nep-rmg New Economics Papers
on Risk Management
Issue of 2007‒05‒12
eight papers chosen by
Stan Miles
Thompson Rivers University

  1. Simulation based approach for measuring concentration risk By Kim, Joocheol; Lee, Duyeol
  2. Global Currency Hedging By John Y. Campbell; Karine Serfaty-de Medeiros; Luis M. Viceira
  3. Carry Trades: Betting Against Safe Haven By Daniel Kohler
  4. Understanding Index Option Returns By Broadie, Mark; Chernov, Mikhail; Johannes, Michael
  5. An Integrated CVaR and Real Options Approach to Investments in the Energy Sector By Fortin, Ines; Fuss, Sabine; Hlouskova, Jaroslava; Khabarov, Nikolay; Obersteiner, Michael; Szolgayova, Jana
  6. Testing for Granger causality between stock prices and economic growth By Foresti, Pasquale
  7. Recent Performance Analysis of Mutual Funds in Brazil By Fonseca, Nelson; Bressan, Aureliano; Iquiapaza, Robert; Guerra, João
  8. Evaluating Structural Models for the U.S. Short Rate Using EMM and Particle Filters By Drew Creal; Ying Gu; Eric Zivot

  1. By: Kim, Joocheol; Lee, Duyeol
    Abstract: Asymptotic Single Risk Factor (ASRF) model is used to derive the regulatory capital formula of Internal Ratings-Based approach in the new Basel accord (Basel II). One of the important assumptions in ASRF model for credit risk is that the given portfolio is well diversified so that one can easily calculate the required capital level by focusing only on systematic risk. In real world, however, idiosyncratic risk of a portfolio cannot be fully diversified away, causing the so called concentration risk problem. In this paper we suggest simulation based approach for measuring concentration risk using bank capital dynamic model. This approach is especially suitable for a portfolio with relatively small to medium number of obligors and relatively large sized loans
    Keywords: Basel II; ASRF model; credit risk; concentration risk
    JEL: G33 G32 G38
    Date: 2007–02–01
  2. By: John Y. Campbell; Karine Serfaty-de Medeiros; Luis M. Viceira
    Abstract: This paper considers the risk management problem of an investor who holds a diversified portfolio of global equities or bonds and chooses long or short positions in currencies to manage the risk of the total portfolio. Over the period 1975-2005, we find that a risk-minimizing global equity investor should short the Australian dollar, Canadian dollar, Japanese yen, and British pound but should hold long positions in the US dollar, the euro, and the Swiss franc. The resulting currency position tends to rise in value when equity markets fall. This strategy works well for investment horizons of one month to one year. In the past 15 years the risk-minimizing demand for the dollar appears to have weakened slightly, while demands for the euro and Swiss franc have strengthened. These changes may reflect the growing role for the euro as a reserve currency in the international financial system. The risk-minimizing currency strategy for a global bond investor is close to a full currency hedge, with a modest long position in the US dollar. Risk-reducing currencies have had lower average returns during our sample period, but the difference in average returns is smaller than would be implied by the global CAPM given the historical equity premium.
    JEL: F3 F31 G11 G12 G15
    Date: 2007–05
  3. By: Daniel Kohler
    Abstract: We examine contagion and flight-to-quality phenomena implied by carry strategies. More specifically, we analyze correlation dynamics between returns on a global equity index and returns on an investment strategy with a long position in high-yield and a short position in low-yield markets. Modeling information spillovers in a multivariate GARCH framework reveals that correlation increases considerably in response to a negative stock market shock. Moreover, a test for symmetry in exceedance correlation shows that correlation is indeed significantly larger for joint market downturns as opposed to joint market upturns. Our findings suggest that conditional correlation exposes carry traders to a severe diversification meltdown in times of global stock market crises.
    Keywords: Carry trades, contagion, multivariate GARCH, exceedance correlation
    JEL: C32 F31
    Date: 2007–04
  4. By: Broadie, Mark; Chernov, Mikhail; Johannes, Michael
    Abstract: This paper studies the returns from investing in index options. Previous research documents significant average option returns, large CAPM alphas, and high Sharpe ratios, and concludes that put options are mispriced. We propose an alternative approach to evaluate the significance of option returns and obtain different conclusions. Instead of using these statistical metrics, we compare historical option returns to those generated by commonly used option pricing models. We find that the most puzzling finding in the existing literature, the large returns to writing out-of-the-money puts, is not even inconsistent with the Black-Scholes model. Moreover, simple stochastic volatility models with no risk premia generate put returns across all strikes that are not inconsistent with the observed data. At-the-money straddle returns are more challenging to understand, and we find that these returns are not inconsistent with explanations such as jump risk premia, Peso problems, and estimation risk.
    Keywords: jump risk premia; jump-diffusion models; options returns; put pricing puzzle
    JEL: C13 G12 G13
    Date: 2007–05
  5. By: Fortin, Ines (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Fuss, Sabine (University of Maastricht/UNU-Merit, Maastricht, The Netherlands); Hlouskova, Jaroslava (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Khabarov, Nikolay (International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria); Obersteiner, Michael (International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria); Szolgayova, Jana (International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria)
    Abstract: The objective of this paper is to combine a real options framework with portfolio optimization techniques and to apply this new framework to investments in the electricity sector. In particular, a real options model is used to assess the adoption decision of particular technologies under uncertainty. These technologies are coal-fired power plants, biomassfired power plants and onshore wind mills, and they are representative of technologies based on fossil fuels, biomass and renewables, respectively. The return distributions resulting from this analysis are then used as an input to a portfolio optimization, where the measure of risk is the Conditional Value-at-Risk (CVaR).
    Keywords: Portfolio optimization, CVaR, climate change policy, uncertainty, real options, electricity, investments
    JEL: C61 D81 D92 G11 Q4 Q56 Q58
    Date: 2007–05
  6. By: Foresti, Pasquale
    Abstract: This paper has focused on the relationship between stock market prices and growth. A Granger-causality analysis has been carried out in order to assess whether there is any potential predictability power of one indicator for the other. The conclusion that can be drawn is that stock market prices can be used in order to predict growth, but the opposite it is not true.
    JEL: C22 E37
    Date: 2006
  7. By: Fonseca, Nelson; Bressan, Aureliano; Iquiapaza, Robert; Guerra, João
    Abstract: This study analyzes the performance of Brazilian Investment Funds between May 2001 and May 2006, using as a guideline the division in fixed-income funds and equity funds. The performance is evaluated in terms of risk and return, using Sharpe and Sortino indexes, with the returns and volatilities being also analyzed through t and F tests. The results indicate that the two categories did not present any significant statistical difference in terms of the mean return in the period. However, differences in the variance along the period generated a better risk x return relation for the fixed income funds, a result that is associated with the high interest rates that were experienced during that period.
    Keywords: Investment funds; Sharpe index; Sortino index.
    JEL: G11 G23
    Date: 2007–04
  8. By: Drew Creal; Ying Gu; Eric Zivot
    Abstract: We combine the efficient method of moments with appropriate algorithms from the optimal filtering literature to study a collection of models for the U.S. short rate. Our models include two continuous-time stochastic volatility models and two regime switching models, which provided the best fit in previous work that examined a large collection of models. The continuous-time stochastic volatility models fall into the class of nonlinear, non-Gaussian state space models for which we apply particle filtering and smoothing algorithms. Our results demonstrate the effectiveness of the particle filter for continuous-time processes. Our analysis also provides an alternative and complementary approach to the reprojection technique of Gallant and Tauchen (1998) for studying the dynamics of volatility.
    Date: 2006–08

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