We highlight the ex ante risk-shifting incentives faced by a bank's shareholders/managers when CoCos (contingent convertible capital) are part of the capital structure. The risk shifting incentive arises from the wealth transfers that the shareholders will receive upon the CoCo's conversion...

Little progress has been made so far in addressing - in a comprehensive way - the externalities caused by impact of the interconnectedness within institutions and markets on funding and market liquidity risk within financial systems. The Systemic Risk-adjusted Liquidity (SRL) model combines...

Little progress has been made so far in addressing — in a comprehensive way — the externalities caused by impact of the interconnectedness within institutions and markets on funding and market liquidity risk within financial systems. The Systemic Risk-adjusted Liquidity (SRL) model combines...

Little progress has been made so far in addressing — in a comprehensive way — the externalities caused by impact of the interconnectedness within institutions and markets on funding and market liquidity risk within financial systems. The Systemic Risk-adjusted Liquidity (SRL) model combines...

This study attempts to identify and trace inter-linkages between sovereign and banking risk in the euro area. To this end, we use an indicator of banking risk in each country based on the Contingent Claim Analysis literature, and 10-year government yield spreads over Germany as a measure of...

Stocks are exposed to the risk of sudden downward jumps. Additionally, a crash in one stock (or index) can increase the risk of crashes in other stocks (or indices). Our paper explicitly takes this contagion risk into account and studies its impact on the portfolio decision of a CRRA investor...

This paper addresses the relationship between stock markets and credit default swaps (CDS) markets. In particular, I aim to gauge if the co-movement between stock prices and sovereign CDS spreads increases with the deterioration of the credit quality of sovereign debt. The analysis of...

Local correlation is used to examine financial contagion. We share the view of previous research that there is contagion from the U.S. spot equity market to that of Germany and Britain. In addition, we provide evidence to suggest contagion from the U.S. spot equity market to that of Japan and...

Severe economic downturns like the great depression of the 1930s take place over extended periods of time. I model an economy where rare economic disasters increase the likelihood of subsequent near term disasters. The mechanism generates more clustering of disasters than existing models. Serial...

CDS spreads are believed to reflect credit risks but remained stable for major UK banks during the subprime crisis. To explain this gap, we employ probabilities of default (PD) from stock options. These may differ from those obtained from debt instruments but are useful for practical reasons and...