
on Risk Management 
Issue of 2005‒03‒20
five papers chosen by 
By:  Andrén, Niclas (Department of Business Administration); Jankensgård, Håkan (The Research Institute of Industrial Economics); Oxelheim, Lars (The Research Institute of Industrial Economics) 
Abstract:  In this paper we derive an exposurebased measure of CashFlowatRisk (CFaR). Existing approaches to calculating CFaR either only focus on cash flow conditional on market changes or neglect marketrisk exposures entirely. We argue here that an essential first step in a riskmanagement program is to quantify cashflow exposure to macroeconomic and market risk. This is the information relevant for corporate hedging. However, it is the total level of cash flow in relation to the firm’s capital needs that is the information relevant for decisionmaking. The firm’s overall CFaR is then calculated based on an assessment of corporate risk exposure. 
Keywords:  CashFlowat Risk; Corporate Hedging; Downside Risk; Risk Exposure; MUSTanalysis; ValueatRisk 
JEL:  F23 G30 G32 M21 
Date:  2005–03–14 
URL:  http://d.repec.org/n?u=RePEc:hhs:iuiwop:0635&r=rmg 
By:  Leo Krippner (AMP Capital Investors) 
Abstract:  This paper uses the volatilityadjusted orthonormalised Laguerre polynomial model of the yield curve (the VAO model) from Krippner (2005), an intertemporallyconsistent and arbitragefree version of the popular Nelson and Siegel (1987) model, to develop a multidimensional yieldcurvebased risk framework for fixed interest portfolios. The VAO model is also used to identify relative value (i.e. potential excess returns) from the universe of securities that define the yield curve. In combination, these risk and return elements provide an intuitive framework for attributing portfolio returns expost, and for optimising portfolios exante. The empirical applications are to six years of daily United States interest rate swap data. The first application shows that the main sources of fixed interest portfolio risk (i.e. unanticipated variability in expost returns) are firstorder (‘duration’) effects from stochastic shifts in the level and shape of the yield curve; secondorder (‘convexity’) effects and other contributions are immaterial. The second application shows that fixed interest portfolios optimised exante using the VAO model risk/relative framework significantly outperform a naive evenlyweighted benchmark over time. 
Keywords:  yield curve; term structure; fixed interest securities; portfolio optimisation; interest rate swaps 
JEL:  E43 G11 G12 
Date:  2005–03–11 
URL:  http://d.repec.org/n?u=RePEc:wai:econwp:05/03&r=rmg 
By:  Simon SosvillaRivero; Pedro N. Rodríguez 
Abstract:  In this paper we propose a new approach to evaluate the predictable components in stock indices using a boostingbased classification technique, and we use this method to examine causality among the three main stock market indices in the world during periods of large positive price changes. The empirical evidence seems to indicate that the Standard & Poors 500 index contains incremental information that is not present in either the FTSE 100 index or the Nikkei 225 index, and that could be used to enhance the predictability of the large positive returns in the three main stock market indices in the world. This in turn would suggest a causality relationship running from the Standard & Poors 500 index to both the FTSE 100 and the Nikkei 225 indices. 
URL:  http://d.repec.org/n?u=RePEc:fda:fdaddt:200423&r=rmg 
By:  Amalia MoralesZumaquero; Simon SosvillaRivero 
Abstract:  This paper analyses whether volatility changes in the real exchange rates (RERs) of the OECD industrial countries are associated with a specific nominal exchange rate regime. To that end, we examine RER behaviour during the period 19602003, thereby covering both the Bretton Woods system of fixed exchange rates and the adoption of generalised floating exchange rates from 1973. We make use of an econometric methodology based on Hansen’s (1997) approximation to the pvalues of the supreme, exponential and average statistics developed by Andrews (1993) and Andrews and Ploberger (1994). This methodology allows us to obtain a profile of pvalues and to delimit periods of stability and instability in the variance of real exchange rates. For most countries in our sample, there is evidence in favour of the nonneutrality of the nominal exchange rate regime regarding real exchange rate volatility. 
URL:  http://d.repec.org/n?u=RePEc:fda:fdaddt:200422&r=rmg 
By:  Michel Normandin; Pascal StAmour 
Abstract:  This paper analyzes the important time variation in U.S. aggregate portfolio allocations. To do so, we first use flexible descriptions of preferences and investment opportunities to derive optimal decision rules that nest tactical, myopic, and strategic portfolio allocations. We then compare these rules to the data through formal statistical analysis. Our main results reveal that i) purely tactical and myopic investment behaviors are unambiguously rejected, ii) strategic portfolio allocations are strongly supported, and iii) the FamaFrench factors best explain empirical portfolio shares. <P>Ce papier analyse la forte variation chronologique dans les portefeuilles agrégés américains. À cet effet, nous utilisons des descriptions flexibles des préférences et des opportunités d'investissement afin de dériver les allocations tactiques, myopes et stratégiques. Ces règles sont ensuite comparées aux données dans le cadre d'une analyse statistique formelle. Nos principaux résultats révèlent que i) les règles purement myopes ou tactiques sont rejetées, ii) les portefeuilles stratégiques sont supportés et iii) les facteurs FamaFrench sont ceux qui reproduisent le mieux les allocations empiriques. 
Keywords:  factorial models of returns, myopic and strategic, nonexpected utility, tactical portfolio allocations , modèles factoriels des rendements, myopes et stratégiques, portefeuilles tactiques, utilité non espérée 
Date:  2005–03–01 
URL:  http://d.repec.org/n?u=RePEc:cir:cirwor:2005s07&r=rmg 