Macroeconomics / Advances in Credit Risk Modelling and Corporate Bankruptcy Prediction

February 26, 2009


Author: Charles I. Jones

Edition: First

Publisher: W. W. Norton & Company

Pages: 445

Price: £38.99

ISBN 9780393926385

Advances in Credit Risk Modelling and Corporate Bankruptcy Prediction

Editors: Stewart Jones and David A. Hensher

Edition: First

Publisher: Cambridge University Press

Pages: 312

Price: £60.00 and £23.99

ISBN 9780521869287 and 689540

It is fortunate for these books that macroeconomics is not only back in fashion but at the forefront of the discipline. It is, however, their misfortune that they were largely out of date almost before they were published.

The credit crunch has changed everything. No course on macro-economics is now complete without a section devoted to the credit crunch, its causes and its consequences. In that, these books will be of little help.

The book by Charles Jones is a perfect example. Apart from the introduction, it is divided into three parts and 14 chapters. The topics covered include many of the usual suspects: long-run growth, the Solow growth model, inflation, unemployment, monetary policy, stabilisation policy, the IS/MP diagram but not the LM curve, the role of government, international trade, finance and exchange rates.

There are lots of diagrams, but not much formal modelling based on a set of equations. In truth, the text is probably better suited to an ambitious first-year course in macroeconomics in the UK rather than as an intermediate text.

There are some attempts to reach out to a global audience, but the focus is on the US, which is a pity, as economics, including macroeconomics, should not be country- or even time-specific unless of course we are focusing on institutions.

But the real problem is that it is out of date. Yet we live in the age of information technology and this has provided a partial recovery route. The book's website provides an additional chapter devoted to more recent events, although with these moving so rapidly even that is dated. But this still does not change the fact that much of the book is written within an outdated context.

The book by Stewart Jones and David Hensher dealing with credit-risk modelling and corporate bankruptcy prediction will also benefit from the current economic crisis, but has been more kindly treated by the crisis.

An edited volume comprising ten chapters, it offers a reasonably sophisticated level of analysis and it would fit well on a masters course in economics.

William Greene's chapter looks at modelling credit-scoring models that effectively predict the probability of an individual defaulting on a loan. Edward Altman's chapter reviews the literature on default recovery rates and loss in the event of defaults.

However, Stewart Jones and Maurice Peat's chapter is of particular interest in dealing with credit derivatives, which are at the heart of the financial crisis. Although the full force of the economic tsunami was not apparent to the authors, reference is made to the collapse of the subprime market in the US.

This chapter contains no econometrics, and we are a long way into it before we meet any maths that is even remotely sophisticated. Nonetheless, if you wish to learn more about the nature of the financial instruments that have brought the world to its knees, then this chapter is a useful starting point.

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