Michael Jacobs

PNC Financial Services · Balance Sheet Analytics & Modeling - Model Development

This study presents an analysis of the impact of asset price bubbles on the markets for cryptocurrencies and con-siders the standard risk management measure Value-at-Risk (“VaR”). We apply the theory of local martingales, present a styled model of asset price bubbles in continuous time and perform a simulation experiment featuring one- and two-dime...

In this study we consider the construction of through-the-cycle ("TTC") probability-of-default ("PD") models designed for credit underwriting uses and point-in-time ("PIT") PD models suitable for early warning uses, considering which validation elements should be emphasized in each case. We build PD models using a long history of large corporate fi...

This paper addresses the building of obligor level hazard rate corporate probability-of-default (“PD”) models for stress testing, departing from the predominant practice in wholesale credit modeling of constructing segment level models for this purpose. We build models based upon varied of financial, credit rating, equity market and macroeconomic f...

The Current Expected Credit Loss (CECL) revised accounting standard for credit loss provisioning is the most important change to United States (US) accounting standards in recent history. In this study, we survey and assess practices in the validation of models that support CECL, across dimensions of both model development and model implementation....

Banking supervisors need to know the amount of capital resources required by an institution to support the risks taken. Traditional approaches, such as regulatory capital ratios, have proven inadequate, giving rise to stress-testing as a primary tool. The macroeconomic variables that supervisors provide to institutions for exercises such as the Com...

In the aftermath of the financial crisis of the last decade, banking supervisors have sought the solution to the problem of determining the optimal capital levels that an institution should hold, in order to support their risk taking activities. The experience of this financial downturn has given rise to the conclusion that traditional approaches,...

In this study we develop and demonstrate a combined stochastic framework for supervisory stress tests that assesses the probable first passage time and the time-related likelihoods for banks to breach their regulatory minimum capital ratios. Our proposed framework allows regulators to intuitively integrate credit characteristics of the individual l...

This paper presents an analysis of the impact of asset price bubbles on standard credit risk measures, extending research by Jacobs published in 2015 in which the author constructed a model, provided evidence that asset price bubbles understate economic credit capital and proposed a new credit risk measure that is robust to this bias (the expected...

Purpose This research aims to model the relationship between the credit risk signals in the credit default swap (CDS) market and agency credit ratings, and determines the factors that help explain the variation in such signals. Design/methodology/approach A comprehensive analysis of the differences in the relative credit risk assessments of CDS-ba...

This study presents an analysis of the impact of asset price bubbles on a liquidity risk measure, the liquidity risk option premium ('LROP'). We present a styled model of asset price bubbles in continuous time, and perform a simulation experiment of a stochastic differential equation ('SDE') system for the asset value through a constant elasticity...

The question of how to prevent another crippling recession has received much attention. The answer in the Dodd-Frank Act is stress testing, which examines through economic models how banks would react to a bad turn of economic events, such as negative interest rates. The first of its kind in the legal literature, this article offers an accurate mod...

The recent financial crisis has given rise to a re-examination by regulators and academics of the conventional wisdom regarding the implications of the spectacular growth of the financial sector of the economy. In the pre-crisis era, there was a widespread common wisdom that “bigger is better.” The arguments underpinning this view ranged from poten...

Following the recent global financial crisis, regulators have recognized the importance of stress testing, in part due to the impact of model risk, and have implemented supervisory requirements in both the revised Basel framework and the Comprehensive Capital Analysis and Review (CCAR) program. We contribute to the literature by developing a Bayesi...

In this chapter, we survey practices and supervisory expectations for stress testing (ST) in a credit-risk framework for banking book exposures. We introduce and motivate ST, and discuss its function, supervisory requirements, and expectations. We conclude with a simple and practical stress testing example that includes a ratings migration matrix-b...

This study presents an analysis of the impact of asset price bubbles on standard credit risk measures, including Expected Loss (“EL”) and Credit Value-at-Risk (“CVaR”). We present a styled model of asset price bubbles in continuous time, and perform a simulation experiment of a 2 dimensional Stochastic Differential Equation (“SDE”) system for asset...

A critical question that banking supervisors are trying to answer is what is the amount of capital or liquidity resources required by an institution in order to support the risks taken in the course of business. The financial crisis of the last several years has revealed that traditional approaches such as regulatory capital ratios to be inadequate...

Purpose – This study aims to survey supervisory requirements and expectations for counterparty credit risk (CCR). Design/methodology/approach – In this paper, a survey of CCR including the following elements has been performed. First, various concepts in CCR measurement and management, including prevalent practices, definitions and conceptual issu...

This paper presents a model of systematic LGD that is simple and effective. It is simple in that it uses only parameters appearing in standard models. It is effective in that it survives statistical testing against more complicated models.

This study represents a comprehensive analysis of the resolution of financial distress or default. First, motivated by economic theory and models, we perform an exhaustive analysis of fundamental data that are thought to influence the relative likelihood of the financial distress resolution process (private or distressed renegotiation versus public...

This study empirically analyses the historical performance of defaulted debt from Moody's Ultimate Recovery Database (1987–2010). Motivated by a stylized structural model of credit risk with systematic recovery risk, we argue and find evidence that returns on defaulted debt co-vary with determinants of the market risk premium, firm specific and str...

The views expressed herein are those of the authors and do not necessarily represent the views of the Office of the Comptroller of the Currency or the Department of the Treasury.

This paper presents a simple and effective model of systematic loss given default. It is simple in that it uses only parameters appearing in standard models. It is effective in that it survives statistical testing against more complicated models.

