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on Risk Management |
| By: | Stéphane Loisel (SAF - EA2429 - Laboratoire de Science Actuarielle et Financière - [Université Claude Bernard - Lyon I]); Christian Mazza (Département de Mathématiques - [Université de Fribourg]); Didier Rullière (SAF - EA2429 - Laboratoire de Science Actuarielle et Financière - [Université Claude Bernard - Lyon I]) |
| Abstract: | We consider the classical risk model and carry out a sensitivity and robustness analysis of finite-time ruin probabilities. We provide algorithms to compute the related influence functions. We also prove the weak convergence of a sequence of empirical finite-time ruin probabilities starting from zero initial reserve toward a Gaussian random variable. We define the concepts of reliable finite-time ruin probability as a Value-at-Risk of the estimator of the finite-time ruin probability. To control this robust risk measure, an additional initial reserve is needed and called Estimation Risk Solvency Margin (ERSM). We apply our results to show how portfolio experience could be rewarded by cut-offs in solvency capital requirements. An application to catastrophe contamination and numerical examples are also developed. |
| Keywords: | Finite-time ruin probability; robustness; Solvency II; reliable ruin probability; asymptotic Normality; influence function; Estimation Risk Solvency Margin (ERSM) |
| Date: | 2007–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:hal-00168714_v1&r=rmg |
| By: | Stéphane Loisel (SAF - EA2429 - Laboratoire de Science Actuarielle et Financière - [Université Claude Bernard - Lyon I]); Christian Mazza (Département de Mathématiques - [Université de Fribourg]); Didier Rullière (SAF - EA2429 - Laboratoire de Science Actuarielle et Financière - [Université Claude Bernard - Lyon I]) |
| Abstract: | The classical risk model is considered and a sensitivity analysis of finite-time ruin probabilities is carried out. We prove the weak convergence of a sequence of empirical finite-time ruin probabilities. So-called partly shifted risk processes are introduced, and used to derive an explicit expression of the asymptotic variance of the considered estimator. This provides a clear representation of the influence function associated with finite time ruin probabilities, giving a useful tool to quantify estimation risk according to new regulations. |
| Keywords: | Finite-time ruin probability; robustness; Solvency II; reliable ruin probability; asymptotic normality; influence function; partly shifted risk process; Estimation Risk Solvency Margin. (ERSM). |
| Date: | 2007–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:hal-00168716_v1&r=rmg |
| By: | Claude Lefèvre (Département de Mathématique - [Université Libre de Bruxelles]); Stéphane Loisel (SAF - EA2429 - Laboratoire de Science Actuarielle et Financière - [Université Claude Bernard - Lyon I]) |
| Abstract: | This paper is concerned with the problem of ruin in the classical compound binomial and compound Poisson risk models. Our primary purpose is to extend to those models an exact formula derived by Picard and Lefèvre (1997) for the probability of (non-)ruin within finite time. First, a standard method based on the ballot theorem and an argument of Seal-type provides an initial (known) formula for that probability. Then, a concept of pseudo-distributions for the cumulated claim amounts, combined with some simple implications of the ballot theorem, leads to the desired formula. Two expressions for the (non-)ruin probability over an infinite horizon are also deduced as corollaries. Finally, an illustration within the framework of Solvency II is briefly presented. |
| Keywords: | ruin probability; finite and infinite horizon; compound binomial model; compound Poisson model; ballot theorem; pseudo-distributions; Solvency II; Value-at-Risk. |
| Date: | 2007–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:hal-00168958_v1&r=rmg |
| By: | Blitz, D.C.; Vliet, P. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | We present empirical evidence that stocks with low volatility earn high risk-adjusted returns. The annual alpha spread of global low versus high volatility decile portfolios amounts to 12% over the 1986-2006 period. We also observe this volatility effect within the US, European and Japanese markets in isolation. Furthermore, we find that the volatility effect cannot be explained by other well-known effects such as value and size. Our results indicate that equity investors overpay for risky stocks. Possible explanations for this phenomenon include (i) leverage restrictions, (ii) inefficient two-step investment processes, and (iii) behavioral biases of private investors. In order to exploit the volatility effect in practice we argue that investors should include low risk stocks as a separate asset class in the strategic asset allocation phase of their investment process. |
| Keywords: | alpha;strategic asset allocation;volatility;volatility effect;low risk stocks;CAPM;Fama-French factors;international; |
| Date: | 2007–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:300011717&r=rmg |
| By: | Massimo Guidolin; Giovanna Nicodano |
| Abstract: | In the context of an international portfolio diversification problem, we find that small capitalization equity portfolios become riskier in bear markets, i.e. display negative co-skewness with other stock indices and high co-kurtosis. Because of this feature, a power utility investor ought to hold a well-diversified portfolio, despite the high risk premium and Sharpe ratios offered by small capitalization stocks. On the contrary small caps command large optimal weights when the investor ignores variance risk, by incorrectly assuming joint normality of returns. The dominant factor in inducing such shifts in optimal weights is represented by the co-skewness, the predictable, time-varying covariance between returns and volatilities. We calculate that if an investor were to ignore co-skewness and co-kurtosis risk, he would suffer a certainty-equivalent reduction in utility equal to 300 basis points per year under the steady-state distribution for returns. Our results are qualitatively robust when both European and North American small caps are introduced in the analysis. Therefore this paper offers robust evidence that predictable covariances between means and variances of stock returns may have a first order effect on portfolio composition. |
| Keywords: | Investments, Foreign ; Stocks |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-030&r=rmg |
| By: | Saleem, Kashif; Vaihekoski, Mika |
