Credit risk in private debt portfolios

Article Abstract:

Default, loss severity, and average loss rates for a large sample of privately placed bonds are presented and compared with loss experience for publicly issued bonds. The chance of very large portfolio losses is estimated and some determinants of such losses are analyzed. Results show ex ante riskier classes of private debt perform better on average than public debt. Both diversification and the riskiness of individual portfolio assets influence the bad tail of the portfolio loss distribution. Private placements are similar to corporate loans in that both are monitored private debt. The results are thus relevant to management and securitization of private debt portfolios generally. (Reprinted by permission of the publisher.)

Asset & Risk Management, Debt & Capital Management, Credit Management, Debt, Financial management

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Structural and return characteristics of small and large firms

Article Abstract:

We examine differences in structural characteristics that lead firms of different sizes to react differently to the same economic news. We find that a small firm portfolio contains a large proportion of marginal firms - firms with low production efficiency and high financial leverage. We construct two size-matched return indices designed to mimic the return behavior of marginal firms and find that these return indices are important in explaining the time-series return difference between small and large firms. Furthermore, risk exposures to these indices are as powerful as log(size) in explaining average returns of size-ranked portfolios. (Reprinted by permission of the publisher.)

Evaluation, Economic aspects, Small business, Investments, Big business, Return on investment, Leverage (Finance), Leverage, Rate of return

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An unconditional asset-pricing test and the role of firm size as an instrumental variable for risk

Article Abstract:

In an intertemporal economy where both risk (stock beta) and expected return are time varying, the authors derive a linear relation between the unconditional beta and the unconditional return under certain stationarity assumptions about the stochastic process of size-portfolio betas. The model suggests the use of long time periods to estimate the unconditional portfolio betas. The authors find that, after controlling for the betas thus estimated, a firm-size proxy, such as the logarithm of the firm size, does not have explanatory power for the averaged returns across the size-ranked portfolios. (Reprinted by permission of the publisher.)

Corporations, Corporate finance

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