1 Department of Economics and Business - Business Studies, Department of Economics and Business Economics, Aarhus BSS, Aarhus University2 Department of Business Studies, Aarhus School of Business, Aarhus BSS, Aarhus University3 Finance Research Group, Aarhus School of Business, Aarhus BSS, Aarhus University4 Department of Economics and Business Economics, Aarhus BSS, Aarhus University5 Department of Economics and Business Economics, Aarhus BSS, Aarhus University
We examine a specific portfolio credit derivative, an Asset Protection Scheme (APS), and its applicability as a tool to restore financial stability and reduce asymmetric information. As opposed to most governmental bailout packages implemented across the world recently, the APS can be a fair valued contract with an appropriate structure of incentives. Within the structural credit risk modeling framework, we apply two alternative multivariate default risk models: the classical Gaussian Merton model and a model based on Normal Inverse Gaussian (NIG) processes. Exchanging the normal factors in the Gaussian model with NIG factors adds more flexibility to the distribution of asset returns while retaining a convenient correlation structure. Using a unique data set on annual, farm level data from 1996 to 2009, we consider the Danish agricultural sector as a case study and price an APS on an agricultural loan portfolio. Moreover, we compute the economic capital for this loan portfolio with and without an APS.
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2011 International Finance and Banking Society (IFABS), 2011