New Economics Papers
on Risk Management
Issue of 2006‒07‒02
four papers chosen by

  1. The Microfinance Collateralized Debt Obligation: a Modern Robin Hood? By Byström, Hans
  2. Dynamic asset allocation and latent variables By Sørensen, Carsten; Trolle, Anders Bjerre
  3. Common Factors in Latin America's Business Cycles By Marco Aiolfi; Allan Timmermann; Luis Catão
  4. A First Cut Estimate of the Equity Risk Premium in India By Varma Jayanth R; Barua Samir K

  1. By: Byström, Hans (Department of Economics, Lund University)
    Abstract: The aim of this paper is to highlight a potentially very fruitful link between micro-entrepreneurs and the international capital markets. We discuss the role structured finance and credit derivatives could play in extending finance to micro-entrepreneurs on a much larger scale than today’s mainly non-commercial microfinance industry. The mechanisms of so called collateralized debt obligations (CDOs) are described and extended to the microfinance world. Finally, a hypothetical, but realistic, example of such a microfinance CDO (MiCDO) is used to discuss the implications of securitization and tranching of microcredits.
    Keywords: commercial microfinance; structured finance; securitization; collateralized debt obligation; MiCDO
    JEL: G15 G21 O16 R51
    Date: 2006–06–18
  2. By: Sørensen, Carsten (Department of Finance, Copenhagen Business School); Trolle, Anders Bjerre (Department of Finance, Copenhagen Business School)
    Abstract: We derive an explicit solution to the portfolio problem of a power utility investor with preferences for wealth at a ¯nite investment horizon. The investor can invest in assets with return dynamics described as part of a general multivariate model. The modeling framework encompasses discrete-time VAR-models where some of the state-variables (e.g. expected excess returns) may not be directly observable. A realistic multivariate model is estimated and applied to analyze the portfolio implications of investment horizon and return predictability when real interest rates and expected excess returns on stock and bonds are not directly observed but must be estimated as part of the problem faced by the investor. The solution exhibits small variability in portfolio allocations over time compared to the case when excess returns are assumed observable.
    Keywords: Portfolio choice; predictability; VAR; unobserved state-variables; hedging demands
    JEL: G11
    Date: 2006–06–26
  3. By: Marco Aiolfi; Allan Timmermann; Luis Catão
    Abstract: This paper constructs new business cycle indices for Argentina, Brazil, Chile, and Mexico based on common dynamic factors extracted from a comprehensive set of sectoral output, external data, and fiscal and financial variables spanning over a century. The constructed indices are used to derive a business cycle chronology for these countries and characterize a set of new stylized facts. In particular, we show that all four countries have historically displayed a striking combination of high business cycle and persistence relative to benchmark countries, and that such volatility has been time-varying, with important differences across policy regimes. We also uncover a sizeable common factor across the four economies which has greatly limited scope for regional risk sharing.
    Keywords: Business cycles , Latin America , Argentina , Brazil , Chile , Mexico , Economic models ,
    Date: 2006–03–07
  4. By: Varma Jayanth R; Barua Samir K
    Abstract: We estimate the equity risk premium in India using data for the last 25 years. We address the shortcomings of existing indices by constructing our own total return index for the 1980s and early 1990s. We use our estimates of the extent of financial repression during this period to construct a series of the risk free rate in India going back to the early 1980s. We find that the equity risk premium is about 8?% on a geometric mean basis and about 12?% on an arithmetic mean basis. There is no significant difference between the pre reform and post reform period: the premium has declined marginally on a geometric mean basis and has risen slightly on an arithmetic mean basis. The reason for this divergence between the sub period behaviour of the two means is the increase in the annualized standard deviation of stock market returns from less than 20% in the pre reform period to about 25% in the post reform period. The higher standard deviation depresses the geometric mean in the post reform period.
    Date: 2006–06–26

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