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.

Asset Pricing with Heterogeneous Agents, Incomplete Markets and Trading Constraints

The consumption capital asset pricing model is the standard economic model used to capture stock market behavior. However, empirical tests have pointed out to its inability to account quantitatively for the high average rate of return and volatility of stocks over time for plausible parameter values. Recent research has suggested that the consumption of stockholders is more strongly correlated with the performance of the stock market than the consumption of non-stockholders. We model two types of agents, non-stockholders with standard preferences and stock holders with preferences that incorporate elements of the prospect theory developed by Kahneman and Tversky (1979). In addition to consumption, stockholders consider fluctuations in their financial wealth explicitly when making decisions. Data from the Panel Study of Income Dynamics are used to calibrate the labor income processes of the two types of agents. Each agent faces idiosyncratic shocks to his labor income as well as aggregate shocks to the per-share dividend but markets are incomplete and agents cannot hedge consumption risks completely. In addition, consumers face both borrowing and short-sale constraints. Our results show that in equilibrium, agents hold different portfolios. Our model is able to generate a time-varying risk premium of about 5.5% while maintaining a low risk free rate, thus suggesting a plausible explanation for the equity premium puzzle reported by Mehra and Prescott (1985).

US Corporate Default Swap Valuation: The Market Liquidity Hypothesis and Autonomous Credit Risk

This paper develops a reduced form three-factor model which includes a liquidity proxy of market conditions which is then used to provide implicit prices. The model prices are then compared with observed market prices of credit default swaps to determine if swap rates adequately reflect market risks. The findings of the analysis illustrate the importance of liquidity in the valuation process. Moreover, market liquidity, a measure of investors. willingness to commit resources in the credit default swap (CDS) market, was also found to improve the valuation of investors. autonomous credit risk. Thus a failure to include a liquidity proxy could underestimate the implied autonomous credit risk. Autonomous credit risk is defined as the fractional credit risk which does not vary with changes in market risk and liquidity conditions.

Liquidity Constraint and Child Labor In India: Is Market Really Incapable Of Eradicating It From Wage-Labor Households?

One way to measure the lower steady state equilibrium outcome in human capital development is the incidence of child labor in most of the developing countries. With the help of Indian household level data in an overlapping generation framework, we show that production loans under credit rationing are not optimally extended towards firms because of issues with adverse selection. More stringent rationing in the credit market creates a distortion in the labor market by increasing adult wage rate and the demand for child labor. Lower availability of funds under stringent rationing coupled with increased demand for loans induces the high risk firms to replace adult labor by child labor. A switch of regime from credit rationing to revelation regime can clear such imperfections in the labor market. The equilibrium higher wage rate elevates the household consumption to a significantly higher level than the subsistence under credit rationing and therefore higher level of human capital development is assured leading to no supply of child labor.

Index properties, shear strenghts and consolidation characteristics of ODP Hole 164-995A sediments

Geotechnical properties of sediment from Ocean Drilling Program Leg 164 are presented as: (1) normalized shipboard strength ratios from the Cape Fear Diapir, the Blake Ridge Diapir, and the Blake Ridge; and (2) Atterberg limit, vane shear strength, pocket-penetrometer strength, and constant-rate-of-strain consolidation results from Hole 995A, located on the Blake Ridge. This study was conducted to understand the stress history in a region characterized by high sedimentation rates and the presence of gas hydrates. Collectively, the results indicate that sediment from the Blake Ridge exhibits significant underconsolidated behavior, except near the seafloor. At least 10 m of additional overburden was removed by erosion or mass wasting at Hole 993A on the Cape Fear Diapir, compared to nearby sites.

Consolidation properties and strength characteristics of ODP Site 204-1244 sediments

Eight whole-core samples from Ocean Drilling Program Site 1244, Hydrate Ridge, Cascadia continental margin, were provided to Massachusetts Institute of Technology (Cambridge, Massachusetts, USA) for geotechnical characterization. The samples were collected from depths ranging from 5 to 136 meters below seafloor (mbsf). Seven of the eight whole-core samples were located within the gas hydrate stability zone, whereas the eighth sample was located in the free gas zone. Atterberg limits testing showed that the average liquid limit of the soil is 81% and the average plastic limit is 38%, giving an average plasticity index of 43%. The liquid limit is sensitive to oven drying, shown by a drop in liquid limit to 64% when tests were performed on an oven-dried sample. Loss on ignition averages 5.45 wt%. Constant rate of strain consolidation (CRSC) tests were performed to obtain the compression characteristics of the soil, as well as to determine the stress history of the site. CRSC tests also provided hydraulic conductivity and coefficient of consolidation characteristics for these sediments. The compression ratio (Cc) ranges from 0.340 to 0.704 (average = 0.568). Cc is fairly constant to a depth of 79 mbsf, after which Cc decreases downhole. The recompression ratio (Cr) ranges from 0.035 to 0.064 (average = 0.052). Cr is constant throughout the depth range. In situ hydraulic conductivity varies between 1.5 x 10**-7 and 3 x 10**-8 cm/s and shows no trend with depth. Ko-consolidated undrained compression/extension (CKoUC/E) tests were also performed to determine the peak undrained shear strength, stress-strain curve, and friction angle. The normalized undrained strength ranges from 0.29 to 0.35. The friction angle ranges from 27 to 37. Because of the limited amount of soil, CRSC and CKoUC/E tests were also conducted on resedimented specimens.

