Can we think of time variation in the frequency of corporate defaults as controlled by ’exogenous’ factors with no feedback from actual defaults to these factors? Or can we statistically document ’contagion effects’ by which one firm’s default increases the likelihood of other firms defaulting?
In a recent paper Das, Duffie, Kapadia, and Saita (2007) (DDKS) test whether default events in an intensity-based setting can reasonably be modeled as ’doubly stochastic’, i.e. as dependent solely on ’exogenous’ factors. Their approach is to transform the time scale using the sum of the default intensities estimated for individual firms and then test whether defaults on this transformed time scale behave as a standard Poisson process. Based on a time series of U.S. corporate defaults, they strongly reject that defaults can be modeled as doubly stochastic. DDKS view this test as a joint test of the specification of the default intensities of the individual firms and the doubly stochastic assumption. A core message of our paper is that the time transformation test should be thought of mainly as a misspecification test. We need - and propose - other tests to look for contagion effects that violate the doubly stochastic assumption.
The influence of external organizations and pressures on business risk management practices has hitherto been examined through the influence of state regulatory regimes on businesses. This literature concentrates on key socio-legal concerns about the influence of the law in social and economic life (Heimer 1996) which is an important source of information about business risk management practices. However most of this work does not clearly differentiate the importance of state regulatory regimes relative to other external pressures on business.
We know that the sources of regulation and risk management are diversifying, as are the tools and techniques employed to manage and regulate risks. What we do not have is much empirically informed research about the range of sources influencing the business world and in particular the weighting of influence exercised by them. In this paper we will explore the different external pressures upon business risk management through an empirical study of the management of food safety and food hygiene risks. A broader objective is to throw some further light onto the debate about regulation within and beyond the state.
The equity premium and the value premium puzzles constitute two of the focal points of the asset pricing literature. As it is well known, the starting point of the first is the inability of standard consumption models to rationalize the observed level of the equity premium, the volatility and predictability of returns, and the low and stable risk free rate. The value premium puzzle is instead concerned with the failure of the CAPM to explain the cross section of average returns of portfolios sorted according to book-to-market. Surprisingly, these two puzzles are, for the most part, studied separately. This is unfortunate because, as we argue here, the two puzzles cannot be tackled independently: Any economic mechanism proposed to address one of them immediately has general equilibrium implications for the other. In this paper, we show that a workhorse of the “equity premium puzzle” literature, the Campbell and Cochrane (1999) external habit persistence model, imposes strong restrictions on the cross-sectional dispersion of individual assets’ cash flow risk in order for this model to explain the value premium as well. Under such restrictions, though, the model not only implies that value stocks have, endogenously, a higher cash flow risk than growth stocks, as recently documented in the empirical literature, but it also offers new insights on the time series variation of risk premia in the cross section. In particular, the model yields what is to our knowledge the first theoretical explanation for the observed time series variation in the value premium.
