Preface

The seminar is open to Master students.

To successfully pass the seminar you need to write a paper and give a presentation. Papers can be written in either German or English and should be of 15-20 pages as a team of two and 20-25 pages as a team of three. For hints how to write a paper see our guidelines. You need to hand in a printed version and also a digital one (PDF). The seminar talks should be given in English. You will have to present around 45 minutes.

For each topic, you should provide a short literature survey (here you should consider more than your intro-paper(s)) and you will also have to work on a practical part in which you should get familiar with empirical analysis (accessing data over Datastream or Bloomberg, performing quantitative analyses). You will need to use a data analysis tool (e.g. Excel, R, Matlab, etc.). 

Some weeks after your registration but before your presentation your supervisor will arrange meetings to discuss your literature and your paper's outline. So you can assure yourself on not missing the point.

Futhermore, you have to hand in a 5-page overview of your problem, your approach and your results in December. Your supervisor will provide some feedback on base of this overview. Consequently, you can consider this feedback in your presentation and your final paper.

All dates for meetings, deadlines, presentations are in the timetable below.

FAQ & Organisational matters

• Do we get a grade? Yes. Your paper and your presentation will be graded and lead to one grade (equally weighted).
• What do we have to hand in? A result-overview one month before your presentation and your final paper one week before the presentation.

Time Table

Topics

1. Implementing the Merton Model
You shall discuss new findings on the impact of specification choices in empirical implementations of the Merton model. As part of your paper, you shall implement different specifications for a large dataset.

Literature to get started:
Afik, Z. et al. (2012), Using the Merton model: an empirical assessment of alternatives, Working Paper

2. Validation of rating systems
You are expected to discuss the validation of rating systems and implement and compare different tests.

Literature to get started:
Bloechlinger, A. and Leippold, M. (2011), A new goodness-of-fit test for event forecasting and its application to credit default models, Management Science, 57(3), pp. 487-505

3. Quality of corporate credit ratings
Review recent work on the (relative) default prediction power of corporate credit ratings and conduct your own empirical study.

Literature to get started:
Hilscher, J. and Wilson, M. (2012), Credit ratings and credit risk, Working Paper

4. Model averaging for credit scoring
The question of which variables are relevant in predicting default risk has been widely discussed in the credit risk literature. You shall discuss and implement Bayesian model averaging (BMA) and compare it to standard approaches.

Literature to get started:
Gonzalez-Aguado, C. and Moral-Benito, E. (2012), Determinants of corporate default: A BMA approach, Working Paper

Student: Wen Cao
Supervisor: Matthias Boehm

5. The role of rating agencies
Rating agencies are in public focus nowadays. Your seminar paper should discuss critically the role of rating agencies. Therefore, you should provide a more in-depth analysis of the relevant literature. You should for example shed light on the business model of the rating agencies and discuss the consequences of wrong rating decisions. In doing so, provide and discuss empirical evidence from various studies. Finally, you should discuss how to get around potential problems.

Literature to get started:
White, L. J. (2010), Markets: The credit rating agencies, Journal of Economic Perspectives, 24(2), pp. 211-226
Jiang, J. et al. (2011), Does it matter who pays for bond ratings? Historical evidence, forthcoming in the Journal of Financial Economics, 105(3), pp. 607-621

Students: Hudson Kiige and Harris Rahim
Supervisor: Matthias Boehm
 
6. The perils of liquidity shocks to financial markets
Your seminar paper should start by discussing the role of liquidity risks in the interbank market. Furthermore, you should discuss the perils of liquidity shocks for financial markets and you should discuss the transmission of these shocks. Is there a risk of contagion between the interbank market and financial markets? Conduct an own empirical study to answer this question. Implement a multivariate GARCH approach to analyze the transmission of liquidity shocks similar to Hesse, H. et al (2008). Interpret and discuss your results in the context of liquidity risks, liquidity shocks and contagiousness.

