Assessing, perceiving and insuring credit risk

Pryce, Gwilym Benjamin John (1999) Assessing, perceiving and insuring credit risk. PhD thesis, University of Glasgow.

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This thesis is concerned with the assessment, perception and insurance of credit
risk. The thesis aims to make contributions both within these areas, and at specific
points of interface between them. No attempt is made to develop a single unifying
thesis. Rather, a series of partial models are developed, both theoretical and
empirical, that develop and connect particular facets of financial economics.
The first model demonstrates how movements in market risk produce movements
in lender risk-assessment effort. It is demonstrated that deleterious movements in
market-wide risk can actually produce a fall in assessment effort. The capricious
nature of risk assessment causes changes in the lender's perception of the weights
placed on determinants. This has important implications for borrowers' attempts
to minimize risk premiums. Time-variability of signal-weights is tested using
structural break tests on ordinary least squares and fixed effects panel models.
Results suggest a fluid relationship between risk and determinants.
Central to empirical investigation is the measurement of perceived risk. A critique
of potential measures rejects the use of interest rate spreads - the most commonly
used measure - on the basis that they do not take into account the possibility of
credit rationing. A model is then constructed to reproduce the standard
explanation of credit rationing - Adverse Selection induced Credit Rationing
Equilibrium (ASCRE). This model is then extended to include classificatory risk
assessment. Assessment is found to reduce the scope for ASCRE, and to cause
favourable selection. Credit insurance is then included, and it is found that
insurance cover makes risk assessment less of an imperative to lenders, and
reduces the utility losses from raising interest rates. The parallel implication is that
credit insurance weakens ASCRE, to the extent that full insurance with flat-rate
premiums removes the possibility of ASCRE altogether. If the terms of insurance
are made contingent on the terms of the loan, a new form of credit rationing
emerges: Contingent Insurance induced Credit Rationing Equilibrium (CICRE).
CICRE is separate, but not mutually exclusive, to ASCRE.
A theoretical model of the demand for loan insurance is developed, and
empirically estimated, in the context of the UK mortgage market. Inter alia, the
model examines the role of auto-perception of risk determining credit insurance
demand. Results reveal the take-up of credit insurance to be relatively insensitive
to the borrower's perception ofhis/her own risk.

Item Type: Thesis (PhD)
Qualification Level: Doctoral
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
Colleges/Schools: College of Social Sciences > Adam Smith Business School > Economics
Supervisor's Name: Supervisor, not known
Date of Award: 1999
Depositing User: Ms Dawn Pike
Unique ID: glathesis:1999-4960
Copyright: Copyright of this thesis is held by the author.
Date Deposited: 14 Feb 2014 11:34
Last Modified: 14 Feb 2014 11:34

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