Publications

September 2008
Article

Firm Heterogeneity and Credit Risk Diversification

By: Samuel G. Hanson, M. Hashem Pesaran and Til Schuermann

This paper examines the impact of neglected heterogeneity on credit risk. We show that neglecting heterogeneity in firm returns and/or default thresholds leads to under estimation of expected losses (EL), and its effect on portfolio risk is ambiguous. Once EL is... View Details

Keywords: Volatility; Credit; Investment Return; Outcome or Result; Risk and Uncertainty; Loss; Diversification; Complexity; United States

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August 2023
Article

Do Rating Agencies Behave Defensively for Higher Risk Issuers?

By: Samuel B. Bonsall IV, Kevin Koharki, Pepa Kraft, Karl A. Muller III and Anywhere Sikochi

We examine whether rating agencies act defensively toward issuers with a higher likelihood of default. We find that agencies' qualitative soft rating adjustments are more accurate as issuers' default risk grows, as evidenced by the adjustments leading to lower Type I... View Details

Keywords: Credit Rating Agencies; Soft Rating Adjustments; Default; Credit; Performance Evaluation; Measurement and Metrics; Financial Institutions; Risk Management

January 1997 (Revised March 1999)
Case

An Overview of Credit Derivatives

Presents the history and features of credit derivatives, a new class of securities. A stylized problem is also provided. View Details

Keywords: Credit Derivatives and Swaps

Educators

September 2011
Article

How Did Increased Competition Affect Credit Ratings?

The credit rating industry has historically been dominated by just two agencies, Moody's and S&P, leading to longstanding legislative and regulatory calls for increased competition. The material entry of a third rating agency (Fitch) to the competitive landscape offers... View Details

Keywords: Credit; Governing Rules, Regulations, and Reforms; Competition; Forecasting and Prediction; Theory

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2008
Working Paper

How Did Increased Competition Affect Credit Ratings?

The credit rating industry has historically been dominated by just two agencies, Moody's and S&P, leading to longstanding legislative and regulatory calls for increased competition. The material entry of a third rating agency (Fitch) to the competitive landscape offers... View Details

Keywords: Credit; Financial Markets; Governing Rules, Regulations, and Reforms; Quality; Reputation; Competition; Financial Services Industry

February 1997 (Revised July 1997)
Case

Enron Corp.: - Credit Sensitive Notes

This case investigates an innovative bond issue by Enron. The coupon on the bond is indexed to the company's credit rating, making it a credit derivative structure. View Details

Keywords: Credit Derivatives and Swaps; Bonds; Energy Industry

Educators

2011
Working Paper

Why Fears about Municipal Credit Are Overblown

Highly publicized predictions of 50-100 municipal defaults have caused anxiety among municipal bond investors. While there is some chance that negative investor sentiment will lead to further spread widening, the probability of the kind of widespread default that would... View Details

Keywords: Financial Crisis; Borrowing and Debt; Insolvency and Bankruptcy; Bonds; Investment Return; City

January 2011
Supplement

Fixed Income Arbitrage in a Financial Crisis (D): TED Spread and Swap Spread in May 2009

The D case briefly recounts the action that investment manager Albert Mills takes in the matter of an unusually low U.S. dollar fixed-floating swap spread. He must decide what to do next. View Details

Keywords: Credit Derivatives and Swaps; Interest Rates; Financial Crisis

August 2017 (Revised February 2024)
Teaching Note

Exotic Interest Rate Swaps: Snowballs in Portugal

By: Boris Vallee, Patrick Augustin and Philippe Rich

This case explores a complex swap transaction implemented by Metro do Porto in 2007. It represents an opportunity to study fixed income derivative instruments, such as plain-vanilla swaps and structured swaps, as well as understand the opportunities and challenges of... View Details

Keywords: Swaps; Public Finance; Structured Finance; Credit Derivatives and Swaps; Public Sector; Transportation Industry; Rail Industry; Portugal

31 Aug 2009
Research & Ideas

Why Competition May Not Improve Credit Rating Agencies

In the run-up to the global financial crisis, credit rating agencies gave high marks to such risky financial vehicles as collateralized debt obligations, which few people understood. It has been argued that these ratings misled investors... View Details

Keywords: by Martha Lagace; Financial Services

2025
Working Paper

Tax Planning, Illiquidity, and Credit Risks: Evidence from DeFi Lending

By: Lisa De Simone, Peiyi Jin and Daniel Rabetti

This study establishes a plausible causal link between tax-planning-induced illiquidity and credit risks in lending markets. Exploiting an exogenous tax shock imposed by the Internal Revenue Service (IRS) on cryptocurrency gains, along with millions of transactions in... View Details

Keywords: Cryptocurrency; Taxation; Financial Liquidity; Credit; Financing and Loans; Financial Markets

January 2017
Case

Exotic Interest Rate Swaps: Snowballs in Portugal

By: Boris Vallee, Patrick Augustin and Philippe Rich

This case explores a complex swap transaction implemented by Metro do Porto in 2007. It represents an opportunity to study fixed income derivative instruments, such as plain-vanilla swaps and structured swaps, as well as understand the opportunities and challenges of... View Details

Keywords: Swaps; Public Finance; Structured Finance; Credit Derivatives and Swaps; Public Sector; Transportation Industry; Rail Industry; Portugal

Educators

23 Jan 2023
Research & Ideas

After High-Profile Failures, Can Investors Still Trust Credit Ratings?

important lesson: getting it wrong can seriously damage their reputations and hurt their businesses. As economic fears mount and raise default concerns, a fresh analysis of new-and-improved credit rating... View Details

Keywords: by Ben Rand

26 Jan 2021
Research & Ideas

A New Way to Cut Credit Card Debt: Pay Off One Purchase at a Time

their debt and get rid of some of it.” The prospect of reduced spending might seem like it would deter credit card companies from rolling out the repayment-by-purchase option. But Norton says those companies actually prefer that people... View Details

Keywords: by Kristen Senz; Financial Services

July 2019
Article

Optimal Capital Structure and Bankruptcy Choice: Dynamic Bargaining vs Liquidation

By: Samuel Antill and Steven R. Grenadier

We model a firm’s optimal capital structure decision in a framework in which it may later choose to enter either Chapter 11 reorganization or Chapter 7 liquidation. Creditors anticipate equityholders’ ex-post reorganization incentives and price them into the ex-ante... View Details

Keywords: Default; Dynamic Bargaining; Capital Structure; Insolvency and Bankruptcy; Mathematical Methods