nep-rmg New Economics Papers
on Risk Management
Issue of 2007‒12‒15
six papers chosen by
Stan Miles
Thompson Rivers University

  1. Analysis of Operational Risk of Banks - Catastrophe Modelling By Gábor Benedek; Dániel Homolya
  2. E-Banking: Risk Management Practices of the Estonian Banks By Dmitri Sokolov
  5. International Macroeconomic Announcements and Intraday Euro Exchange Rate Volatility By Evans, Kevin; Speight, Alan E H
  6. How Does Duration Between Trades of Underlying Securities Affect Option Prices By Alvaro Cartea; Thilo Meyer-Brandis

  1. By: Gábor Benedek (Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest and Thesys Labs Ltd.); Dániel Homolya (Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest and Magyar Nemzeti Bank)
    Abstract: Nowadays financial institutions due to regulation and internal motivations care more intensively on their risks. Besides previously dominating market and credit risk new trend is to handle operational risk systematically. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. First we show the basic features of operational risk and its modelling and regulatory approaches, and after we will analyse operational risk in an own developed simulation model framework. Our approach is based on the analysis of latent risk process instead of manifest risk process, which widely popular in risk literature. In our model the latent risk process is a stochastic risk process, so called Ornstein-Uhlenbeck process, which is a mean reversion process. In the model framework we define catastrophe as breach of a critical barrier by the process. We analyse the distributions of catastrophe frequency, severity and first time to hit, not only for single process, but for dual process as well. Based on our first results we could not falsify the Poisson feature of frequency, and long tail feature of severity. Distribution of “first time to hit” requires more sophisticated analysis. At the end of paper we examine advantages of simulation based forecasting, and finally we conclude with the possible, further research directions to be done in the future.
    Keywords: risk management, operational risk, risk modelling, banking
    JEL: G32 C19 C69 G21
    Date: 2007–11
  2. By: Dmitri Sokolov (Institute of Economics at Tallinn University of Technology)
    Abstract: During the last years the development of e-banking in Estonia has been very significant. According to the report of the World Economic Forum, the Estonian IT-development has been substantial. The success of e-banking in Estonia can be compared to the corresponding success of the Nordic countries. According to the Deutsche Bank Research, around 70-80% of the Internet users in Estonia use Internet banking and in this respect, Estonia could be compared to Finland, Norway and Iceland. Despite of certain benefits, e-banking has turned out a great risk, as bank clients are expecting e-banking services to be available 24 hours a day and seven days a week. The major risks associated with e-banking are strategic, operational, legal and reputational. Security is considered the central operational risk of e-banking. Some of the specific problems cut across risk categories, e.g. breach of security allowing unauthorised access to customer information can be classified as an operational risk, but such an event also exposes the bank to legal risk and reputational risk. Customer education on security risks and precautions can play an important role for consumer protection and for limiting reputational risk. In Estonia, all commercial banks which are engaged in e-banking activities have published on their websites recommendations to potential customers on how to increase the security while making transactions in electronic environment. The Estonian Financial Supervision Authority responsible for the banking supervision has disseminated on its website a special brochure to e-banking customers on how to use the Internet bank safely. At the international level the Basel Committee on Banking Supervision (BCBS) has elaborated risk management principles for e-banking. These risk management principles fall into three broad, and often overlapping, categories: Board and Management Oversight, Security Controls and Legal and Reputational Risk Management. The research question of this paper is whether these risk management principles are implemented at the Estonian banks. In order to assess the risk management practices of the Estonian banks in the field of e-banking as well as their conformity to the BCBS guidelines, the author has prepared a questionnaire and circulated it to all banks. According to the results of the survey, the Estonian banks generally comply with all BCBS guidelines in the field of e-banking risk management.
    Keywords: e-banking, risks, risk management
    JEL: G21
    Date: 2007
  3. By: Marco S. Matsumura
    Date: 2007
  4. By: Mardi Dungey; Michael McKenzie; Vanessa Smith
    Abstract: Sufficiently fast and large disruptions to the continuous price process are referred to as jumps. Cojumping arises when jumps occur contemporaneously across assets. This paper finds significant evidence of jumps and cojumps in the US term structure using the Cantor-Fitzgerald tick dataset sampled over the period 2002-2006. Cojumping frequently occurs in response to scheduled macroeconomic news announcements, however, around one-third of cojumps occur independently of any news announcements.
    JEL: C22 G14
    Date: 2007–07
  5. By: Evans, Kevin (Cardiff Business School); Speight, Alan E H
    Abstract: The short-run reaction of Euro returns volatility to a wide range of macroeconomic announcements is investigated using five-minute returns for spot Euro-Dollar, Euro-Sterling and Euro-Yen exchange rates. The marginal impact of each individual macroeconomic announcement on volatility is isolated whilst controlling for the distinct intraday volatility pattern, calendar effects, and a latent, longer run volatility factor simultaneously. Macroeconomic news announcements from the US are found to cause the vast majority of the statistically significant responses in volatility, with US monetary policy and real activity announcements causing the largest reactions of volatility across the three rates. ECB interest rate decisions are also important for all three rates, whilst UK Industrial Production and Japanese GDP cause large responses for the Euro-Sterling and Euro-Yen rates, respectively. Additionally, forward looking indicators and regional economic surveys, the release timing of which is such that they are the first indicators of macroeconomic performance that traders observe for a particular month, are also found to play a significant role.
    Keywords: Intraday volatility; macroeconomic announcements; exchange rates
    JEL: G12 E44 E32
    Date: 2007–09
  6. By: Alvaro Cartea (School of Economics, Mathematics & Statistics, Birkbeck); Thilo Meyer-Brandis
    Abstract: We propose a model for stock price dynamics that explicitly incorporates random waiting times between trades, also known as duration, and show how option prices can be calculated using this model. We use ultra-high-frequency data for blue-chip companies to motivate a particular choice of waiting-time distribution and then calibrate risk-neutral parameters from options data. We also show that the convexity commonly observed in implied volatilities may be explained by the presence of duration between trades. Furthermore, we find that, ceteris paribus, implied volatility decreases in the presence of longer durations, a result consistent with the findings of Engle (2000) and Dufour and Engle (2000) which demonstrates the relationship between levels of activity and volatility for stock prices.
    Keywords: Duration between trades, waiting-times, high frequency data, Levy processes, option pricing, time changes, operational time, irregularly spaced data.
    Date: 2007–12

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