|
on Risk Management |
| By: | Loriana Pelizzon; Stephen Schaefer |
| Abstract: | Under the New Basel Accord bank capital adequacy rules (Pillar 1) are substantially revised but the introduction of two new "Pillars" is, perhaps, of even greater significance. This paper focuses on Pillar 2 which expands the range of instruments available to the regulator when intervening with banks that are capital inadequate and investigates the complementarity between Pillar 1 (risk-based capital requirements) and Pillar 2. In particular, the paper focuses on the role of closure rules when recapitalization is costly. In the model banks are able to manage their portfolios dynamically and their decisions on recapitalization and capital structure are determined endogenously. A feature of our approach is to consider the costs as well as the benefits of capital regulation and to accommodate the behavioral response of banks in terms of their portfolio strategy and capital structure. The paper argues that problems of capital adequacy are minor unless, in at least some states of the world, banks are able to violate the capital adequacy rules. The paper shows how the role of Pillar 2 depends on the effectiveness of capital regulation, i.e., the extent to which banks can "cheat". |
| JEL: | G21 G28 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11666&r=rmg |
| By: | Andrea Beltratti; Claudio Morana (SEMEQ Department - Faculty of Economics - University of Eastern Piedmont) |
| Abstract: | We study the time series properties of the Fama-French factor returns volatility processes. Among the original findings of this paper, we point to structural breaks in the volatility of the factors, and strong coincidence between the timing of the breaks in the volatility of the market portfolio and the timing of the breaks in the volatility of SMB. Moreover, analyses of the break free series show that two common long memory factors drive the long-run evolution of the series. The first factor mainly affects the volatility of the market and the volatility of SMB, while the second one mainly affects the volatility of HML. These results imply that the time-varing volatility of stocks is driven mainly by the time-varying volatility of the market as a whole and of the HML portfolio, while the volatility of SMB does not seem to be an independent driving force. |
| Keywords: | risk factors, structural change, long memory, fractional cointegration, portfolio allocation |
| JEL: | C32 F30 G10 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:upo:upopwp:105&r=rmg |