Empirical Analysis of Credit Risk Regime Switching and Temporal Conditional Default Correlation in Credit Default Swap Valuation: The Market liquidity effect

In this paper, we extend the debate concerning Credit Default Swap valuation to include time varying correlation and co-variances. Traditional multi-variate techniques treat the correlations between covariates as constant over time; however, this view is not supported by the data. Secondly, since financial data does not follow a normal distribution because of its heavy tails, modeling the data using a Generalized Linear model (GLM) incorporating copulas emerge as a more robust technique over traditional approaches. This paper also includes an empirical analysis of the regime switching dynamics of credit risk in the presence of liquidity by following the general practice of assuming that credit and market risk follow a Markov process. The study was based on Credit Default Swap data obtained from Bloomberg that spanned the period January 1st 2004 to August 08th 2006. The empirical examination of the regime switching tendencies provided quantitative support to the anecdotal view that liquidity decreases as credit quality deteriorates. The analysis also examined the joint probability distribution of the credit risk determinants across credit quality through the use of a copula function which disaggregates the behavior embedded in the marginal gamma distributions, so as to isolate the level of dependence which is captured in the copula function. The results suggest that the time varying joint correlation matrix performed far superior as compared to the constant correlation matrix; the centerpiece of linear regression models.

Quantile Inferences for Inflation and Its Variability: Does a Threshold Inflation Rate Exist?

Using quantile regressions and cross-sectional data from 152 countries, we examine the relationship between inflation and its variability. We consider two measures of inflation - the mean and median - and three different measures of inflation variability - the standard deviation, coefficient of variation, and median deviation. Using the mean and standard deviation or the median and the median deviation, the results support both the hypothesis that higher inflation creates more inflation variability and that inflation variability raises inflation across quantiles. Moreover, higher quantiles in both cases lead to larger marginal effects of inflation (inflation variability) on inflation variability (inflation). Using the mean and the coefficient of variation, however, the findings largely support no correlation between inflation and its variability. Finally, we also consider whether thresholds for inflation rate or inflation variability exist before finding such positive correlations. We find evidence of thresholds for inflation rates below 3 percent, but mixed results for thresholds for inflation variability.

Ontogenetic Effects of Hatching Plasticity in the Spotted Salamander (Ambystoma maculatum) due to Egg and Larval Predators

The ability to respond plastically to the environment has allowed amphibians to evolve a response to spatial and temporal variation in predation threat (Benard 2004). Embroys exposed to egg predation are expected to hatch out earlier than their conspecifics. Larval predation can induce a suite of phenotypic changes including growing a larger tail area. When presented with cues from both egg and larval predators, embryos are expected to respond to the egg predator by hatching out earlier because the egg predator presents an immediate threat. However, hatching early may be costly in the larval environment in terms of development, morphology, and/or behavior. We created a laboratory experiment in which we exposed clutches of spotted salamander (Ambystoma maculatum) eggs to both egg (caddisfly larvae) and larval (A. opacum) predators to test this hypothesis. We recorded hatching time and stage and took developmental and morphological data of the animals a week after hatching. Larvae were entered into lethal predation trials with a larval predatory sunfish (Lepomis sp.) in order to study behavior. We found that animals exposed to the egg predator cues hatched out earlier and at earlier developmental stages than conspecifics regardless of whether there was a larval predator present. Animals exposed to larval predator cues grew relatively larger tails and survived longer in the lethal predation trials. However the group exposed to both predators showed a cost of early hatching in terms of lower tail area and shorter survival time in predation trials. The morphological and developmental effects measured of hatching plasticity were transient as there were no developmental or morphological differences between the treatment groups at metamorphosis. Hatching plasticity may be transient but it is important to the development and survival of many amphibians.