<p>This paper has been awarded the Ronald S. Love Prize of the Western Society for French History in 2009.</p>

This study examines the timeliness of write-downs taken by U.S. financial institutions during the financial crisis of 2007-2008. The timeliness of write-downs is measured by benchmarking the quarterly accounting write-down schedule with the devaluation schedule implied by credit indices such as the ABX. The results show that accounting write-downs are less timely than the devaluations implied by credit indices. In a cross-sectional analysis of the determinants of the timeliness of write-downs, I document that higher corporate governance quality is positively related to timelier write-downs. Furthermore, I observe that regulatory investigations and litigation pressure are positively related to the timeliness of write-downs, whereas the write-downs by firms with more complex exposures, higher financial leverage, and tighter regulatory constraints are less timely. In addition, I control for numerous exposure-specific characteristics and document that less risky exposures, and exposures that were affected later during the financial crisis, were written down later. Regarding the consequences of timeliness, this study finds that the exposure to risky assets is reflected faster in stock returns for firms with timelier write-downs.

This dissertation is an investigation into one of the important functions of the banking system: to transform short-term liquid deposits into long-term illiquid financial assets that can fund long gestation activities and, thus, raise the rate of economic growth. To investigate this function empirically, the dissertation uses two new data sets on the maturity of bank credit to the private sector. First data set contains yearly observations covering 74 countries during the period from about 1990 to 2005, while the second data set contains quarterly observations covering 14 transition countries from about 1995 to 2006. Using the data on a broad set of countries, the dissertation shows that economic growth is enhanced in countries where the financial system extends more long-term credit. This finding is the first empirical confirmation of the theoretical predictions regarding the liquidity transformation function of banks. Furthermore, using the same data set, the dissertation shows that credit maturity depends on a number of institutional and economic factors. The determinants of credit maturity have an impact on economic growth via their influence on the availability of long-term external financing. Credit maturity is longer in countries with strong legal institutions, with low inflation, with deeper financial markets, and with schemes for sharing credit information between financial institutions. From a policy perspective, the institutions for sharing credit information probably present the most interest because their establishment is a policy choice. Findings from the broad set of countries are confirmed in the second data set using several definitions of maturity. Additional results from the second data set suggest that credit maturity is longer in countries at the higher level of economic development, with less liquid stock markets, and with more privately owned domestic banks. Furthermore, the results suggest that credit information sharing mechanisms lengthen the maturity of credit if credit information sharing institutions are privately owned or have greater quality of information.

This study examines the timeliness of write-downs taken by U.S. financial institutions during the financial crisis of 2007-2008. The timeliness of write-downs is measured by benchmarking the quarterly accounting write-down schedule with the devaluation schedule implied by credit indices such as the ABX. The results show that accounting write-downs are less timely than the devaluations implied by credit indices. In a cross-sectional analysis of the determinants of the timeliness of write-downs, I document that higher corporate governance quality is positively related to timelier write-downs. Furthermore, I observe that regulatory investigations and litigation pressure are positively related to the timeliness of write-downs, whereas the write-downs by firms with more complex exposures, higher financial leverage, and tighter regulatory constraints are less timely. In addition, I control for numerous exposure-specific characteristics and document that less risky exposures, and exposures that were affected later during the financial crisis, were written down later. Regarding the consequences of timeliness, this study finds that the exposure to risky assets is reflected faster in stock returns for firms with timelier write-downs.

Prior literature finds that firms incur a lower cost of debt capital when they voluntarily disclose information. However, the economic literature demonstrates that creditors' lending standards become more stringent (lax) when credit is rationed (abundant) suggesting that they value voluntary disclosure from borrowers differentially across credit market regimes. I draw upon the economic and finance literature on credit rationing to test whether the effects of voluntary disclosure on firms' cost of debt capital is greater during periods of credit rationing. I provide some evidence that confirms this prediction. Moreover, I provide some evidence that this relation is stronger for smaller firms than larger firms during periods of credit rationing suggesting that creditors value voluntary disclosure more from firms that have fewer resources to cover the increased agency cost of lending during periods of credit rationing.

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This thesis deals with credit risk modeling and related mathematical issues. In particular we study first-passage models for credit risk, where obligors default upon first passage of a ``credit quality" process to zero. The first passage problem for correlated Brownian motion is a mathematical structure which arises quite naturally in such models, in particular the seminal multivariate Black-Cox model. In general this problem is analytically intractable, however in two dimensions analytic results are available. In addition to correcting mistakes in several published formulae, we derive an exact simulation scheme for sampling the passage times. Our algorithm exploits several interesting properties of planar Brownian motion and conformal local martingales. The main contribution of this thesis is the development of a novel multivariate framework for credit risk. We allow for both stochastic trend and volatility in credit qualities, with dependence introduced by letting these quantities be driven by systematic factors common to all obligors. Exploiting a conditional independence structure we are able to express the proportion of defaults in an asymptotically large portfolio as a path functional of the systematic factors. The functional in question returns crossing probabilities of time-changed Brownian motion to continuous barriers, and is typically not available in closed form. As such the distribution of portfolio losses is in general analytically intractable. As such we devise a scheme for simulating approximate losses and demonstrate almost sure convergence of this approximation. We show that the model calibrates well, across both tranches and maturities, to market quotes for CDX index tranches. In particular we are able to calibrate to data from 2006, as well as more recent ``distressed" data from 2008.

