing the mechanisms behind these relationships is important for the design of policies both for institutions that oversee the redistribution of wealth, as well as for institutions that oversee the financial markets of a country.