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Calls for convertible bonds (Project Manager Ken L. Bechmann)

Convertible bonds are corporate bonds, which typically have two important options attached to them. First, the holder of the convertible bond has the option to convert the bond into a certain number of shares in the issuing company. Secondly, the issuing company has the option to redeem the bonds prematurely. These two options give rise to several interesting aspects of corporate finance and financial markets in general. This project makes a detailed study of the stock market reaction - including price and volume effects in cases, where the company exercises its redemption option.

PhD Projects

Kristina Birch Andersen

Knowledge of the effect of advertisements on consumers is crucial, when the company devises advertising and media strategy. There is, thus, a great deal of interest in the measurement, modelling and analysis of the effect of advertisements. The development of workable models for the analysis of the effect of advertisements will be of great benefit to both the individual company and the media provider. Up until now, this modelling has been carried out with the help of relatively simple aggregate models, which have not allowed for the estimation of desired effects. Nevertheless, data collection on the level of the individual (panel data/single-source data) has facilitated the development of more advanced statistic models, so that it is now possible to analyse the effect of advertisements on the individual consumer - both statically and dynamically. Therefore, models can now be set up, based on the individual level for the analysis of the effect of marketing instruments on consumers, which is the focus of this project. The aim of the project is also to develop statistical models for use in dealing with marketing issues based on the individual level. As data has been made available by the Center for Marketing Communication, it is possible to combine different theories and practical tests on the data, making the project to a great extent applied research.

Claus Bajlum

The aim of the project is to model dependency in loan portfolios. The modelling of dependency between bankruptcies and the dependency between fluctuations in the quality of the credits/obligations, issued as a result of changes in the bankruptcy risk, are in practice among the greatest challenges within credit risk modelling. The most obvious reason for concerning oneself with dependency in loan portfolios is that it alters the probability distribution of loss in the portfolio. This, in turn, affects the determination of relevant fractiles and risk measurements and thereby general risk management.

For an introduction to credit risk modelling and dependency, see Giesecke (2004); for a more thorough introduction, see Lando (2004).

Jens Henrik Eggert Christensen

The title of the PhD project is ’Quantitative Credit Risk Models and Bank Regulation’. The focus of the project is to investigate the possibility of applying quantitative economic and statistical models within the area of banking regulation.

This has gained interest, since the new Basel II rules for regulation of international banks allow banks to use their internal models to calculate economic capital.

Specifically, these new rules challenge the banks to deliver estimates of the one-year probability of default, of the loss given default and of the exposure of default for each exposure/loan. In this project we look into how this can be done and whether there are any systematic or economy-wide factors that should be taken into consideration, when performing this type of estimation.

Peter Feldhütter

Riskless rates are fundamental in all of asset pricing theory and therefore the determination of riskless rates is an important problem in finance. Government bonds are traditionally used, but recent research suggests that their yields might be distorted due to liquidity and repo effects. Instead, swap rates are suggested as measures of riskless rates.

1. A joint reduced-form modelling of government bonds, corporate bonds, and swap rates including liquidity. The relation between government bonds, swap rates, and corporate bonds is complex, but looking at all three instruments together is necessary for a full understanding of the swap curve. Therefore, research will be conducted using the rating-based approach developed in Lando (1998) and including both credit risk and liquidity. The estimation method in this research will be the Kalman filter.

2. Affine Term Structure Models
The previously proposed research would give insights into the determination of the riskless rate, swap rates, and the unobserved factors driving the rates. The next part of the project examines how well the term structure model, which is the prefered model class within term structure modelling, is at replicating key properties of actual yield data.

3. Estimation Methodology
The Kalman filter is becoming the standard tool for estimating financial econometric models with panel data. The last area of research would be comparing the Kalman filter with other estimation methods such as MCMC to assess finite-sample properties.

Mads Stenbo Nielsen

Financial instruments involving credit risk play an ever increasing role in financial markets, but in spite of this, there is still a significant lack of models, which are capable of pricing these credit derivatives in a satisfactory way.

The project is based on previous models for corporate bonds and Credit Default Swaps, and the aim is to improve existing pricing formulas in order to obtain a better match to observed market prices than what is currently possible.

The fundamental idea in the models we consider is to combine the modelling of the market value of the company’s asset with rational stock owner behaviour, in order to describe both the time of and cost related to a possible default event. The purpose is to obtain explicit expressions for relevant figures such as the value of equity and debt as well as the yield spread.

Furthermore, the intension is to extend the setup - to handle the situation with multiple companies through the introduction of a proper correlation modelling, and then subsequently use this framework for the pricing of Collateralised Debt Obligations.

Our approach will mainly be based on methods from probability theory, where some of the fundamental concepts will be jump diffusion processes, Markov chains, first hitting times, Laplace transforms and copulas.

Anders Bjerre Trolle

Last updated by Betina Thestrup 30/03/2009