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- Typology for flight-to-quality episodes and downside risk measurementPublication . Gubareva, Mariya; Borges, Maria RosaWe propose a total return-based framework to measure downside risk associated with phenomenon of capital outflows from riskier to safer financial markets. The proposed method consists of three elements: (i) the general definition of the flight-to-quality (FtQ) phenomenon, (ii) the typological classification of the flight-to-quality occurrences for associating them with the phases of the business cycle and (iii) the automated technique to diagnose the time frames and to measure the impact of flight-to-quality on financial instruments. The proposed framework is applied to analyse the global-scale capital inflows/outflows from emerging markets public debt to the US Treasuries and vice versa. The results show that different phases of business cycles and GDP growth rates, including turning points, could be associated with flights-to-quality of different types and causality origins. Addressing downside risk crystallizations in flight-to-quality occurrences, new perspectives of integrated interest rate risk and credit risk management are discussed. For strengthening financial stability, we suggest the use of flight-to-quality windows as scenarios for stress testing, both for banks and financial institutions
- The methodology and implementation of a knowledge management system in the economic area of a high polytechnic school: case study LABSPublication . Gubareva, Mariya; Gomes, Orlando; Piteira, Margarida; Correia, Anabela; Proença, Carlos; Ochoa Guevara, Nancy Edith; LOPEZ QUINTERO, JOSE FERNANDOThe knowledge management regarding scientific production of the fully employed professors and contributing lecturers of renowned universities is a well-established practice in the major developed countries. Still, substantial improvements in this field are desirable for high polytechnic schools of Southern Europe. This chapter presents a study on knowledge management and analyses trends of a scientific production in the economics and finance area at one of the Portuguese high polytechnic school, namely Lisbon Accounting and Business School (LABS). The data collection methodology regarding scientific research outcomes firstly was proposed and implemented at the economics and finance area. This data collection was based on the direct mail messages addressed to the effective teaching staff members followed by the individual and aggregate analyses of the obtained information regarding published works in the field of economics and finance. The time frame of scientific publications analyses spans over the period of 20 years, namely 1997 - 2016. Later the same methodology was also extended to cover the entire institution. The knowledge management system was implemented in all the knowledge-producing units of LABS. A special database was created to keep the records. It now allows for timely consultation by the administrative bodies of the institution. The main contribution of this study is to demonstrate that the right knowledge management in polytechnic schools is able to unleash hidden potentialities of the capacities evidenced through the implementation of the system of knowledge management. In practical terms, the aggregate results were presented in the form of a report entitled "Creating Knowledge", which was published on the Internet site of the institution. The main findings of this report "Creating Knowledge" were used in the promotion of the LABS towards potential students and represented one of the main factors of fully accomplished enrollment of students for all graduate courses of the LABS for the new academic year beginning in September 2016 at the first stage of the enrollment process.
- Derivative-based Treatment of Interest Rate Risk and Credit Risk for Economic Capital Management.Publication . Gubareva, MariyaThis chapter addresses interest rate risk and credit risk assessment in banking books of financial institutions by the comprehensive method employing decade long historical data on derivative instruments such as interest rate swaps (IRS) and credit default swaps (CDS). The proposed method allows for integrated approach to interest rate and credit risk assessment as well as for measuring risks separately. To analyze the interrelation between interest rate and credit risk, IRS rates and CDS spreads are used as proxies for the interest rate risk and credit default risk related components in bonds yields. Then, the economic capital for banking book is modeled following individual and integrated approach to quantification of capital requirements for interest rate and credit risk. Capital-wise elasticity of interest rate risk and credit risk is assessed and analyzed through the prism of economic capital quantification for pre-crisis and post-crisis conditions. Economic capital for modeled fixed-income portfolio consisting of emerging market sovereign bonds is assessed. It is empirically demonstrated that such cross-risk elasticity is a function of the considered time windows and, hence, depends on the phases of business cycle; either expansion or contraction, as they affect risk-free interest rate level, creditworthiness of obligors, and other parameters which in their turn influence IRS rates and CDS spreads. Analyzing historical behavior of elasticity between interest rate and credit risk, potential hedge strategies against downside risk are proposed. They are based either on IRS or CDS contracts, or on a joint usage of both IRS and CDS instruments. Possible outcomes of such strategies from the point of view of economic capital optimization are discussed. Additionally, a comparison of the proposed derivative-based integrated approach with a bond yield-based historic VaR approach, widely employed in banking sector, is performed. The chapter discusses a regulatory perspective of interest rate and credit risk integration. Analyzing such risk integration results and focusing on diversification versus compounding effects this study represents a long needed attempt to define a common basis for discussion between banking industry and financial markets regulators. Examining rules for asset sensitivity or non-sensitivity to interest rate and providing an integrated treatment of interest rate and credit risk potentially allows for optimizing bank economic capital and unleashing resources for real economy. This research contributes to the discussion on the cross-geographies alignment of methodologies under Basel III capital accord. It potentially allows financial institution to improve their risk assessment and capital management.
