nep-rmg New Economics Papers
on Risk Management
Issue of 2007‒09‒24
four papers chosen by
Stan Miles
Thompson Rivers University

  1. Asset pricing and predictability of stock returns in the french market By Ellouz, Siwar; Bellalah, Mondher
  2. What about Underevaluating Operational Value at Risk in the Banking Sector? By Georges Dionne; Hela Dahen
  3. Sophistication in Risk Management, Bank Equity, and Stability By Jan Wenzelburger; Hans Gersbach
  4. The effect of realised volatility on stock returns risk estimates By Aurea Grane; Helena Veiga

  1. By: Ellouz, Siwar; Bellalah, Mondher
    Abstract: This paper studies the predictability of returns in the French stock market. It provides an analysis of predictable components of monthly common stock returns. We study a single-beta conditional model and we show that stock market risk premium is variable over the time and is important for capturing predictable variations of stock returns. We find also that the expected excess returns on small and medium capitalization stocks are more sensitive to changes in the predetermined variables such as dividend yields, default spread and term spread, than expected excess returns on large capitalization stocks.
    Keywords: predictability; predetermined variables; conditional asset pricing; stock returns.
    JEL: G14 G11 G12
    Date: 2007–03–07
  2. By: Georges Dionne; Hela Dahen
    Abstract: The objective of this article is to develop a precise and rigorous measurement of a bank's operational VaR. We compare our model to the standard model frequently used in practice. This standard model is constructed based on lognormal and Poisson distributions which do not take into account any data which fall below the truncature threshold and undervalue banks' exposure to risk. Our risk measurement also brings into account external operational losses that have been scaled to the studied bank. This, in effect, allows us to account for certain possible extreme losses which have not yet occurred. The GB2 proves to be a good candidate for consideration when determining the severity distribution of operational losses. As the GB2 has already been applied recently in several financial domains, this article argues in favor of the relevance of its application in modeling operational risk. For the tails of the distributions, we have chosen the Pareto distribution. We have also shown that the Poisson model, unlike the negative-binomial model, is retained in none of the cases for frequencies. Finally, we show that the operational VaR is largely underestimated when the calculations are based solely on internal data.
    Keywords: Operational risk in banks, severity distribution, frequency distribution, operational VaR, operational risk management
    JEL: G21 G28 C30 C35
    Date: 2007
  3. By: Jan Wenzelburger (Keele University, Centre for Economic Research and School of Economic and Management Studies); Hans Gersbach (Center of Economic Research at ETH Zurich and CEPR)
    Abstract: We investigate the question of whether sophistication in risk management fosters banking stability. We compare a simple banking system in which an average rating is used with a sophisticated banking system in which banks are able to assess the default risk of entrepreneurs individually. Both banking systems compete for deposits, loans, and bank equity. While a sophisticated system rewards entrepreneurs with low default risks with low loan interest rates, a simple system acquires more bank equity and finances more entrepreneurs. Expected repayments in a simple system are always higher and its default risk is lower if productivity is sufficiently high. Expected aggregate consumption of entrepreneurs, however, is higher in a sophisticated banking system.
    Keywords: Financial intermediation, macroeconomic risks, risk management, risk premia, banking regulation, rating.
    JEL: D40 E44 G21
    Date: 2007–08
  4. By: Aurea Grane; Helena Veiga
    Abstract: In this paper, we estimate minimum capital risk requirements for short, long positions and three investment horizons, using the traditional GARCH model and two other GARCH-type models that incorporate the possibility of asymmetric responses of volatility to price changes; and, most importantly, we analyse the models performance when realised volatility is included as an explanatory variable into the models' variance equations. The results suggest that the inclusion of realised volatility improves the models forecastability and their capacity to calculate accurate measures of minimum capital risk requirements.
    Date: 2007–09

This nep-rmg issue is ©2007 by Stan Miles. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.