Journal 40: Zicklin-Capco Institute Paper Series in Applied Finance

As we publish this 40th issue of the Journal, it’s fair to say that the intervening years have witnessed some of the most dramatic events in the history of finance, business and technology, including the evolving crisis that started in 2007. Although many of these events were unpredictable to say the least, we have always put innovation at the heart of our agenda. In issue 1 we predicted that “the true impact of the internet on businesses must be recognized... [its] primary impact has been to reduce barriers to entry significantly and, consequently, to curtail the ability to maintain competitive advantage over the long term.” We continue in this pioneering spirit in the 40th issue where financial transformation is the main topic.

In the expert opinion article Bernd Richter offers his view on how institutions can take advantage of technological and regulatory changes while updating payments systems.

In one of the three high-level debate articles, Sam Price and Joseph Abou-Jaoude bring us back to peer-to-peer lending and analyze its possible incorporation in mainstream finance, following Yvan De Munck’s article in issue 39.

In a second research article Jennifer Liu, following her introductory CCP article in issue 38, analyzes the impact of central clearing costs, arguing that one needs to account not only for central clearing counterparties (CCP) charges but also for charges from service providers, central securities depositories, settlement/payment banks, as well as internal operating costs. Again, we are at the heart of financial transformation since central clearing is changing the way banks and financial institutions trade and manage key risks that have been at the heart of the ongoing crisis that started in 2007.

The 40th issue also includes three cutting edge papers. The journal has always been attentive to financial transformation at all levels from large macroeconomic and systemic transformation to changes in the detailed methodology used in the financial markets for trading, lending, pricing, hedging and risk management.

In one of these articles, we once again address regulation, as Tomasz Borkowski, Niklas Hegemann, Maria Knodt and Oliver Krauskopf use a classic credit risk model to assess the Single Bank Resolution Fund introduced by the new Bank Recovery and Resolution Directive of the European Union. In the second cutting edge paper, Morten Dyrmose and Gavin Reid apply cutting edge statistical analysis to examine initial public offering underpricing and its variation by world regions via kernel density techniques and inferential results.

Our final article focuses on financial product classes that contributed to the crisis that started in 2007, namely collateralized debt obligations (CDO). Key drivers of CDO price and risk include the default dependence or “correlation” across different credit entities. It is fair to say that the problem of properly modeling the dynamics of dependence in credit risk is still open, and that despite the diminished interest in CDOs, this remains a very challenging and important problem since securitization is still active or even increasing in a number of markets, as we have seen earlier when discussing peer-to-peer lending secondary markets. It is thus just as well that in this 40th issue we publish this technical paper on CDOs, where Stephan Höcht, Matthias Scherer and Patrick Spitaler deal with an empirical study on pricing and hedging CDO tranches using latent one-factor models.

Journal Articles