New Economics Papers
on Risk Management
Issue of 2006‒12‒04
seven papers chosen by

  1. Credit Cycles, Credit Risk, and Prudential Regulation By Jesus, Saurina; Gabriel, Jimenez
  2. On Bounds for Concave Distortion Risk Measures for Sums of Risks By Antonella Campana; Paola Ferretti
  3. Time-Varying Exchange Rate Exposure and Exchange Rate Pass-Through By Kizys, Renatas; Pierdzioch, Christian
  4. Contagion effect in banking system - measures based on randomised loss scenarios By Hałaj, Grzegorz
  5. Risk-based decisions on assets structure of a bank — partially observed economic conditions By Hałaj, Grzegorz
  6. Long memory and non-linearity in Stock Markets By Bond, Derek; Dyson, Kenneth
  7. Institutional investors and stock market efficiency: The case of the January anomaly By Bohl, Martin T.; Gottschalk, Katrin; Pál, Rozália

  1. By: Jesus, Saurina; Gabriel, Jimenez
    Abstract: This paper finds strong empirical support of a positive, although quite lagged, relationship between rapid credit growth and loan losses. Moreover, it contains empirical evidence of more lenient credit standards during boom periods, both in terms of screening of borrowers and in collateral requirements. We find robust evidence that during upturns, riskier borrowers get bank loans, while collateralized loans decrease. We develop a regulatory prudential tool, based on a countercyclical, or forward-looking, loan loss provision that takes into account the credit risk profile of banks’ loan portfolios along the business cycle. Such a provision might contribute to reinforce the soundness and the stability of banking systems.
    Keywords: credit risk; lending cycles; loan loss provisions; bank capital; collateral
    JEL: G00 G0
    Date: 2006–03–20
  2. By: Antonella Campana (Department SEGeS, University of Molise); Paola Ferretti (Department of Applied Mathematics, University of Venice)
    Abstract: In this paper we consider the problem of studying the gap between bounds of risk measures for sums of non-independent random variables. Owing to the choice of the context where to set the problem, namely that of distortion risk measures, we first deduce an explicit formula for the risk measure of a discrete risk by referring to its writing as sum of layers. Then, we examine the case of sums of discrete risks with identical distribution. Upper and lower bounds for risk measures of sums of risks are presented in the case of concave distortion functions. Finally, the attention is devoted to the analysis of the gap between risk measures of upper and lower bounds, with the aim of optimizing it.
    Keywords: Distortion risk measures, discrete risks, concave risk measure, upper and lower bounds, gap between bounds
    JEL: D81
    Date: 2006
  3. By: Kizys, Renatas; Pierdzioch, Christian
    Abstract: We report evidence of a time-varying link between returns on national stock market indexes and exchange rate returns (exchange rate exposure). We use this evidence to make inferences regarding the potential sources of changes over time in exchange rate pass-through. Using monthly data for 14 industrialized countries for the period 1975–2006, we document the existence of a long-run cointegration relation between exchange rate exposure and the industry composition of a country’s imports. The evidence of a cointegration relation between exchange rate exposure and openness to trade is weak. Our findings also suggest that, in the short run, exchange rate exposure is not endogenous to a country’s rate of inflation or to inflation uncertainty.
    Keywords: Stock market returns; exchange rate exposure; exchange rate pass-through
    JEL: F31 F37 G15
    Date: 2006–10
  4. By: Hałaj, Grzegorz
    Abstract: Measures of risk of domino effect (contagion) transmitted through interbank market are discussed and results on implementation of measurement procedure in banking sector are presented. It is shown how a very limited set of available data – interbank exposures and information from balance sheets and profit a loss accounts – can help in generating randomised scenarios of possible losses related to market and credit risk.
    Keywords: Contagion; banking system; interbank
    JEL: C62 G21
    Date: 2006–10
  5. By: Hałaj, Grzegorz
    Abstract: A model of bank’s dynamic asset management problem in case of partially observed future economic conditions and requirements concerning level of risk taken has been built. It requires solving the resulting optimal control with random terminal condition resulting from partial observation of parameter of maximized functional. Stochastic Maximum Principle reduces the problem to solving FBSDE. As optimization may usually imply dependence of forward equation on solutions of backward equation we allow the drift and diffusion of forward part to be functions of solution of backward equation. The necessary conditions for existence of solutions of FBSDE in such a form have been derived. A numerical scheme is then implemented for a particular choice of parameters of the problem.
    Keywords: Portfolio optimization; bank’s assets; partial observation; stochastic maximum principle; + FBSDEs.
    JEL: C61 G11
    Date: 2006–08–06
  6. By: Bond, Derek; Dyson, Kenneth
    Abstract: In this paper the long memory and non-linear properties of share prices in the UK’s Stock Exchange and AIM are explored. The results suggest that the most commonly traded shares exhibit long memory thus raising interesting issues about the validity of normal assumptions of market efficiencies.
    Keywords: Efficient Markets; Long Memory; Nonlinear Models
    JEL: G14 C22
    Date: 2006–09
  7. By: Bohl, Martin T.; Gottschalk, Katrin; Pál, Rozália
    Abstract: In this paper, we investigate the effect of institutional investors on the January stock market anomaly. The Polish and Hungarian pension system reforms and the associated increase in investment activities of pension funds are used as a unique institutional characteristic to provide evidence on the impact of individual versus institutional investors on the January effect. We find robust empirical results that the increase in institutional ownership has reduced the magnitude of an anomalous January effect induced by individual investors’ trading behavior.
    Keywords: Institutional traders; Individual investors; January effect; Polish and Hungarian pension fund investors
    JEL: G14 G23
    Date: 2006–03

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