nep-rmg New Economics Papers
on Risk Management
Issue of 2007‒02‒24
three papers chosen by
Stan Miles
Thompson Rivers University

  1. Sound practices for the management of operational risk in financial institutions (in Spanish) By Pailhé, Cristina; Delfiner, Miguel; Mangialavori, Ana
  2. Implied default barrier in credit default swap premia By Francisco Alonso; Santiago Forte; José M. Marqués
  3. The Business Cycle and the Equity Risk Premium in Real Time By Kizys, Renatas; Pierdzioch, Christian

  1. By: Pailhé, Cristina; Delfiner, Miguel; Mangialavori, Ana
    Abstract: The Basel Committee on Banking Supervision (BCBS) has defined operational risk (OR) as the risk of loss resulting from inadequate or failed internal processes, people and systems from external events. This definition includes legal risk, but excludes strategic and reputational risk. Traditionally, individual OR management has been an important part of financial institutions’ efforts to avoid frauds and to keep the integrity of internal controls, among other aspects. Nevertheless, what is quite new is the fact of considering OR management as a comprehensive practice similar to the management of other risks (such as credit or market risk), and the measurement of losses due to OR events and the requirement of regulatory capital. Considering OR as an inclusive risk category, the BCBS has outlined a set of sound practices for the management and supervision of this risk. This document analyses those sound practices and their application in internationally active banks. A sample of Latin American countries which have published regulations on sound practices about this matter, is analyzed. It has to be emphasized that many countries in the region have established regulations in order to promote the adoption of OR management structures based on BCBS principles.
    Keywords: Operational risk; Basel Committee; sound practices
    JEL: G21 G28
    Date: 2007–01
  2. By: Francisco Alonso (Banco de España); Santiago Forte (ESADE - Universitat Ramon Llull); José M. Marqués (Banco de España)
    Abstract: This paper applies the methodology developed by Forte and Peña (2006) to extract the implied default point in the premium on credit default swaps (CDS). As well as considering a more extensive international sample of corporations (96 US, European and Japanese companies) and a longer time interval (2001-2004), we make two significant contributions to the original methodology. First, we calibrate bankruptcy costs, allowing for the adjustment of the mean recovery rate of each sector to its historical average. Second, and drawing on the sample of default point indicators for each company-year obtained, we propose an econometric model for these indicators that excludes any reference to the credit derivatives market. With this model it is thus possible to estimate the default barrier resorting solely to the equity market. Compared with other alternatives for setting the default point in the absence of CDS (such as the optimal default point for shareholders, the default point in the Moody’s-KMV model or the face value of the debt), the out-of-sample use of the econometric model significantly improves the capacity of the structural model proposed by Forte and Peña (2006) to differentiate between companies with an investment grade rating (CDS less than 150 bp) and those with a non-investment grade rating.
    Keywords: credit risk, structural model, credit default swap, implied default barrier
    JEL: G13 G33
    Date: 2006–12
  3. By: Kizys, Renatas; Pierdzioch, Christian
    Abstract: Building on the stochastic discount factor model, we estimated a multivariate exponential GARCH-in-mean model to analyze the link between the business cycle and the equity risk premium in the United States. In order to measure the business cycle, we used revised and real-time monthly data on industrial production for the period from 1963 to 2006. The main result of our empirical analysis is that estimates of the equity risk premium based on real-time data may significantly differ from estimates of the equity risk premium based on revised data.
    Keywords: Stochastic discount factor model; multivariate exponential GARCH-in-mean model; United States; equity risk premium; real-time macroeconomic data
    JEL: E44 G12 C32 E32
    Date: 2007–02

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