Michael Gordy

Michael Gordy
Board of Governors of the Federal Reserve System | Federal Reserve Board · Research & Statistics

PhD, Economics

About

59
Publications
9,911
Reads
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3,216
Citations
Introduction
I work at a regulatory institution, so am bound to avoid conflict of interest while promoting my research. Therefore, I neither give nor receive endorsements on ResearchGate. Thanks for your understanding.
Additional affiliations
January 2014 - May 2014
Princeton University
Position
  • Visiting Lecturer
Description
  • Taught courses in 2nd half of semester on derivatives and on financial crises.
September 1994 - present
Board of Governors of the Federal Reserve System
Position
  • Senior Economist
August 1994 - June 2017
Board of Governors of the Federal Reserve System
Position
  • Economist

Publications

Publications (59)
Article
We offer a model and evidence showing that private debtholders play a key role in setting the endogenous asset value threshold below which corporations declare bankruptcy. As predicted by the model, we find that the recovery rate at emergence from bankruptcy on all of the firm’s debt taken together is increasing in the pre-bankruptcy share of priva...
Article
We study a class of backtests for forecast distributions in which the test statistic depends on a spectral transformation that weights exceedance events by a function of the modeled probability level. The weighting scheme is specified by a kernel measure which makes explicit the user’s priorities for model performance. The class of spectral backtes...
Article
Full-text available
We study a class of backtests for forecast distributions in which the test statistic is a spectral transformation that weights exceedance events by a function of the modeled probability level. The choice of the kernel function makes explicit the user's priorities for model performance. The class of spectral backtests includes tests of unconditional...
Article
Full-text available
We investigate how market participants price and manage counterparty risk in the post-crisis period using confidential trade repository data on single-name credit default swap (CDS) transactions. We find that counterparty risk has a modest impact on the pricing of CDS contracts, but a large impact on the choice of counterparties. We show that marke...
Technical Report
We estimate a reduced-form model of credit risk that incorporates stochastic volatility in default intensity via stochastic time-change. Our Bayesian MCMC estimation method overcomes nonlinearity in the measurement equation and state-dependent volatility in the state equation. We implement on firm-level time-series of CDS spreads, and find strong i...
Article
We estimate a reduced-form model of credit risk that incorporates stochastic volatility in default intensity via stochastic time-change. Our Bayesian MCMC estimation method overcomes nonlinearity in the measurement equation and state-dependent volatility in the state equation. We implement on firm-level time-series of CDS spreads, and find strong i...
Article
We derive multivariate moment generating functions for the conditional and stationary distributions of a discrete sample path of n observations of a square-root diffusion (CIR) process, X(t). For any fixed vector of observation times t1,…,t n , we find the conditional joint distribution of (X(t1),…,X(t n )) is a multivariate noncentral chi-squared...
Article
Full-text available
The credit value-at-risk model underpinning the internal ratings-based approach of Basel II and III assumes that idiosyncratic risk has been fully diversified in the portfolio, so that economic capital depends only on systematic risk contributions. We propose a simple granularity adjustment (GA) for approximating the effect of undiversified idiosyn...
Article
We develop two novel approaches to solving for the Laplace transform of a time-changed stochastic process. We discard the standard assumption that the background process (Xt) is Levy. Maintaining the assumption that the business clock (Tt) and the background process are independent, we develop two different series solutions for the Laplace transfor...
Article
Full-text available
We derive the multivariate moment generating function (mgf) for the stationary distribution of a discrete sample path of n observations of a square-root diffusion (CIR) process, X(t). The form of the mgf establishes that the stationary joint distribution of (X(t(1)),...,X(t(n))) for any fixed vector of observation times (t(1),...,t(n)) is a Krishna...
Article
To reduce moral hazard and systemic risk, regulators require banks to hold capital in order to absorb unforeseen risks. Standards developed by the Basel Committee on Banking Supervision (via Basel I and Basel II) have gone some way to aligning such capital requirements with banks' risk profiles. This article examines the rationale for capital regul...
Article
The impact of undiversified idiosyncratic risk on value-at-risk and expected shortfall can be approximated analytically via a methodology known as granularity adjustment (GA). In principle, the GA methodology can be applied to any risk-factor model of portfolio risk. Thus far, however, analytical results have been derived only for simple models of...
Chapter
We discuss nested simulation methods for computing loss distributions and Value-at-Risk (VaR) for a portfolio containing CDO tranches as well as single-name CDS and bonds. When these instruments are modeled via correlated stochastic default-intensity models, estimation of VaR requires a nested simulation procedure: in the outer step of the simulati...
Article
In its complexity and its vulnerability to market volatility, the CPDO might be viewed as the poster child for the excesses of financial engineering in the credit market. This paper examines the CPDO as a case study in model risk in the rating of complex structured products. We demonstrate that the models used by S&P and Moody's would have assigned...
Article
Turán-type inequalities for combinations of Kummer functions involving Φ(a±ν,c±ν,x) and Φ(a,c±ν,x) have been recently investigated in [Á. Baricz, Functional inequalities involving Bessel and modified Bessel functions of the first kind, Expo. Math. 26 (3) (2008) 279–293; M.E.H. Ismail, A. Laforgia, Monotonicity properties of determinants of special...
Article
Full-text available
Risk measurement for derivative portfolios almost invariably calls for nested simulation. In the outer step one draws realizations of all risk factors up to the horizon, and in the inner step one re-prices each instrument in the portfolio at the horizon conditional on the drawn risk factors. Practitioners may perceive the computational burden of su...
Article
