New Economics Papers
on Risk Management
Issue of 2007‒12‒19
six papers chosen by

  1. Bank size, credit and the sources of bank market risk By Ryan Stever
  2. Estimation and decomposition of downside risk for portfolios with non-normal returns By Boudt, Kris; Peterson, Brian; Croux, Christophe
  3. How Sovereign is Sovereign Credit Risk? By Francis A. Longstaff; Jun Pan; Lasse H. Pedersen; Kenneth J. Singleton
  4. Pension fund finance and sponsoring companies: empirical evidence on theoretical hypotheses By E. Philip Davis; Sybille Grob; Leo de Haan
  5. Does global liquidity help to forecast US inflation? By D'Agostino, A; Surico, P
  6. The Impact of Emerging Asia on Commodity Prices By Calista Cheung; Sylvie Morin

  1. By: Ryan Stever
    Abstract: This study examines bank risk by investigating the equity and loan portfolio characteristics of publicly-traded bank holding companies. Unlike the pattern for non-financial firms, equity betas of large banks are two to five times greater than those of small banks. In explaining this, we note that regulation imposes an effective cap on banks' equity volatility. Because the portfolios of small banks are less diversified, this cap has a greater effect on small banks than large banks. But we reject the hypothesis that small banks lower their equity volatility through lower leverage. Instead, we find that the reduced ability of small banks to diversify forces them to either pick borrowers whose assets have relatively low credit risk or make loans that are backed by relatively more collateral.
    Keywords: FBank size, beta, idiosyncratic, volatility
    Date: 2007–11
  2. By: Boudt, Kris; Peterson, Brian; Croux, Christophe
    Abstract: We propose a new estimator for Expected Shortfall that uses asymptotic expansions to account for the asymmetry and heavy tails in financial returns. We provide all the necessary formulas for decomposing estimators of Value at Risk and Expected Shortfall based on asymptotic expansions and show that this new methodology is very useful for analyzing and predicting the risk properties of portfolios of alternative investments.
    Keywords: Alternative investments; Component Value at Risk; Cornish-Fisher expansion; downside risk; expected shortfall; portfolio; risk contribution; Value at Risk.
    JEL: C13 C22 G11
    Date: 2007–08–17
  3. By: Francis A. Longstaff; Jun Pan; Lasse H. Pedersen; Kenneth J. Singleton
    Abstract: We study the nature of sovereign credit risk using an extensive sample of CDS spreads for 26 developed and emerging-market countries. Sovereign credit spreads are surprisingly highly correlated, with just three principal components accounting for more than 50 percent of their variation. Sovereign credit spreads are generally more related to the U.S. stock and high-yield bond markets, global risk premia, and capital flows than they are to their own local economic measures. We find that the excess returns from investing in sovereign credit are largely compensation for bearing global risk, and that there is little or no country-specific credit risk premium. A significant amount of the variation in sovereign credit returns can be forecast using U.S. equity, volatility, and bond market risk premia.
    JEL: G12 G15
    Date: 2007–11
  4. By: E. Philip Davis; Sybille Grob; Leo de Haan
    Abstract: This study presents empirical evidence on the influence of sponsoring companies on the funding and portfolio allocation of pension funds, an issue on which most extant literature is theoretical. We use a unique microdataset of 550 Dutch defined benefit company pension funds and 100 sponsoring firms over 1996-2005 to test the relevance of the main theoretical hypotheses, the first paper to do so in a comprehensive manner. We find that pension funds have lower cover ratios when (1) their sponsoring company is highly leveraged, (2) the fund's return on assets is relatively low, and (3) the sponsoring firm is small. Further, defined benefit pension funds are found to invest more in shares when their sponsoring companies are highly leveraged. These links in general suggest higher risk in the sponsor leads to correspondingly higher risk in the fund, and warrant close attention by regulators. 
    Keywords: Pension funds; Sponsoring company; Capital structure
    JEL: G23 G32
    Date: 2007–12
  5. By: D'Agostino, A; Surico, P
    Abstract: We construct a measure of global liquidity using the growth rates of broad money for the G7 economies. Global liquidity produces forecasts of US inflation that are significantly more accurate than the forecasts based on US money growth, Phillips curve, autoregressive and moving average models. The marginal predictive power of global liquidity is strong at three years horizons. Results are robust to alternative measures of inflation.
    JEL: C53 C22 E37 E47
    Date: 2007–11
  6. By: Calista Cheung; Sylvie Morin
    Abstract: Over the past 5 years, real energy and non-energy commodity prices have trended sharply higher. These relative price movements have had important implications for inflation and economic activity in both Canada and the rest of the world. China has accounted for the bulk of incremental demand for oil and many base metals over this period. As rapid economic growth in China has raised the level of world demand, this has put upward pressure on commodity prices. The effect has been amplified by rising resource intensities in China's production in recent years. This paper discusses the factors driving emerging Asia's demand for commodities and assesses the impact of emerging Asia on the real prices of oil and base metals in the Bank of Canada Commodity Price Index (BCPI). Two separate single-equation models are estimated for oil and the base metals price index. We employ a structural break approach for oil prices, while metals prices are modelled with an error correction model (ECM). In both cases, we find strong evidence that oil and metals prices have historically moved with the business cycle in the developed world, but that this relationship has broken down since mid-1997. Thereafter, industrial activity in emerging Asia appears to have become a more dominant driver of oil price movements. While metal price fluctuations have also become increasingly aligned with levels of industrial activity in emerging Asia, rising intensities of metal production may have been a more important factor behind the acceleration in prices in recent years.
    Keywords: Business fluctuations and cycles; International topics
    JEL: E3 F4 O19 Q11
    Date: 2007

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