Journal of Credit Risk

Mark Carey
GARP Risk Institute

Jing-Zhi Huang
Pennsylvania State University

It is a pleasure to introduce this special issue of The Journal of Credit Risk, which is dedicated to papers presented at the 2019 International Risk Management Conference on “Risk management in a challenging global environment” in Milan, Italy. Much research related to risk management was presented and discussed at the conference. This special issue includes three of the papers presented.

The first paper in the issue, “Explaining credit ratings through a perpetual-debt structural model” by Gaia Barone, examines whether a one-factor perpetual-debt structural model (PDSM) can generate default probabilities (under the physical measure) that are consistent with historical default rates estimated by Moody’s. In this model, debt is perpetual, equity holders have a perpetual American option to default, and there is an available closed-form formula for default probabilities. Barone provides a first calibration of this model and shows that it can indeed generate default probabilities consistent with Moody’s average default rates by rating category and horizon. This paper also illustrates how to apply the model to individual listed firms. Overall, Barone provides evidence that the simple PDSM is useful in practice. Anyone interested in credit risk might find this paper of value.

Our second paper, “Three ways to improve the systemic risk analysis of the Central and Eastern European region using SRISK and CoVaR” by Marta Kara´s and Witold Szczepaniak, proposes measures for the analysis of systemic risk at both the individual firm level and the national financial system level. Conventional SRISK and CoVaR require as inputs data that are typically available only for listed firms, such as equity returns. Kara´s and Szczepaniak propose measures that can be applied to unlisted firms (including subsidiaries of firms listed in other nations) that allow the calculation of SRISK- and CoVaR-like values. The proposed measures are applied to banks in several Central and Eastern European countries and are found to have desirable properties. This exciting paper provides a foundation for the wider analysis of systemic risk by both official-sector institutions (such as central banks) and market participants.

The issue’s third and final paper, “Small and medium-sized enterprises that borrow from ‘alternative’ lenders in the United Kingdom: who are they?” is by Gabriele Sabato, Edward I. Altman and Galina Andreeva. Little is known about the characteristics of borrowers from “fintech” financial institutions. Their characteristics probably differ across nations because financial systems differ in each nation and provide different niches into which fintech lenders fit. This paper compares the default risk of borrowers at an alternative lender in the United Kingdom with a generic sample of small UK businesses, finding that the fintech borrowers are less risky. They are more leveraged than the typical small business, but they also have more cashflow and are growing more rapidly. Many other characteristics are also presented. Anyone interested in the lending structure of financial systems is likely to find this paper useful.

We believe readers will find the papers in this special issue of The Journal of Credit Risk to be of great interest. We hope you enjoy reading them and find them to be of value.