New Economics Papers
on Risk Management
Issue of 2008‒05‒10
four papers chosen by

  1. Factor Model for Stress-testing with a Contingent Claims Model of the Chilean Banking System By James P Walsh; Dale F. Gray
  2. Combining Multiple Criterion Systems for Improving Portfolio Performance By H. D. Vinod; D. F. Hsu; Y. Tian
  3. Integration, Cointegration and Long-Horizont Forecasting of Credit-Default-Cycles By Wagatha, Matthias
  4. Efficient Market Hypothesis in European Stock Markets By Maria Rosa Borges

  1. By: James P Walsh; Dale F. Gray
    Abstract: This paper derives risk indicators for the major Chilean banks based on contingent claims analysis, an extension of Black-Scholes-Merton option-pricing theory. These risk indicators are clearly tied to macroeconomic and financial developments in Chile and outside, but bank responses are highly heterogeneous. To reduce the number of variables linked to the banks' risk to a tractable number, we apply principal component analysis. Vector autoregressions of risk indicators with the most significant factors show strong ties from financial markets and regional developments. Impulse response functions from these factors are derived, which allow for scenario testing. The scenarios derived in the paper illustrate how the magnitude and persistence of responses of bank credit risk can vary across banks in the system.
    Keywords: Working Paper , Chile ,
    Date: 2008–04–09
  2. By: H. D. Vinod (Fordham University, Department of Economics); D. F. Hsu (Fordham University, Department of Computer and Information Science); Y. Tian (Fordham University, Department of Computer and Information Science)
    Abstract: A central issue for managers or investors in portfolio management of assets is to select the assets to be included and to predict the value of the portfolio, given a variety of historical and concurrent information regarding each asset in the portfolio. There exist several criteria or models to predict asset returns, which in turn are sensitive to underlying probability distributions, their unknown parameters, whether it is a bull, bear or flat period subject to further uncertainty regarding switch times between bull and bear periods. It is possible to treat various portfolio-choice criteria as multiple criterion systems in the uncertain world of asset markets from historical market data. This paper develops the initial framework for the selection of assets using information fusion to combine these multiple criterion systems. These MCS’ are combined, using the recently developed Combinatorial Fusion Analysis (CFA) to enhance the portfolio performance. We demonstrate with an example using US stock market data that combination of multiple criteria (or models) systems does indeed improve the portfolio performance.
    Keywords: Rank-score function, combinatorial fusion, stock performance, return of equity
    JEL: G11 C14 D81
    Date: 2008
  3. By: Wagatha, Matthias
    Abstract: Summary: This paper examines the longterm forecast performance of cointegrated systems relative to forecast performance of comparable VAR that fails to recognize that the system is characterized by cointegration. I use Monte Carlo simulation, real data sets, and multi-step-ahead forecasts to study this question. The cointegrated system I examine is composed of six vectors, five macoreconomic variables, and a credit-default-cycle. The forecasts produced by the vector error correction modell associated with this system are compared with those obtained from a corresponding differenced vector autoregression, as well as a vector autoregression based upon the levels of the data. Alternative measures of forecast accuracy (full-system) are discussed. My findings suggest that selective forecast performance improvement may be observed by incorporating knowledge of cointegration rank. Furthermore the results indicate that a cointegration modeling of credit risk should be favored against the prevalent level or differenced estimation.
    Keywords: Integration; Kointegration; Langzeitprognose; Kreditausfallzyklus; Integration; Cointegration; Forecasting; Credit-default-cycle
    JEL: C32 C53
    Date: 2007–07–01
  4. By: Maria Rosa Borges
    Abstract: This paper reports the results of tests on the weak-form market efficiency applied to stock market indexes of France, Germany, UK, Greece, Portugal and Spain, from January 1993 to December 2007. We use a serial correlation test, a runs test, an augmented Dickey-Fuller test and the multiple variance ratio test proposed by Lo and MacKinlay (1988) for the hypothesis that the stock market index follows a random walk. The tests are performed using daily and monthly data for the whole period and for the period of the last five years, i.e., 2003 to 2007. Overall, we find convincing evidence that monthly prices and returns follow random walks in all six countries. Daily returns are not normally distributed, because they are negatively skewed and leptokurtic. France, Germany, UK and Spain meet most of the criteria for a random walk behavior with daily data, but that hypothesis is rejected for Greece and Portugal, due to serial positive correlation. However, the empirical tests show that these two countries have also been approaching a random walk behavior after 2003.
    JEL: G14 G15
    Date: 2008–04

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