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on Risk Management |
| By: | Monica Billio (Department of Economics, University Of Venice Cà Foscari); Mila Getmansky (Isenberg School of Management, University of Massachusetts); Loriana Pelizzon (Department of Economics, University Of Venice Cà Foscari) |
| Abstract: | We measure dynamic risk exposure of hedge funds to various risk factors during different market volatility conditions using the regime-switching beta model. We find that in the high-volatility regime (when the market is rolling-down) most of the strategies are negatively and significantly exposed to the Large-Small and Credit Spread risk factors. This suggests that liquidity risk and credit risk are potentially common factors for different hedge fund strategies in the down-state of the market, when volatility is high and returns are very low. We further explore the possibility that all hedge fund strategies exhibit idiosyncratic risk in a high volatility regime and find that the joint probability jumps from approximately 0% to almost 100% only during the Long-Term Capital Management (LTCM) crisis. Out-of-sample forecasting tests confirm the economic importance of accounting for the presence of market volatility regimes in determining hedge funds risk exposure. |
| Keywords: | Hedge Funds; Risk Management; Regime-Switching Models, Liquidity |
| JEL: | G12 G29 C51 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:17_07&r=rmg |
| By: | Herbertsson, Alexander (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | We model dynamic credit portfolio dependence by using default contagion in an intensity-based framework. Two different portfolios (with 10 obligors), one in the European auto sector, the other in the European financial sector, are calibrated against their market CDS spreads and the corresponding CDS-correlations. After the calibration, which are perfect for the banking portfolio, and good for the auto case, we study several quantities of importance in active credit portfolio management. For example, implied multivariate default and survival distributions, multivariate conditional survival distributions, implied default correlations, expected default times and expected ordered defaults times. The default contagion is modelled by letting individual intensities jump when other defaults occur, but be constant between defaults. This model is translated into a Markov jump process, a so called multivariate phase-type distribution, which represents the default status in the credit portfolio. Matrix-analytic methods are then used to derive expressions for the quantities studied in the calibrated portfolios.<p> |
| Keywords: | Portfolio credit risk; intensity-based models; dynamic dependence modelling; CDS-correlation; default contagion; Markov jump processes; multivariate phase-type distributions; matrixanalytic methods |
| JEL: | C02 C63 G13 G32 G33 |
| Date: | 2007–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0271&r=rmg |
| By: | Dimitrios D. Thomakos (University of Peloponnese, Greece and The Rimini Centre for Economics Analysis, Italy.); Dimitris N. Politis (University of California, San Diego, USA) |
| Abstract: | In this paper we contribute several new results on the NoVaS transformation approach for volatility forecasting introduced by Politis (2003a,b, 2007). In particular: (a) we introduce an alternative target distribution (uniform); (b) we present a new method for volatility forecasting using NoVaS ; (c) we show that the NoVaS methodology is applicable in situations where (global) stationarity fails such as the cases of local stationarity and/or structural breaks; (d) we show how to apply the NoVaS ideas in the case of returns with asymmetric distribution; and finally (e) we discuss the application of NoVaS to the problem of estimating value at risk (VaR). The NoVaS methodology allows for a flexible approach to inference and has immediate applications in the context of short time series and series that exhibit local behavior (e.g. breaks, regime switching etc.) We conduct an extensive simulation study on the predictive ability of the NoVaS approach and find that NoVaS forecasts lead to a much ÔtighterÕ distribution of the forecasting performance measure for all data generating processes. This is especially relevant in the context of volatility predictions for risk management. We further illustrate the use of NoVaS for a number of real datasets and compare the forecasting performance of NoVaS -based volatility forecasts with realized and range-based volatility measures. |
| Keywords: | ARCH, GARCH, local stationarity, structural breaks, VaR, volatility. |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:44-07&r=rmg |
| By: | Herbertsson, Alexander (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | We value synthetic CDO tranche spreads, index CDS spreads, kth-to-default swap spreads and tranchelets in an intensity-based credit risk model with default contagion. The default dependence is modelled by letting individual intensities jump when other defaults occur. The model is reinterpreted as a Markov jump process. This allow us to use a matrix-analytic approach to derive computationally tractable closed-form expressions for the credit derivatives that we want to study. Special attention is given to homogenous portfolios. For a fixed maturity of five years, such a portfolio is calibrated against CDO tranche spreads, index CDS spread and the average CDS and FtD spreads, all taken from the iTraxx Europe series. After the calibration, which render perfect fits, we compute spreads for tranchelets and kth-to-default swap spreads for different subportfolios of the main portfolio. We also investigate implied tranche-losses and the implied loss distribution in the calibrated portfolios.<p> |
| Keywords: | Credit risk; intensity-based models; CDO tranches; index CDS; kth-to-default swaps; dependence modelling; default contagion; Markov jump processes; Matrix-analytic methods |
| JEL: | C02 C63 G13 G32 G33 |
| Date: | 2007–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0270&r=rmg |
