scholarly journals De and re-levering betas with risky debt

2018 ◽  
Vol 12 (2) ◽  
pp. 703-720
Author(s):  
Marko Volker Krause
Keyword(s):  
Risky Debt

Banks’ Risk Dynamics and Distance to Default

2019 ◽  
Vol 33 (6) ◽  
pp. 2421-2467 ◽  
Author(s):  
Stefan Nagel ◽  
Amiyatosh Purnanandam
Keyword(s):  
Default Risk ◽  
Structural Models ◽  
Return Volatility ◽  
Usual Assumption ◽  
Asset Volatility ◽  
Risk Dynamics ◽  
Asset Values ◽  
Distance To Default ◽  
Bank Equity ◽  
Risky Debt

Abstract We adapt structural models of default risk to take into account the special nature of bank assets. The usual assumption of lognormally distributed asset values is not appropriate for banks. Typical bank assets are risky debt claims with concave payoffs. Because of the payoff nonlinearity, bank asset volatility rises following negative shocks to borrower asset values. As a result, standard structural models with constant asset volatility can severely understate banks’ default risk in good times when asset values are high. Additionally, bank equity return volatility is much more sensitive to negative shocks to asset values than in standard structural models.

Liquidity hedging with futures and forward contracts

2019 ◽  
Vol 36 (2) ◽  
pp. 265-290 ◽  
Author(s):  
Yong Jae Shin ◽  
Unyong Pyo
Keyword(s):  
Firm Value ◽  
Minimal Amount ◽  
Forward Contracts ◽  
Content Type ◽  
Term Operation ◽  
Futures Contract ◽  
Hedging Strategies ◽  
Parameter Values ◽  
Risky Debt

Purpose This paper aims to develop hedging strategies using both futures and forward contracts and issuing risky debt when financially constrained firms are forced to operate in long horizon. Design/methodology/approach The authors present a model for developing hedging strategies using both futures and forward contracts and issuing risky debt. A theoretical model employing stochastic differential equations for forward hedging is illustrated with a numerical example over parameter values consistent with the literature. Findings A financially constrained firm with limited cash balance must hedge its liquidity with both future and forward contracts and issue risky debt to support its long-term operations. The firm can issue a minimal amount of risky debt by adding forward contracts into hedging and can increase its value higher than that when hedging with only futures contracts. We show numerically that hedging with both futures and forward contracts allows the firm to issue minimal risky debt in increasing its firm value. Practical implications When Metallgesellschaft nearly collapsed in 1993, it offered long-term forward contracts to its customers and attempted to hedge its risk by rolling over series of short-term futures contract. It created the situation of inherent mismatch in maturity structure. A financially constrained firm operating in a long horizon appears to commit its liquidity as long-term forward contracts, which cannot be fully hedged with series of futures contacts. The firm should hedge its liquidity with both futures and forward contracts and avoid liquidation with deadweight costs in its long-term operation. Originality/value This is the first study examining hedging strategies with both futures and forward contracts.

scholarly journals Bank Leverage Cycles

2017 ◽  
Vol 9 (2) ◽  
pp. 32-72 ◽  
Author(s):  
Galo Nuño ◽  
Carlos Thomas
Keyword(s):  
Financial Crisis ◽  
Moral Hazard ◽  
General Equilibrium ◽  
Economic Activity ◽  
Asset Returns ◽  
Financial Intermediaries ◽  
Risk Shifting ◽  
Short Term ◽  
Risky Debt

We propose a general equilibrium framework with financial intermediaries subject to endogenous leverage constraints, and assess its ability to explain the observed fluctuations in intermediary leverage and real economic activity. In the model, intermediaries (“banks”) borrow in the form of short-term risky debt. The presence of risk-shifting moral hazard gives rise to a leverage constraint, and creates a link between the volatility in bank asset returns and leverage. Unlike TFP or capital quality shocks, volatility shocks produce empirically plausible fluctuations in bank leverage. The model replicates well the fall in leverage, assets, and GDP during the 2007–2009 financial crisis. (JEL D82, E44, G01, G21, G32)

scholarly journals Jump Diffusion Models for Risky Debts: Quality Spread Differentials

2003 ◽  
Vol 06 (06) ◽  
pp. 655-662 ◽  
Author(s):  
Hoi Ying Wong ◽  
Yue Kuen Kwok
Keyword(s):  
Diffusion Process ◽  
Closed Form ◽  
Firm Value ◽  
Jump Diffusion ◽  
Brownian Diffusion ◽  
Fixed Rate ◽  
Floating Rate ◽  
The Difference ◽  
The Impact ◽  
Risky Debt

The quality spread differential is defined to be the difference between the default premiums demanded for fixed rate and floating rate risky debts. The risky debt model based on Merton's firm value approach is used to examine the behaviors of the quality spread differential of fixed rate and floating rate debts. We extend earlier result by adopting Geometric Brownian diffusion process with jumps for the underlying firm value process of the debt issuer. Closed form formulas are obtained for the default premiums for risky debts. The impact of the jumps on the fixed-floating spread differential is examined.

scholarly journals PRICING DEFAULTABLE DEBT: SOME EXACT RESULTS

1999 ◽  
Vol 02 (01) ◽  
pp. 95-99 ◽  
Author(s):  
D. F. WANG
Keyword(s):  
Interest Rate ◽  
Term Structure ◽  
Exact Results ◽  
The Interest Rate ◽  
Risky Debt

In this letter, I consider the issue of pricing risky debt by following Merton's approach. I generalize Merton's results to the case where the interest rate is modeled by the CIR term structure. Exact closed forms are provided for the risky debt's price.

Monitoring and Controlling Bank Risk: Does Risky Debt Help?

2005 ◽  
Vol 60 (1) ◽  
pp. 343-378 ◽  
Author(s):  
C. N. V. KRISHNAN ◽  
P. H. RITCHKEN ◽  
J. B. THOMSON
Keyword(s):  
Bank Risk ◽  
Risky Debt
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