- IFRS 9 compliant adjustment of CDS implied point-in-time PDs to through-the-cycle default frequenciesPublication . Gubareva, MariyaThis paper presents an economically justified International Financial Reporting Standard 9 (IFRS 9) compliant solution around the impairment component related to Expected Credit Loss (ECL) modeling. Under IFRS 9 the probabilities of default (PDs) employed in ECL calculation must be real-time estimates, i.e., the PDs must be point-in-time and incorporate forward-looking information. While market indicators of future debt performance, as credit default swap (CDS) spreads and yield curves, are frequently available in the market, at least for large issuers, they cannot be used directly for PD estimates, as non-default risks, such as liquidity, transparency, and other, explain a relevant part of a fixed-income issue´s credit spread. Still, IFRS 9 requires a neutral character of PD estimations. We demonstrate how to calibrate single-name CDS implied PDs by examining the relationship between individual point-in-time forward-looking credit spreads and historically observed long-term average default frequencies. As CDS spreads are individual measures corresponding to a concrete reference entity while default frequencies represent aggregate measures across homogeneous groups of issuers, to make an economically meaningful calibration possible the CDS data must be averaged over time and rating, sector and/or geography to allow for comparison of comparable metrics. Our easy-to-implement solution specifically targeting IFRS 9 purposes is illustrated on a sample of corporate issuers. The proposed adjustment framework permits to reach better understanding by banks and financial institutions of complex ongoing interactions between the impairment and economic capital requirements in relation to credit losses
- A tale of company fundamentals vs sentiment driven pricing: The case of GameStopPublication . Umar, Zaghum; Gubareva, Mariya; Yousaf, Imran; Ali, ShoaibBy means of the wavelet coherence approach, we study the relationship between the GameStop returns and the sentiment driven pricing, as described by the following indicators: twitter publication count, news publication count excluding twitter, put–call ratio, and short-sale volume. The documented impacts of media-driven sentiment suggest that regulators and policymakers should continuously monitor the investing groups on social media platforms as they can create inefficiency in the market. The put–call ratio strongly and positively affects the GameStop returns prior to the peak of the GameStop saga, being one of the drivers of the January skyrocketing prices. Our results also reveal a positive relationship between the GameStop returns and the short sales volume during the GameStop episode, confirming the short squeeze phenomenon. We highlight the importance for the regulators to consider limiting some predatory short-selling practices, namely ‘‘naked’’ short selling, as excessive short selling may move the market towards inefficiency.
- Switching interest rate sensitivity regimes of U.S. CorporatesPublication . Gubareva, Mariya; Borges, Maria RosaWe study interest rate sensitivities of U.S. investment grade BBB-rated and high yield corporate bonds over the period of 2001–2016. Our methodology assesses the capital gains of corporate bond portfolios and risk-free government bond portfolios, using average coupon and blended yield indices for the U.S. market. For both, U.S. BBB and high yield corporate bonds, we evidence the switching, from positive to negative interest rate sensitivity, occurring over the transition from the normal economic conditions to the periods of economic distress and vice-versa. The proposed theoretical explanation of such binary behavior posits an interrelation between interest rate and creditworthiness of issuers, which varies according to the phases of the business cycle. This research advances an economic understanding of interest rate risk management and sheds light on how financial institutions may develop strategies that hedge against downside risk.