| By: | Herbertsson, Alexander (Department of Economics, School of Business, Economics and Law, Göteborg University); Rootzén, Holger (Department of Mathematical Statistic) |
| Abstract: | We study a model for default contagion in intensity-based credit risk and its consequences for pricing portfolio credit derivatives. The model is specified through default intensities which are assumed to be constant between defaults, but which can jump at the times of defaults. The model is translated into a Markov jump process which represents the default status in the credit portfolio. This makes it possible to use matrix-analytic methods to derive computationally tractable closed-form expressions for single-name credit default swap spreads and kth-to-default swap spreads. We ”semicalibrate” the model for portfolios (of up to 15 obligors) against market CDS spreads and compute the corresponding kth-to-default spreads. In a numerical study based on a synthetic portfolio of 15 telecom bonds we study a number of questions: how spreads depend on the amount of default interaction; how the values of the underlying market CDS-prices used for calibration influence kth-th-to default spreads; how a portfolio with inhomogeneous recovery rates compares with a portfolio which satisfies the standard assumption of identical recovery rates; and, finally, how well kth-th-to default spreads in a nonsymmetric portfolio can be approximated by spreads in a symmetric portfolio.<p> |
| Keywords: | Portfolio credit risk; intensity-based models; default dependence modelling; default contagion; CDS; kth-to-default swaps; Markov jump processes; Matrix-analytic methods |
| JEL: | C02 C63 G13 G32 G33 |
| Date: | 2007–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0269&r=rmg |
| By: | Barbara Luppi (CEFIN and University of Modena and Reggio Emilia, Italy); Massimiliano Marzo (University of Bologna and The Rimini Centre for Ecomonic Analysis, Italy); Antonello E. Scorcu (University of Bologna and The Rimini Centre for Ecomonic Analysis, Italy) |
| Abstract: | We estimate a model of credit risk for portfolios of Small and Medium-sized enterprises, conditional on being a non-profit or for-profit firms. The estimation is based on a unique dataset on Italian firms provided by a large commercial bank. We show that the main variables to identify creditworthiness are different for non-profit andcrucial for non-profit firms. Classification-JEL: G21, G28 |
| Keywords: | SME finance; Basel II; Retail banking; Non-profit |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:30-07&r=rmg |
| By: | Herbertsson, Alexander (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | We study default contagion in large homogeneous credit portfolios. Using data from the iTraxx Europe series, two synthetic CDO portfolios are calibrated against their tranche spreads, index CDS spreads and average CDS spreads, all with five year maturity. After the calibrations, which render perfect fits, we investigate the implied expected ordered defaults times, implied default correlations, and implied multivariate default and survival distributions, both for ordered and unordered default times. Many of the numerical results differ substantially from the corresponding quantities in a smaller inhomogeneous CDS portfolio. Furthermore, the studies indicate that market CDO spreads imply extreme default clustering in upper tranches. The default contagion is introduced by letting individual intensities jump when other defaults occur, but be constant between defaults. The model is translated into a Markov jump process. Expressions for the investigated quantities are derived by using matrix-analytic methods.<p> |
| Keywords: | Credit risk; intensity-based models; dependence modelling; default contagion; Markov jump processes; Matrix-analytic methods; synthetic CDO-s; index CDS-s |
| JEL: | C02 C63 G13 G32 G33 |
| Date: | 2007–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0272&r=rmg |
| By: | KAPITSINAS, SPYRIDON |
| Abstract: | This paper presents evidence on the use of derivative contracts in the risk management process of the Greek non-financial firms. The survey was conducted by sending a questionnaire to 110 non-financial firms and its results are compared with the findings of previous surveys: 33,9 percent of non-financial firms in Greece use derivatives, mainly to hedge their exposure to interest rate risk. The major source of concern for derivatives users is the accounting treatment of the contracts and the disclosure requirement. Non-financial firms in Greece use sophisticated methods of risk assessment and report having a documented corporate policy with respect to the use of derivatives, while at the same time consider the domestic economic environment not to be favorable of derivative usage. Non-financial firms that chose not to use derivatives responded that they do so because of insufficient exposure to risks. |
| Keywords: | risk management; financial risk; derivatives; corporate finance; Greece |
| JEL: | G32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5636&r=rmg |
| By: | Matteo Pelagatti |
| Abstract: | The returns of many financial assets show significant skewness, but in the literature this issue is only marginally dealt with. Our conjecture is that this distributional asymmetry may be due to two different dynamics in positive and negative returns. In this paper we propose a process that allows the simultaneous modelling of skewed conditional returns and different dynamics in their conditional second moments. The main stochastic properties of the model are analyzed and necessary and sufficient conditions for weak and strict stationarity are derived. An application to the daily returns on the principal index of the London Stock Exchange supports our model when compared to other frequently used GARCH-type models, which are nested into ours. |
| Keywords: | Volatility, Skewness, GARCH, Asymmetric Dynamics, Stationarity |
| JEL: | C22 C53 G10 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:mis:wpaper:20071101&r=rmg |