Stress testing credit risk: the Great Depression scenario

By employing Moody’s corporate default and rating transition data spanning the last 90 years we explore how much capital banks should hold against their corporate loan portfolios to withstand historical stress scenarios. Specifically, we will focus on the worst case scenario over the observation period, the Great Depression. We find that migration risk and the length of the investment horizon are critical factors when determining bank capital needs in a crisis. We show that capital may need to rise more than three times when the horizon is increased from 1 year, as required by current and future regulation, to 3 years. Increases are still important but of a lower magnitude when migration risk is introduced in the analysis. Further, we find that the new bank capital requirements under the so-called Basel 3 agreement would enable banks to absorb Great Depression-style losses. But, such losses would dent regulatory capital considerably and far beyond the capital buffers that have been proposed to ensure that banks survive crisis periods without government support.

Energetic constraints on precipitation under climate change

Energetic constraints on precipitation are useful for understanding the response of the hydrological cycle to ongoing climate change, its response to possible geoengineering schemes, and the limits on precipitation in very warm climates of the past. Much recent progress has been made in quantifying the different forcings and feedbacks on precipitation and in understanding how the transient responses of precipitation and temperature might differ qualitatively. Here, we introduce the basic ideas and review recent progress. We also examine the extent to which energetic constraints on precipitation may be viewed as radiative constraints and the extent to which they are confirmed by available observations. Challenges remain, including the need to better demonstrate the link between energetics and precipitation in observations and to better understand energetic constraints on precipitation at sub-global length scales.

The sky is the limit? The determinants and constraints of European airports' commercial revenues

This study investigates the determinants of commercial and retail airport revenues as well as revenues from real estate operations. Cross-sectional OLS, 2SLS and robust regression models of European airports identify a number of significant drivers of airport revenues. Aviation revenues per passenger are mainly determined by the national income per capita in which the airport is located, the percentage of leisure travelers and the size of the airport proxied by total aviation revenues. Main drivers of commercial revenues per passenger include the total number of passengers passing through the airport, the ratio of commercial to total revenues, the national income, the share of domestic and leisure travelers and the total number of flights. These results are in line with previous findings of a negative influence of business travelers on commercial revenues per passenger. We also find that a high amount of retail space per passenger is generally associated with lower commercial revenues per square meter confirming decreasing marginal revenue effects. Real estate revenues per passenger are positively associated with national income per capita at airport location, share of intra-EU passengers and percent delayed flights. Overall, aviation and non-aviation revenues appear to be strongly interlinked, underlining the potential for a comprehensive airport management strategy above and beyond mere cost minimization of the aviation sector.

Equidistributing Meshes with Constraints

Adaptive methods which “equidistribute” a given positive weight function are now used fairly widely for selecting discrete meshes. The disadvantage of such schemes is that the resulting mesh may not be smoothly varying. In this paper a technique is developed for equidistributing a function subject to constraints on the ratios of adjacent steps in the mesh. Given a weight function $f \geqq 0$ on an interval $[a,b]$ and constants $c$ and $K$, the method produces a mesh with points $x_0 = a,x_{j + 1} = x_j + h_j ,j = 0,1, \cdots ,n - 1$ and $x_n = b$ such that\[ \int_{xj}^{x_{j + 1} } {f \leqq c\quad {\text{and}}\quad \frac{1} {K}} \leqq \frac{{h_{j + 1} }} {{h_j }} \leqq K\quad {\text{for}}\, j = 0,1, \cdots ,n - 1 . \] A theoretical analysis of the procedure is presented, and numerical algorithms for implementing the method are given. Examples show that the procedure is effective in practice. Other types of constraints on equidistributing meshes are also discussed. The principal application of the procedure is to the solution of boundary value problems, where the weight function is generally some error indicator, and accuracy and convergence properties may depend on the smoothness of the mesh. Other practical applications include the regrading of statistical data.

Temporal constraints on linear BRDF model parameters

Linear models of bidirectional reflectance distribution are useful tools for understanding the angular variability of surface reflectance as observed by medium-resolution sensors such as the Moderate Resolution Imaging Spectrometer. These models are operationally used to normalize data to common view and illumination geometries and to calculate integral quantities such as albedo. Currently, to compensate for noise in observed reflectance, these models are inverted against data collected during some temporal window for which the model parameters are assumed to be constant. Despite this, the retrieved parameters are often noisy for regions where sufficient observations are not available. This paper demonstrates the use of Lagrangian multipliers to allow arbitrarily large windows and, at the same time, produce individual parameter sets for each day even for regions where only sparse observations are available.

The information content of REIT credit rating actions and transparency

We examine the short-run and long-run price reaction of equity REIT shares following credit rating actions, testing the transparency of the REIT structure. Generally, the economic effect on the stock price is subdued for both upgrades and downgrades compared to prior literature examining the broader U.S. equity market. An examination of trading volume revealed a significant increase in trading in reaction to downgrade credit rating changes, with a more subdued response to upgrades. The findings support the notion that REITs are more publicly forthcoming about the expectation of positive news in comparison to negative news.