Dr Simone Varotto

'Dr Simone Varotto

Dr Simone Varotto

  • Associate Professor in Finance

Contact details

Profile & Expertise

Simone holds a PhD in Financial Economics from Birkbeck College, London. Between 1996 and 2000, he was a member of the research staff of the Bank of England where he worked on credit risk modelling and bank regulation. Soon afterwards he joined the ICMA Centre at Henley Business School as a lecturer. Simone teaches undergraduate and postgraduate courses in risk management and mergers and acquisitions and has an active research interest in credit, liquidity and systemic risk and financial regulation.

Simone has published in a number of peer reviewed international journals including the Journal of Banking and Finance, European Financial Management and the International Review of Financial Analysis. He is the recipient of the Research Endowment Trust Fund Best Research Output Prize for Henley Business School and of the Outstanding Paper Award of the Emerald Literati Network Awards for Excellence.

He has been an invited speaker at conferences/workshops organised by the Deutsche Bundesbank, Bank of Thailand, CFA Institute and Royal Bank of Scotland. Simone served as programme chair of the 2013 edition of the European Financial Management Association (EFMA) annual meeting, as a member of the board of directors of the EFMA and president of the Association.

Specialisms

  • Credit Risk
  • Bank regulation
  • Systemic risk
  • Risk management

Key publications, books, research & papers

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Article

Time varying price discovery

Avino, D. , Lazar, E. and Varotto, S. (2015) Time varying price discovery. Economics Letters, 126. pp. 18-21. ISSN 0165-1765 doi: 10.1016/j.econlet.2014.09.030

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We show how multivariate GARCH models can be used to generate a time-varying “information share” (Hasbrouck, 1995) to represent the changing patterns of price discovery in closely related securities. We find that time-varying information shares can improve credit spread predictions.

Dr Emese Lazar

Dr Emese Lazar

Programme Director: MSc Financial Engineering

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Dr Simone Varotto

Dr Simone Varotto

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Article

Price discovery of credit spreads in tranquil and crisis periods

Avino, D. , Lazar, E. and Varotto, S. (2013) Price discovery of credit spreads in tranquil and crisis periods. International Review of Financial Analysis, 30. pp. 242-253. ISSN 1057-5219 doi: 10.1016/j.irfa.2013.08.002

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In this paper we investigate the price discovery process in single-name credit spreads obtained from bond, credit default swap (CDS), equity and equity option prices. We analyse short term price discovery by modelling daily changes in credit spreads in the four markets with a vector autoregressive model (VAR). We also look at price discovery in the long run with a vector error correction model (VECM). We find that in the short term the option market clearly leads the other markets in the sub-prime crisis (2007-2009). During the less severe sovereign debt crisis (2009-2012) and the pre-crisis period, options are still important but CDSs become more prominent. In the long run, deviations from the equilibrium relationship with the option market still lead to adjustments in the credit spreads observed or implied from other markets. However, options no longer dominate price discovery in any of the periods considered. Our findings have implications for traders, credit risk managers and financial regulators.

Dr Emese Lazar

Dr Emese Lazar

Programme Director: MSc Financial Engineering

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Dr Simone Varotto

Dr Simone Varotto

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Article

Credit and liquidity components of corporate CDS spreads

Coro, F., Dufour, A. and Varotto, S. (2013) Credit and liquidity components of corporate CDS spreads. Journal of Banking & Finance, 37 (12). pp. 5511-5525. ISSN 0378-4266 doi: 10.1016/j.jbankfin.2013.07.010

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This paper investigates the role of credit and liquidity factors in explaining corporate CDS price changes during normal and crisis periods. We find that liquidity risk is more important than firm-specific credit risk regardless of market conditions. Moreover, in the period prior to the recent “Great Recession” credit risk plays no role in explaining CDS price changes. The dominance of liquidity effects casts serious doubts on the relevance of CDS price changes as an indicator of default risk dynamics. Our results show how multiple liquidity factors including firm specific and aggregate liquidity proxies as well as an asymmetric information measure are critical determinants of CDS price variations. In particular, the impact of informed traders on the CDS price increases when markets are characterised by higher uncertainty, which supports concerns of insider trading during the crisis.

