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3.cPkrocycliicalitys(time-lseries)

  • Margin Spiral: Lending Standards/ Margins increase at time of crisis

  • Why?

    • Use short past data

sample

  • ARCH

(time-varying vol.)

Senior

10-12

15-20

2nd lien

15-20

20-30

Mezzanine

18-25

30+

Margins/Haircuts:

Investment grade

0-3

3-7

High yield

0-5

10+

AAA

2-4

8-10

AA

4-7

20

A

8-15

30

BBB

10-20

50

Equity

50

100

Source: Citigroup, IMF Stability report 2007

ABS and CDO

Leveraged Loan

Rating

Jan-May 2007

July-Aug 2007

Bond

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