| Abstract: | In this paper we study international asset pricing models and pricing of global and local sources of risk in the Russian stock market using weekly data from 1999 to 2006. In our empirical specification, we utilize and extend the multivariate GARCH-M framework of De Santis and Gérard (1998), by allowing conditional local influence as well. Similar to them we find global risk to be time-varying. Currency risk also found to be priced and highly time varying in the Russian market. Moreover, our results suggest that the Russian market is partially segmented and local risk is also priced in the market. The model also implies that the biggest impact on the US market risk premium is coming from the world risk component whereas the Russian risk premium is on average caused mostly by the local and currency risk components. |
| Keywords: | international asset pricing models; segmentation; currency risk; multivariate GARCH-M; Russia |
| JEL: | G15 G12 |
| Date: | 2007–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4795&r=rmg |
| By: | Wang, Fan |
| Abstract: | High loan-to-value (LTV) mortgage are residential mortgage loans with LTV ratio greater or equal to 90\%. Lenders are increasingly engaged in risk-based pricing. If properly quantified, the additional credit risk taken when originating high LTV mortgage can be compensated by higher interest rate charged to customers. High LTV mortgage is regulated to meet higher capital requirement and thus have higher funding cost. Current regulation raises regulatory capital requirement of banks on all high LTV mortgage holdings. However, it is not efficient to differentiate the risk between a high LTV first mortgage and a second lien mortgage with the same LTV. In the paper, I show how LTV ratio affects credit risk in mortgage. A structured credit modeling approach is taken to quantify the credit risk of first mortgage and second mortgage. The total risk in a combination of first and second mortgage is shown to be equal to that of a first mortgage with the same aggregate LTV. Default risk is derived implicitly. Optionality of defaultable debt results in an upward sloping credit supply curve in terms of a function of interest rate with respect to LTV. Current regulation in high LTV mortgage creates a funding advantage in seperating a high LTV mortgage into a lower funding cost first mortgage and a higher cost second mortgage. |
| Keywords: | mortgage lending; risk-based pricing; credit risk; regulatory capital |
| JEL: | G21 |
| Date: | 2007–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4788&r=rmg |
| By: | Andreas Billmeier; Isabella Massa |
| Abstract: | Similar to other emerging economies, the Egyptian stock market has recently experienced a remarkable run-up but also a major downturn. This paper analyzes the stock market from two angles. First, it compares the performance of the major stock price index with its underlying fundamentals. Second, it explores the relationship between the Egyptian and other stock markets. The paper finds that (i) there is some evidence against a stable relationship between the Egyptian index and its fundamental value; and (ii) short-term correlations and long-term cointegrating relations provide conflicting signals on the value of Egyptian stocks as a means of diversification. |
| Date: | 2007–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/179&r=rmg |
| By: | Jérôme Lahaye; Sébastien Laurent; Christopher J. Neely |
| Abstract: | We analyze and assess the impact of macroeconomic announcements on the discontinuities in many assets: stock index futures, bond futures, exchange rates, and gold. We use bi-power variation and the recently proposed non-parametric techniques of Lee and Mykland (2006) to extract jumps. Beyond characterizing the jump and cojump dynamics of many assets, we analyze how news arrival causes jumps and cojumps and estimate limited-dependent-variable models to quantify the impact of surprises. We confirm previous findings that some surprises create jumps. However, many announce-ments do not create jumps and many jumps are not related to announcements. The propensity of surprises to create jumps differs across asset classes, i.e., exchange rates, bonds, stock index. Payroll announcements are most important on stocks and bonds futures markets. Trade related news often creates cojumps on exchange rate markets. |
| Keywords: | Foreign exchange rates ; Bond market |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-032&r=rmg |
| By: | Giulio PALOMBA ([n.a.]); Caterina LUCARELLI (Universita' Politecnica delle Marche, Dipartimento di Economia) |
| Abstract: | This paper investigates the Chinese mainland Stock Exchanges and their following;interconnecting features: savers' attitude towards stock investments,;investors' trading behaviour and stock returns explanations. We evaluate;the eectiveness of the recent eorts made by the Chinese authorities to;improve the level of legal protections for shareholders and the opening-up;of the Chinese Stock Markets to foreign investors. The whole analysis is;carried out through a system of simultaneous equations. The main results;are that Chinese shareholders and stock markets are mostly driven by emotional;behaviour. Stock market returns are barely influenced by the overall;chinese economic booming, but reveal the presence of speculative influences.;Investors' behaviour, as well as general trading activities, hardly seems to;be aected by the legal framework introduced by the national Authorities. |
| Keywords: | chinese stock exchanges, corporate governance, investors' behaviour, shareholders' rights, system of simultaneous equations |
| JEL: | C30 F30 G18 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wpaper:297&r=rmg |
| By: | Aaro Hazak; Kadri Männasoo |
| Abstract: | The present paper contributes to the research on the indicators that provide a warning of company failure by employing micro and macro variables within a framework of survival analysis using a sample of 0.4 million companies from the European Union (EU). The sensitivity of the results is checked using two complementary event definitions - bankruptcy and negative equity. Our results imply that the baseline hazard of a default is a U-shaped function of the time the company has survived. High leverage and a low return on assets appear to be strong predictors of failure. Macroeconomic variables give mixed evidence for old and new member states as well as for the two default definitions |
| Keywords: | corporate default, bankruptcy, survival analysis |
| JEL: | G33 C41 |
| Date: | 2007–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2007-10&r=rmg |