nep-rmg New Economics Papers
on Risk Management
Issue of 2008‒04‒12
five papers chosen by
Stan Miles
Thompson Rivers University

  1. Does Interbank Borrowing Reduce Bank Risk? By Dinger, Valeriya; von Hagen, Jürgen
  2. Does Competition Reduce the Risk of Bank Failure? By Martinez-Miera, David; Repullo, Rafael
  3. The Economic Value of Predicting Stock Index Returns and Volatility. By Wessel Marquering; Marno Verbeek
  4. Country risk ratings and financial crises 1995 – 2001: a survival analysis By Leonardo Bonilla; Andrés Felipe García; Monica Roa
  5. Habit persistence: Explaining cross-sectional variation in returns and time-varying expected returns By Møller, Stig Vinther

  1. By: Dinger, Valeriya; von Hagen, Jürgen
    Abstract: In this paper we investigate whether banks that borrow from other banks have lower risk levels. We concentrate on a large sample of Central and Eastern European banks which allows us to explore the impact of interbank lending when exposures are long-term and interbank borrowers are small banks. The results of the empirical analysis generally confirm the hypothesis that long-term interbank exposures result in lower risk of the borrowing banks.
    Keywords: bank risk; interbank market; market discipline; transition countries
    JEL: E53 G21
    Date: 2008–01
  2. By: Martinez-Miera, David; Repullo, Rafael
    Abstract: A large theoretical literature shows that competition reduces banks' franchise values and induces them to take more risk. Recent research contradicts this result: When banks charge lower rates, their borrowers have an incentive to choose safer investments, so they will in turn be safer. However, this argument does not take into account the fact that lower rates also reduce the banks' revenues from non-defaulting loans. This paper shows that when this effect is taken into account, a U-shaped relationship between competition and the risk of bank failure generally obtains.
    Keywords: Bank competition; Bank failure; Credit risk; Default correlation; Franchise values; Loan defaults; Loan rates; Moral hazard; Net interest income; Risk-shifting
    JEL: D43 E43 G21
    Date: 2008–01
  3. By: Wessel Marquering; Marno Verbeek
    Abstract: In this paper, we analyze the economic value of predicting index returns as well as volatility. On the basis of fairly simple linear models, estimated recursively, we produce genuine out-of-sample forecasts for the return on the S\&P 500 index and its volatility. Using monthly data from 1954 to 1998, we test the statistical significance of return and volatility predictability and examine the economic value of a number of alternative trading strategies. We find strong evidence for market timing in both returns and volatility. Joint tests indicate no dependence between return and volatility timing, while it appears easier to forecast returns when volatility is high. For a mean-variance investor, this predictability is economically profitable, even if short sales are not allowed and transaction costs are quite large.
    Date: 2008–03
  4. By: Leonardo Bonilla; Andrés Felipe García; Monica Roa
    Abstract: Financial system’s health is a signal of economic growth therefore it is a key indicator to investors. As a consequence, one of the main purposes of policymakers is to keep its stability as well as protect it from foreign activity. Both financial and economic activity in general are susceptible of crises, as soon as this happen a country may face default risk, which can be measured with long term debt risk rating of countries. Through this variable we propose the use the survival analysis methodology, to analyze falls rating duration and capability of macroeconomic variables to predict that event. From the analysis, we point out important differences between developed and emerging economies, with variables which stand out exchange risk and economies indebtedness.
    Date: 2008–03–26
  5. By: Møller, Stig Vinther (Department of Business Studies, Aarhus School of Business)
    Abstract: This paper finds empirical support for the habit persistence model of Campbell and Cochrane (1999) along both cross-sectional and time-series dimensions of the US stock market over the period 1947-2005. GMM estimations show that the model is able to explain a substantial part of the cross-sectional variation in returns on the 25 Fama and French value and size portfolios, although it has difficulties in fully explaining the value premium. In addition, the model accounts for time-varying expected returns on stocks. The surplus consumption ratio forecasts future stock returns and the forecasting power is not diminished by including the 1990s stock market boom. The extended version of the model allows for cyclical variation in interest rates and provides a reasonable fit of the real risk free rate.
    Keywords: Campbell-Cochrane model; 25 Fama-French portfolios; GMM; return predictability by surplus-consumption ratio
    Date: 2008–03–19

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