Essays on Banking Competition

I study local shocks to consumer credit supply arising from the opening

of bank-related retail stores. Bank-related store openings coincide with

sharp increases in credit card placements in the neighborhood of the

store, in the months surrounding the store opening, and with the bank

that owns the store. I exploit this relationship to instrument for new

credit cards at the individual level, and find that obtaining a new

credit card sharply increases total borrowing as well as default risk,

particularly for risky and opaque borrowers. In line with theories of

default externality, I observe that existing lenders react to the

increased consumer borrowing and associated riskiness by contracting

their own supply. In particular, in the year following the issuance of a

new credit card, banks without links to stores reduce credit card limits

by 24-51%, offsetting most of the initial increase in total credit

limits.

Network externalities across financial institutions

We propose and estimate a financial distress model that explicitly accounts for the interactions or spill-over effects between financial institutions, through the use of a spatial continuity matrix that is build from financial network data of inter bank transactions. Such setup of the financial distress model allows for the empirical validation of the importance of network externalities in determining financial distress, in addition to institution specific and macroeconomic covariates. The relevance of such specification is that it incorporates simultaneously micro-prudential factors (Basel 2) as well as macro-prudential and systemic factors (Basel 3) as determinants of financial distress. Results indicate network externalities are an important determinant of financial health of a financial institutions. The parameter that measures the effect of network externalities is both economically and statistical significant and its inclusion as a risk factor reduces the importance of the firm specific variables such as the size or degree of leverage of the financial institution. In addition we analyze the policy implications of the network factor model for capital requirements and deposit insurance pricing.

Structural Connectivity Of The Default Mode Network And Cognition In Alzheimer׳s Disease.

Disconnectivity between the Default Mode Network (DMN) nodes can cause clinical symptoms and cognitive deficits in Alzheimer׳s disease (AD). We aimed to examine the structural connectivity between DMN nodes, to verify the extent in which white matter disconnection affects cognitive performance. MRI data of 76 subjects (25 mild AD, 21 amnestic Mild Cognitive Impairment subjects and 30 controls) were acquired on a 3.0T scanner. ExploreDTI software (fractional Anisotropy threshold=0.25 and the angular threshold=60°) calculated axial, radial, and mean diffusivities, fractional anisotropy and streamline count. AD patients showed lower fractional anisotropy (P=0.01) and streamline count (P=0.029), and higher radial diffusivity (P=0.014) than controls in the cingulum. After correction for white matter atrophy, only fractional anisotropy and radial diffusivity remained significantly lower in AD compared to controls (P=0.003 and P=0.05). In the parahippocampal bundle, AD patients had lower mean and radial diffusivities (P=0.048 and P=0.013) compared to controls, from which only radial diffusivity survived for white matter adjustment (P=0.05). Regression models revealed that cognitive performance is also accounted for by white matter microstructural values. Structural connectivity within the DMN is important to the execution of high-complexity tasks, probably due to its relevant role in the integration of the network.

Whole Cortical And Default Mode Network Mean Functional Connectivity As Potential Biomarkers For Mild Alzheimer's Disease.

The search for an Alzheimer's disease (AD) biomarker is one of the most relevant contemporary research topics due to the high prevalence and social costs of the disease. Functional connectivity (FC) of the default mode network (DMN) is a plausible candidate for such a biomarker. We evaluated 22 patients with mild AD and 26 age- and gender-matched healthy controls. All subjects underwent resting functional magnetic resonance imaging (fMRI) in a 3.0 T scanner. To identify the DMN, seed-based FC of the posterior cingulate was calculated. We also measured the sensitivity/specificity of the method, and verified a correlation with cognitive performance. We found a significant difference between patients with mild AD and controls in average z-scores: DMN, whole cortical positive (WCP) and absolute values. DMN individual values showed a sensitivity of 77.3% and specificity of 70%. DMN and WCP values were correlated to global cognition and episodic memory performance. We showed that individual measures of DMN connectivity could be considered a promising method to differentiate AD, even at an early phase, from normal aging. Further studies with larger numbers of participants, as well as validation of normal values, are needed for more definitive conclusions.

The Psychedelic State Induced By Ayahuasca Modulates The Activity And Connectivity Of The Default Mode Network.

The experiences induced by psychedelics share a wide variety of subjective features, related to the complex changes in perception and cognition induced by this class of drugs. A remarkable increase in introspection is at the core of these altered states of consciousness. Self-oriented mental activity has been consistently linked to the Default Mode Network (DMN), a set of brain regions more active during rest than during the execution of a goal-directed task. Here we used fMRI technique to inspect the DMN during the psychedelic state induced by Ayahuasca in ten experienced subjects. Ayahuasca is a potion traditionally used by Amazonian Amerindians composed by a mixture of compounds that increase monoaminergic transmission. In particular, we examined whether Ayahuasca changes the activity and connectivity of the DMN and the connection between the DMN and the task-positive network (TPN). Ayahuasca caused a significant decrease in activity through most parts of the DMN, including its most consistent hubs: the Posterior Cingulate Cortex (PCC)/Precuneus and the medial Prefrontal Cortex (mPFC). Functional connectivity within the PCC/Precuneus decreased after Ayahuasca intake. No significant change was observed in the DMN-TPN orthogonality. Altogether, our results support the notion that the altered state of consciousness induced by Ayahuasca, like those induced by psilocybin (another serotonergic psychedelic), meditation and sleep, is linked to the modulation of the activity and the connectivity of the DMN.

