New Economics Papers
on Risk Management
Issue of 2008‒06‒07
six papers chosen by

  1. RAROC & EVA :The New Drivers of Business Growth in Indian Banks By Bandyopadhyay, Arindam; Saha, Asish
  2. On the effectiveness of the Federal Reserve's new liquidity facilities By Tao Wu
  3. Nested simulation in portfolio risk measurement By Michael B. Gordy; Sandeep Juneja
  4. Returns and Volatility of Eurozone Energy Stocks By Oberndorfer, Ulrich
  5. Partial Likelihood-Based Scoring Rules for Evaluating Density Forecasts in Tails By Cees Diks; Valentyn Panchenko; Dick van Dijk
  6. Macroeconomic Sources of Foreign Exchange Risk in New EU Members By Tigran Poghosyan; Evzen Kocenda

  1. By: Bandyopadhyay, Arindam; Saha, Asish
    Abstract: Through RAROC and EVA tools, Banks can establish a good risk management culture that can create competitive advantage and improve shareholder value
    Keywords: RAROC; EVA; Integrated Risk Management; Banking
    JEL: L25 G31 G21 M21
    Date: 2007–10–12
  2. By: Tao Wu
    Abstract: This paper examines the effectiveness of the new liquidity facilities that the Federal Reserve established in response to the recent financial crisis. I develop a noarbitrage based affine term structure model with default risk and conduct a thorough factor analysis of the counterparty default risk among major financial institutions and the underlying mortgage default risk. The new facilities' effectiveness is examined, by first separately examining their effects in relieving financial institutions' liquidity concerns and reducing the counterparty risk premiums, and then quantifying their overall effects in reducing financial strains in the inter-bank money market. ; Empirical results indicate that the Term Auction Facility (TAF) has a strong effect in reducing financial strains in the inter-bank money market, primarily through relieving financial institutions' liquidity concerns. Heightened uncertainty regarding the macroeconomy, financial markets, and mortgage default risk have significantly raised counterparty risk premiums among financial institutions, but have had little effect on their liquidity premiums. The Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF), however, are found to have had less discernible effects so far in relieving financial strains in the Libor market. This is consistent with market observations of a weaker interest from primary dealers in participating in the TSLF auctions than banks have shown in tapping the TAF.
    Keywords: Liquidity (Economics) ; Monetary policy - United States ; Money market ; Financial markets ; Interbank market
    Date: 2008
  3. By: Michael B. Gordy; Sandeep Juneja
    Abstract: Risk measurement for derivative portfolios almost invariably calls for nested simulation. In the outer step one draws realizations of all risk factors up to the horizon, and in the inner step one re-prices each instrument in the portfolio at the horizon conditional on the drawn risk factors. Practitioners may perceive the computational burden of such nested schemes to be unacceptable, and adopt a variety of second-best pricing techniques to avoid the inner simulation. In this paper, we question whether such short cuts are necessary. We show that a relatively small number of trials in the inner step can yield accurate estimates, and analyze how a fixed computational budget may be allocated to the inner and the outer step to minimize the mean square error of the resultant estimator. Finally, we introduce a jackknife procedure for bias reduction and a dynamic allocation scheme for improved efficiency.
    Date: 2008
  4. By: Oberndorfer, Ulrich
    Abstract: This paper constitutes a first analysis on stock returns and stock return volatility of energy corporations from the Eurozone. According to our results, the gas market does not play a role for the pricing of Eurozone energy stocks. However, changes in the Euro to U.S. Dollar exchange rate as well as developments at the money and especially at the oil market strongly affect returns of the energy stock portfolios analyzed. While oil price hikes negatively impact on stock returns of European utilities, they lead to an appreciation of oil and gas stocks. Most importantly, we show that oil market volatility negatively affects European oil and gas stocks. In contrast, energy stock volatility is not driven by volatility of the resource market, but only by its own dynamics.
    Keywords: Energy stocks, resource prices, volatility, asset pricing
    JEL: C13 G12 Q40 Q43
    Date: 2008
  5. By: Cees Diks (University of Amsterdam); Valentyn Panchenko (University of New South Wales); Dick van Dijk (Erasmus University Rotterdam)
    Abstract: We propose new scoring rules based on partial likelihood for assessing the relative out-of-sample predictive accuracy of competing density forecasts over a specific region of interest, such as the left tail in financial risk management. By construction, existing scoring rules based on weighted likelihood or censored normal likelihood favor density forecasts with more probability mass in the given region, rendering predictive accuracy tests biased towards such densities. Our novel partial likelihood-based scoring rules do not suffer from this problem, as illustrated by means of Monte Carlo simulations and an empirical application to daily S&P 500 index returns.
    Keywords: density forecast evaluation; scoring rules; weighted likelihood ratio scores; partial likelihood; risk management
    JEL: C12 C22 C52 C53
    Date: 2008–05–20
  6. By: Tigran Poghosyan; Evzen Kocenda
    Abstract: We address the issue of foreign exchange risk and its macroeconomic determinants in several new EU members. The joint distribution of excess returns in the foreign exchange market and the observable macroeconomic factors is modeled using the stochastic discount factor (SDF) approach and a multivariate GARCH-in-mean model. We find that in post-transition economies real factors play a small role in determining foreign exchange risk, while nominal and monetary factors have a significant impact. Therefore, to contribute to the further stability of their domestic currencies, the central banks in the new EU member countries should continue stabilization policies aimed at achieving nominal convergence with the core EU members, as nominal factors play a crucial role in explaining the variability of the risk premium.
    Keywords: foreign exchange risk, time-varying risk premium, stochastic discount factor, multivariate GARCH-in-mean, post-transition and emerging markets
    JEL: C22 F31 G15 P59
    Date: 2007–11–01

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