Price discovery of credit spreads in tranquil and crisis periods

In this paper we investigate the price discovery process in single-name credit spreads obtained from bond, credit default swap (CDS), equity and equity option prices. We analyse short term price discovery by modelling daily changes in credit spreads in the four markets with a vector autoregressive model (VAR). We also look at price discovery in the long run with a vector error correction model (VECM). We find that in the short term the option market clearly leads the other markets in the sub-prime crisis (2007-2009). During the less severe sovereign debt crisis (2009-2012) and the pre-crisis period, options are still important but CDSs become more prominent. In the long run, deviations from the equilibrium relationship with the option market still lead to adjustments in the credit spreads observed or implied from other markets. However, options no longer dominate price discovery in any of the periods considered. Our findings have implications for traders, credit risk managers and financial regulators.

Haircut undone? The Greek drama and prospects for investment arbitration

As a result of the sovereign debt crisis that engulfed Europe in 2010, investors are much more likely to pursue dispute resolution options when faced with losses. This paper seeks to examine the position of investors who suffered losses in the Greek haircut of 2012 in the context of investment treaty arbitration. The paper evaluates arguments that investments in Greek sovereign bonds have been expropriated by the introduction of retrofit CACs and that compensation is payable as a result of the protections offered by BITs. The paper investigates whether sovereign bonds come within the definition of protected investment in BITs, assesses the degree to which CACs act as a jurisdictional bar to investor-state claims and attempts an evaluation of whether claims could be successful. The analysis uses as an illustration recent cases brought against Greece at ICSID. The paper concludes by considering whether the Greek haircut was expropriatory and reflects on the possible outcome of current arbitrations.

A model intervenes: the many faces of moral hazard

This article builds on advances in social ontology to develop a new understanding of how mainstream economic modelling affects reality. We propose a new framework for analysing and describing how models intervene in the social sphere. This framework allows us to identify and articulate three key epistemic features of models as interventions: specificity, portability and formal precision. The second part of the article uses our framework to demonstrate how specificity, portability and formal precision explain the use of moral hazard models in a variety of different policy contexts, including worker compensation schemes, bank regulation and the euro-sovereign debt crisis.

The effects of corporate and country sustainability characteristics on the cost of debt: an international investigation

We investigate the relationship between corporate and country sustainability on the cost of bank loans. We look into 470 loan agreements signed between 2005 and 2012 with borrowers based in 28 different countries across the world and operating in all major industries. Our principal findings reveal that country sustainability, relating to both social and environmental frameworks, has a statistically and economically impactful effect on direct financing of economic activity. An increase of one unit in a country's sustainability score is associated with an average decrease in the cost of debt by 64 basis points. Our international analysis shows that the environmental dimension of a country's institutional framework is approximately twice as impactful as the social dimension, when it comes to determining the cost of corporate loans. On the other hand, we find no conclusive evidence that firm-level sustainability influences the interest rates charged to borrowing firms by banks. Our main findings survive a battery of robustness tests and additional analyses concerning subsamples, alternative sustainability metrics and the effects of financial crisis.

Reactive crisis management in construction projects

Patterns of communication and behaviour emerge within a construction project in response to a construction crisis. This paper investigates, within a grounded theory framework, the nature of these patterns, the sociological and psychological forces which shape them and their relationship with crisis management efficiency. A grounded theory is presented in four parts. The first part conceives a construction crisis as a period of social instability, arising from conflicting interest groups, seeking to exercise power in the pursuit of social structures which suit their political and economic interests. The second part sees a construction crisis as a de-sensitizing phenomenon which results in a period of behavioural instability and conflict which is self-perpetuating. The third part cites social structure as an important influence upon construction crisis management efficiency, in determining the efficiency of information flow, and the level of uncertainty between those affected. The fourth part points to the in-built defence mechanisms which construction crises have and to three managerial ironies which make construction crisis management difficult.