nep-rmg New Economics Papers
on Risk Management
Issue of 2006‒10‒07
eleven papers chosen by
Stan Miles
Thompson Rivers University

  1. Business Process Risk Management, Compliance and Internal Control: A Research Agenda By Rikhardsson, Pall; Best, Peter; Green, Peter; Rosemann, Michael
  2. Scenario Based Principal Component Value-at-Risk: an Application to Italian Banks' Interest Rate Risk Exposure By Roberta Fiori; Simonetta Iannotti
  3. Value-at-Risk for long and short trading positions: The case of the Athens Stock Exchange By Panayiotis Diamandis; Georgios Kouretas; Leonidas Zarangas
  4. Asset allocation in the Athens Stock Exchange: A variance sensitivity analysis By Panayiotis Diamandis; Georgios Kouretas; Leonidas Zarangas
  9. Tail Conditional Expectation for vector-valued Risks By Imen Bentahar
  11. A ten-year retrospection of the behavior of Russian stock returns By Anatolyev, Stanislav

  1. By: Rikhardsson, Pall (Department of Management Science and Logistics, Aarhus School of Business); Best, Peter (Faculty of Business); Green, Peter (The University of Queensland Business School); Rosemann, Michael (Faculty of Information Technology)
    Abstract: Integration of risk management and management control is emerging as an important area in the wake of the Sarbanes-Oxley Act and with ongoing development of frameworks such as the Enterprise Risk Management (ERM) framework from the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on an inductive methodological approach using literature review and interviews with managers engaged in risk management and internal control projects, this paper identifies three main areas that currently have management attention. These are business process risk management, compliance management and internal control development. This paper discusses these areas and identifies a series of research questions regarding these critical issues
    Keywords: Risk management; Internal control; Business processes; Compliance; Sarbanes-Oxley Act; ERP systems; COSO; COBIT
    Date: 2006–09–18
  2. By: Roberta Fiori (Banca d'Italia); Simonetta Iannotti (Banca d'Italia)
    Abstract: The paper develops a Value-at-Risk methodology to assess Italian banks’ interest rate risk exposure. By using 5 years of daily data, the exposure is evaluated through a Principal Component VaR based on Monte Carlo simulation according to two different approaches (parametric and non-parametric). The main contribution of the paper is a methodology for modelling interest rate changes when underlying risk factors are skewed and heavy-tailed. The methodology is then implemented on a one year holding period in order to compare the results from those resulting from the Basel II standardized approach. We find that the risk measure proposed by Basel II gives an adequate description of risk, provided that duration parameters are changed to reflect market conditions. Finally, the methodology is used to perform a stress testing analysis.
    Keywords: Interest rate risk, VAR, PCA, Non-normality, Non parametric methods
    JEL: C14 C19 G21
    Date: 2006–09
  3. By: Panayiotis Diamandis (Department of Business Administration, Athens University of Economics and Business); Georgios Kouretas (Department of Economics, University of Crete); Leonidas Zarangas (Department of Finance and Auditing, Technological Educational Institute of Epirus)
    Abstract: This paper provides Value-at-Risk estimates for daily stock returns with the application of various parametric univariate models that belong to the class of ARCH models which are based on the skewed Student distribution. We use daily data for three stock indexes of the Athens Stock Exchange (ASE) and three stocks of Greek companies listed in the ASE. We conduct our analysis with the adoption of the methodology suggested by Giot and Laurent (2003). Therefore, we estimate an APARCH model based on the skewed Student distribution to fully take into account the fat left and right tails of the returns distribution. We show that the estimated VaR for traders having both long and short positions in the Athens Stock Exchange is more accurately modeled by a skewed Student APARCH model that by a normal or Student distributions.
    Keywords: Value-at-Risk, risk management, APARCH models, skewed Student distribution
    JEL: C53 G21 G28
    Date: 2006–01
  4. By: Panayiotis Diamandis (Department of Business Administration, Athens University of Economics and Business); Georgios Kouretas (Department of Economics, University of Crete); Leonidas Zarangas (Department of Finance and Auditing, Technological Educational Institute of Epirus)
    Abstract: This paper provides an analysis of asset allocation using univariate portfolio GARCH models from the Athens Stock Exchange. We use daily data for the period January 1997 to February 2005. Our analysis adopts the methodology due to Manganelli (2004) and we are able to recover from the univariate approach the multivariate dimension of the portfolio allocation problem. Manganelli (2004) suggests that such a dual problem can be solved with the application of a variance sensitivity analysis which considers the change in the portfolio variance induced by an infinitesimal change in the portfolio allocation. Our main findings are based on the estimation of the variance sensitivity for a portfolio of two assets and the way sensitivity has been changing over time and this has implications for risk management. In addition we compute the second derivative of the estimated variance with respect to portfolio weights and this gives an indication of the benefits arising from diversification at any given point of time.
    Keywords: asset allocation, GARCH models, risk management, sensitivity analysis
    JEL: C53 G21 G28
    Date: 2006–02
  5. By: Abel Elizalde (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This report analyzes reduced-from credit risk models, and reviews the three main approaches to incorporate credit risk correlation among firms within the framework of reduced models. The first approach, conditionally independent defaults (CID) models, introduces credit risk dependence of the firms' default intensity processes on a common set of state variables. Contagion models extend the CID approach to account for default clustering (periods in which the firms's credit risk is increased and in which the majority of the defaults take place). Finally, default dependecies can also be accounted for using copula functions. The copula approach takes as given the marginal default probabilities of the different firms and plugs them into a copula function, which provides the model with the default dependece structure. After a description of copulas, we present two different approaches of using copula functions in intensity models, and discuss the choice and calibration of the copula function.
