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on Risk Management |
| By: | Ole E. Barndorff-Nielsen; Silja Kinnebrock; Neil Shephard |
| Abstract: | We propose a new measure of risk, based entirely on downward moves measured using high frequency data. Realised semivariances are shown to have important predictive qualities for future market volatility. The theory of these new measures is spelt out, drawing on some new results from probability theory. |
| Keywords: | Market Frictions, Quadratic Variation, Realised Variance, Semimartingale, Semivariance |
| JEL: | C01 C14 C32 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:382&r=rmg |
| By: | Carriquiry, Miguel A.; Osgood, Daniel E. |
| Abstract: | Index insurance and probabilistic seasonal forecasts are becoming available in developing countries to help farmers manage climate risks in production. Although these tools are intimately related, work has not been done to formalize the connections between them. We investigate the relationship between the risk management tools through a model of input choice under uncertainty, forecasts, and insurance. While it is possible for forecasts to undermine insurance, we find that when contracts are appropriately designed, there are important synergies between forecasts, insurance, and effective input use. Used together, these tools overcome barriers preventing the use of imperfect information in production decision making. |
| Keywords: | basis risk, climate forecast, index insurance, input decisions, insurance, risk management. |
| Date: | 2008–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:12884&r=rmg |
| By: | Wagner P. Gaglianone; Luiz Renato Lima; Oliver Linton |
| Abstract: | We propose an alternative backtest to evaluate the performance of Value-at-Risk (VaR) models. The presented methodology allows us to directly test the performance of many competing VaR models, as well as identify periods of an increased risk exposure based on a quantile regression model (Koenker & Xiao, 2002). Quantile regressions provide us an appropriate environment to investigate VaR models, since they can naturally be viewed as a conditional quantile function of a given return series. A Monte Carlo simulation is presented, revealing that our proposed test might exhibit more power in comparison to other backtests presented in the literature. Finally, an empirical exercise is conducted for daily S&P500 return series in order to explore the practical relevance of our methodology by evaluating five competing VaRs through four different backtests. |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:161&r=rmg |
| By: | Arellano, Cristina |
| Abstract: | Recent sovereign defaults in emerging countries are accompanied by interest rate spikes and deep recessions. This paper develops a small open economy model to study default risk and its interaction with output, consumption, and foreign debt. Default probabilities and interest rates depend on incentives for repayment. Default occurs in equilibrium because asset markets are incomplete. The model predicts that default incentives and interest rates are higher in recessions, as observed in the data. The reason is that in a recession, a risk averse borrower finds it more costly to repay non-contingent debt and is more likely to default. In a quantitative exercise the model matches various features of the business cycle in Argentina such as: high volatility of interest rates, higher volatility of consumption relative to output, a negative correlation of interest rates and output and a negative correlation of the trade balance and output. The model can also predict the recent default episode in Argentina. |
| JEL: | F34 F32 E44 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7867&r=rmg |
| By: | Enrique G. Mendoza; Vivian Z. Yue |
| Abstract: | Models of business cycles in emerging economies explain the negative correlation between country spreads and output by modeling default risk as an exogenous interest rate on working capital. Models of strategic default explain the cyclical properties of sovereign spreads by assuming an exogenous output cost of default with special features, and they underestimate debt-output ratios by a wide margin. This paper proposes a solution to this default risk-business cycle disconnect based on a model of sovereign default with endogenous output dynamics. The model replicates observed V-shaped output dynamics around default episodes, countercyclical sovereign spreads, and high debt ratios, and it also matches the variability of consumption and the countercyclical fluctuations of net exports. Three features of the model are key for these results: (1) working capital loans pay for imported inputs; (2) imported inputs support more efficient factor allocations than when these inputs are produced internally; and (3) default on the foreign obligations of firms and the government occurs simultaneously. |
| JEL: | E32 E44 F32 F34 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13861&r=rmg |
| By: | Yu-Chin Chen; Kenneth Rogoff; Barbara Rossi |
| Abstract: | This paper demonstrates that "commodity currency" exchange rates have remarkably robust power in predicting future global commodity prices, both in-sample and out-of-sample. A critical element of our in-sample approach is to allow for structural breaks, endemic to empirical exchange rate models, by implementing the approach of Rossi (2005b). Aside from its practical implications, our forecasting results provide perhaps the most convincing evidence to date that the exchange rate depends on the present value of identifiable exogenous fundamentals. We also find that the reverse relationship holds; that is, that commodity prices Granger-cause exchange rates. However, consistent with the vast post-Meese-Rogoff (1983a,b) literature on forecasting exchange rates, we find that the reverse forecasting regression does not survive out-of-sample testing. We argue, however, that it is quite plausible that exchange rates will be better predictors of exogenous commodity prices than vice-versa, because the exchange rate is fundamentally forward looking. Therefore, following Campbell and Shiller (1987) and Engel and West (2005), the exchange rate is likely to embody important information about future commodity price movements well beyond what econometricians can capture with simple time series models. In contrast, prices for most commodities are extremely sensitive to small shocks to current demand and supply, and are therefore likely to be less forward looking. |
| JEL: | C52 C53 F31 F47 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13901&r=rmg |
| By: | Li Gan; Roberto Mosquera |
| Abstract: | This paper proposes an econometric model to identify unobserved consumer types in the credit market. Consumers choose different amounts of loan because of differences in their time or risk preferences (types). Thus, the unconditional probability of default is modeled using a mixture density combining a type-conditioning default variable with a type-determining random variable. The model is estimated using individual-level consumer credit card information. The parameter estimates and statistical tests support this kind of specification. Furthermore, the model produces better out-of-sample predictions on the probability of default than traditional models; hence, it provides evidence of the existence of types in the consumer credit market. |
| JEL: | C81 D12 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13873&r=rmg |