We offer a model and evidence that private debtholders play a key role in setting the endogenous asset value threshold below which corporations declare bankruptcy. The model, in the spirit of Black and Cox (1976), implies that the recovery rate at emergence from bankruptcy on all of the firm's debt is related to the pre-bankruptcy share of private...
Article
The credit value-at-risk model underpinning the Basel II Internal Ratings-Based approach assumes that idiosyncratic risk has been diversified away fully in the portfolio, so that economic capital depends only on systematic risk contributions. We develop a simple methodology for approximating the effect of undiversified idiosyncratic risk on VaR. Th...
Conference Paper
Full-text available
We consider a portfolio containing CDO tranches as well as ordinary bonds. Our interest is in large loss probabilities and risk measures such as value-at-risk. When loss is measured on a mark-to-market basis, estimation via simulation requires a nested procedure: In the outer step one draws realizations of all risk factors up to the horizon, and in...
Article
The debate over the potential procyclicality of bank capital requirements under Basel II has focused overwhelmingly on peak-to-trough variation in minimum regulatory requirements. In this paper, we re-examine the problem from the perspective of market discipline. First, we show that the marginal impact of introducing Basel II depends strongly on th...
Article
Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 1994. Includes bibliographical references (p. 143). by Michael B. Gordy. Ph.D.
Article
To explain persistence of credit card interest rates at relatively high levels, Calem and Mester (AER, 1995) argued that informational barriers create switching costs for high-balance customers. As evidence, using data from the 1989 Survey of Consumer Finances, they showed that these households were more likely to be rejected when applying for new...
Article
Saddlepoint approximation offers a robust and extremely fast alternative to Panjer recursion for the solution of the CreditRisk + loss distribution. This chapter shows how saddlepoint approximation can be applied to an extended version of CreditRisk + that incorporates idiosyncratic severity risk. Regardless of the number of sectors and without any...
Article
I demonstrate that ratings-based capital rules, including both the current Basel Accord and its proposed revision, can be reconciled with the general class of credit value-at-risk models. Each exposure's contribution to VaR is portfolio-invariant only if (a) dependence across exposures is driven by a single systematic risk factor, and (b) no exposu...
Article
When economic capital is calculated using a portfolio model of credit value-at-risk, the marginal capital requirement for an instrument depends, in general, on the properties of the portfolio in which it is held. By contrast, ratings-based capital rules, including both the current Basel Accord and its proposed revision, assign a capital charge to a...
Article
Full-text available
When models of portfolio credit risk are calibrated to historical ratings performance data, parameters that capture cross-obligor dependence can be (and often are) fit directly to estimated default correlations. The accuracy of our measures of credit value-at-risk therefore rests on the precision with which default correlations can be estimated. In...
Article
CreditRisk+ is an influential and widely implemented model of portfolio credit risk. As a close variant of models long used for insurance risk, it retains the analytical tractability for which the insurance models were designed. Value-at-risk (VaR) can be obtained via a recurrence-rule algorithm, so Monte Carlo simulation can be avoided. Little rec...
Article
Full-text available
1 The opinions expressed here are those of the authors and do not reflect the views of the Board of Governors or its staff.
Article
Although the mathematical foundations of common value auctions have been well understood since Milgrom and Weber (1982), equilibrium bidding strategies are computationally complex. Very few calculated examples can be found in the literature, and only for highly specialized cases. This paper introduces two sets of distributional assumptions that are...
Article
Auctions of government securities typically permit bidders to enter multiple price-quantity bids. Despite the widespread adoption of this institutional feature and its use by bidders, the motivations behind its use and its effects on auction outcomes are not well understood theoretically and have been little explored empirically. This paper propose...
Article
Within the past two years, important advances have been made in modeling credit risk at the portfolio level. Practitioners and policy makers have invested in implementing and exploring a variety of new models individually. Less progress has been made, however, with comparative analyses. Direct comparison often is not straightforward, because the di...
Article
Full-text available
In the short time since their public releases in 1997, J.P. Morgan's CreditMetrics and Credit Suisse's CreditRisk + have become innuential benchmarks for internal credit risk models. Practitioners and policy makers have invested in implementing and exploring each of the models individually, but have made less progress with comparative analyses. Dir...
Article
Full-text available
This paper introduces the ``compound confluent hypergeometric'' (CCH) distribution. The CCH unifies and generalizes three recently introduced generalizations of the beta distribution: the Gauss hypergeometric (GH) distribution of Armero and Bayarri (1994), the generalized beta (GB) distribution of McDonald and Xu (1995), and the confluent hypergeom...
Article
Although the mathematical foundations of common-value auctions have been well understood since Milgrom and Weber (1982), equilibrium bidding strategies are computationally complex. Very few calculated examples can be found in the literature, and only for highly specialized cases. This paper introduces two sets of distributional assumptions that are...
Article
Implements "Computationally Convenient Distributional Assumptions for Common Value Auctions" by Michael B. Gordy, Federal Reserve Board FEDS 1997-5, January 1997.
Article
Implements a Genetic Algorithm for Maximization a la Dorsey and Mayer, Journal of Business and Economic Statistics, January 1995, 13(1)
Article
In auctions of government treasury securities, each bidder is permitted to enter multiple price-quantity bids. Gordy (1996) finds empirical evidence from Portugal's treasury bill auctions that multiple bidding is used more intensively as the potential for winner's curse increases. That is, ceteris paribus, a bidder submits a larger number of bids a...