Dr Alfonso Dufour

Dr Alfonso Dufour

Director of the PhD Programme, Head of Postgraduate Research Programmes - Henley Business School

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Dr Simone Varotto

Dr Simone Varotto

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Article

Stress testing credit risk: the Great Depression scenario

Varotto, S. (2012) Stress testing credit risk: the Great Depression scenario. Journal of Banking and Finance, 36 (12). pp. 3133-3149. ISSN 0378-4266 doi: 10.1016/j.jbankfin.2011.10.001

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By employing Moody’s corporate default and rating transition data spanning the last 90 years we explore how much capital banks should hold against their corporate loan portfolios to withstand historical stress scenarios. Specifically, we will focus on the worst case scenario over the observation period, the Great Depression. We find that migration risk and the length of the investment horizon are critical factors when determining bank capital needs in a crisis. We show that capital may need to rise more than three times when the horizon is increased from 1 year, as required by current and future regulation, to 3 years. Increases are still important but of a lower magnitude when migration risk is introduced in the analysis. Further, we find that the new bank capital requirements under the so-called Basel 3 agreement would enable banks to absorb Great Depression-style losses. But, such losses would dent regulatory capital considerably and far beyond the capital buffers that have been proposed to ensure that banks survive crisis periods without government support.

Dr Simone Varotto

Dr Simone Varotto

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Article

Liquidity risk, credit risk, market risk and bank capital

Varotto, S. (2011) Liquidity risk, credit risk, market risk and bank capital. International Journal of Managerial Finance, 7 (2). pp. 134-152. ISSN 1743-9132 doi: 10.1108/17439131111122139

Dr Simone Varotto

Dr Simone Varotto

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Article

Ratings-based credit risk modelling: an empirical analysis

Nickell, P., Perraudin, W. and Varotto, S. (2007) Ratings-based credit risk modelling: an empirical analysis. International Review of Financial Analysis, 16 (5). pp. 434-451. ISSN 1057-5219 doi: 10.1016/j.irfa.2007.06.003

Dr Simone Varotto

Dr Simone Varotto

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Article

An assessment of the internal rating based approach in Basel II

Varotto, S. (2008) An assessment of the internal rating based approach in Basel II. The Journal of Risk Model Validation, 2 (2). ISSN 1753-9579

Dr Simone Varotto

Dr Simone Varotto

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Book or Report Section

Tests on the accuracy of Basel II

Varotto, S. (2008) Tests on the accuracy of Basel II. In: Wagner, N. (ed.) Credit risk: models, derivatives, and management. Financial Mathematics Series (6). Chapman & Hall/CRC. ISBN 9781584889946

Dr Simone Varotto

Dr Simone Varotto

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Book or Report Section

Ex ante versus ex post regulation of bank capital

Daripa, A. and Varotto, S. (2010) Ex ante versus ex post regulation of bank capital. In: Blenman, L. P., Black, H. A. and Kane, E. J. (eds.) Banking and capital markets: new international perspectives. World scientific publishing company, Singapore, pp. 29-58. ISBN 9789814273602

Dr Simone Varotto

Dr Simone Varotto

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Article

Timeliness of spread implied ratings

Kou, J. and Varotto, S. (2008) Timeliness of spread implied ratings. European Financial Management, 14 (3). pp. 503-527. ISSN 1468-036X doi: 10.1111/j.1468-036X.2007.00362.x

Dr Simone Varotto

Dr Simone Varotto

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Article

Country bias detection in postgraduate student admissions

Drage, S. and Varotto, S. (2010) Country bias detection in postgraduate student admissions. International Journal of Management Education, 8 (3). pp. 95-106. ISSN 1472-8117 doi: 10.3794/ijme.83.260

Dr Simone Varotto

Dr Simone Varotto

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Taught modules

Credit Risk

This course introduces students to a set of newly developed techniques to measure and manage credit risk in bank portfolios. In recent years financial institutions have been looking at ways to quantify risk in their corporate loan and mortgage books. The lack of market prices for these types of…

This course introduces students to a set of newly developed techniques to measure and manage credit risk in bank portfolios. In recent years financial institutions have been looking at ways to quantify risk in their corporate loan and mortgage books. The lack of market prices for these types of…

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Management of Risk

Introduces you to current techniques for measuring and managing risk in financial institutions. This module will help you to develop critical risk management skills that are now considered indispensable for anyone wanting to undertake a career in the financial sector. Topics include: types of…

Introduces you to current techniques for measuring and managing risk in financial institutions. This module will help you to develop critical risk management skills that are now considered indispensable for anyone wanting to undertake a career in the financial sector. Topics include: types of…

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