|
on Risk Management |
| By: | Hakenes, Hendrik (Sonderforschungsbereich 504) |
| Abstract: | Risk management, although of major importance in the banking industry in practice, plays only a minor role in the theory of banking. We reduce this gap by putting forward a model in which risk managers - specialists that can find out correlations between risky assets - endogenously take over typical functions of banks. They grant loans, they consult on financial questions with firms that are threatened by bankruptcy, and they sign tailor-made hedge transactions with these firms. Delegation costs are innately low if banks assume the function of risk managers in an economy. Risk management can be seen as a core competence of banks. |
| Date: | 2003–09–11 |
| URL: | http://d.repec.org/n?u=RePEc:xrs:sfbmaa:03-13&r=rmg |
| By: | MARCO FABIO DELZIO |
| Abstract: | In this paper we propose a new methodology for calculating the risk-neutral default probability of a generic firm XYZ, using equity options prices. This model can be used for the pricing and risk management of corporate bonds and, more in general, credit derivatives. We assume that the market is arbitrage-free but not necessarily complete, meaning that many probability measure can exist. We select the 'market' probability measure implied in the equity options prices and use it for pricing single name credit derivatives. Firstly, the equity probability density function is inferred from equity implied volatilities with different strikes and maturities. Then, the corresponding assets density function and default probability are calculated, obtaining the option implied default probability as the main output of the model. We show that the option implied default probability can be expressed as a function of a firm's assets volatility and debt nominal value. Both variables are firm specific, the former being an indicator of business risk, the latter of financial leverage (indeed, financial risk) of the firm XYZ. This model can be used either as a pricing tool, if credit derivatives are not traded, or as a relative value analysis tool in liquid markets. |
| Date: | 2004–02 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceiswp:198&r=rmg |
| By: | JESPER TOR JACOBSON; KASPER ROSZBACH LINDÉ |
| Abstract: | The new Basel II regulation contains a number of new regulatory features. Most importantly, internal ratings will be given a central role in the evaluation of bank loans' riskiness. Another novelty is that retail credit and SME loans will receive a special treatment in recognition of the fact that the riskiness of such exposure derives to a greater extent from idiosyncratic risk and much less from common factor risk. Much of the work done on the differences between the risk properties of retail, SME and corporate credit has been based on parameterized model of credit risk. In this paper we present new quantitative evidence on the implied credit loss distributions for two Swedish banks using a non-parametric Monte Carlo re-sampling method following Carey [1998]. Our results are based on a panel data set containing both loan and internal rating data from the banks' complete business loan portfolios over the period 1997-2000. We compute the credit loss distributions that each rating system implies and compare the required economic capital implied by these loss distributions with the regulatory capital under Basel II. By exploiting the fact that a subset of all businesses in the sample is rated by both banks, we can generate loss distributions for SME, retail and corporate credit portfolios with a constant risk profile. Our findings suggest that a special treatment for retail credit and SME loans may not be justified. We also investigate if any alternative definition of SME's and retail credit would warrant different risk weight functions for these types of exposure. Our results indicate that it may be di¢cult to find a simple risk weight function that can account for the differences in portfolio risk properties between banks and asset types. |
| Date: | 2004–02 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceiswp:199&r=rmg |
| By: | Boes,Mark-Jan; Drost,Feike C.; Werker,Bas J.M. (Tilburg University, Center for Economic Research) |
| Abstract: | This paper investigates the effect of closed overnight exchanges on option prices. During the trading day asset prices follow the literature s standard affine model which allows asset prices to exhibit stochastic volatility and random jumps. Independently, the overnight asset price process is modelled by a single jump. We find that the overnight component reduces the variation in the random jump process significantly. However, neither the random jumps nor the overnight jumps alone are able to empirically describe all features of asset prices. We conclude that both random jumps during the day and overnight jumps are important in explaining option prices, where the latter account for about one quarter of total jump risk. |
| JEL: | G11 G13 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:20051&r=rmg |