International Review of applied finnance Issues and Economics: Current Issue

Volume 3 Issue 3 (September 2011)

Regular Articles

Performance of Analyst Recommendations in the Istanbul Stock Exchange

Oral Erdogan

Istanbul Bilgi University, Turkey

Dan Palmon

The State University of New Jersey, Rutgers, USA

Ari Yezegel

Bentley University, USA

The role of Financial Instruments in Economic Development of Mediterranean Countries

Nidal Rashid Sabri

Birzeit University, Palestine

Market Risk Predictability with Multiscale Beta

Rossitsa Yalamova

University of Lethbridge, Canada

An Alternative Methodological Approach to Assess the Predictive Performance of the Moving Average Trading Rule in Financial Markets. Application to the London Stock Exchanges

Alexandros E. Milionis

Bank of Greece, University of the Aegean, Greece

Evangelia Papanagiotou

University of the Aegean, Greece

The Puzzle of Warrants Trading below their Intrinsic Values in China's A-Share Market

Qiang Liu

Southwestern University of Finance and Economics, China

Song-Ping Zhu

University of Wollongong, Australia

Wei Fan

University of Electronic Science and Technology of China, China

Option-Implied Stock Market Expectations across the Week: New Evidence from the FTSE-100 Index Options

Janne Aijo

University of Vaasa, Finland

Special Issue Articles

Special Issue: Credit Risk Analysis
Volume 3, Issue 3 (2011)

Edited by Robert A. Jarrow, Michael Jacobs and Tarek Chebbi

Editorial

We have just witnessed the most severe global financial crisis of the last century, surely a transformative event for economies and markets: trillions of dollars of wealth has evaporated, dozens of financial institutions have disappeared, many countries have entered severe recessions and struggle with massive debts, and faith in our markets and institutions has been shaken to the core; add to that with the sovereign crisis percolating, and that we may be on the cusp of a second act to this. What sets this crisis apart from historical precedents is the role played by credit risk in augmenting the severity and duration of this episode. Fueled by massive capital inflows at very low cost and short-term funding, financial institutions lost a one-directional highly levered bet on the housing market, which compounded into a large number of previously highly rated institutions failing. The crisis spread from the epicenter in the U.S. and U.K. rapidly to countries on the periphery, as global financial markets seized up, and as losses rapidly arose. Credit risk had indeed reared its ugly head, and we were reminded that this is the single most important risk that financial institutions face. Furthermore, combined with new structures that expose bank to this (e.g., structured finance and credit derivatives), we rapidly came to the realization that in the new environment robust credit risk is not a trivial exercise. In retrospect, we realize that it is not only a credit crisis, but also a crisis in credit risk modeling that got us into this situation: while banks and supervisors where convinced that solid credit analysis was being done, and moral hazard under control, in reality the models and analytical techniques at hand were insufficient to measure and manage the credit risk associated with complex new products and market mechanisms.Just as credit markets and structures had come undone, the models underlying broke under the weight of a complex new reality at odds with the overly simplistic (or just plain erroneous) assumptions that these were built upon.
Against this challenging backdrop, the IRAFIE team is pleased to present this special issue on credit risk in finance and economics. We have worked tirelessly to gather some of the best, cutting edge research conducted by leading scholars in this space. These papers illustrate some of the best thinking on how to construct models that are capable of coping with the new financial reality faced by institutions, investors and regulators concerned with credit risk. A broad theme here is the interrelation between credit risk and other types of risk that we seek to measure and management, such as market and liquidity risk. Also, there is an emphasis in many of these papers upon challenging many of the conveniently made assumptions or simplification that have been made in credit risk modeling - e.g., the independence between credit and other types of risk or the constancy of certain credit risk parameters. We hope that you enjoy this special issue and we look forward to future collaboration with you on theseand related topics in economics and finance.

Pricing Credit-Rated Defaultable Coupon Bonds

Raj Jagannathan

University of Iowa, USA

Ehud Ronn

University of Texas at Austin, USA

Wei Chen

SAS Inc. Cary, NC

Abstract | References | Full Text | How To Cite

Copula Correlation, Default Correlation and the Financial Crisis

Donald R. Chambers

Lafayette College, Easton, Pennsylvania, USA

Jeffrey Liebner