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.

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.

<p>Credit derivatives are very popular on financial markets in recent days.</p><p>The most liquid credit derivative is a credit default swap (CDS). In</p><p>this research we investigate methods for modeling and monitoring of the</p><p>price process of CDS. We study Hull and White model to calculate CDS</p><p>spread and have data for our analysis. We consider different methods for</p><p>monitoring of the price process of CDS. In particular we study CUSUM</p><p>method. And we calculate more commonly used perfomance measures</p><p>for this method.</p>

This paper seeks to investigate the reaction of credit ratings and credit markets in response to accounting restatements. Accounting restatements can often be perceived as a precursor to fraudulent activity, which could lead to a more negative credit rating, or a heightened credit default swap (CDS) price. CDS prove to be a useful measuring tool as they adjust to changes relatively quickly; much more quickly than the assessment of a credit rating agency. My results suggest that restatements do indeed have an effect on credit rating. It does, however take longer for credit ratings to be updated after the restatement, but CDS quotes move faster and are just as, if not more accurate. I also find that credit default swaps do not anticipate restatements, showing that while the credit markets are beating the rating agencies, they do not appear to be beating the accountants.

This study includes two theoretical works. In both works, I assume that economic agents have heterogeneous beliefs. I study collateralized loan transactions among economic agents arising from the divergent beliefs. Moreover, I make collateral requirements endogenously determined, along with interest rates and loan quantities. The theme of the first work is to study private transactions in currency crises. I assume that domestic residents have different beliefs on how resilient the central bank is in defending the currency. Due to the different beliefs, domestic residents willingly borrow and lend among themselves. I show that the heterogeneity of beliefs per se brings stability to the system, but that short-term collateralized loans among domestic residents arising from the divergent opinions make an exchange rate peg vulnerable. The second work is to understand credit default swaps in general equilibrium. The model features a market for a risky asset, a market for loans collateralized by the risky asset, and a market for credit default swaps referencing these loans. I show that the introduction of credit default swaps only as insurance has no effect on the price of the risky asset. And the introduction of credit default swaps both as insurance and as tools for making side bets depresses the price of the risky asset in general but has no effect hen the majority of the economy hold bearish views on the risky asset.

The credit valuation adjustment (CVA) on an over-the-counter derivative transaction is the price of the risk associated with the potential default of the counterparties to the trade. This dissertation provides an introduction to the concept of CVA, beginning with the required backdrop of counterparty risk and the basics of default risk modelling. Right and wrong way risks are central themes of the dissertation. A model for the pricing of both the unilateral and the bilateral CVA on a credit default swap (CDS) is implemented. Each step of this process is explained thoroughly. Results are reported and discussed for a range of parameters. The trends observed in the CDS CVA numbers produced by the model are all justified and the right and wrong way nature of the exposures captured. In addition, the convergence and stability of the numerical schemes utilised are shown to be appropriate. A case study, in which the model is applied to a set of market scenarios, concludes the dissertation. Since the field is far from established, a number of areas are suggested for further research. Copyright / Dissertation (MSc)--University of Pretoria, 2012. / Mathematics and Applied Mathematics / unrestricted

Credit derivatives are very popular on financial markets in recent days. The most liquid credit derivative is a credit default swap (CDS). In this research we investigate methods for modeling and monitoring of the price process of CDS. We study Hull and White model to calculate CDS spread and have data for our analysis. We consider different methods for monitoring of the price process of CDS. In particular we study CUSUM method. And we calculate more commonly used perfomance measures for this method.

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Cette thèse présente dans un premier temps l’histoire récente et les enjeux de l’économie et du système financier indien. Puis, en se concentrant la période récente, elle étudie la question de l’intégration financière sur différents marchés : les marchés actions sont traités dans le 1er chapitre, les spreads des CDS indiens sont abordés dans 2nd chapitre et la relation entre les prix des matières premières et la politique monétaire est analysée dans le 3e chapitre. Enfin, le dernier chapitre pose la question de savoir si un secteur bancaire plus efficient peut aider l’économie indienne à sortir de la crise. Globalement, les résultats indiquent que les marchés étudiés sont plus intégrés depuis la crise, ce qui suggère une fragilité du secteur financier indien aux chocs extérieurs. Néanmoins, les résultats du chapitre 4 montrent, dans le cadre d’un modèle simple, que le système financier peut aussi permettre à l’économie indienne de surmonter ses déboires actuels, s’il l’on y implémente les réformes adéquates et que la productivité des banques est améliorée. / This thesis first presents India’s economy and financial system’s recent history and current issues. Then, with an emphasis on the recent turmoil period, it studies the question of financial integration in various markets: equity markets are dealt with in the 1st chapter, CDS spreads are analyzed in the 2nd chapter while the 3rd chapter focuses on the monetary policy-commodity prices nexus. Finally, the last chapter reflects on the ability of the banking system to help the country out of the current crisis. Overall, our results indicate that markets are more integrated since the crisis, which suggest a frailty of the Indian financial structure to exterior shocks. Nevertheless, results for chapter 4 show that the financial system could also allow the economy to recover if the proper reforms are implemented and that banking efficiency is improved.

Credit default swaptions (CDS options) are credit derivatives that are widely used by finan-cial institutions such as banks and hedging companies to manage their credit risk. These options are usually priced using Black-Scholes model, but the assumptions underlying this model do not always hold especially when solving complex financial problems. The proposed solution is to use numerical methods such as finite difference method (FDM) to approximate the solution of the Black-Scholes PDE in cases where closed form solutions cannot be obtained. The pricing of swaptions are important in financial markets, hence we specifically discuss the pricing of interest rate swaptions, CDS options, commodity swaptions and energy swap-tions using Black-Scholes model. Simple parabolic PDE known as heat equation given at (Higham, 2004) forms a foundations to understand the application of FDM when solving a PDE. Since, Black-Scholes PDE is also a parabolic equation it is transformed to a form of a heat equation (diffusion equation) by applying change of variables technique. FDM, specifically Crank-Nicolson method can be applied to the heat equation but in this dissertation it is applied directly to the Black-Scholes PDE to approximate its solution. Therefore, it is preferable to use Crank-Nicolson method because it is known to be second- order accurate, unconditionally stable, very flexible, suitable and can accommodate varia- tions in financial problems, (Duffy, 2008). The stability of this method is investigated using a matrix approach because it accommodates the effect of boundary conditions. To test the convergence of Crank-Nicolson method, it is compared with the Black-Scholes method used in (Tucker and Wei, 2005) to price CDS options. Conclusively the results obtained by Crank-Nicolson method to price CDS options are similar to those obtained using Black-Scholes method. / Thesis (MSc (Risk Analysis))--North-West University, Potchefstroom Campus, 2013.