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on Risk Management |
| By: | B. Luppi; M. Marzo; E. Scorcu |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:601&r=rmg |
| By: | B. Luppi; M. Marzo; E. Scorcu |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:600&r=rmg |
| By: | Brännäs, Kurt (Department of Economics, Umeå University); G De Gooijer , Jan (Department of Quantitative Economics); Soultanaeva, Albina (Department of Economics, Umeå University) |
| Abstract: | The paper suggests a nonlinear and multivariate time series model framework that enables the study of simultaneity in returns and in volatilities, as well as asymmetric effects arising from shocks and an outside stock exchange. Using daily data 2000-2006 for the Baltic state stock exchanges and that of Moscow we find recursive structures with Riga directly depending in returns on Tallinn and Vilnius, and Tallinn on Vilnius. For volatilities both Riga and Vilnius depend on Tallinn. In addition, we find evidence of asymmetric effects arising in Moscow and in Baltic state shocks on both returns and volatilities. |
| Keywords: | Time series; nonlinear; multivariate; finance; value at risk; portfolio allocation |
| JEL: | C32 C51 G11 G12 G14 G15 |
| Date: | 2007–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0725&r=rmg |
| By: | Francis X. Diebold (University of Pennsylvania and NBER); Kamil Yýlmaz |
| Abstract: | Notwithstanding its impressive contributions to empirical financial economics, there remains a significant gap in the volatility literature, namely its relative neglect of the connection between macroeconomic fundamentals and asset return volatility. We progress by analyzing a broad international cross section of stock markets. We find a clear link between macroeconomic fundamentals and stock market volatilities, with volatile fundamentals translating into volatile stock markets. |
| Keywords: | Financial market, equity market, asset return, risk, variance, asset pricing |
| JEL: | G1 E0 |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:0711&r=rmg |
| By: | fratostiteanu, cosmin; tanasie, anca |
| Abstract: | The administration of a financial activities portfolio usually generates two categories of risks: the risk exposure and the market risk. The purpose is to present the evolution of the country risk of Romania through using the specific statistic indicators with the granted classification by the main rating agencies. The risk exposure is the result of credit activity to a public debtor (in this case, a country), this activity being applied by banks at international level. From this point of view, the analysis of the country risk must offer information on the base of which the banks can establish the upper limits of exposure to a country and can monitories as possible in real time, the exposure to the respective country. The market risk appears as a result of unfavorable changes that may appear in a country’s financial market and that may affect the performance of activities that compose the portfolio of a bank, which has an exposure in relations with the respective country. In the literature approaching the country risk, the market risk is as inexistent or it is treated with superficiality, although it constitutes a fundamental component of the banking risk, concerning the development of the activities that unfold on these markets. From this perspective the approach of the country risk is insufficient and the developed methodologies must be extended through including this last aspect. But this paper does not purpose to introduce new components in the methodologies of analysis concerning the country risk and the market risk. The administration of a financial activities portfolio usually generates two categories of risks: the risk exposure and the market risk. The purpose is to present the evolution of the country risk of Romania through using the specific statistic indicators with the granted classification by the main rating agencies. The paper has three principal parts - the first tries to familiarize the reader with the definitions and the fundamentals of the country risk analysis, the second presents the statistic indicators and methods used in the assessment of the country risk and the third focuses on the Romanian case. |
| Keywords: | counytry risk; Romania; evaluation methods |
| JEL: | F02 F3 |
| Date: | 2007–11–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5857&r=rmg |
| By: | Alain Chaboud; Benjamin Chiquoine; Erik Hjalmarsson; Mico Loretan |
| Abstract: | Using two newly available ultrahigh-frequency datasets, we investigate empirically how frequently one can sample certain foreign exchange and U.S. Treasury security returns without contaminating estimates of their integrated volatility with market microstructure noise. Using volatility signature plots and a recently-proposed formal decision rule to select the sampling frequency, we find that one can sample FX returns as frequently as once every 15 to 20 seconds without contaminating volatility estimates; bond returns may be sampled as frequently as once every 2 to 3 minutes on days without U.S. macroeconomic announcements, and as frequently as once every 40 seconds on announcement days. With a simple realized kernel estimator, the sampling frequencies can be increased to once every 2 to 5 seconds for FX returns and to about once every 30 to 40 seconds for bond returns. These sampling frequencies, especially in the case of FX returns, are much higher than those often recommended in the empirical literature on realized volatility in equity markets. We suggest that the generally superior depth and liquidity of trading in FX and government bond markets contributes importantly to this difference. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:905&r=rmg |
