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Erdem Aktug
Research Statement
1. Current Research & Achievements I am currently a doctoral candidate in economics at Lehigh University in the College of Business and Economics. I am lucky enough to work with two outstanding advisors, Professor Nandu (Nandkumar) Nayar and Professor Geraldo Vasconcellos on my dissertation titled Essays on Sovereign Risk. In addition to my advisors, I am also grateful to the other members of the dissertation committee, Youngsoo Bae and Vladimir Dobric, for providing their input, and to Ahmet Kocagil and Krishnamoorthy Narasimhan of Fitch Ratings for providing a real-life introduction to credit markets. Furthermore, I received useful suggestions from Jochen Andritzky, Stefan Boes, Shin-Yi Chou, Parveen Gupta, Wei-Min Huang, and participants at my presentations at Moody’s KMV (San Francisco), Moody’s Economy.com (West Chester), and Lehigh University. The first chapter of my dissertation sheds light on the effect of financial development on sovereign credit ratings. I examine the effect of size and liquidity of banking assets, which are proxies for sophistication, and also the degree of competition in the banking sector within a nation on sovereign risk. Using Ordered Probit with Aggregate Time Effects methodology, our results show that financial system variables such as Concentration in Banking System, Size of Banking System, and Liquidity of Banking Assets are significantly related to sovereign credit ratings. The dataset used in this paper includes twenty-four advanced economies and eleven emerging markets covering a ten year period from 1996 to 2005. In the second chapter, I question the long-run equilibrium relationship between sovereign bond and credit default swap (CDS) markets. Specifically, I analyze the 2001 - 2007 period for 30 Emerging Markets via Vector Error Correction Methodology (VECM). My analysis shows bond markets’ leading role in the price discovery mechanism. This result is in sharp contrast with studies on corporate credit markets and it reveals the inefficiencies surrounding sovereign credit markets. Overall, the findings of both chapters of my dissertation possess valuable information for issuers, regulators, investors, and traders of sovereign securities. Recently, I have also received a Master of Science in Analytical Finance (MSAF) degree at Lehigh University. The MSAF Program at Lehigh University combines key concepts in financial theory, mathematical finance and engineering decision making. Throughout the program, I was involved in a project to help PPL Corporation manage its interest rate risk dynamically. 2. Research Interests & Agenda Beyond my dissertation, my research interests cover a broad range of disciplines, such as international finance and economics, financial engineering and credit risk, and applied microeconomics and macroeconomic modeling. I am particularly interested in the intersection of these disciplines. For example, it has always fascinated me to find connections between microeconomics and macroeconomics, and the use of certain optimization methods to identify anomalies or arbitrage opportunities in financial markets. My prospective research agenda includes exploring the contingent claims approach to sovereign risk analysis. Briefly, this approach combines option pricing theory, macroeconomics, and modern finance theory, creating a relatively new discipline: macro-financial risk analysis. I am particularly interested in addressing the weaknesses of Moody’s KMV risk assessment methodology (or Merton Modeling) in sovereign context. In addition, I plan to apply ARCH (autoregressive conditional heteroskedasticity) and GARCH (generalized ARCH) modeling framework to come up with more accurate volatility estimations for the sovereign case. Lastly, I still have more questions in mind as a consequence of my recent professional experiences. My most recent experience was a financial engineering project at Lehigh University. In this project we were asked to analyze the interest rate markets from an econometric point of view in order to help PPL Corporation manage its interest rate risk dynamically. I am willing to extend this study with a more comprehensive literature review and a stronger time series econometric analysis. My prior experience at Fitch Ratings-Quantitative Financial Research Group helped me grasp the mechanics of risk analysis in structured finance. In the future, I plan to improve these risk models and examine their use in different markets. 3. Contributions & Goals My research contributes to the existing literature in many aspects. First, the empirical analysis provided in my papers test the validity of existing arguments. Some of my findings are in line, but some of them are in contrast with the existing literature. Second, I shed light on different corners of international finance and economics literature which were not examined before, such as the impact of banking sector on sovereign risk. Third, my empirical study on international credit markets uncovers the inefficiencies and anomalies in sovereign credit default swap and bond markets. My goal in the near future is to discover promising directions in the fields of international economics and empirical finance, and contribute to the literature as much as I can. I also have a strong interest in expanding my research towards disciplines in which I do not have much experience, such as game theory and microeconomic modeling. I enjoy learning new fields and using expertise and experience from one area to another. I consider that one’s research interests should be flexible, as research areas grow and change quickly. Finally, my major goal in the long-run is to produce high quality research which has important policy implications as well as practical real-life applications.
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