We present a theory of unsecured consumer debt that does not rely on utility costs of default or on enforcement mechanisms that arise in repeated-interaction settings. The theory is based on private information about a person’s type and on a person’s incentive to signal his type to entities other than creditors. Specifically, debtors signal their low-risk status to insurers by avoiding default ...

Previous research suggests that credit rating announcements by Moody’s are anticipated by participants in the credit default swap market. In particular, it is argued that downgrades and negative outlook reports do not contain significant information, but there seems to be anticipation of both types of ratings announcements. In this paper, we examine credit default swap spread changes conditiona...

Standard market risk optimization tools, based on assumptions of normality, are ineffective for credit risk. In this paper, we develop three scenario optimization models for portfolio credit risk. We first create the trade risk profile and find the best hedge position for a single asset or obligor. The second model adjusts all positions simultaneously to minimize the regret of the portfolio sub...

We introduce Large Scale Asset Purchases (LSAPs) in a New-Keynesian DSGE model that features distinct mortgage and corporate loan markets. We show that following a significant disruption of financial intermediation, central-bank purchases of mortgage-backed securities (MBS) are uniformly less effective at easing credit market conditions and stabilizing economic activity than outright purchases ...

While the intensive quantification of market risk has led to measurements accurate to the basis point (and beyond), difficulties in quantifying credit risk have resulted in the practice of measuring this risk with far less precision. Indeed, financial institutions that develop their own internal measures of credit risk usually employ a "1" to "9" scale of creditworthiness for their exposures, t...

We present a theory of unsecured consumer debt that does not rely on utility costs of default or on enforcement mechanisms that arise in repeated-interaction settings. The theory is based on private information about a person’s type and on a person’s incentive to signal his type to entities other than creditors. Specifically, debtors signal their low-risk status to insurers by avoiding default ...

This paper analyses the determinants of variation in the yield spread (credit spread) between government bonds and corporate bonds in Japan's bond market after 1997. The authors conduct empirical tests on the relationship between credit spreads and several economic and financial variables. A key finding is that default risk and the overall financial situation in Japan were the most significant ...

Using data on municipal bonds issued in California and New York between 1996 and 2014, this paper documents a decline in the benefit of municipal bond insurance, explores its underlying determinants, and quantifies its aggregate effect. First, we find that the insurance benefit declined remarkably from approximately 5.1% of the overall deal value between 1996 and 2001 to 0.5% by 2011-2014. Seco...

The paper investigates the impact on credit risk of capital structure choices driven by firm’s investments and financing decisions. We propose a realistic dynamic structural model featuring endogenous investment, capital structure and default. We calibrate the model on accounting and market data. Using simulation, we find that, credit spreads as well as other standard metrics of credit worthine...

Access to credit markets is generally considered a hallmark of developed economies. In the United States, most households appear to have substantial ability to borrow; indeed, households in the United States have an average of over $23,000 in nonmortgage debt alone. Nevertheless, economists often point to limited borrowing opportunities for lower-income households to explain anomalous findings ...