he chief undertaking of this study is to investigate consumer debt decisions and identify the factors that may lead to credit card delinquency. We base the analysis on the UK and present a synthesis of these findings with respect to education and policy making. The thesis: summarises relevant academic literature and key policy debates; explores new approaches to decision making under uncertainty; makes a case for measures to imprOve financial literacy; employs the recently accessible UK Wealth and Assets survey (WAS) that is not yet the basis for published research findings in the area of consumer debt;1 uses appropriate empirical methods to discover the factors that increase risk of credit card delinquency amongst the 16-35 age group. With respect to credit card delinquency, the study concludes that personal demographic and socio-economic characteristics which have been found to be relevant predictors of fragile personal finances in previous research are relevant also in the case of credit card delinquency amongst young persons in the UK. Gender, ethnicity and education are discovered to be important determinants of the risk of delinquency and there is some evidence that personal attitudes to financial risk may also be relevant. With respect to financial literacy and policy making, the study concludes that there is a need for the Government and the policy makers to promote financial education across the population with emphasis on young adults, particularly males without Higher Education and ethnic minorities. Moreover, policy makers should acknowledge the presence of uncertainty in consumer debt decisions and incorporate seminars on risk awareness in the educational system and labour market.

The thesis consists of three papers. Credit Rating and Competition (co-authored wth Pragyan Deb and Nelson Camanho) studies the behaviour of credit rating agencies in a competitive framework with the presence of conflicts of interest. We show that competition for market share through reputation is insufficient to discipline rating agencies in equilibrium. More importantly, our results suggest that, in most cases, competition will aggravate the lax behaviour of rating agencies, resulting in greater ratings inflation. This result has important policy implications since it suggests that enhanced competition in the ratings industry is likely to make the situation worse. Credit Default Swaps - Default Risk, Counter-party Risk and Systemic Risk examines the implications of CDS on systemic risk. I show that CDS can contribute to systemic risk in two ways: through counter-party risk and through sharing of default risks. A central clearing house, which can only reduce counter-party risk, is by no means a panacea. More importantly, excessive risk taken by one reckless institution may spread to the entire financial system via the CDS market. This could potentially explain the US government's decision to bail out AIG during the recent financial crisis. Policies requiring regulatory disclosure of CDS trades would be desirable. Investor Cash Flow and Mutual Fund Behaviour (co-authored with Zhigang Qiu) analyzes the trading incentives of mutual fund managers. In open-ended funds, investors are only willing to invest in the fund when the share price of the fund is expected to increase, i.e. the fund is expected to make profits in the future.We show that the fund manager may buy the asset even when he perceives the asset to be over-valued, given that his portfolio choices are disclosed to the investors and that he is paid a fixed fraction of the terminal value of the fund.

In this thesis we examine the relationship between corporate bond spreads and economic activity in eight European countries using data on 500 corporate bonds between July 1994 and May 2011 for the United Kingdom and between October 2001 and May 2011 for Austria, Belgium, France, Germany, Italy, Netherlands and Spain. We construct a unique dataset of corporate bond spreads from bond-level data employing a similar methodology to Gilchrist and Zakrajsek (2012a) in the United States. Thus, we ensure that our credit spread measure is not distorted by illiquidity, embedded options, or mismatched maturities and coupon schedules between the two bond instruments being compared. We evaluate the importance of the country-level corporate bond spread index in .predicting the future growth in real activity at the individual country level for various measures of economic activity (such as industrial production, unemployment available at monthly frequency; and employment and real GOP available at quarterly frequency). We find that the credit spread index is a consistent predictor of real activity even when we include measures of monetary policy tightness (such as the term spread and the real interest rate), other leading indicator variables (economic sentiment and consumer confidence) and factors extracted from a large macro dataset. Our results are consistent at different forecasting horizons and are robust to different measures of the credit spread index. We then decompose the credit spread by purging it of expected default, tax and liquidity premia in an attempt to determine what component accounts for its information Content. We find that the excess bond premium, an indicator of financial market tightness, is the major driving source of the spread's predictive content. When)He compare the predictive ability of the credit spread and the excess bond premium across individual countries within the Euro area and Outside the Euro area, we find that mainly the core European countries have similar predictive ability, while the other countries in the Euro area and the UK are more heterogeneous.

