Corporate credit risk prediction under stochastic volatility and jumps

This paper examines the impact of allowing for stochastic volatility and jumps (SVJ) in a structural model on corporate credit risk prediction. The results from a simulation study verify the better performance of the SVJ model compared with the commonly used Merton model, and three sources are provided to explain the superiority. The empirical analysis on two real samples further ascertains the importance of recognizing the stochastic volatility and jumps by showing that the SVJ model decreases bias in spread prediction from the Merton model, and better explains the time variation in actual CDS spreads. The improvements are found particularly apparent in small firms or when the market is turbulent such as the recent financial crisis.

Banking sector contingent liabilities and sovereign risk

The global financial crisis has underscored the need to pay attention to contingent government liabilities that could arise from bank failures for sovereign risk management. This paper proposes a simple method to construct a contingent liability index (CLI) for a banking sector that takes into account the size and concentration of the banking system, market expectations of bank defaults, and perceptions of government support to each bank. This method allows us to track potential government liabilities related to bank failures for 32 advanced and emerging economies on a monthly basis from 2006 to 2013. Furthermore, we find that the CLI is a significant determinant of sovereign CDS spreads. Our results suggest that a 1 percentage point increase in the CLI is associated with an increase in sovereign CDS spreads by 24 basis points for advanced economies and 75 basis points for emerging markets on average.

Music industry

The music industry is usually structured into three industry sectors: live music, music licensing, and recorded music. Live music and recorded music are primarily consumer businesses where revenues are generated consumers who buy CDs or concert tickets. The licensing industry on the other hand is a business-to-business industry where companies pay music rights owners for the use of their musics in various contexts, e.g. background music in shops, music in advertising, or music in broadcast radio...

Proposed vehicle impact speed: Severe injury probability relationships for selected crash types

Speed is recognised as a key contributor to crash likelihood and severity, and to road safety performance in general. Its fundamental role has been recognised by making Safe Speeds one of the four pillars of the Safe System. In this context, impact speeds above which humans are likely to sustain fatal injuries have been accepted as a reference in many Safe System infrastructure policy and planning discussions. To date, there have been no proposed relationships for impact speeds above which humans are likely to sustain fatal or serious (severe) injury, a more relevant Safe System measure. A research project on Safe System intersection design required a critical review of published literature on the relationship between impact speed and probability of injury. This has led to a number of questions being raised about the origins, accuracy and appropriateness of the currently accepted impact speed–fatality probability relationships (Wramborg 2005) in many policy documents. The literature review identified alternative, more recent and more precise relationships derived from the US crash reconstruction databases (NASS/CDS). The paper proposes for discussion a set of alternative relationships between vehicle impact speed and probability of MAIS3+ (fatal and serious) injury for selected common crash types. Proposed Safe System critical impact speed values are also proposed for use in road infrastructure assessment. The paper presents the methodology and assumptions used in developing these relationships. It identifies further research needed to confirm and refine these relationships. Such relationships would form valuable inputs into future road safety policies in Australia and New Zealand.