nep-rmg New Economics Papers
on Risk Management
Issue of 2007‒08‒08
eleven papers chosen by
Stan Miles
Thompson Rivers University

  1. Risk Management Theory: A comprehensive empirical assessment By Klimczak, Karol Marek
  2. Spectral risk measures and portfolio selection By Alexandre Adam; Mohamed Houkari; Jean-Paul Laurent
  3. Application of a General Risk Management Model to Portfolio Optimization Problems with Elliptical Distributed Returns for Risk Neutral and Risk Averse Decision Makers By Kaynar, B.; Birbil, S.I.; Frenk, J.B.G.
  4. An Empirical Investigation of Value-at-Risk in Long and Short Trading Positions By Kulp-Tåg, Sofie
  5. A note on the risk management of CDOs By Jean-Paul Laurent
  6. Irregularly Spaced Intraday Value at Risk (ISIVaR) Models : Forecasting and Predictive Abilities By Christophe Hurlin; Gilbert Colletaz; Sessi Tokpavi
  7. Public disclosure, risk, and performance at bank holding companies By Beverly Hirtle
  8. Forecasting Cross-Section Stock Returns using The Present Value Model By George Bulkley; Richard Holt
  9. Evaluating hedge fund performance: a stochastic dominance approach By Sheng Li; Oliver Linton
  10. Differentiation of some functionals of risk processes. By Stéphane Loisel
  11. Hedge funds, financial intermediation, and systemic risk By John Kambhu; Til Schuermann; Kevin J. Stiroh

