nep-rmg New Economics Papers
on Risk Management
Issue of 2006‒06‒24
four papers chosen by
Stan Miles
York University

  1. "CAN BASEL II ENHANCE FINANCIAL STABILITY?: A Pessimistic View" By L. Randall Wray
  2. Calendar Anomalies in an Emerging African Market: Evidence from the Ghana Stock Exchange. By Paul Alagidede; Theodore Panagiotidis
  3. Supply and Demand for Terrorism Insurance: Lessons from Germany By Thomann, Christian; Graf von der Schulenburg, J.-Matthias
  4. A Three-Factor Yield Curve Model: Non-Affine Structure, Systematic Risk Sources, and Generalized Duration By Francis X. Diebold; Lei Ji; Canlin Li

  1. By: L. Randall Wray
    Abstract: Even as the United States enjoys an economic expansion, there is an undercurrent of concern among economic analysts who follow financial markets. Some feel that the expansion of the credit derivatives markets poses the threat of a crisis similar to the Long-Term Capital Management debacle of 1998. Credit derivatives allow banks to share risks with holders of the derivatives, which are often mutual funds and other nonbank financial institutions. The Basel II accord, now being implemented in many countries, is hailed as a good form of protection against the risk of a series of bank failures of the type that might cause problems in the derivatives markets. Basel II represents a more sophisticated and complex version of the original Basel Accord of 1992, which set minimum capital ratios for various types of bank assets.
    Date: 2006–05
  2. By: Paul Alagidede (Loughborough University); Theodore Panagiotidis (Loughborough University)
    Abstract: This paper investigates two calendar anomalies in an emerging African market. Both the day of the week and month of the year effects are examined for Ghana. The latter is an interesting case because i) it operates for only three days per week during the sample period and ii) the increased focus that African stock markets have received lately both from academics and practitioners. We employ rolling techniques to asses the affects of policy and institutional changes. This allows deviations from the linear paradigm. We finally employ non-linear models from the GARCH family in a rolling framework to investigate the role of asymmetries. Contrary to a January return pattern in most markets, an April effect is found for Ghana. The evidence also shows the presence of the day of the week effects with asymmetric volatility performing better than the benchmark linear estimates. This seasonality though disappears when only the latest information is used (time-varying asymmetric GARCH). Our approach provides a new framework for investigating this well-known puzzle in finance.
    Keywords: Calendar Anomalies, Non-Linearity, Market Efficiency, Asymmetric Volatility, Rolling windows.
    JEL: C22 C52 G10
    Date: 2006–06
  3. By: Thomann, Christian; Graf von der Schulenburg, J.-Matthias
    Abstract: In our article we consider insurance as a means of allocating terrorism risk. Terrorism poses a significant challenge for insurers worldwide. In terms of possible losses it fits into the same category as earthquakes and hurricanes. Yet as a result of the uncertainty surrounding these risks private markets face significant difficulties in providing insurance for it. In the insurance industry costly risk bearing can explain the supply of capacity risks. Corporate risk management theory provides reasons why transaction costs can motivate firms to purchase insurance. In the context of these tightly connected theories we derive models for both the supply of terrorism reinsurance and the demand for terrorism insurance. Using two datasets from the German terrorism insurer we estimate models on how corporations in Germany employ government sponsored insurance to manage their terrorism risk and on the factors that determine the supply for private market terrorism reinsurance.
    Keywords: Terrorism Insurance, Risk Allocation, Regulation
    JEL: G22 G32 D61
    Date: 2006–06
  4. By: Francis X. Diebold (Department of Economics, University of Pennsylvania); Lei Ji (Department of Economics, University of Pennsylvania); Canlin Li (Graduate School of Management, University of California)
    Abstract: We assess and apply the term-structure model introduced by Nelson and Siegel (1987) and re-interpreted by Diebold and Li (2003) as a modern three-factor model of level, slope and curvature. First, we ask whether the model is a member of the affine class, and we find that it is not. Hence the poor forecasting performance recently documented for affine term structure models in no way implies that our model will forecast poorly, which is consistent with Diebold and Li's (2003) finding that it indeed forecasts quite well. Next, having clarified the relationship between our three-factor model and the affine class, we proceed to assess its adequacy directly, by testing whether its level, slope and curvature factors do indeed capture systematic risk. We find that they do, and that they are therefore priced. Finally, confident in the ability of our three-factor model to capture the pricing relations present in the data, we proceed to explore its efficacy in bond portfolio risk management. Traditional Macaulay duration is appropriate only in a one-factor (level) context; hence we move to a three-factor generalized duration, and we show the superior performance of hedges constructed using it.
    Keywords: Term structure; Yield curve; Factor model; Risk Management
    JEL: G1 E43 E47 C5
    Date: 2006–03–09

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