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on Risk Management |
| By: | Antje Berndt (Tepper School of Business, GSIA Room 317A, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213, USA.); Iulian Obreja (Tepper School of Business, GSIA Room 317A, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213, USA.) |
| Abstract: | This paper investigates the determinants of the default risk premia embedded in the European credit default swap spreads. Using a modified version of the intertemporal capital asset pricing model, we show that default risk premia represent compensation for bearing exposure to systematic risk and to a new common factor capturing the proneness of the asset returns to extreme events. This new factor arises naturally because the returns on defaultable securities are more likely to have fat tails. The pricing implications of this new factor are not limited to credit markets only. We find that this common factor is priced consistently across a broad spectrum of corporate bond portfolios. In addition, our asset pricing tests also document patterns that are consistent with the so called "flight to quality" effect. JEL Classification: G12, G13, G15. |
| Keywords: | Credit default swap, default risk premium, European credit market, European corporate bond markets, risk factors. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070805&r=rmg |
| By: | J. ANNAERT; G. DEELSTRA; D. HEYMAN; M. VANMAELE |
| Abstract: | In this paper, we elaborate a formula for determining the optimal strike price for a bond put option, used to hedge a position in a bond. This strike price is optimal in the sense that it minimizes, for a given budget, either Value-at-Risk or Tail Value-at-Risk. Formulas are derived for both zero-coupon and coupon bonds, which can also be understood as a portfolio of bonds. These formulas are valid for any short rate model that implies an affine term structure model and in particular that implies a lognormal distribution of future zero-coupon bond prices. As an application, we focus on the Hull-White one-factor model, which is calibrated to a set of cap prices. We illustrate our procedure by hedging a Belgian government bond, and take into account the possibility of divergence between theoretical option prices and real option prices. This paper can be seen as an extension of the work of Ahn et al. (1999), who consider the same problem for an investment in a share. |
| Keywords: | (Tail) Value-at-Risk, bond hedging, affine term structure model |
| JEL: | G11 C61 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:07/465&r=rmg |
| By: | Spargoli, Fabrizio (Università Politecnica delle Marche); Zagaglia, Paolo (Dept. of Economics, Stockholm University) |
| Abstract: | This paper studies the comovements between the daily returns of forwards on natural gas traded in the NYMEX with maturity of 1, 2 and 3 months. We identify a structural multivariate BEKK model using a recursive assumption whereby shocks to the volatility of the returns are transmitted from the short to the long section of the forward curve. We find strong evidence of spillover effects both in the conditional first and second moments. In the conditional mean, we show that the transmission mechanism operates from the longer to the shorter maturity. In terms of reducedform conditional second moments, the shortest the maturity, the higher the volatility of the return, and the more the returns become independent from the others and follow the dynamics of the underlying commodity. The evidence from the structural second moments indicates that the longer the maturity is, the higher is the uncertainty about the returns. We also show that the higher the structural variance of a return relative to that of another return, the stronger the correlation is between the two. |
| Keywords: | natural gas prices; forward markets; GARCH; structural VAR |
| JEL: | C22 G19 |
| Date: | 2007–08–23 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2007_0016&r=rmg |
| By: | Colavecchio , Roberta (BOFIT); Funke, Michael (BOFIT) |
| Abstract: | This paper estimates switching autoregressive conditional heteroscedasticity (SWARCH) time series models for weekly returns of nine Asian forward exchange rates. We find two regimes with different volatility levels, whereby each regime displays considerable persistence. Our analysis provides evidence that the knock-on effects from China´s U.S. dollar future rates upon other Asian countries have been modest, in that little evidence exists for co-dependence of volatility regimes. |
| Keywords: | China; renminbi; Asia; forward exchange rates; non-deliverable forward market; SWARCH models |
| JEL: | C22 F31 F36 |
| Date: | 2007–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2007_017&r=rmg |
| By: | Haibin Zhu |
| Abstract: | This paper develops a stochastic dynamic model to examine the impact of capital regulation on banks' financial decisions. In equilibrium, lending decisions, capital buffer and the probability of bank failure are endogenously determined. Compared to a flat-rate capital rule, a risk-sensitive capital standard causes the capital requirement to be much higher for small (and riskier) banks and much lower for large (and less risky) banks. Nevertheless, changes in actual capital holdings are less pronounced due to the offsetting effect of capital buffers. Moreover, the non-binding capital constraint in equilibrium implies that banks adopt an active portfolio strategy and hence the counter-cyclical movement of risk-based capital requirements does not necessarily lead to a reinforcement of the credit cycle. In fact, the results from the calibrated model show that the impact on cyclical lending behavior differs substantially across banks. Lastly, the analysis suggests that the adoption of a more risk-sensitive capital regime can be welfare-improving from a regulator's perspective, in that it causes less distortion in loan decisions and achieves a better balance between safety and efficiency. |
| Keywords: | Capital requirement, economic capital, regulatory capital, actual capital holding, procyclicality effect, dynamic programming, prudential regulation |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:232&r=rmg |