Dr Simone Varotto
Dr Simone Varotto
- Associate Professor in Finance
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.
- Credit Risk
- Bank regulation
- Systemic risk
- Risk management
Key publications, books, research & papers
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Corporate governance, bank mergers and executive compensation
Liu, Y., Padgett, C.
Using a sample of US bank mergers from 1995 to 2012, we observe that the pre-post merger changes in CEO bonus are significantly negatively related to the strength of corporate governance within the bidding bank. This suggests that bonus compensation is not consistent with the “optimal contracting hypothesis”. Salary changes, on the other hand, are not affected by corporate governance which is in line with “optimal contracting”. We also find that good governance is associated with more accretive deals for the bidder. Overall, our results are consistent with the notion that, unlike salary and long-term compensation, bonus compensation is not aligned with value creation and is more vulnerable to CEO manipulation in banks with poor corporate governance.
Time varying price discovery
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.
Price discovery of credit spreads in tranquil and crisis periods
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.
Credit and liquidity components of corporate CDS spreads
Coro, F., Dufour, A.
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.
Stress testing credit risk: the Great Depression scenario
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.
Liquidity risk, credit risk, market risk and bank capital
Ratings-based credit risk modelling: an empirical analysis
Nickell, P., Perraudin, W. and Varotto, S.
An assessment of the internal rating based approach in Basel II
Tests on the accuracy of Basel II
Ex ante versus ex post regulation of bank capital
Daripa, A. and Varotto, S.
Timeliness of spread implied ratings
Kou, J. and Varotto, S.
Country bias detection in postgraduate student admissions
Drage, S. and Varotto, S.
News & Media Appearances
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