Credit rating agencies (CRAs) very often have been criticized for announcing inaccurate credit ratings and are suspected of being exposed to conflicts of interest. Despite these objections CRAs remained largely unregulated. Based on Pagano & Immordino (2007), we study the optimal regulation of...

Credit rating agencies (CRAs) very often have been criticized for announcing inaccurate credit ratings and are suspected of being exposed to conflicts of interest. Despite these objections CRAs remained largely unregulated. Based on Pagano & Immordino (2007), we study the optimal regulation of...

Outright bank failures without prior indication of financial instability are very rare. Supervisory authorities monitor banks constantly. Thus, they usually obtain early warning signals that precede ultimate failure and, in fact, banks can be regarded as troubled to varying degrees before...

We propose efficient Bayesian Hamiltonian Monte Carlo method for estimation of systemic risk measures, LRMES, SRISK and ∆CoVaR, and apply it for thirty global systemically important banks and for eighteen largest US financial institutions over the period of 2000-2020. The advantage of the...

Individual financial systems can be understood as very specific configurations of certain key elements. Often these configurations remain unchanged for decades. We hypothesize that there is a specific relationship between key elements, namely that of complementarity. Thus, complementarity seems...

We propose a unified structural credit risk model incorporating insolvency, recovery and rollover risks. The firm finances itself mainly by issuing short- and long-term debt. Short-term debt can have either a discrete or a more realistic staggered tenor structure. We show that a unique threshold...

This paper studies the dynamic risk management of highly-levered financial institutions within a structural model of credit risk. We consider a context in which systemic default induces externalities that amplify the private cost of financial distress. This represents a source of strategic...

Systemic risk - the possibility that an individual firm's failure will result in broad damages to the economy as a whole - is the epitome of financial crisis. Bailouts of troubled firms have long been the standard response to systemic risk. Yet, bailouts suffer from problems of political...

We consider the problem faced by an investor who must liquidate a given basket of assets over a finite time horizon. The investor's goal is to maximize the expected utility of the sales revenues over a class of adaptive strategies. We assume that the investor's utility has constant absolute risk...

Distance to default (DTD) is a strong predictor of default risk derived from structural models. This paper specifies a stressed version of DTD ("stressed DTD'') to measure time-varying corporate default risk in the event that a systematic stress scenario occurs. Compared with the ordinary DTD,...