The aim of my thesis is to study the impact of three different types of credit supply shocks on the US economy during the recent boom-bust cycle. I apply rigourous identification strategies using a comprehensive mortgage loan-application level dataset that spans two decades to identify the causal effect of each shock on the US housing market { the market at the epicentre of the recent global financial crisis. The first chapter examines how shocks to the geographic distance between borrowers and lenders affected the quality of loans originated by US banks. I show that US banks that originated loans at relatively long distances recorded relatively high shares of delinquent mortgages, which suggests that geographic distance hampers a bank's ability to screen bor- rowers. The second chapter assesses how the supply of mortgage credit was affected by the closure of the private-label securitisation market in 2007. By impairing lender financing conditions, I demonstrate that the shock to the securitisation market caused US mortgage lenders to curtail new lending and that this adversely affected the aggregate level of new mortgage credit. The third chapter explores whether shocks to bank lending standards affect household borrowing and spending. I show that the introduction of US state anti-predatory lending laws, by tightening lending standards, caused a decline in the level of household mortgage credit, although this had little subsequent impact on household spending.

In every society around the world, shelter is one of the most basic needs for every human being. Unfortunately, it is not one of the free gifts of nature. This means financing for housing is unavoidable. However, majority of the individuals are unable to achieve this without financial assistance. The recent 2007 financial crisis intervened in the pattern of housing finance which brought some changes in the market for the demand and supply of mortgage loans. This study therefore aims at investigating the extent of these changes and the resulting implications. It further explores households’ choice of mortgage provider and homeownership status. Using a longitudinal study, data was collected for periods before, during and after the financial crisis, with data ranging from 2003 to 2013. Primary and secondary method of data collection was employed in achieving the aims and objectives of the study. Primary data was collected using questionnaires and interviews. The questionnaire involved 320 bank customers while the interviews was done on 43 participants. Out of these 43 participamts, 31 were from the demand side of the study while 12 were mortage advisors. The findings revealed that the three distinct periods had significant differences in their patterns of housing finance. It was also found that households preferred their mortgages to be provided by the high street banks for security reasons with 88.2% of them satisfied with their mortgage providers. Also, initial deposit and increasing house prices were the most important impediment to obtaining a mortgage. Moreover, the claim by the households that the banks were not willing to grant mortgage loan to them was true to an extent as 54.4% of them agreed to the validity of the statement. Finally, the implications of the financial crisis on households as well as homeownership status implications on tenants were generally negative.

The thesis presents my work on the modelling, explanation and prediction of credit risk through three channels: (binary) default indicator, (ordinal) credit ratings and (continuous) CDS spreads.

This thesis analyses the relationship between the increasingly important sovereign CDS spreads and exchange rates, from a macroeconomic perspective. It attempts to address an existing gap in the empirical literature, which to date has paid limited attention to the role of exchange rates in influencing sovereign CDS spreads, and vice versa. In exploring the relationship between sovereign CDS markets and foreign exchange markets, I find relatively strong evidence of a causal relationship between these two variables. In a longer-term cointegrating relationship, I find that sovereign CDS spreads have different impacts (positive or negative) on exchange rates depending on the structural characteristics of the domestic export sectors of the countries studied. Turning to the second moment of exchange rates and sovereign CDS spreads, I examine the relationship between the volatility of sovereign CDS spreads and the volatility of exchange rates for developed economies (proxied by an index containing 10 Eurozone countries) and emerging economies (proxied by Brazil and Russia). My findings point to different mechanisms of transmission between sovereign CDS markets and foreign exchange markets with regard to developed and emerging economies: for developed economies, exchange rates affect sovereign CDS spreads through the volatility, whilst in emerging economies the exchange rates affect sovereign CDS spreads at the price level. To further analyse the determinants of sovereign CDS spreads, I incorporate additional macroeconomic fundamentals in addition to exchange rates into a model to explain sovereign CDS spreads. The results show that sovereign CDS spreads are indeed driven by most macroeconomic fundamentals. However, these results do not hold during periods of economic turmoil, in which the rising risk aversion of investors becomes a principal influence behind the sovereign CDS spreads. As changes in exchange rates are able to capture changes to risk aversion through trading in foreign exchange markets, the exchange rate retains its explanatory power to sovereign CDS spreads in ‘normal’ as well as ‘crisis’ conditions. Overall, the study provides strong support for the claim that exchange rates are an important determinant of sovereign CDS spreads, in addition to the interest rate which is highlighted in the literature review. The exchange rate – as an important fundamental indicator – can reflect the general domestic economic status, the relative international competitiveness of countries, as well as capture changes in risk aversion among investors. Therefore, using exchange rates to explain sovereign CDS spreads can help to account for both domestic and international dimensions of the ‘health’ of an economy as well as changes in investors’ attitudes.

