We estimate the shadow cost of capital requirements using data on a costly loophole that allowed banks to relax these constraints. This loophole — liquidity guarantees to asset-backed commercial paper conduits — was exploited by the largest banks before the crisis of 2008. We show...

This paper evaluates the model risk of models used for forecasting systemic and market risk. Model risk, which is the potential for different models to provide inconsistent outcomes, is shown to be increasing with market uncertainty. During calm periods, the underlying risk forecast models...

The Basel capital is a “margin” requirement imposed by regulators to cushion banks against extreme falls in prices of assets held, and is often a function of value-at-risk (VaR). The way banks adjust their balance sheets to maintain the requirement is equivalent to leverage targeting that...

The aim of the present research is to provide a new CoCo bond pricing method to assist analyses of both equity investors and fixed income investors. For this reason, we develop models in terms of PDEs where the spatial variable is the underlying stock. By using these approaches, one will be able...

We identify and track over time the factors that make the financial system vulnerable to fire sales by constructing an index of aggregate vulnerability. The index starts increasing quickly in 2004, before most other major systemic risk measures, and triples by 2008. The fire-sale-specific...

This paper presents a Least Square Monte Carlo approach for accurately calculating credit value adjustment (CVA). In contrast to previous studies, the model relies on the probability distribution of a default time/jump rather than the default time itself, as the default time is usually...

A system is implemented that simulates a bond portfolio over the long-term of liabilities. It pays all liabilities and extracts continuously a fixed percentage of remaining liabilities to stakeholders while maintaining a strategic asset allocation. This fixed percentage is proposed as return...

Financial regulators can enhance the credibility of credit ratings if agencies are offered a registration facility that sequesters part of their fee as a performance bond over a designated maturity. The margin can be responsive to the rating, the defined credit event, and the registration...

We show that provision of public liquidity has real consequences for firms. Comparing A-1 rated non-financial commercial paper issuers using Commercial Paper Funding Facility (CPFF) eligibility criteria, we show that firms with access to the CPFF were able to mitigate financing disruptions...

This paper attempts to assess the economic significance and implications of collateralization in different financial markets, which is essentially a matter of theoretical justification and empirical verification. We present a comprehensive theoretical framework that allows for collateralization...