Using information in US and European bank and sovereign CDS spreads we study the systematic component of banks' credit risk that stems from banks' common exposure to sovereign default risk. Based on a default intensity model, we find that sovereign default risk is a significant factor of bank...

This paper analyses the risk and return of loans portfolios in a joint setting. I develop a model to obtain the distribution of loans returns. I use this model to describe the investment opportunity set of lenders using mean-variance analysis with a Value at Risk constraint. I also obtain closed...

The one-side defaultable financial derivatives valuation problems have been studied extensively, but the valuation of bilateral derivatives with asymmetric credit qualities is still lacking convincing mechanism. This paper presents an analytical model for valuing derivatives subject to default...

This article presents a comprehensive framework for valuing financial instruments subject to credit risk and collateralization. In particular, we focus on the impact of default dependence on asset pricing, as correlated default risk is one of the most pervasive threats to financial markets. Some...

We estimate the cost of capital for the banking industry and find that while the cost of capital soared for banks in the financial crisis, after the passage of the Dodd-Frank Act, the value-weighted cost of capital for banks fell differentially more than did the cost of capital for nonbanks. The...

This paper explores the financial stability implications of mark-to-market accounting, in particular its tendency to amplify financial cycles and the "reach for yield". Market prices play a dual role. Not only do they serve as a signal of the underlying fundamentals and the actions taken by...

Equity-linked notes are flexible financial products that give investors favorable capital treatment. The payoff of a note depends on the performance of a basket of equities or indices averaged over a certain period, but is bounced below by a guaranteed amount. This article presents a new model...

Using the unique regulatory setting from the Hong Kong stock market with both shortable and no-short stocks, we document that no-short stocks on average earn significantly higher average returns than shortable stocks. Furthermore, stocks that comove more with the portfolio of no-short stocks...