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High corporate indebtedness can pose an important threat to the adjustment processes in some of the Euro area periphery countries, through its drag on investment as well as the possible migration of private sector losses to the sovereign balance sheet. This paper examines the macroeconomic implications of corporate debt overhang in recent years, confirming empirical evidence in the literature on the relationship between a firm’s balance sheet position and its investment choices, especially beyond certain threshold levels. Building on an event study of past crisis experiences with corporate deleveraging, it also discusses the expected macro-financial impact of the ongoing deleveraging processes in these countries, presenting available policy options to facilitate an orderly balance-sheet adjustment and support a return to productivity and growth.

Corporations --- Debts, External --- Business corporations --- C corporations --- Corporations, Business --- Corporations, Public --- Limited companies --- Publicly held corporations --- Publicly traded corporations --- Public limited companies --- Stock corporations --- Subchapter C corporations --- Business enterprises --- Corporate power --- Disincorporation --- Stocks --- Trusts, Industrial --- Debts, Foreign --- Debts, International --- External debts --- Foreign debts --- International debts --- Debt --- International finance --- Investments, Foreign --- Finance. --- Accounting --- Exports and Imports --- Financial Risk Management --- Public Finance --- Investment --- Capital --- Intangible Capital --- Capacity --- International Lending and Debt Problems --- Capital Budgeting --- Fixed Investment and Inventory Studies --- Financial Crises --- Public Administration --- Public Sector Accounting and Audits --- Debt Management --- Sovereign Debt --- Economic & financial crises & disasters --- Financial reporting, financial statements --- International economics --- Finance --- Public finance & taxation --- Financial crises --- Financial statements --- Debt burden --- Debt restructuring --- Public debt --- Public financial management (PFM) --- External debt --- Asset and liability management --- Finance, Public --- Debts, Public --- Portugal

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In a recent paper, Bai and Perron (2006) demonstrate that their approach for testing for multiple structural breaks in time series works well in large samples, but they found substantial deviations in both the size and power of their tests in smaller samples. We propose modifying their methodology to deal with small samples by using Monte Carlo simulations to determine sample-specific critical values under the each time the test is run. We draw on the results of our simulations to offer practical suggestions on handling serial correlation, model misspecification, and the use of alternative test statistics for sequential testing. We show that, for most types of data generating processes in samples with as low as 50 observations, our proposed modifications perform substantially better.

Econometrics. --- Time-series analysis. --- Monte Carlo method. --- Artificial sampling --- Model sampling --- Monte Carlo simulation --- Monte Carlo simulation method --- Stochastic sampling --- Games of chance (Mathematics) --- Mathematical models --- Numerical analysis --- Numerical calculations --- Stochastic processes --- Analysis of time series --- Autocorrelation (Statistics) --- Harmonic analysis --- Mathematical statistics --- Probabilities --- Economics, Mathematical --- Statistics --- Data Processing --- Data Collection and Data Estimation Methodology --- Computer Programs: General --- Data capture & analysis --- Data processing --- Electronic data processing

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As is well known, most models of credit risk have failed to measure the credit risks in the context of the global financial crisis. In this context, financial industry representatives, regulators and academics worldwide have given new impetus to efforts to improve credit risk modeling for countries, corporations, financial institutions, and financial instruments. The paper summarizes some of the recent advances in this regard. It considers modifications of structural models, including of the classical Merton model, and efforts to reconcile the structural and the reduced-form models. It also discusses the reassessment of the default correlations using copulas, the pricing of credit index options, and the determination of the prices of distressed debt and estimation of recovery values.

Finance --- Business & Economics --- Credit, Debt & Loans --- Credit --- Risk management. --- Management --- Mathematical models. --- Borrowing --- Insurance --- Money --- Loans --- Banks and Banking --- Financial Risk Management --- Investments: Options --- Macroeconomics --- Money and Monetary Policy --- Financing Policy --- Financial Risk and Risk Management --- Capital and Ownership Structure --- Value of Firms --- Goodwill --- International Financial Markets --- Price Level --- Inflation --- Deflation --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Financial services law & regulation --- Monetary economics --- Credit risk --- Asset valuation --- Asset prices --- Options --- Financial risk management --- Asset-liability management --- Prices --- Derivative securities --- United States