    Date: 2006–04
  6. By: Abel Elizalde (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This report reviews the structural approach for credit risk modelling, both considering the case of a single firm and the case with default dependences between firms. In the single firm case, we review the Merton (1974) model and first passage models, examining their main characteristics and extensions. Liquidation process models extend first passage models to account for the possibility of a lengthy liquidation process which might or might not end up in default. Finally, we review structural models with state dependet cash flows (recession vs. expansion) or debt coupons (ratingbased). The estimation of structural models is addressed, covering the different ways proposed in the literature. In the second part of the text, we present some approaches to model default dependences between firms. They account for two types of default correlations: cyclical default correlation and contagion effects. We close the paper with a brief mention of factor models. The paper pretends to be a guide to the literature, providing a comprehensive list of references and, along the way, suggesting different possible extensions for its furure development.
    Date: 2006–04
  7. By: Abel Elizalde (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: In recent years, some papers hav tried to bridge the gap between the two main approaches in credit risk modelling: structural and reduced form models. Based on incomplete information versions of standard structural models, they are able to obtain reduced form models in which the intensity of default is not given exogenously but determined endogenously within the model and it is a function of the firm's characteristics and the level of informtion that investors posses. They key element to link both approaches lies in the model's information assumptions. Using a specification of a structural model where investors do not have complete information about the dynamics of the processes which trigger the firm's default, these models derive a cumulative rate of default consistent with a reduced form model. This paper pretends to be an introduction to this literature, providing some of basic insights of the modelling structure and the main conclusion and results.
    Date: 2006–04
  8. By: Abel Elizalde (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: Some investors in the Collateralized Debt Obligations (CDOs) market have been publicly accused of not fully understanding the risks and dynamics of these products. They won't have an excuse any more. This report explains the mechanics of CDOs: their implied cash flows, the variables affecting those cash flows, their pricing, the sensitivity of CDO price to those variables, the functioning of the markets where they are traded, their different types, the conventions used for trading CDOs,...We built our description of CDOs pricing upon the Vasicek asymptotic single factor model because of its simplicity and the insights it provides regarding the pricing of CDOs. Additionally, we provide an extensive and updated review of the literature which extends the Vasicek model by relaxing its, somehow restrictive, assumptions in order to build more realistic and, as a consequence, more complicated CDO princing models.
    Date: 2006–04
  9. By: Imen Bentahar
    Abstract: In his paper we introduce a quantile-based risk measure for multivariate financial positions "the vector-valued Tail-conditional-expectation (TCE)". We adopt the framework proposed by Jouini, Meddeb, and Touzi [9] to deal with multi-assets portfolios when one accounts for frictions in the financial market. In this framework, the space of risks formed by essentially bounded random vectors, is endowed with some partial vector preorder >= accounting for market frictions. In a first step we provide a definition for quantiles of vector-valued risks which is compatible with the preorder >=. The TCE is then introduced as a natural extension of the "classical" real-valued tail-conditional-expectation. Our main result states that for continuous distributions TCE is equal to a coherent vector-valued risk measure. We also provide a numerical algorithm for computing vector-valued quantiles and TCE.
    Keywords: Risk measures, vector-valued risk measures, coherent risk-measures, quantiles, tail-conditional-expectation
    JEL: C60 G13
    Date: 2006–04
  10. By: Jose Ceron; Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This paper examines the experience of fourteen developed countries for which there are about thirty years of quarterly inflation-adjusted housing price data. Price dynamics is modelled as a combination of a country-specific component and a cyclical component is a two-state variable captures previously undocumented changes in the volatility of real housing price increases. These volatility phases are quite persistent (about six years,on average) and occur with about the same unconditional frequency over time. In line with previous studies, the mean of real housing price increases can be predicted to be larger when lagged values of those increases are large, real GDP growth is high, unemployment falls, and interest rates are low or have declined. Our findings have important implications for risk management in regard to residential property markets.
    Keywords: Housing prices, cycles, volatility, Markov switching.
    JEL: E32 G15 R31
    Date: 2006–01
  11. By: Anatolyev, Stanislav (New Economic School)
    Abstract: We study three aspects of the Russian stock market – factors influencing stock returns, integration of the stock market with world .financial markets, and market efficiency – from 1995 to present, putting emphasis on how these evolved over time. We .find many highly unstable relationships, and indeed, greater instability than that generated by financial crises alone. While most computed statistics exhibit constant ups and downs, there are recently clear tendencies in the development of the Russian stock market: a sharp rise in explainability of returns, an increased role of international financial markets, and a decrease in the profitability of trading.
    Keywords: Russia; transition; stock returns; integration; efficiency
    JEL: C22 F36 G14 G15
    Date: 2005–07–15

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