New Economics Papers
on Risk Management
Issue of 2005‒03‒20
five papers chosen by

  1. Exposure-based Cash-Flow-at-Risk under Macroeconomic Uncertainty By Andrén, Niclas; Jankensgård, Håkan; Oxelheim, Lars
  2. Attributing Returns and Optimising United States Swaps Portfolios Using an Intertemporally-Consistent and Arbitrage-Free Model of the Yield Curve By Leo Krippner
  3. Linkages in international stock markets: Evidence from a classification procedure By Simon Sosvilla-Rivero; Pedro N. Rodríguez
  4. Structural Breaks in Volatility: Evidence from the OECD Real Exchange Rates By Amalia Morales-Zumaquero; Simon Sosvilla-Rivero
  5. An Empirical Analysis of U.S. Aggregate Portfolio Allocations By Michel Normandin; Pascal St-Amour

  1. 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 exposure-based measure of Cash-Flow-at-Risk (CFaR). Existing approaches to calculating CFaR either only focus on cash flow conditional on market changes or neglect market-risk exposures entirely. We argue here that an essential first step in a risk-management program is to quantify cash-flow 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 decision-making. The firm’s overall CFaR is then calculated based on an assessment of corporate risk exposure.
    Keywords: Cash-Flow-at Risk; Corporate Hedging; Downside Risk; Risk Exposure; MUST-analysis; Value-at-Risk
    JEL: F23 G30 G32 M21
    Date: 2005–03–14
  2. By: Leo Krippner (AMP Capital Investors)
    Abstract: This paper uses the volatility-adjusted orthonormalised Laguerre polynomial model of the yield curve (the VAO model) from Krippner (2005), an intertemporally-consistent and arbitrage-free version of the popular Nelson and Siegel (1987) model, to develop a multi-dimensional yield-curve-based 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 ex-post, and for optimising portfolios ex-ante. 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 ex-post returns) are first-order (‘duration’) effects from stochastic shifts in the level and shape of the yield curve; second-order (‘convexity’) effects and other contributions are immaterial. The second application shows that fixed interest portfolios optimised ex-ante using the VAO model risk/relative framework significantly outperform a naive evenly-weighted benchmark over time.
    Keywords: yield curve; term structure; fixed interest securities; portfolio optimisation; interest rate swaps
    JEL: E43 G11 G12
    Date: 2005–03–11
  3. By: Simon Sosvilla-Rivero; Pedro N. Rodríguez
    Abstract: In this paper we propose a new approach to evaluate the predictable components in stock indices using a boosting-based 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.
  4. By: Amalia Morales-Zumaquero; Simon Sosvilla-Rivero
    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 1960-2003, 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 p-values 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 p-values 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 non-neutrality of the nominal exchange rate regime regarding real exchange rate volatility.
  5. By: Michel Normandin; Pascal St-Amour
    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 Fama-French 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 Fama-French sont ceux qui reproduisent le mieux les allocations empiriques.
    Keywords: factorial models of returns, myopic and strategic, non-expected utility, tactical portfolio allocations , modèles factoriels des rendements, myopes et stratégiques, portefeuilles tactiques, utilité non espérée
    Date: 2005–03–01

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