30 results found
We explore the impact of media content on sovereign credit risk. Our measure of media tone is extracted from the Thomson Reuters News Analytics database. As a proxy for sovereign credit risk we consider Credit Default Swap (CDS) spreads, which are decomposed into their risk premium and default risk components. We find that media tone explains and predicts CDS returns and is a mixture of noise and information. Its effect on risk premium induce a temporary change in investors’ appetite for credit risk exposure whereas its impact on the default component lead to reassessments of the fundamentals of sovereign economies.
Cathcart L, Dufour A, Rossi L, et al., 2020, The differential impact of leverage on the default risk of small and large firms, Journal of Corporate Finance, Vol: 60, Pages: 1-36, ISSN: 0929-1199
We analyse a sample of 6 million firm-year observations of large corporations and small and medium sized enterprises (SMEs) spanning 6 European countries from 2005 to 2015, to determine the impact of leverage and different sources of funding on default risk. We find that financial leverage has a greater impact on the probability of default of SMEs than of large corporations. The difference in default probability between the top and bottom leverage quartiles is 1.24% for large firms and 2.87% for SMEs. This difference may be explained by the greater exposure of SMEs to short-term debt and their consequently higher refinancing risk. Indeed, we find that SMEs that recover from the state of insolvency may have similar leverage to defaulted SMEs; however their liability structure is significantly altered towards long-term debt and away from short-term debt. Our findings have important implications not only for bank regulators and policy-makers but also for credit risk modelling.
Cathcart L, El-Jahel L, Evans L, et al., 2019, Excess comovement in credit default swap markets: Evidence from the CDX indices, Journal of Financial Markets, Vol: 43, Pages: 96-120, ISSN: 1386-4181
We provide evidence of excess comovement in the credit default swap (CDS) market following inclusions to and exclusions from investment grade and high yield CDX indices during the 2003–2016 period. We find that when a name joins an index, its return tends to covary more with the returns of that index and conversely when it is excluded from an index, its return tends to covary less with it. We use univariate regressions and a difference-in-difference approach to show that the CDS market is impacted by indexation. This excess comovement indicates a departure from fundamental-based pricing and provides support in favour of style investing.
Bedendo M, Cathcart L, El-Jahel L, 2017, Reputational shocks and the information content of credit ratings, Journal of Financial Stability, Vol: 34, Pages: 44-60, ISSN: 1572-3089
We investigate how shocks to the reputation of credit rating agencies and the subsequent introduction of stricter regulation affect investors’ reaction to rating signals. We focus on three major episodes of reputational distress: the Enron/WorldCom scandals, the subprime crisis and the lawsuit against Standard & Poor's. We document a stronger response of stock investors to downgrades in the aftermath of reputational shocks, which is not, however, accompanied by an improvement in rating quality. Our results are consistent with a scenario where, following evidence of misrating, market investors conclude that ratings are generally overstated and infer greater negative information from downgrades. The effect is stronger for the investment-grade segment, where rating errors have a wider reputational impact. The introduction of new regulatory measures such the SOX Act, the CRA Reform Act and the Dodd-Frank Act, seems instead to improve rating quality and soften investors’ response.
Cathcart L, El-Jahel L, Jabbour R, 2017, Basel II: an engine without brakes, Journal of Banking Regulation, Vol: 18, Pages: 359-374, ISSN: 1745-6452
The primary goal sought by the Bank of International Settlements and its committee on banking supervision (BCBS) is to make banks safer entities while maintaining a “level playing field.” However, the question of whether this objective can be attained through enforcing capital requirements is still debatable due to the controversy surrounding the impact of regulatory standards, in particular, the Basel I and II accords on crises that occurred soon after the frameworks were introduced. While the impact of the latter remains controversial in the U.S. due to its effective implementation date, we observe that the newly introduced capital requirements could have played a role in the buildup to the subprime crisis. These results have direct policy implications with regard to ongoing revisions to Basel III, in particular the standardized approach for credit risk.
Cathcart L, Bedendo M, El-Jahel L, 2016, Distressed debt restructuring in the presence of credit default swaps, Journal of Money, Credit and Banking, Vol: 48, Pages: 165-201, ISSN: 1538-4616
The availability of credit insurance via credit default swaps has been closely associated with the emergence of empty creditors. We empirically investigate this issue by looking at the debt restructurings (distressed exchanges and bankruptcy filings) of rated, nonfinancial U.S. companies over the period January 2007–June 2011. Using different proxies for the existence of insured creditors, we do not find evidence that the access to credit insurance favors bankruptcy over a debt workout. However, we document higher recovery prices following a distressed exchange in firms where empty creditors are more likely to emerge.
Cathcart L, El-Jahel L, Jabbour R, 2015, "Can Regulators Allow Banks to Set their Own Capital Ratios?", Journal of Banking and Finance, Vol: 53, Pages: 112-123, ISSN: 1872-6372
Badaoui S, Cathcart L, El-Jahel L, 2015, Implied Liquidity Risk in the Term Structure of Sovereign Credit Default Swap Spreads and Bond Spreads, European Journal of Finance, Vol: 22, Pages: 825-853, ISSN: 1466-4364
In this study, we focus on the dynamic properties of the risk-neutral liquidity risk premium specific to the sovereign credit default swap (CDS) and bond markets. We show that liquidity risk has a non-trivial role and participates directly to the variation over time of the term structure of sovereign CDS and bond spreads for both the pre- and crisis periods. Secondly, our results indicate that the time-varying bond and CDS liquidity risk premium move in opposite directions which imply that when bond liquidity risk is high, CDS liquidity risk is low (and vice versa), which may in turn be consistent with the substitution effect between CDS and bond markets. Finally, our Granger causality analysis reveals that, although the magnitude of bond and CDS liquidity risk is substantially different, there is a strong liquidity flow between the CDS and the bond markets, however, no market seems to consistently lead the other.
