Banks' Option to Lend, Interest Rate Sensitivity, and Credit Availability

House Prices, Credit and Willingness to Lend

This paper establishes a Tobin’s q model in which house prices fluctuate around their long run equilibrium due to fluctuations in credit availability and income. It is shown that house prices are positively related to credit in the short run, however, negatively related to the availability of credit in the long run. Using survey data on banks’ willingness to lend and data on disintermediation f...

Credit Default Swaps Calibration and Option Pricing with the SSRD Stochastic Intensity and Interest-Rate Model

In the present paper we introduce a two-dimensional shifted square-root diffusion (SSRD) model for interest rate derivatives and single-name credit derivatives, in a stochastic intensity framework. The SSRD is the unique model, to the best of our knowledge, allowing for an automatic calibration of the term structure of interest rates and of credit default swaps (CDS’s). Moreover, the model reta...

Dynamic Interest Rate and Credit Risk Models

Are Interest Rate Swaps Used to Manage Banks’ Earnings?

Previous research has shown that loan loss provisions and security gains and losses are used to manage banks’ net income. However, these income components are reported below banks largest operating component, net interest income (NII). This study extends the literature by examining whether banks exploit the accounting permitted under past and current hedge accounting standards to manage NII by ...

Pricing Interest Rate-Sensitive Credit Portfolio Derivatives

In this paper we present a modelling framework for portfolio credit risk which incorporates the dependence between risk-free interest-rates and the default loss process. The contribution in this approach is that – besides the traditional diffusionbased covariation between loss intensities and interest-rates – a direct dependence between interest-rates and the loss process is allowed, in particu...