Operations Research
http://lists.repec.orgmailman/listinfo/nep-ore
Operations Research
2016-02-04
Choosing Expected Shortfall over VaR in Basel III Using Stochastic Dominance
http://d.repec.org/n?u=RePEc:ems:eureir:79539&r=ore
Bank risk managers follow the Basel Committee on Banking Supervision (BCBS) recommendations that recently proposed shifting the quantitative risk metrics system from Value-at-Risk (VaR) to Expected Shortfall (ES). The Basel Committee on Banking Supervision (2013, p. 3) noted that: “a number of weaknesses have been identified with using VaR for determining regulatory capital requirements, including its inability to capture tail risk”. The proposed reform costs and impact on bank balances may be substantial, such that the size and distribution of daily capital charges under the new rules could be affected significantly. Regulators and bank risk managers agree that all else being equal, a “better” distribution of daily capital charges is to be preferred. The distribution of daily capital charges depends generally on two sets of factors: (1) the risk function that is adopted (ES versus VaR); and (2) their estimated counterparts. The latter is dependent on what models are used by bank risk managers to provide for forecasts of daily capital charges. That is to say, while ES is known to be a preferable “risk function” based on its fundamental properties and greater accounting for the tails of alternative distributions, that same sensitivity to tails can lead to greater daily capital charges, which is the relevant (that is, controlling) practical reference for risk management decisions and observations. In view of the generally agreed focus in this field on the tails of non-standard distributions and low probability outcomes, an assessment of relative merits of estimated ES and estimated VaR is ideally not limited to mean variance considerations. For this reason, robust comparisons between ES and VaR will be achieved in the paper by using a Stochastic Dominance (SD) approach to rank ES and VaR.
Chang, C-L.
Jiménez-Martín, J.A.
Maasoumi, E.
McAleer, M.J.
Stochastic dominance, Value-at-Risk, Expected Shortfall, Optimizing strategy, Basel III Accord
2015-12-01
Generalizing smooth transition autoregressions
http://d.repec.org/n?u=RePEc:pav:demwpp:demwp0114&r=ore
We introduce a new time series model capable to parametrize the joint asymmetry in duration and length of cycles - the dynamic asymmetry - by using a particular generalization of the logistic function. The modelling strategy is discussed in detail, with particular emphasis on two different tests for the null of symmetric adjustment and three diagnostic tests, whose power properties are explored via Monte Carlo experiments. Four case studies in classical economic and biological real datasets illustrate the versatility of the new model in different fields. In all the cases, the dynamic asymmetry in the cycle is efficiently detected and modelled. Finally, a rolling forecasting exercise is applied to the resulting estimates. Our model beats linear and conventional nonlinear competitors in point forecasting, while this superiority becomes less evident in density forecasting, specially when relying on robust measures.
Emilio Zanetti Chini
Dynamic asymmetry, Nonlinear time series, Econometric Modelling, Point forecasts, Density forecasts, Evaluating forecasts, Combining forecasts, Error measures.
2016-01
Financial connectedness among European volatility risk premia
http://d.repec.org/n?u=RePEc:mod:wcefin:15112&r=ore
In this paper we use the Diebold Yilmaz (2009 and 2012) methodology to estimate the contribution and the vulnerability to systemic risk of volatility risk premia for five European stock markets: France, Germany, UK, Switzerland and the Netherlands. The volatility risk premium, which is a proxy of risk aversion, is measured by the difference between the implied volatility and expected realized volatility of the stock market for next month. While Diebold and Yilmaz focus is on the forecast error variance decomposition of stock returns or range based volatilities employing a stationary VAR in levels, we account for the (locally) long memory stationary properties of the levels of volatility risk premia series. Therefore, we estimate and invert a Fractionally Integrated VAR model to compute the cross forecast error variance shares necessary to obtain the index of total and directional connectedness.
Andrea Cipollini
Iolanda Lo Cascio
Silvia Muzzioli
volatility risk premium, long memory, FIVAR, financial connectedness
2015-12
Information Acquisition in Vertical Relations
http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1543&r=ore
We analyze a simple supply chain with one supplier, one retailer and uncertainty about market demand. Focusing on the incentives of the supplier and the retailer to enhance their private information about the actual market conditions, we show that choices on information acquisition are strategic complements. While the retailer's incentives are mainly driven by the information rent that he can earn, the supplier will choose to acquire information only if the retailer is rather well informed, even though the information is free of charge.
