Zoe Tsesmelidakis

Senior Research Fellow

University of Oxford
Oxford-Man Institute of Quantitative Finance
Saïd Business School
Nuffield College

Curriculum Vitae

Contact Information


University of Oxford
Oxford-Man Institute
Eagle House, Office 1.08
Walton Well Road
Oxford OX2 6ED, United Kingdom


zoe.tsesmelidakis (at)


+44 1865 616637

Research Interests

Financial Economics, Asset Pricing, Regulation, Banking, Credit Risk

Working Papers

Beyond Capital Regulation: An Underestimated Risk Source

with F. Schweikhard, AFA 2016 Meetings Paper

Leverage constraints are an important pillar of bank regulation. Yet, this paper argues that in times of economic turmoil affecting a bank’s borrower base, bank risk grows more than suggested by the leverage increase alone. In a sequence of shocks hitting a borrower, the impact on the bank’s asset value grows disproportionately with every bump due to the concavity of the loan value in the borrower’s assets. This type of increase in bank exposure cannot be reflected by capital ratios. However, a structural default model as proposed by this study can capture this sensitivity. Using a sample of 400 corporates and 25 banks, we demonstrate the nonlinear nature of the changes in banks’ risk exposures after a series of shocks to their borrowers and show that the effect is more severe for firms with low ratings. In a second step, we simulate the impacts of the same series of shocks under different leverage scenarios and are thus able to assess the substantial magnitude of asset risk relative to leverage risk. The results of this study highlight the importance of a careful screening of borrowers as well as an ongoing monitoring of and provisioning for the risk of their loans.

The Impact of Government Interventions on CDS and Equity Markets

with F. Schweikhard, EFA 2010, AFA 2012 Meetings Paper

We investigate the impact of government guarantees on the pricing of default risk in credit and stock markets in light of the unprecedented wave of rescue actions witnessed in the 2007-09 financial crisis. Using a Merton-type credit model, we provide evidence of a structural break in the valuation of U.S. bank debt in the course of the crisis, manifesting in a lowered default boundary, or, under the pre-crisis regime, in lower credit spreads than if there were no guarantees. The counterfactual is estimated from stock market information, the underlying assumption being that, unlike creditors, shareholders are not the targeted beneficiaries of interventions. The discrepancies are positively related to firm size, default correlation, systemic risk, and high ratings, thus corroborating our too-big-to-fail hypothesis. The framework we develop allows (1) to measure the magnitude of the guarantees, (2) to identify which firms are perceived as TBTF and when guarantees become particularly valuable, and finally (3) to have a better estimator of the standalone financial condition of a firm, and as such opens up interesting avenues for research and policy applications in the area of economic policy and regulation.

→ Coverage at Businessweek.com
→ Coverage at Reuters.com

The Value of Implicit Guarantees

with R. C. Merton, F. Schweikhard, WFA 2013, AFA 2014, FIRS 2015, NBER Meetings Paper

Firms considered "too big to fail" (TBTF) benefit from access to cheaper funding during crises. Using a comprehensive data set of bond characteristics and prices in the primary and secondary market for a sample of 74 U.S. financial institutions, we investigate how reduced debt capital costs affect the positions of shareholders and creditors. Issue and transaction prices are revalued on the basis of a funding advantage estimated using a structural model. Our results indicate that wealth transfers to investors sum up to $365bn and that banks shifted to fixed-rate short-term funding to take advantage of their TBTF status.

The Internalization of Systemic Risk: An Analysis of Bank Levy Schemes

with F. Schweikhard, M. Wahrenburg

The government actions during the 2007-09 financial crisis have demonstrated that large financial institutions benefit from implicit "too-big-to-fail" (TBTF) guarantees. This paper analyzes the effectiveness of the recent national bank levy schemes introduced in Germany, France, and the U.K. in reducing the social costs incurred by excessive (systemic) risk-taking. Based on a sample of 41 large European and U.S. banks, we compute the retrospective annual tax amounts as if a given levy had applied to all banks throughout the period 2007-10. The contributions are then contrasted to the cash value of the funding cost advantage, the TBTF premium, which is estimated both from rating-implied bond yields and a structural model of default risk. The results suggest that the U.K. and German levies perform similarly well, but that all schemes fail to match the amount required for the internalization of the externality. The discriminatory power of the French levy is the weakest.

Government Guarantees and the Valuation of Bank Debt – A Global Perspective

This paper analyzes the credit spreads of major banks in Europe and the U.S. using a structural model and provides estimates of the magnitude of government support. The guarantee-component reflected in prices is then linked to country-specific characteristics and the actual bailout costs and commitments as reported by the governments. Our results indicate vast discrepancies among countries. Italy and Spain exhibit smaller guarantees. Countries with a significant banking sector like the U.K. exhibit a higher guarantee value, and so do countries that invested massive amounts in the bailouts of their financial sector. Sovereign credit spreads negatively impacts on the model-market spread deviation, in line with the idea that higher sovereign risk deteriorates the value of guarantees. An orientation towards banks rather than capital markets for corporate finance is only a positive and significant factor for countries whose banking sector is important anyways.

How to Become Too-Big-to-Fail – The Impact of Mergers on Credit Risk

with F. Schweikhard

Using deal transaction data for the financial sector, this paper investigates the impact of mergers and acquisitions on the borrowing costs and credit insurance premiums of acquirers and targets. We find that M&A activity indeed reduces credit spreads, most notably in the case of the bidding firms. A further examination of the abnormal returns reveals their relationship with firm size and systemic risk and thus supports the notion that as firms grow they gradually become "too big to fail" as per the market's perception.