Friday, 24 July, 2009 | 10:30 | Defense

Martin Vojtek: “Essays on Interest Rates and Credit Risk”

Dissertation Committee:
Evžen Kočenda (chair)
Petr Zemčík
Viatcheslav Vinogradov
Ronald Anderson



This dissertation addresses inefficiencies and problems in the financial markets of post-transition countries, which denies the use of standard estimation techniques. It focuses on interest rate markets and empirically analyzes the situation in the countries that joined the EU in May 2004. These countries underwent significant changes over the last two decades and markets in these countries are often not stable and not developed. In my dissertation I am conducting research in the areas where the empirical results are very scarce. A deeper understanding of the specifics in the markets of post-transition countries can be very helpful for example in designing policy measures touching these markets.

Chapter 1 deals with one the specifics of post-transition countries, namely non-existent or very small markets with certain types of financial products, in this case the derivatives of interest rates. However, due to infrequent or non-regular trading, the prices do not contain sufficient information (or the prices are not quoted at all) and the implied volatility approach to calibration cannot be used. The paradigm used in Chapter 1 is the Brace-Gatarek-Musiela model of interest rates that models the evolution of LIBOR (London InterBank Offered Rates)-type market interest rates together with the Orthogonal GARCH. The BGM model is among the most widely used no-arbitrage type of model and its correct calibration is crucial in the calculation of the correct prices of financial instruments based on interest rates. The paper builds on calibrated models for the Visegrad 4 countries and an analysis of interest rate markets with shorter-end maturities is performed. It answers the question to what extent are these models reliable for pricing derivatives in transition markets.

Chapter 2 is a part of the research conducted at the Czech National Bank to measure how market participants perceive the prospects of enlarging the euro area for the four Visegrad countries that joined the EU in May 2004. The traditional methods to estimate the probability of EMU enlargement for post-transition countries cannot be used or there are serious limitations. Therefore a method based on the state space model is developed and used in this chapter. Lund (1999) builds on the equilibrium interest rate model of the Vasicek type, where first the so-called “true local spreads”, i.e. the spreads of the local (domestic) interest rates to the euro interest rates that would occur in the case that no anticipated entry of domestic country into EMU is possible, are estimated. Based on the knowledge of the true local spread and the actual spread it is possible using the Kalman filter to infer how likely is the entry of the domestic country into the EMU zone.

In the Chapter 3 we developed an optimal specification of the credit scoring model to analyze data on loans at the Czech retail banking market. We employed two approaches: parametric (logistic regression) and non-parametric (Classification and Regression Trees, or CART). Along with analyzing our results we also aimed to assess the determinants of default behavior. We construct three different models using logistic regression and one model using CART and compare these models in terms of efficiency and power in discriminating between bad and good clients. We were able to detect the most important characteristics of default behavior. Both methods are robust: they found similar variables as determinants. Further, we show that socio-demographic variables are important in the process of granting credit and therefore such variables should not be excluded from credit scoring model specification.

Full Text: “Essays on Interest Rates and Credit Risk” by Martin Vojtek