|
on Risk Management |
| By: | Günter Franke (Center for Finance and Econometrics at the University of Konstanz, and CFS Center for Financial Studies, Frankfurt); Jan Pieter Krahnen (Goethe-University Frankfurt and CFS Center for Financial Studies, Frankfurt, and CEPR. Correspondence: CFS, Taunusanlage 6, D-60329 Frankfurt(Main)) |
| Abstract: | This paper contributes to the economics of financial institutions risk management by exploring how loan securitization a.ects their default risk, their systematic risk, and their stock prices. In a typical CDO transaction a bank retains through a first loss piece a very high proportion of the expected default losses, and transfers only the extreme losses to other market participants. The size of the first loss piece is largely driven by the average default probability of the securitized assets. If the bank sells loans in a true sale transaction, it may use the proceeds to to expand its loan business, thereby incurring more systematic risk. We find an increase of the banks’ betas, but no significant stock price e.ect around the announcement of a CDO issue. Our results suggest a role for supervisory requirements in stabilizing the financial system, related to transparency of tranche allocation, and to regulatory treatment of senior tranches. |
| JEL: | D82 G21 D74 |
| Date: | 2005–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200506&r=rmg |
| By: | Torben G. Andersen (Department of Finance, Kellogg School of Management, Northwestern University, Evanston, IL 60208, and NBER); Tim Bollerslev (Department of Economics, Duke University, Durham, NC 27708, and NBER); Peter F. Christoffersen (Faculty of Management, McGill University, Montreal, Quebec, H3A 1G5, and CIRANO); Francis X. Diebold (Department of Economics, University of Pennsylvania, Philadelphia, PA 19104, and NBER) |
| Abstract: | What do academics have to offer market risk management practitioners in financial institutions? Current industry practice largely follows one of two extremely restrictive approaches: historical simulation or RiskMetrics. In contrast, we favor flexible methods based on recent developments in financial econometrics, which are likely to produce more accurate assessments of market risk. Clearly, the demands of real-world risk management in financial institutions – in particular, real-time risk tracking in very high-dimensional situations – impose strict limits on model complexity. Hence we stress parsimonious models that are easily estimated, and we discuss a variety of practical approaches for high-dimensional covariance matrix modeling, along with what we see as some of the pitfalls and problems in current practice. In so doing we hope to encourage further dialog between the academic and practitioner communities, hopefully stimulating the development of improved market risk management technologies that draw on the best of both worlds. |
| JEL: | G10 |
| Date: | 2005–01–02 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200502&r=rmg |
| By: | Sean D. Campbell (Brown University); Francis X. Diebold (University of Pennsylvania, and NBER) |
| Abstract: | We take a simple time-series approach to modeling and forecasting daily average temperature in U.S. cities, and we inquire systematically as to whether it may prove useful from the vantage point of participants in the weather derivatives market. The answer is, perhaps surprisingly, yes. Time-series modeling reveals conditional mean dynamics, and crucially, strong conditional variance dynamics, in daily average temperature, and it reveals sharp differences between the distribution of temperature and the distribution of temperature surprises. As we argue, it also holds promise for producing the long-horizon predictive densities crucial for pricing weather derivatives, so that additional inquiry into time-series weather forecasting methods will likely prove useful in weather derivatives contexts. |
| Keywords: | Risk management; hedging; insurance; seasonality; temperature; financial derivatives |
| Date: | 2004–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200410&r=rmg |
| By: | Ari A. Perdana (Centre for Strategic and International Studies) |
| Abstract: | This paper reviews some literatures on the mechanisms available for the poor in managing risk. Lacking access to formal mechanisms of risk management, the poor rely on informal mechanisms, which are built based on the existing social networks and trust. But when the shocks are big or affecting the entire community, these informal mechanisms may not be adequate. Some policy interventions are then required to help improving the ability of poor people in managing risk. Policy intervention should aim to provide access for the poor on saving, credit and insurance. Microfinance schemes have been applauded as a successful ‘best practice’ in providing access to saving and credit. However, microfinance institutions still have some room for improvement by expanding their role in providing insurance schemes. |
| Keywords: | poverty, vulnerability, risk management, microfinance |
| JEL: | E21 E51 E52 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:527&r=rmg |