This thesis deals with credit risk modeling and related mathematical issues. In particular we study first-passage models for credit risk, where obligors default upon first passage of a ``credit quality" process to zero. The first passage problem for correlated Brownian motion is a mathematical structure which arises quite naturally in such models, in particular the seminal multivariate Black-Cox model. In general this problem is analytically intractable, however in two dimensions analytic results are available. In addition to correcting mistakes in several published formulae, we derive an exact simulation scheme for sampling the passage times. Our algorithm exploits several interesting properties of planar Brownian motion and conformal local martingales. The main contribution of this thesis is the development of a novel multivariate framework for credit risk. We allow for both stochastic trend and volatility in credit qualities, with dependence introduced by letting these quantities be driven by systematic factors common to all obligors. Exploiting a conditional independence structure we are able to express the proportion of defaults in an asymptotically large portfolio as a path functional of the systematic factors. The functional in question returns crossing probabilities of time-changed Brownian motion to continuous barriers, and is typically not available in closed form. As such the distribution of portfolio losses is in general analytically intractable. As such we devise a scheme for simulating approximate losses and demonstrate almost sure convergence of this approximation. We show that the model calibrates well, across both tranches and maturities, to market quotes for CDX index tranches. In particular we are able to calibrate to data from 2006, as well as more recent ``distressed" data from 2008.

The aim of this research is to produce a model allowing me to estimate the credit risks in the aggregate and the sectors levels of the Swedish economy in response to the evaluation of key macroeconomic variables. In order to estimate the credit risk models for the Swedish economy, one-factor models were used and the employed data were covering the period from 2003 to 2011. One factor models’ estimations for the sectors facilitate a comparison of default rates’ determiners between different sectors. The analyze part of the thesis starts with the estimation of the credit risk model at the aggregate economy level and it follows by the estimation of the models for different sectors. Ten different sectors are analyzed and for all sectors, the default rate models are produced. Furthermore, the paper presents some examples of applying the estimated models to macro stress testing. The findings demonstrate that in the transport and in the sector others, the most significant macroeconomic indicators were GDP, interest rates and repo rates. But, in all other sectors: GDP, interest rates and inflation rates showed the highest significant results. All coefficients were significant at the 5 % confidence level either in aggregate level or in sectors level. The interest rates showed positive relations with the default rates while the GDP and the inflation rates showed opposite relations. Reciprocal analyzes of the sectors indicated that compared to other sectors, the default rates in the financial sector strongly depended on the GDP and in the construction sector it weakly depended on inflation rates. In addition, the credit risks were varying between the sectors. At the education and the sector others, default rates were low, fluctuated between 0 and 0.05%. In contrast, at the manufacturing, the wholesale, the transportation, and the finance sectors the default rates were very high. It fluctuated between 0.03% and 0.16%. Finally, estimated models were used for the sensitive analyze of default rates by creating shocks over the independent variables. So, these calculations provided that, the default rates in financial activities sector were the most sensible sector during the shock at the GDP and the default rates in the construction sector were the most insensible ones during the shock at the interest rates and the inflation rates. To conclude, the results of this thesis can help understand the relationship between credit risk and macroeconomic indicators. This research provides important findings on how the macroeconomic indicators influence the default rates of Swedish economy either at the aggregate or at the sectors level. The calculated models can be used for the default rates’ prediction or stress testing.

The concept of asymmetric information is probably best described by medieval idiom to buy a pig in a poke or to buy a cat in a sack, and is a long standing issue in a market economy. A solution to this predicament, is thought to be an objective third party certifier who would provide true information for the market participants. Credit Rating Agencies (CRAs) by all definitions act as such certifiers within financial markets and have been on the public spotlight for the last years. In both cases, the US subprime mortgage crisis and the EU sovereign debt crisis, the agencies were charged for miss-information on quality of financial products, that led to financial losses for the investors or debtors. Theoretical deduction suggest that certain market reaction to CRA announcements may indicate  if markets perceive CRAs themselves as selling a cat in a sack to the investors. Event study approach is employed to investigate how do sovereign debt market react to CRA announcements. The results suggest that sovereign debt market reaction is more pronounced if three major CRAs issue clustered announcements, and more actively react to following announcements as opposed to the leading ones.