New Economics Papers
on Financial Markets
Issue of 2009‒09‒05
three papers chosen by

  1. Linking Financial and Macroeconomic Factors to Credit Risk Indicators of Brazilian Banks By Marcos Souto; Benjamin M. Tabak; Francisco Vazquez
  2. Financial market´s appetite for risk: and the challenge of assessing its evolution by risk appetite indicators By Uhlenbrock, Birgit
  3. "Hedging European Derivatives with the Polynomial Variance Swap under Uncertain Volatility Environments" By Akihiko Takahashi; Yukihiro Tsuzuki; Akira Yamazaki

  1. By: Marcos Souto; Benjamin M. Tabak; Francisco Vazquez
    Abstract: This study constructs a set of credit risk indicators for 39 Brazilian banks, using the Merton framework and balance sheet information on the banks’ total assets and liabilities. Despite the simplifying assumptions, the methodology captures well several stylized facts in the recent history of Brazil. In particular, it identifies deterioration in the credit risk indicators of the banking sector, following the crisis in the early 2000s. The risk indicators were regressed against a number of macro-financial variables at both individual and systemic level, showing that an increase in the system EDF, interest rates, and CDS spreads will lead to a deterioration of the individual expected default probability.
    Date: 2009–07
  2. By: Uhlenbrock, Birgit
    Abstract: Assessments of investors' risk appetite/aversion stance via indicators often yields results which seem unsatisfactory (see e.g. Illing and Aaron (2005)). Understanding how such indicators work therefore seems essential for further improvements. The present paper seeks to contribute to this evolution, focusing on the Global Risk Appetite Index (GRAI) class of indicators going back to Kumar and Persaud (2002). Looking at international stock indices during the subprime crisis in 2007, the plausibility of the GRAIs benefits from applying the rank correlation approach of Kumar and Persaud (2002) combined with a modified version of the factor-transformation extension proposed by Misina (2006).
    Keywords: Risk appetite indicators,risk aversion indicators,asset pricing,financial markets.
    JEL: G11 G12 G15
    Date: 2009
  3. By: Akihiko Takahashi (Faculty of Economics, University of Tokyo); Yukihiro Tsuzuki (Mizuho-DL Financial Technology Co., Ltd.); Akira Yamazaki (Graduate School of Economics, University of Tokyo and Mizuho-DL Financial Technology Co., Ltd.)
    Abstract: This paper proposes a new hedging scheme of European derivatives under uncertain volatility environments, in which a weighted variance swap called the polynomial variance swap is added to the Black-Scholes delta hedging for managing exposure to volatility risk. In general, under these environments one cannot hedge the derivatives completely by using dynamic trading of only an underlying asset owing to volatility risk. Then, for hedging uncertain volatility risk, we design the polynomial variance, which can be dependent on the level of the underlying asset price. It is shown that the polynomial variance swap is not perfect, but more efficient as a hedging tool for the volatility exposure than the standard variance swap. In addition, our hedging scheme has a preferable property that any information on the volatility process of the underlying asset price is unnecessary. To demonstrate robustness of our scheme, we implement Monte Carlo simulation tests with three different settings, and compare the hedging performance of our scheme with that of standard dynamic hedging schemes such as the minimum-variance hedging. As a result, it is found that our scheme outperforms the others in all test cases. Moreover, it is noteworthy that the scheme proposed in this paper continues to be robust against model risks.
    Date: 2009–08

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