Literature to get started:
Cifuentes, R. et al. (2005), Liquidity risk and contagion, Journal of the European Economic Association, 3(2-3), pp. 556-566
Hesse, H. et al (2008), Transmission of liquidity shocks: Evidence from the 2007 subprime crisis, Working Paper

Students: Jingping Wu and Dan Wu
Supervisor: Matthias Boehm

7. Cyclicality in credit risk measures: Identifying the credit cycle
You seminar paper should shed light on the relation between credit risk and the business cycle. Discuss the sensitivity of credit risk to macroeconomic conditions. In doing so, identify threshold effects in credit risk measures like the default probability, nonperforming loans or credit spreads. These threshold effects should describe how credit risk evolves in various economic conditions. Conduct an own empirical study similar to Nunes, T. M. T. & Rodrigues, P. M. M. (2011). Therefore, apply a SETAR model to time series of, for example, nonperforming loans or credit spreads and discuss your estimation results.

Literature to get started:
Marcuccia, J. and Quagliariellob, M. (2009), Asymmetric effects of the business cycle on bank credit risk, Journal of Banking & Finance, 33(9), pp. 1624-1635
Nunes, T. M. T. and Rodrigues, P. M. M. (2011), Threshold effects in credit risk and stress scenarios, International Journal of Finance & Economics, 16(4), pp. 393-407

8. Systemic risks of financial institutions: Causes, consequences and detection
Your seminar paper should examine systemic risk in the context of financial institutions. Furthermore, discuss fundamental characteristics of intervened and nonintervened financial institutions. Conduct your own empirical study where you identify systemic risks through regime shifts in the volatility of systemic risk indicators. To this end, apply a multi-state Markov switching (G)ARCH model for different time series of systemic risk indicators similar to the Financial Stability Report of the International Monetary Fund.

Literature to get started:
Global Financial Stability Report - Responding to the Financial Crisis and Measuring Systemic Risks (2009), International Monetary Fund (Chapter 3)
Acharya, V. V. et al. (2010), Measuring systemic risk, in Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance
Haldane, A. G. and May, M. R. (2011), Systemic risk in banking ecosystems, Nature, 469(7330), pp. 351-355
 
9. Ratings shopping and the reputation of CRAs
Credit rating agencies (CRAs) are often accused of having a conflict of interest which could influence the rating quality. Borrowers have the ability to choose from ratings to purchase (Ratings shopping). You are expected to discuss the literature, models, empirical and theoretical findings on ratings shopping and the reputation of CRAs.

Literature to get started:
Skreta, V. and Veldkamp, L. (2009), Ratings shopping and asset complexity: A theory of ratings inflation, Journal of Monetary Economics, 56(5), pp. 678–695
Croce, A. et al. (2011), Rating alignment, rating shopping and reputation of credit rating agencies: Evidence from the subprime crisis, Working Paper

10. Reaction of capital markets to sovereign rating changes
You are expected to analyze the short and long term reaction of capital markets to changes in sovereign ratings for both stock and bond indices.

Literature to get started:
Dichev, I. D. and Piotroski, J. D. (2001), The long-run stock returns following bond ratings changes, The Journal of Finance, 56(1), pp. 173-203

Student: Irina Zyulyaeva
Supervisor: Prof. Dr. Loeffler

11. Do Sovereign ratings reflect the prevailing economic situation?
With data from countries in the Eurozone, you are expected to conduct an analysis similar to Mora (2006). 

Literature to get started:
Mora, N. (2006), Sovereign credit ratings: Guilty beyond reasonable doubt? Journal of Banking & Finance, 30(7), pp. 2041–2062

12. Reaction of CDS markets to rating changes
Similar to Galil & Soffer (2011), you are expected to investigate how CDS markets respond to rating actions. You are further required to investigate the effects of rating changes on CDS in different market sectors.

Literature to get started:
Galil, K. and Soffer, G. (2011), Good news, bad news and rating announcements: An empirical investigation, Journal of Banking & Finance, 35(11), pp. 3101–3119

Student: Benjamin Adomako
Supervisor: Eugene Muluka