nep-rmg New Economics Papers
on Risk Management
Issue of 2006‒02‒12
six papers chosen by
Stan Miles
York University

  1. Stochastic Processes in Credit Risk Modelling By Roberto Casarin
  2. Cyclical risk exposure of pension funds: a theoretical framework By Francesco Menoncin
  3. Does Diversification Improve the Performance of German Banks? Evidence from Individual Bank Loan Portfolios By Evelyn Hayden; Daniel Porath; Natalja von Westernhagen
  4. Modeling Conditional Skewness in Stock Returns By Markku Lanne; Pentti Saikkonen
  5. The effect of the war risk: a comparison of the consequences of the two Iraq wars on some financial variables By Elena Corallo
  6. Investing in European Stock Markets for High-Technology Firms By Christian Pierdzioch; Andrea Schertler

  1. By: Roberto Casarin
    Abstract: In credit risk modelling, jump processes are widely used to de- scribe both default and rating migration events. This work is mainly a review of some basic denitions and properties of the jump processes intended for a preliminary step before more ad- vanced lectures on credit risk modelling. We focus on the Poisson process and some generalisations, like the compounded and the double stochastic Poisson processes, which are widely used for describing the time-inhomogeneous dynamic either of the default process or of the credit rating transition. As such, much of the material is not new, but focused and organized from a credit risk perspective. Moreover it contains detailed proofs of some funda- mental results. Other original contributions come from examples and simulated studies, which help the reader to better understand the features of the described processes.
  2. By: Francesco Menoncin
    Abstract: We study the asset allocation problem for a pension fund which operates in a PAYG system and periodically revises its investment strategies. If the optimal amount of wealth invested in risky assets is always positive, then during the management period the optimal portfolio is constantly riskier (less risky) than Merton’s portfolio when the growth rate of workers is higher (lower) than the growth rate of pensioners. In particular, there exists a time when the risk exposure is a maximum (minimum).
  3. By: Evelyn Hayden (Oesterreichische Nationalbank, Banking Analysis and Inspections Division); Daniel Porath (Deutsche Bundesbank, Banking and Financial Supervision Department); Natalja von Westernhagen (Deutsche Bundesbank, Banking and Financial Supervision Department)
    Abstract: Should banks be diversified or focused? Does diversification indeed lead to increased performance and therefore greater safety on the part of banks as traditional portfolio and banking theory would suggest? This paper investigates the link between banks’ profitability and their portfolio diversification across different industries, broader economic sectors and geographical regions. To explore this issue, we use a unique data set of the individual bank loan portfolios of 983 German banks for the period from 1996 to 2002. The overall evidence we provide shows that there are no large performance benefits associated with diversification since each type of diversification tends to reduce the banks’ returns. Additionally, we find that banks do not use diversification to operate at a constant level of risk-return efficiency, which implies that banks are not risk-return efficient. Moreover, we find that the impact of diversification strongly depends on the risk level. However, only for moderate risk levels and in the case of industrial diversification does diversification significantly improve the banks’ returns.
    Date: 2006–09–01
  4. By: Markku Lanne; Pentti Saikkonen
    Abstract: In this paper we propose a new GARCH-in-Mean (GARCH-M) model allowing for conditional skewness. The model is based on the so-called z distribution capable of modeling moderate skewness and kurtosis typically encountered in stock return series. The need to allow for skewness can also be readily tested. Our empirical results indicate the presence of conditional skewness in the postwar U.S. stock returns. Small positive news is also found to have a smaller impact on conditional variance than no news at all. Moreover, the symmetric GARCH-M model not allowing for conditional skewness is found to systematically overpredict conditional variance and average excess returns.
    Keywords: Conditional skewness, GARCH-in-Mean, Risk-return tradeoff
    JEL: C16 C22 G12
    Date: 2005
  5. By: Elena Corallo (Cattaneo University (LIUC))
    Abstract: This paper measures the effect of war on some financial variables using the heteroskedasticity based estimation technique proposed by Rigobon and Sack (2005). The importance of applying this technique is due to the possibility of capturing the effect of a variable, which is here the risk of war, that is not measurable. This work compares the effect of the Iraq war of 1991 with the Iraq war of 2003 on different variables in Italy and US. According to the results, we find that the two wars caused different effects on the analysed variables.
    Date: 2005–06
  6. By: Christian Pierdzioch; Andrea Schertler
    Abstract: We used a recursive modeling approach to study whether investors could, in real time, have used information on the comovement of stock markets to forecast stock returns in European stock markets for high-technology firms. We used weekly data on returns in the Neuer Markt, the Nouveau Marché, the Alternative Investment Market, and the NASDAQ. We found substantial changes over time in the usefulness of the inter-European and cross-Atlantic comovement of stock markets for predicting stock returns. We also studied how monitoring the comovement of stock markets would have affected the performance of simple trading rules and investor’s markettiming skills.
    Keywords: Recursive modeling approach; Comovement of returns; Hightechnology firms learning by exporting, total factor productivity, export destination, quantile regression, instrumental variables
    JEL: B22 C32 E24
    Date: 2006–01

This nep-rmg issue is ©2006 by Stan Miles. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.