SSRN Author: Rong FanRong Fan SSRN Content
http://www.ssrn.com/author=289190
http://www.ssrn.com/rss/en-usWed, 06 Jan 2016 01:22:03 GMTeditor@ssrn.com (Editor)Wed, 06 Jan 2016 01:22:03 GMTwebmaster@ssrn.com (WebMaster)SSRN RSS Generator 1.0REVISION: An Index-Based Measure of LiquidityThe liquidity shocks of '08-'09 revealed that measures of liquidity risk being used in most financial institutions turned out to be woefully inadequate. The construction of long-short portfolios based on liquidity proxies introduces errors such as extraneous risk factors and hedging error. We develop a new measure for liquidity risk using exchange-traded funds (ETFs) that attempts to minimize this error. We form a theoretically-supported measure that is long ETFs and short the underlying components of that ETF, i.e., long and short a similar set of underlying securities with the same weights. Pricing discrepancies between the long and short positions are driven by liquidity differences between the ETF and its underlying components. Constructing theoretically supported liquidity risk factors in a number of markets, we undertake several tests to validate our new liquidity metric. The results show that our illiquidity measure is strongly related to other measures of illiquidity, ...
http://www.ssrn.com/abstract=1782295
http://www.ssrn.com/1457566.htmlTue, 05 Jan 2016 13:29:53 GMTREVISION: Bayesian Migration in Credit Ratings Based on Probabilities of DefaultThe advent of models for computing probabilities of default (PD) has provided a supplementary measure of default likelihood in addition to credit ratings. Credit ratings are a coarser measure of default likelihood, and embed the same information as PDs plus a modicum of human judgment. Rating transitions tend to occur less frequently than PD changes, since the human judgment involved overrides temporary spikes in state variables driving PDs.
We have developed a Bayesian model based on PD changes to mimic rating changes. The free parameters in the model are tuned to historical data to fit the human judgment element in rating transitions.
The model is easy to implement. We generate a simulation-fitted transition matrix that mimics the historical empirical one closely. This lends support to the often-made argument that PDs may be used as sufficient statistics for rating changes. Rating agencies may use this model as a basis for proposing rating changes to credit analysts, and finally, ...
http://www.ssrn.com/abstract=1782285
http://www.ssrn.com/1431329.htmlFri, 25 Sep 2015 17:11:41 GMT