In his seminal paper Ball (1994) devised a methodology to measure the output cost associated with disinflations (the sacrifice ratio) and was able to test several hypotheses concerning its determinants for a cross section of moderate inflation OECD economies. The sacrifice ratio measure is the sum of the differences between the logs of trend and actual output divided by a change in trend inflation during a given disinflation episode. It is interpreted as the output loss (or cost) of reducing inflation by one point. Ball(1994) explains that his measure best fits instances where the fall in trend inflation is the result of explicit contractionary aggregate demand policies and argues that his algorithm for identifying dis-inflationary episodes best captures these policy shifts.
Corporate defaults exhibit two key characteristics that have profound implications for default risk management. First, default risk is correlated through time. Bankruptcies are normally the end of a process that begins with adverse economic shock and end with financial distress. Although some bankruptcies are unexpected and, therefore, are point events, like Enron and Worldcom, investors become aware of the company’s difficulties some years prior to the bankruptcy event. Second, financial wealth of companies in the same industry, or within the same economic area, is a function of managers’ skills and common factors that introduce correlations.
Companies’ default risk is linked through sector-specific and/or macroeconomic factors. Whilst a great deal of effort has been made by practitioners to measure and explain companies’ default correlations, academics have only recently began to devote attention to this issue. The existing literature on default correlations can be divided into two approaches: the structural approach that models default correlations through companies’ assets values; and the reduced-form approach that models default correlations through default intensities. While financial institutions, namely banks, are aware of these relationships, their ability to model such correlations is still not fully developed. Basle Committee on Banking and Supervision (BCBS 1999, p. 31) states “… the factors affecting the credit worthiness of obligors sometimes behave in a related manner…” which “… requires consideration of the dependencies between the factors determining credit related losses”. Whilst there are many different models and approaches to compute default probabilities, there is no consensus on the importance of different factors that drive default correlations. BCBS (1999) report points out that whilst practitioners have been managing and studying this dependence, there is a lack of theoretical and empirical work on this issue that tests the robustness of the frameworks.
The results of calculations of semileptonic Bc meson exclusive decay channels using the quark potential model are presented. These results are compared with estimations made using the spectator model. The polarization of charmonia states resulting from b to c decay are also calculated, providing a more detailed experimental check of the model.
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