Estimating defaults in organized security lending markets: an empirical study on a default indicator

Abstract

Security lending is a simple financial transaction that leads to credit risk like every other lending transaction. This thesis aims to analyse the dynamics of the security lending process and lending markets in order to identify the variables that can affect the credit risk arising from lending contracts and supplement the internal rating models commonly used for credit risk management with models that incorporate characteristics of the stock borrowed. Using the data provided by İstanbul Settlement and Custody Bank on the equity lending contracts of Takasbank Securities Lending Market between 2010 and 2012 as well as the data provided by Borsa İstanbul on Equity Market transactions for the same timeframe, this thesis focuses on whether stock price volatility, stock returns and the relative liquidity of lending market and equity market affect the defaults of lending contracts. The results of the thesis illustrate a statistically significant relationship between volatility and the default state of the lending contracts but fail to establish a connection between default states and stock returns or relative liquidity of markets.|Keywords : Security lending, Equity lending, Takasbank, Securities Lending Market, Credit risk management in security lending, Default estimation in security lending.