No description available.

The purpose of this thesis is to determine and to better inform industry practitioners to the most appropriate classification and regression techniques for modelling the three key credit risk components of the Basel II minimum capital requirement; probability of default (PD), loss given default (LGD), and exposure at default (EAD). The Basel II accord regulates risk and capital management requirements to ensure that a bank holds enough capital proportional to the exposed risk of its lending practices. Under the advanced internal ratings based (IRB) approach Basel II allows banks to develop their own empirical models based on historical data for each of PD, LGD and EAD. In this thesis, first the issue of imbalanced credit scoring data sets, a special case of PD modelling where the number of defaulting observations in a data set is much lower than the number of observations that do not default, is identified, and the suitability of various classification techniques are analysed and presented. As well as using traditional classification techniques this thesis also explores the suitability of gradient boosting, least square support vector machines and random forests as a form of classification. The second part of this thesis focuses on the prediction of LGD, which measures the economic loss, expressed as a percentage of the exposure, in case of default. In this thesis, various state-of-the-art regression techniques to model LGD are considered. In the final part of this thesis we investigate models for predicting the exposure at default (EAD). For off-balance-sheet items (for example credit cards) to calculate the EAD one requires the committed but unused loan amount times a credit conversion factor (CCF). Ordinary least squares (OLS), logistic and cumulative logistic regression models are analysed, as well as an OLS with Beta transformation model, with the main aim of finding the most robust and comprehensible model for the prediction of the CCF. Also a direct estimation of EAD, using an OLS model, will be analysed. All the models built and presented in this thesis have been applied to real-life data sets from major global banking institutions.

This thesis is devoted to UK Mortgage Performance Modelling. The research conducted uses an option pricing methodology to model theoretically the value of Mortgages, the Option to default and the probability to default and to compare the predictive accuracy of the latter with the predictive accuracy of data driven credit-scoring techniques. Theoretical models are constructed to represent the life cycles of loans collateralised by real property operating within a stochastic economic environment of house-price and interest rate. These realistic mortgage models provide a confirmation of recent research based upon a relaxation of the assumption of financially rational, 'ruthless' prepayment, bridge a potential oversight in existing research by an extension of existing modelling in the stochastic behaviour of the house price process and present a proposal for a straightforward approach utilising characteristic measures of borrower delinquency and insolvency that enables estimation of the default probabilities implicit in residential mortgages using a simple but enhanced optimising structural model. This model straightforwardly demonstrates that one can predict the probability of eventual default, beginning at the origination of the loan, the time when a lender would be most interested in making such a determination. Secondly the problem of mortgage loan default risk is empirically assessed in a number of different ways focusing upon analysis of the competing risks of early termination, the inclusion of macro-economic variables - time varying covariates and unobserved borrower heterogeneity. Key insight is provided by means of a multi-period model exploiting the potential of the survival analysis approach when both loan survival times and the various regressors are measured at discrete points in time. The discrete-time hazard model is used as an empirical framework for analysing the deterioration process leading to loan default and as a tool for prediction of the same event. Results show that the prediction accuracy of the duration model is better than that provided by a single period logistic model. The predictive power of the discrete time survival analysis is enhanced when it is extended to allow for unobserved individual heterogeneity (frailty).