We study the possibility for international diversification of catastrophe risk by the insurance sector. Adopting the argument that large insurance losses may be a `globalizing factor' for the industry, we study the dependence of geographically distant insurance markets via equity returns. In...

A new empirical reduced-form model for credit rating transitions is introduced. It is a parametric intensity-based duration model with multiple states and driven by exogenous covariates and latent dynamic factors. The model has a generalized semi-Markov structure designed to accommodate many of...

Various economic theories are available to explain the existence of credit and default cycles. There remains empirical ambiguity, however, as to whether or these cycles coincide. Recent papers suggest by their empirical research set-up that they do, or at least that defaults and credit spreads...

U.S. trading in non-U.S. stocks has grown dramatically. Round-the-clock, these stocks trade in the home market, in the U.S. market and, potentially, in both markets simultaneously. We use a state space model to study 24-hour price discovery. As opposed to the standard "variance ratio'' approach,...

We model 1981–2002 annual US default frequencies for a panel of firms in different rating and age classes. The data is decomposed into a systematic and firm-specific risk component, where the systematic component reflects the general economic conditions and default climate. We have to cope...

Taking a portfolio perspective on option pricing and hedging, we show that within the standard Black-Scholes-Merton framework large portfolios of options can be hedged without risk in discrete time. The nature of the hedge portfolio in the limit of large portfolio size is substantially different...

We extend the hidden Markov Model for defaults of Crowder et al. (2005, Quantitative Finance 5, 27--34) to include covariates. The covariates enhance the prediction of transition probabilities from high to low default regimes. To estimate the model, we extend the EM estimating equations to...

We model 19812002 annual default frequencies for a panel of US firms in different rating and age classes from the Standard and Poor's database. The data is decomposed into a systematic and firm-specific risk component, where the systematic component reflects the general economic conditions and...

Current research suggests that the large downside risk in hedge fund returns disqualifies the variance as an appropriate risk measure. For example, one can easily construct portfolios with nonlinear pay-offs that have both a high Sharpe ratio and a high downside risk. This paper examines the...

We model 1927-1997 U.S. business failure rates using a time series approach based on unobserved components. Clear evidence is found of cyclical behavior in default rates. The cycle has a period of around 10 years. We also detect longer term movements in default probabilities and default...