Physical and geotechnical properties of Norwegian Sea sediments

Sediment composition and rate of deposition are the primary factors responsible for determining the spatial distribution of geotechnical properties on the Wring Plateau. Grain size and depth of burial have no significant influence. Vertical and lateral changes in geotechnical properties are associated with vertical and lateral composition changes in which biogenic silica is the most important variable. Anomalous trends of decreasing density and increasing porosity and water content with depth are associated with increasing silica content downsection. Void ratios, inferred in-situ permeability, and change in void ratio during consolidation testing are relatively high in siliceous sediments and tend to increase as the biogenic silica content increases. Portions of the section are overconsolidated, probably as a result of changes in sediment accumulation rates. However, the higher permeabilities of siliceous sediments may also be a factor influencing consolidation state.

Constraints on the magnitude and patterns of ocean cooling at the Last Glacial Maximum - Supplementary material

Observation-based reconstructions of sea surface temperature from relatively stable periods in the past, such as the Last Glacial Maximum, represent an important means of constraining climate sensitivity and evaluating model simulations. The first quantitative global reconstruction of sea surface temperatures during the Last Glacial Maximum was developed by the Climate Long-Range Investigation, Mapping and Prediction (CLIMAP) project in the 1970s and 1980s. Since that time, several shortcomings of that earlier effort have become apparent. Here we present an updated synthesis of sea surface temperatures during the Last Glacial Maximum, rigorously defined as the period between 23 and 19 thousand years before present, from the Multiproxy Approach for the Reconstruction of the Glacial Ocean Surface (MARGO) project. We integrate microfossil and geochemical reconstructions of surface temperatures and include assessments of the reliability of individual records. Our reconstruction reveals the presence of large longitudinal gradients in sea surface temperature in all of the ocean basins, in contrast to the simulations of the Last Glacial Maximum climate available at present.

Strength and deformation behavior of ODP Leg 110 sediments

The shape and morphology of the northern Barbados Ridge complex is largely controlled by the sediment yield and failure behavior in response to high lateral loads imposed by convergence. Loads in excess of sediment yield strength result in nonrecoverable deformations within the wedge, and failure strength acts as an upper limit beyond which stresses are released through thrust faults. Relatively high loading rates lead to delayed consolidation and in-situ pore pressures greater than hydrostatic. The sediment yield and failure behavior is described for any stress path by a generalized constitutive model. A yield locus delineates the onset of plastic (non-recoverable) deformation, as defined from the isotropic and anisotropic consolidation responses of high-quality 38-mm triaxial specimens; a failure envelope was obtained by shearing the same specimens in both triaxial compression and extension. The yield locus is shown to be rotated into extension space and is centered about a K-line greater than unity, suggesting that the in-situ major principal stress has rotated into the horizontal plane, and that the sediment wedge is being subjected to extensional effective stress paths.

Atterberg limits of sediments from DSDP Leg 65 Holes

Atterberg limits have been determined for 32 unconsolidated sediment samples, ranging in composition from silty clay to sandy silt and recovered from four sites drilled at the mouth of the Gulf of California during DSDP Leg 65. The liquid limit of the samples ranged from 41.5% to 157.5%, and the plastic limit from 32.8% to 65.1%. The plasticity index ranged from 5.9% to 102.0%. In some samples, the water content was less than the liquid limit. The liquidity index averaged 76% while the flow and toughness indices averaged 35% and 2.18%, respectively. On the basis of these limits, the sediments analyzed can be classified as inorganic clays of high plasticity, organic clays of moderate to high plasticity, and diatomaceous sands, silts, and silty clays of low plasticity.

Lake Baikal amphipods under climate change: Thermal constraints and ecological consequences, links to supplementary material

Lake Baikal, the world's most voluminous freshwater lake, has experienced unprecedented warming during the last decades. A uniquely diverse amphipod fauna inhabits the littoral zone and can serve as a model system to identify the role of thermal tolerance under climate change. This study aimed to identify sublethal thermal constraints in two of the most abundant endemic Baikal amphipods, Eulimnogammarus verrucosus and Eulimnogammarus cyaneus, and Gammarus lacustris, a ubiquitous gammarid of the Holarctic. As the latter is only found in some shallow isolated bays of the lake, we further addressed the question whether rising temperatures could promote the widespread invasion of this non-endemic species into the littoral zone. Animals were exposed to gradual temperature increases (4 week, 0.8 °C/d; 24 h, 1 °C/h) starting from the reported annual mean temperature of the Baikal littoral (6 °C). Within the framework of oxygen- and capacity-limited thermal tolerance (OCLTT), we used a nonlinear regression approach to determine the points at which the changing temperature-dependence of relevant physiological processes indicates the onset of limitation. Limitations in ventilation representing the first limits of thermal tolerance (pejus (= "getting worse") temperatures (Tp)) were recorded at 10.6 (95% confidence interval; 9.5, 11.7), 19.1 (17.9, 20.2), and 21.1 (19.8, 22.4) °C in E. verrucosus, E. cyaneus, and G. lacustris, respectively. Field observations revealed that E. verrucosus retreated from the upper littoral to deeper and cooler waters once its Tp was surpassed, identifying Tp as the ecological thermal boundary. Constraints in oxygen consumption at higher than critical temperatures (Tc) led to an exponential increase in mortality in all species. Exposure to short-term warming resulted in higher threshold values, consistent with a time dependence of thermal tolerance. In conclusion, species-specific limits to oxygen supply capacity are likely key in the onset of constraining (beyond pejus) and then life-threatening (beyond critical) conditions. Ecological consequences of these limits are mediated through behavioral plasticity in E. verrucosus. However, similar upper thermal limits in E. cyaneus (endemic, Baikal) and G. lacustris (ubiquitous, Holarctic) indicate that the potential invader G. lacustris would not necessarily benefit from rising temperatures. Secondary effects of increasing temperatures remain to be investigated.