Pio Baake
Andreas Harasser
Friederike Heiny
Asymmetric information, information acquisition, vertical relations
2016
Behavioral Origins of Epidemiological Bifurcations
http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-16-00004&r=ore
In this paper, we investigate the nature of rational expectations equilibria for economic epidemiological models, with a particular focus on the behavioral origins of epidemiological bifurcations. Unlike mathematical epidemiological models, economic epidemiological models can produce regions of indeterminacy or instability around the endemic steady states. We consider SI, SIS, SIR and SIRS versions of economic compartmental models and show how well-intentioned public policy may contribute to disease instability and uncertainty.
David Aadland
David Finnoff
Kevin X. D. Huang
economic epidemiology, bifurcation, dynamics, disease, indeterminacy, rational expectations
2016-01-26
ON ILL-POSEDNESS OF NONPARAMETRIC INSTRUMENTAL VARIABLE REGRESSION WITH CONVEXITY CONSTRAINTS
http://d.repec.org/n?u=RePEc:gnv:wpaper:unige:79975&r=ore
This note shows that adding monotonicity or convexity constraints on the regression function does not restore well-posedness in nonparametric instrumental variable regression. The minimum distance problem without regularisation is still locally ill-posed.
Scaillet, Olivier
Nonparametric Estimation, Instrumental Variable, Ill-Posed Inverse Problems
2016
Dynamic Global Currency Hedging
http://d.repec.org/n?u=RePEc:aah:create:2016-03&r=ore
This paper proposes a model for discrete-time hedging based on continuous-time movements in portfolio and foreign currency exchange rate returns. In particular, the vector of optimal currency exposures is shown to be given by the negative realized regression coefficients from a one-period conditional expectation of the intra-period quadratic covariation matrix for portfolio and foreign exchange rate returns. These are labelled the realized currency betas. The model, hence, facilitates dynamic hedging strategies that depend exclusively on the dynamic evolution of the ex-post quadratic covariation matrix. These hedging strategies are suggested implemented using modern, yet simple, non-parametric techniques to accurately measure and dynamically model historical quadratic covariation matrices. The empirical results from an extensive hedging exercise for equity investments illustrate that the realized currency betas exhibit important time variation, leading to substantial economic, as well as statistically significant, volatility reductions from the proposed hedging strategies, compared to existing benchmarks, without sacrificing returns. As a result, a risk-averse investor is shown to be willing to pay several hundred basis points to switch from existing hedging methods to the proposed realized currency beta approach. Interestingly, the empirical analysis strongly suggests that the superior performance of the latter during the most recent global financial crisis of 2008 is, at least partially, funded by carry traders.
Bent Jesper Christensen
Rasmus T. Varneskov
Currency Hedging, Foreign Exchange Rates, High-frequency Data, Infill Asymptotics, Mean-Variance Analyis, Quadratic Covariation, Realized Currency Beta.
2016-01-18
Nonparametric estimation of the leverage effect: a trade-off between robustness and efficiency
http://d.repec.org/n?u=RePEc:mtl:montde:2015-05&r=ore
We consider two new approaches to nonparametric estimation of the leverage effect. The first approach uses stock prices alone. The second approach uses the data on stock prices as well as a certain volatility instrument, such as the CBOE volatility index (VIX) or the Black-Scholes implied volatility. The theoretical justification for the instrument-based estimator relies on a certain invariance property, which can be exploited when high frequency data is available. The price-only estimator is more robust since it is valid under weaker assumptions. However, in the presence of a valid volatility instrument, the price-only estimator is inefficient as the instrument-based estimator has a faster rate of convergence. We consider two empirical applications, in which we study the relationship between the leverage effect and the debt-to-equity ratio, credit risk, and illiquidity.
KALNINA, Ilze
XIU, Dacheng
Derivatives; VIX; Implied volatility; High frequency data; Spot correlation
2015