nep-rmg New Economics Papers
on Risk Management
Issue of 2006‒07‒21
three papers chosen by
Stan Miles
York University

  1. Choice of Corporate Risk Management Tools under Moral Hazard By Jan Bena
  2. Insurance Sector Risk By Jan Frederik Slijkerman
  3. Forecasting Stock Price Changes: Is it Possible? By Pedro N. Rodríguez,; Simón Sosvilla-Rivero

  1. By: Jan Bena
    Abstract: This paper examines the choice of tools for managing a firm’s operational risks: cash reserves, insurance contracts, and financial assets under an optimal financing contract that solves moral hazard between insiders and outside investors. Risk management is valuable as it reduces the costs of raising external financing, increases debt capacity, lessens underinvestment, and improves welfare. I show that insurance is superior as it facilitates the outside financing relationship but leads to inefficient excessive continuation if used without coverage limits. When insurance against an operational risk is not available, the firm uses financial assets instead or resorts to holding cash reserves.
    Date: 2006–06
  2. By: Jan Frederik Slijkerman (Faculty of Economics, Erasmus Universiteit Rotterdam)
    Abstract: We model and measure simultaneous large losses of the market value of insurers to understand the impact of shocks on the insurance sector. The downside risk of insurers is explicitly modelled by common and idiosyncratic risk factors. Since reinsurance is important for the capacity of insurers, we measure risk dependence among European insurers and reinsurers. The results point to a relatively low insurance sector wide risk. Dependence among insurers is higher than among reinsurers.
    Keywords: Systemic risk; asymptotic dependence
    JEL: G15 G22 G38
    Date: 2006–06–12
  3. By: Pedro N. Rodríguez,; Simón Sosvilla-Rivero
    Abstract: We examine the relation between monthly stock returns and lagged publicly available information. Our primary objective is to determine whether the variables proposed in the literature to predict the equity premium contain incremental information to an investor. We find that certain variables do provide incremental information and may have some practical value. Although this not necessarily imply that return-forecasting models may be used to predict future stock returns, some model specifications may be used to predict future stock movements.

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