The determinants of default risk in Brazil

We formulated a general unrestricted model of the Brazilian Emerging Markets Bond Index Plus (EMBI+) spreads, a proxy for the country`s default risk. Employing algorithms that perform automated model selection, we found that macroeconomic fundamentals, such as current account deficit ratio to gross domestic product, public deficit ratio to gross domestic product and imports over foreign exchange reserves, can explain a great part of the variation in EMBI+ spreads. There is also robust evidence of systematic contagion from Argentina and Mexico and that the variance of the spread also affects its mean.

White matter microstructure underlying default mode network connectivity in the human brain

Resting state functional magnetic resonance imaging (fMRI) reveals a distinct network of correlated brain function representing a default mode state of the human brain The underlying structural basis of this functional connectivity pattern is still widely unexplored We combined fractional anisotropy measures of fiber tract integrity derived from diffusion tensor imaging (DTI) and resting state fMRI data obtained at 3 Tesla from 20 healthy elderly subjects (56 to 83 years of age) to determine white matter microstructure e 7 underlying default mode connectivity We hypothesized that the functional connectivity between the posterior cingulate and hippocampus from resting state fMRI data Would be associated with the white matter microstructure in the cingulate bundle and fiber tracts connecting posterior cingulate gyrus With lateral temporal lobes, medial temporal lobes, and precuneus This was demonstrated at the p<0001 level using a voxel-based multivariate analysis of covariance (MANCOVA) approach In addition, we used a data-driven technique of joint independent component analysis (ICA) that uncovers spatial pattern that are linked across modalities. It revealed a pattern of white matter tracts including cingulate bundle and associated fiber tracts resembling the findings from the hypothesis-driven analysis and was linked to the pattern of default mode network (DMN) connectivity in the resting state fMRI data Out findings support the notion that the functional connectivity between the posterior cingulate and hippocampus and the functional connectivity across the entire DMN is based oil distinct pattern of anatomical connectivity within the cerebral white matter (C) 2009 Elsevier Inc All rights reserved

Notes on market failure and the Paretian (Kaldor-Hicks) relevance and irrelevance of unfavourable externalities

The following are notes that have been distributed by me over the last few years to students in Environmental Economics at The University of Queensland. They give particular attention to whether externalities are Pareto or Kaldor-Hicks relevant from a policy point of view. Externalities are Kaldor-Hicks or Pareto irrelevant if no change is possible for which gainers could compensate losers. Both absolute and marginal externalities may be Kaldor-Hicks relevant. Infra-marginal negative externalities are often, but not always, Kaldor-Hicks irrelevant. There are at least two cases where such externalities can be relevant. First, the absolute impact of the negative externality may be so great that the source of the externality should be eliminated. Secondly, if the externality arises from production, its nature may depend on the type of production technique adopted. Although for the technique adopted, an infra-marginal negative externality occurs. That is Paretian irrelevant given that choice of this technique is the only available possibility, alternative techniques may actually be available in practice. Some of these may generate even smaller total external effects and be socially preferable. Both cases are outlined and illustrated in these notes. The analysis reveals the dangers of relying on marginalism for deciding on environmental policy. Total (external) effects are often of great social and economic importance and appropriate social choices cannot be made on the basis of marginalism alone.

Optimal insurance with counterparty default risk

We study the design of optimal insurance contracts when the insurer can default on its obligations. In our model default arises endogenously from the interaction of the insurance premium, the indemnity schedule and the insurer’s assets. This allows us to understand the joint effect of insolvency risk and background risk on efficient contracts. The results may shed light on the aggregate risk retention sched- ules observed in catastrophe reinsurance markets, and can assist in the design of (re)insurance programs and guarantee funds.

Simulation of default events in a CDX and estimation of the spread

The portfolio generating the iTraxx EUR index is modeled by coupled Markov chains. Each of the industries of the portfolio evolves according to its own Markov transition matrix. Using a variant of the method of moments, the model parameters are estimated from a data set of Standard and Poor's. Swap spreads are evaluated by Monte-Carlo simulations. Along with an actuarially fair spread, at least squares spread is considered.

What drives corporate default risk premia? Evidence from the CDS market

This paper studies the evolution of the default risk premia for European firms during the years surrounding the recent credit crisis. We employ the information embedded in Credit Default Swaps (CDS) and Moody’s KMV EDF default probabilities to analyze the common factors driving this risk premia. The risk premium is characterized in several directions: Firstly, we perform a panel data analysis to capture the relationship between CDS spreads and actual default probabilities. Secondly, we employ the intensity framework of Jarrow et al. (2005) in order to measure the theoretical effect of risk premium on expected bond returns. Thirdly, we carry out a dynamic panel data to identify the macroeconomic sources of risk premium. Finally, a vector autoregressive model analyzes which proportion of the co-movement is attributable to financial or macro variables. Our estimations report coefficients for risk premium substantially higher than previously referred for US firms and a time varying behavior. A dominant factor explains around 60% of the common movements in risk premia. Additionally, empirical evidence suggests a public-to-private risk transfer between the sovereign CDS spreads and corporate risk premia.

Fiscal adjustments and sovereign default in different government systems

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Economics from the NOVA – School of Business and Economics