  1. By: Klimczak, Karol Marek
    Abstract: The aim of this paper is to develop a methodology for thorough empirical testing of major contemporary corporate risk management theories: financial theory, agency theory, stakeholder theory and new institutional economics. Unlike in previous research, the tests are organised around theories, rather than individual hypotheses. I used a number of tests for robustness and subjected hypotheses to repeated testing, cross-verifying results. Evidence of tests conducted on a sample of 150 companies listed at the Warsaw Stock Exchange in Poland, covering years from 2001 to 2005, clearly point to low empirical verification of all theories considered. However, I find evidence for some theoretical determinants: currency exposure, market-to-book value, IT and service sectors and size. In conclusion I suggest implications for future empirical and conceptual research.
    Keywords: corporate risk management; hedging; derivatives; CART
    JEL: G32
    Date: 2007–07–23
  2. By: Alexandre Adam (SAF - EA2429 - Laboratoire de Science Actuarielle et Financière - [Université Claude Bernard - Lyon I]); Mohamed Houkari (SAF - EA2429 - Laboratoire de Science Actuarielle et Financière - [Université Claude Bernard - Lyon I]); Jean-Paul Laurent (SAF - EA2429 - Laboratoire de Science Actuarielle et Financière - [Université Claude Bernard - Lyon I])
    Abstract: This paper deals with risk measurement and portfolio optimization under risk constraints. Firstly we give an overview of risk assessment from the viewpoint of risk theory, focusing on moment-based, distortion and spectral risk measures. We subsequently apply these ideas to an asset management framework using a database of hedge funds returns chosen for their non- Gaussian features. We deal with the problem of portfolio optimization under risk constraints and lead a comparative analysis of efficient portfolios. We show some robustness of optimal portfolios with respect to the choice of risk measure. Unsurprisingly, risk measures that emphasize large losses lead to slightly more diversified portfolios. However, risk measures that account primarily for worst case scenarios overweight funds with smaller tails which mitigates the relevance of diversification.
    Keywords: portfolio selection; expected shortfall; distortion risk measures; spectral risk measures; hedge funds
    Date: 2007–07–26
  3. By: Kaynar, B.; Birbil, S.I.; Frenk, J.B.G. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: In this paper portfolio problems with linear loss functions and multivariate elliptical distributed returns are studied. We consider two risk measures, Value-at-Risk and Conditional-Value-at-Risk, and two types of decision makers, risk neutral and risk averse. For Value-at-Risk, we show that the optimal solution does not change with the type of decision maker. However, this observation is not true for Conditional-Value-at-Risk. We then show for Conditional-Value-at-Risk that the objective function can be approximated by Monte Carlo simulation using only a univariate distribution. To solve the equivalent Markowitz model, we modify and implement a finite step algorithm. Finally, a numerical study is conducted.
    Keywords: Elliptical distributions;Linear loss functions;Value-at-risk;Conditional value-at-risk;Portfolio optimization;Disutility;
    Date: 2007–05–24
  4. By: Kulp-Tåg, Sofie (Swedish School of Economics and Business Administration)
    Abstract: This paper uses the Value-at-Risk approach to define the risk in both long and short trading positions. The investigation is done on some major market indices(Japanese, UK, German and US). The performance of models that takes into account skewness and fat-tails are compared to symmetric models in relation to both the specific model for estimating the variance, and the distribution of the variance estimate used as input in the VaR estimation. The results indicate that more flexible models not necessarily perform better in predicting the VaR forecast; the reason for this is most probably the complexity of these models. A general result is that different methods for estimating the variance are needed for different confidence levels of the VaR, and for the different indices. Also, different models are to be used for the left respectively the right tail of the distribution.
    Keywords: Value-at-Risk; asymmetry; Exponential GARCH; Asymmetric Power ARCH; long-trading; short-trading
    Date: 2007–04–13
  5. By: Jean-Paul Laurent (SAF - EA2429 - Laboratoire de Science Actuarielle et Financière - [Université Claude Bernard - Lyon I])
    Abstract: The purpose of this note is to describe a risk management procedure applicable to options on large credit portfolios such as CDO tranches on iTraxx or CDX. Credit spread risk is dynamically hedged using single name defaultable claims such as CDS while default risk is kept under control thanks to diversification. The proposed risk management approach mixes ideas from finance and insurance and departs from standard approaches used in incomplete markets such as mean-variance hedging or expected utility maximisation. In order to ease the analysis and the exposure, default dates follow a multivariate Cox process.
    Keywords: CDOs; default risk; credit spread risk; dynamic hedging; diversification, large portfolios; incomplete markets; Cox process; doubly stochastic Poisson process
    Date: 2007–07–27
  6. By: Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Gilbert Colletaz (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Sessi Tokpavi (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans])
    Abstract: The objective of this paper is to propose a market risk measure defined in price event time and a suitable backtesting procedure for irregularly spaced data. Firstly, we combine Autoregressive Conditional Duration models for price movements and a non parametric quantile estimation to derive a semi-parametric Irregularly Spaced Intraday Value at Risk (ISIVaR) model. This ISIVaR measure gives two information: the expected duration for the next price event and the related VaR. Secondly, we use a GMM approach to develop a backtest and investigate its finite sample properties through numerical Monte Carlo simulations. Finally, we propose an application to two NYSE stocks.
    Keywords: Value at Risk; High-frequency data; ACD models; Irregularly spaced market risk models; Backtesting
    Date: 2007–07–13
  7. By: Beverly Hirtle
    Abstract: This paper examines the relationship between the amount of information disclosed by bank holding companies (BHCs) and their subsequent risk profile and performance. Using data from the annual reports of BHCs with large trading operations, we construct an index of publicly disclosed information about the BHCs? forward-looking estimates of market risk exposure in their trading and market-making activities. The paper then examines the relationship between this index and the subsequent risk and return in both the BHCs? trading activities and the firm overall, as proxied by equity market returns. The key findings are that more disclosure is associated with lower risk, especially idiosyncratic risk, and in turn with higher risk-adjusted returns. These findings suggest that greater disclosure is associated with more efficient risk taking and thus improved risk-return trade-offs, although the direction of causation is unclear.
    Keywords: Bank holding companies ; Risk assessment ; Financial risk management
    Date: 2007
  8. By: George Bulkley; Richard Holt
    Abstract: We contribute to the debate over whether forecastable stock returns reflect an unexploited profit opportunity or rationally reflect risk differentials. We test whether agents could earn excess returns by selecting stocks which have a low market price compared to an estimate of the fundamental value obtained from the present value model. The criterion for stock picking is one which could actually have been implemented by agents in real time. We show that statistically significant, and quantitatively substantial, excess returns are delivered by portfolios of stocks which are cheap relative to our estimate of fundamental value. There is no evidence that the under priced stocks are relatively risky and hence excess returns cannot easily be interpreted as an equilibrium compensation for risk.
    Keywords: Excess returns, Trading rule, Efficient markets, Present value model, Stock prices.
    JEL: G12 G14
  9. By: Sheng Li; Oliver Linton
    Abstract: We introduce a general and flexible framework for hedge fund performance evaluation and asset allocation: stochastic dominance (SD) theory. Our approach utilizes statistical tests for stochastic dominance to compare the returns of hedge funds. We form hedge fund portfolios by using SD criteria and examine the out-of-sample performance of these hedge fund portfolios. Compared to performance of portfolios of randomly selected hedge funds and mean-variance efficient hedge funds, our results show that fund selection method based on SD criteria greatly improves the performance of hedge fund portfolio.Keywords: Alpha; Mean Variance analysis; Portfolio; Risk Return
    Date: 2007–07
  10. By: Stéphane Loisel (SAF - EA2429 - Laboratoire de Science Actuarielle et Financière - [Université Claude Bernard - Lyon I])
    Abstract: For general risk processes, the expected time-integrated negative part of the process on a fixed time interval is introduced and studied. Differentiation theorems are stated and proved. They make it possible to derive the expected value of this risk measure, and to link it with the average total time below zero studied by Dos Reis (1993) and the probability of ruin. Differentiation of other functionals of unidimensional and multidimensional risk processes with respect to the initial reserve level are carried out. Applications to ruin theory, and to the determination of the optimal allocation of the global initial reserve which minimizes one of these risk measures, illustrate the variety of application fields and the benefits deriving from an efficient and effective use of such tools.
    Keywords: Ruin theory; Sample path properties; Optimal allocation; Multidimensional risk process; Risk measures
    Date: 2007–07–26
  11. By: John Kambhu; Til Schuermann; Kevin J. Stiroh
    Abstract: Hedge funds are significant players in the U.S. capital markets, but differ from other market participants in important ways such as their use of a wide range of complex trading strategies and instruments, leverage, opacity to outsiders, and their compensation structure. The traditional bulwark against financial market disruptions with potential systemic consequences has been the set of counterparty credit risk management (CCRM) practices by the core of regulated institutions. The characteristics of hedge funds make CCRM more difficult as they exacerbate market failures linked to agency problems, externalities, and moral hazard. While various market failures may make CCRM imperfect, it remains the best line of defense against systemic risk.
    Keywords: Hedge funds ; Financial markets ; Financial risk management ; Capital market
    Date: 2007

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