Purpose–The purpose of this paper is to build an easy to implement, pragmatic and parsimonious yet accurate model to determine an exposure at default (EAD) distribution for CCL (contingent credit lines) portfolios. Design/methodology/approach–Using an algorithm similar to the basic CreditRisk+ and Fourier Transforms, the authors arrive at a portfol...

In this study we empirically investigate ultimate loss given default by studying its determinants. In the process, we build a predictive econometric model and evaluate the rank ordering and predictive accuracy properties of this model. We use a sample of 871 large corporate bankruptcies and out-of-court settlements on firms, rated by Moody's in the...

In this study we develop a theoretical model for ultimate loss-given default in the Merton (1974) structural credit risk model framework, deriving compound option formulae to model differential seniority of instruments, and incorporating an optimal foreclosure threshold. We consider an extension that allows for an independent recovery rate process,...

This study empirically analyzes the historical performance of defaulted debt from Moody’s Ultimate Recovery Database (1987-2010). Motivated by a stylized structural model of credit risk with systematic recovery risk, we argue and find evidence that returns on defaulted debt co-vary with determinants of the market risk premium, firm specific and str...

Exposure at Default (EAD) quantification for the large exposures to contingent credit lines (CCLs) is a critical for models of credit risk amongst financial institutions. This includes expected loss calculations for loan provisions, economic credit capital as well as regulatory capital under the Basel II advanced Internal Ratings Based (IRB) framew...

This paper analyzes bank efficiency in a quantile regression framework, in order to investigate bank efficiency for banks of different sizes, and compares this approach with traditional efficiency methodologies as summarized in Sickles (2005). The recent financial crisis has placed the large banks in an unfavorable spotlight, i.e., the "too-big-to-...

A challenge in economic capital modelling within financial institutions is developing a coherent approach to model validation. This has been motivated by rapid financial innovation, developments in supervisory standards (Pillar 2 of the Basel II framework) and the recent financial turmoil. Various practices are surveyed in validating economic capit...

A challenge in economic capital modeling within financial institutions is developing a coherent approach to model validation. This has been motivated by rapid financial innovation, developments in supervisory standards (Pillar II of the Basel II framework) and the recent financial turmoil. We survey various practices in validating economic capital...

A Bayesian approach to default rate estimation is proposed and illustrated using a prior distribution assessed from an experienced industry expert. The principle advantage of the Bayesian approach is the potential for coherent incorporation of expert information--crucial when data are scarce or unreliable. A secondary advantage is access to efficie...

The prices of or spread on credit default swaps (CDS) theoretically represent the pure credit risk of a firm. Callen, Livnat and Segal (2007) note that although the CDS premium is related to credit ratings issued by the rating agencies, rather wide variation in CDS spreads are observed for firms having a given rating. Following the recent subprime...

In this study we develop a theoretical model for ultimate loss-given default in the Merton (1974) structural credit risk model framework, deriving compound option formulae to model differential seniority of instruments, and incorporating an optimal foreclosure threshold. We consider an extension that allows for an independent recovery rate process,...

In this paper we examine whether variation in investors’ demand for risky assets is associated with recoveries on defaulted debt securities. Our examination is motivated by the prediction of standard portfolio separation theorems that an increase in aggregate investor risk aversion is associated with a decrease in the demand for the market portfoli...

Loss given default (LGD) is a critical parameter in various facets of credit risk modeling. This study empirically investigates the determinants of LGD and builds alternative predictive econometric models for LGD on bonds and loans using an extensive sample of most major U.S. defaults in the period 1985–2008. We build a simultaneous equation model...

This study evaluates and compares alternative time series correlation modeling techniques, using a broad database of 33 variables and 467 asset pairs in nine different asset classes. For each pair of assets a time-varying moving window correlation (MWC) is computed from different moving itional correlation (DCC) time series model, first documenting...

A challenge in enterprise risk measurement for diversified financial institutions is developing a coherent approach to aggregating different risk types. This has been motivated by rapid financial innovation, developments in supervisory standards (Basel 2) and recent financial turmoil. The main risks faced - market, credit and operational – have dis...

Prudential management of credit risk and supervisory requirements call for the accurate measurement of loss conditional upon default (LGD). In the case of banks, in order to achieve Advanced Internal Ratings Based (AIRB) compliance under the Basel II minimum regulatory capital framework, loss arising fro m counterparty default must be estimated. Ho...

A central challenge to the practice of enterprise risk measurement and management faced by diversified financial institutions (e.g., an internationally active bank or insurance company) is developing a coherent approach to aggregating different risk types. This has been motivated by rapid financial innovation, developments in supervisory standards...

In this study we empirically investigate the determinants of and build a predictive econometric model for exposure at default (EAD) using a sample of Moody’s rated defaulted firms having revolving credits. We extend prior empirical work by considering alternative determinants of EAD risk, in addition to the traditional factors (e.g., credit rating....

In this study, we empirically investigate the determinants of the process utilized to resolve financial distress (resolution process) and also the outcome of the financial distress (resolution outcome). Specifically, we separate firms that utilize a private (work out) versus a public (filing for bankruptcy) resolution process and then we further se...

Thesis (Ph. D.)--City University of New York, 2001. Includes bibliographical references (leaves 227-243).

The relationship between trading volume and price changes in futures markets continues to be of interest mainly due to the inconclusive nature of the results reported so far in the literature (Karpoff, 1987). One source of controversy centers on the empirical distribution of futures price changes (Sterge, 1989).A recent study by Najand and Yung (19...

The relationship between trading volume and price changes in futures markets continues to be of interest mainly due to the inconclusive nature of the results reported so far in the literature (Karpoff, 1987). One source of controversy centers on the empirical distribution of futures price changes (Sterge, 1989).A recent study by Najand and Yung (19...