I build a dynamic model of the shadow banking system that intermediates funds through the interbank repo market to understand its failing mechanism during the recent financial crisis. The model emphasizes a key friction, the maturity mismatch between short-term repo and long-term investments...

The Lehman Brothers' bankruptcy triggered the failure of the collateralized debt markets, which was a major contributor of the financial crisis in 2008. Such collateralized debt markets have both collateral price channel and counterparty (borrower and lender) channel of contagion. I propose a...

The algorithm for optimization of a credit portfolio has not been fully demonstrated. This paper fills the gap in the literature by presenting a general approach for optimizing a credit portfolio by minimizing the default risk of the entire portfolio. Default risk is measured with quadratic...

This paper analyses the effects of different model specifications.

Credit limit management is of paramount importance for successful short-term credit-risk management, even more so when the situation in credit and financial markets is tense. We consider a continuous-time model where the credit provider and the credit taker interact within a game-theoretic...

We investigate the determinants of bid-ask spreads on corporate credit default swaps (CDSs). We find that proxies for dealer inventory costs such as variability of CDS premia and CDS trading volume explain as much as 80% of variation in CDS bid-ask spreads. We also analyze the influence of...

This paper explores the sources of counterparty risk in material supply relationships. Using long-term supply contracts collected from SEC filings, we test whether three sources of counterparty risk - financial exposure, product quality risk, and redeployability risk - are priced in the equity...

In standard ratings-based models for analyzing credit portfolios and pricing credit derivatives, it is assumed that defaults and recoveries are statistically independent. This paper presents evidence that aggregate quarterly default rates and recovery rates are, in fact, negatively correlated....

More than 25% of credit bonds in China received improved issuance ratings, among which 96.6% used credit enhancement. We find that credit enhancement can effectively lower credit spreads, which still holds after a battery of robustness tests. We employ the propensity score matching method, the...

The underlying asset pool of collateral debt obligations (CDOs) simultaneously encompasses credit risk and market risk. However, the standard CDO pricing model not only underestimates the risk to the asset pool due to a poor description of the correlation structure among obligors but is also...