| By: | Tak Kuen Siu; Hailiang Yang Unim; John W Lau |
| Abstract: | Recently, there has been considerable interest in investigating option valuation problem in the context of regime-switching models. However, most of the literature consider the case that the risk due to switching regimes is not priced. Relatively little attention has been paid to investigate the impact of switching regimes on the option price when this source of risk is priced. In this paper, we shall articulate this important problem and consider the pricing of an option when the price dynamic of the underlying risky asset is governed by a Markov-modulated geometric Brownian motion. We suppose that the drift and volatility of the underlying risky asset switch over time according to the state of an economy, which is modeled by a continuous-time hidden Markov chain. We shall develop a two-stage pricing model which can price both the diffusion risk and the regime-switching risk based on the Esscher transform and the minimization of the maximum entropy between an equivalent martingale measure and the real-world probability measure over different states. The latter is called a min-max entropy problem. We shall conduct numerical experiments to illustrate the effect of pricing regime-switching risk. The results of the numerical experiments reveal that the impact of pricing regime-switching risk on the option prices is significant. |
| Keywords: | Option valuation; Regime-switching risk; Two-stage pricing procedure; Esscher trans- form; Martingale restriction; Min-max entropy problem. |
| JEL: | G10 G12 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0713&r=rmg |
| By: | Rajdeep Sengupta |
| Abstract: | This paper models entry and competition in "high-risk" credit markets. An incumbent lender's advantage over any outside bank derives from its knowledge of (i) the risk profile of its (creditworthy) clients and (ii) uncreditworthy types in the borrower population. Screening is costly and the uninformed lender's ability to use collateral as a screening mechanism depends on its cost advantage over its informed rival. Nevertheless, the outside bank can pool uncreditworthy borrowers with creditworthy types, but only if it has a low cost of funds. Therefore, while a secular decline in the cost of funds does not help outside banks to screen uncreditworthy borrowers, it allows them to pool these borrowers with creditworthy types. This not only facilitates entry of outside banks into "high-risk" credit markets, but also makes it optimal for them to include non-creditworthy borrowers in their loan portfolio. The framework is relevant for explaining the recent entry of outside banks into the "subprime"-end of the loan market, for example, loans to the lowest end of small businesses in developing countries - also known as microfinance. |
| Keywords: | Credit control - United States ; Bank loans - United States |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-044&r=rmg |
| By: | Yuliya Demyanyk; Otto Van Hemert |
| Abstract: | We analyze the subprime mortgage crisis: an unusually large fraction of subprime mortgages originated in 2006 being delinquent or in foreclosure only months later. We utilize a loan-level database, covering about half of all US subprime mortgages, and identify two major causes. First, over the past five years, high loan-to-value borrowers increasingly became high-risk borrowers, in terms of elevated delinquency and foreclosure rates. Lenders were aware of this and adjusted mortgage rates accordingly over time. Second, the below-average house price appreciation in 2006-2007 further contributed to the crisis. |
| Keywords: | Mortgage loans |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlsp:2007-05&r=rmg |
| By: | Elisa Luciano; Jaap Spreeuw; Elena Vigna |
| Abstract: | Stochastic mortality, i.e. modelling death arrival via a jump process with stochastic intensity, is gaining increasing reputation as a way to rep- resent mortality risk. This paper represents a .rst attempt to model the mortality risk of couples of individuals, according to the stochastic inten- sity approach. We extend to couples the Cox processes set up, namely the idea that mortality is driven by a jump process whose intensity is itself a stochastic process, proper of a particular generation within each gen- der. Dependence between the survival times of the members of a couple is captured by an Archimedean copula. We also provide a methodology for fitting the joint survival function by working separately on the (analytical) copula and the (analytical) mar- gins. First, we calibrate and select the best fit copula according to the methodology of Wang and Wells (2000b) for censored data. Then, we provide a sample-based calibration for the intensity, using a time- homogeneous, non mean-reverting, affine process: this gives the marginal survival functions. By coupling the best fit copula with the calibrated mar- gins we obtain a joint survival function which incorporates the stochastic nature of mortality improvements. Several measures of time dependent association can be computed out of it. We apply the methodology to a well known insurance dataset, using a sample generation. The best fit copula turns out to be a Nelsen one, which implies not only positive dependency, but dependency increasing with age. |
| Keywords: | stochastic mortality, bivariate mortality, copula functions, longevity risk. |
| JEL: | G22 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:43&r=rmg |