Badaoui S, Cathcart L, El-Jahel L, 2013, Do sovereign credit default swaps represent a clean measure of sovereign default risk? A factor model approach, Journal of Banking & Finance, Vol: 37, Pages: 2392-2407, ISSN: 0378-4266
Cathcart L, ElJahel L, Jabbour R, 2013, The Basel Capital Requirement Puzzle: A Study of Changing interconnections between Leverage and Risk-Based Capital Ratios, European Financial Management Association
Evans L, Cathcart L, El-Jahel L, 2013, The Credit Ratings Crisis and the Informational Content of Corporate Credit Ratings, Working Papers, SSRN
Cathcart L, El-Jahel L, Evans L, 2013, The Correlation Structure of the CDS Market: An Empirical Investigation, The Journal of Fixed Income, Vol: 22, Pages: 53-74, ISSN: 1059-8596
Cathcart L, El-Jahel L, Jabbour R, 2013, The Basel Capital Requirement Puzzle: A Study of Changing Interconnections between Leverage and Risk-Based Capital Ratios, The Financial Engineering and Banking Society
Cathcart L, El-Jahel L, Badaoui S, 2012, Do Sovereign Credit Default Swaps Represents a Clean Measure of Sovereign Default Risk? A Factor Model Approach, European Financial Management Association
Cathcart L, El-Jahel L, Badaoui S, 2012, Do Sovereign Credit Default Swaps Represent a Clean Measure of Sovereign Default Risk? A Factor Model Approach, World Finance Conference
Cathcart L, El-Jahel L, Jabbour R, 2012, The Impact of Regulatory Risk Based Capital Requirements on Credit Crises, The Financial Engineering and Banking Society
Cathcart L, El-Jahel L, Jabbour R, 2012, The Impact of Regulatory Risk-Based Capital Requirements on Credit Crises, International Paris Finance Meeting
Bedendo M, Cathcart L, El-Jahel L, 2011, Market and Model Credit Default Swap Spreads: Mind the Gap!, EUROPEAN FINANCIAL MANAGEMENT, Vol: 17, Pages: 655-678, ISSN: 1354-7798
Cathcart L, Bedendo M, El-Jahel L, 2011, Market and Model Credit Default Swap Spreads: mind the Gap!, European Financial Management
Bedendo M, Cathcart L, El-Jahel L, 2010, In-and Out of Court Debt Restructuring in the Presence of Credit Default Swaps, Working Paper, SSRN
This paper empirically investigates whether the availability of credit insurance via credit default swaps (CDS) affects the debt restructuring process of distressed firms, as predicted by the empty creditors theory. Looking at the restructuring outcome (distressed exchanges versus Chapter 11 filings) of a sample of rated, non-financial U.S. companies during the 2008-2009 crisis, we do not find evidence that the access to credit insurance favors bankruptcy over a debt workout. Instead, we observe that the probability of filing for Chapter 11 during the crisis is significantly associated with high leverage and short-term debt ratios, a simplified debt structure characterized by a high proportion of secured debt, and large profitability shocks incurred by the main banks lending to the company. Further checks on the determinants of the recovery values and on the characteristics of debt renegotiations confirm that the presence of CDS does not seem to have significant distortive effects on the debt restructuring process.
Bedendo M, Cathcart L, El-Jahel L, 2007, The slope of the term structure of credit spreads: an empirical investigation, Journal of Financial Research, Vol: 30, Pages: 237-257, ISSN: 0270-2592
Cathcart L, El-Jahel L, Bedendo M, 2007, The Slope of the term Structure of Credit Spreads, Professional Investor, Vol: 18, ISSN: 0958-2541
Cathcart L, El-Jahel L, 2006, Pricing defaultable bonds: a middle-way approach between structural and reduced-form models, Quantitative Finance, Vol: 6, Pages: 243-253, ISSN: 1469-7688
Cathcart L, El-Jahel L, Bedendo M, et al., 2005, Trading down the slopes, Risk, Vol: 18, Pages: 107-109, ISSN: 0952-8776
Cathcart L, El-Jahel L, 2004, Multiple defaults and merton's model, Journal of Fixed Income, Vol: 14, Pages: 60-69, ISSN: 1059-8596
Bedendo M, Cathcart L, El-Jahel L, 2004, The Shape of the Term Structure of Credit Spreads: An Empirical Investigation (Discussion Paper)
Cathcart L, El-Jahel L, 2002, Semi-analytical pricing of defaultable bonds in a signaling jump-default model, Journal of Computational Finance, Vol: 6, Pages: 91-108, ISSN: 1460-1559
Cathcart L, El-Jahel L, 1998, Valuation of defaultable bonds, Journal of Fixed Income, Vol: 8, Pages: 65-78
Cathcart L, 1998, The pricing of floating rate instruments, Journal of Computational Finance, Vol: 1, Pages: 31-51
Cathcart L, Perraudin W, 1996, Interest Rate Setting in Floating Rate Mortgage Markets
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