- Governed by the Cycle: Direct and Inverted Interest-Rate Sensitivity of Emerging Market Corporate DebtPublication . Gubareva, Mariya; Borges, Maria Rosas proposed. Our focus is centered at price sensitivity of modeled investment grade and high yield portfolios to changes in the present value of modeled portfolios composed of safe-haven assets, which define risk-free interest rates. Our methodology is based on blended yield indexes. Modeled investment horizons are always kept above one year thus allowing to derive empirical implications for practical strategies of interest rate risk management in the banking book. As our study spans over the period 2002 – 2015, it covers interest rate sensitivity of assets under the pre-crisis, crisis, and post-crisis phases of the economic cycles. We demonstrate that the emerging market corporate bonds both, investment grade and high yield types, depending on the phase of a business cycle exhibit diverse regimes of sensitivity to interest rate changes. We observe switching from a direct positive sensitivity under the normal pre-crisis market conditions to an inverted negative sensitivity during distressed turmoil of the recent financial crisis, and than back to direct positive but weaker sensitivity under new normal post-crisis conjuncture. Our unusual blended yield-based approach allows us to present theoretical explanations of such phenomena from economics point of view and helps us to solve an old controversy regarding positive or negative responses of credit spreads to interest rates. We present numerical quantification of sensitivities, which corroborate with our conclusion that hedging of interest rate risk ought to be a dynamic process linked to the phases of business cycles as we evidence a binary-like behavior of interest rate sensitivities along the economic time. Our findings allow banks and financial institutions for approaching downside risk management and optimizing economic capital under Basel III regulatory capital rules.
- Impact of the Covid-19 on liquidity of emerging market bondsPublication . Gubareva, MariyaWe analyze liquidity of the emerging market (EM) bonds during the Covid-19 fueled uncertainty. Using bid/offer spreads we demonstrate that the apogee of both, liquidity and credit stresses is reached in late-March, and that although liquidity has improved since then, it has not yet returned to the pre-Covid levels. In particular, we find that the EM financials are more resilient to liquidity shocks than the EM corporates and sovereigns. Moreover, we observe a decoupling in the dynamics of the liquidity and credit risk metrics, as credit spreads have been tightening very slowly due to the Covid-19-triggered repricing of default risk.
- Interest rate, liquidity, and sovereign risk: derivative-based VaRPublication . Gubareva, Mariya; Borges, Maria RosaPurpose – The purpose of this paper is to study connections between interest rate risk and credit risk and investigate the inter-risk diversification benefit due to the joint consideration of these risks in the banking book containing sovereign debt. Design/methodology/approach – The paper develops the historical derivative-based value at risk (VaR) for assessing the downside risk of a sovereign debt portfolio through the integrated treatment of interest rate and credit risks. The credit default swaps spreads and the fixed-leg rates of interest rate swap are used as proxies for credit risk and interest rate risk, respectively. Findings – The proposed methodology is applied to the decade-long history of emerging markets sovereign debt. The empirical analysis demonstrates that the diversified VaR benefits from imperfect correlation between the risk factors. Sovereign risks of non-core emu states and oil producing countries are discussed through the prism of VaR metrics. Practical implications – The proposed approach offers a clue for improving risk management in regards to banking books containing government bonds. It could be applied to access the riskiness of investment portfolios containing the wider spectrum of assets beyond the sovereign debt. The approach represents a useful tool for investigating interest rate and credit risk interrelation. Originality/value – The proposed enhancement of the traditional historical VaR is twofold: usage of derivative instruments’ quotes and simultaneous consideration of the interest rate and credit risk factors to construct the hypothetical liquidity-free bond yield, which allows to distil liquidity premium.
- Twelve Fundamental Contemporaneous Contributions for the Advancement of Economic ThoughtPublication . Gomes, Orlando; Gubareva, MariyaResearch in economics has progressed significantly in the last few decades, with relevant contributions being delivered in the most important areas this science comprehends, e.g., macroeconomic theory, measurement of the economic activity, analysis of individual decision-making, finance, international economics. This chapter provides a discussion on the recent breakthroughs of the economic science, by highlighting twelve outstanding contemporaneous studies in fields that range from business cycles theory, to human capital formation, international trade models, the empirics of economic development or the application of statistical techniques to the analysis of economic phenomena. These studies were selected following several criteria: recent publication (in the last half decade) in a top scientific journal and already with a large citation record. Obviously, selecting a few prominent contributions from an extremely wide range of quality studies produced by economists in the last few years ends up by neglecting many other influential works. Nevertheless, we believe that the undertaken choice covers a series of meaningful advancements that are helping in launching the debate in many important topics in the years to come. Each one of the approached articles constitutes a piece of the best the reflection on economic theory and empirical analysis has to offer to the academy, to policy-makers and to all those that somehow rely on the progress of the economic science to optimize the respective decision-making process.