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on Risk Management |
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Issue of 2008‒06‒21
seven papers chosen by |
| By: | Bandyopadhyay, Arindam; Saha, Asish |
| Abstract: | Assessment of individual bank’s need for economic capital will enable them to understand their actual solvency position for internal management of capital and evaluating the larger strategic issues like expanding or contracting its risk appetite to generate returns. This paper is an attempt to empirically demonstrate the process of estimating bank's mark to market measure of economic capital on an integrated basis. Such measure will help the bank as well as the regulator to understand the bank's solvency position on a regular basis. The top down approach followed in this paper will also assist the bank to measure Risk Adjusted Return on its entire business and examine its economic value addition on an integrated basis. |
| Keywords: | Bank Solvency; Economic Capital; Integrated Risk Management |
| JEL: | G15 G32 G21 |
| Date: | 2008–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9098&r=rmg |
| By: | Dijk, D. van (Erasmus Universiteit Rotterdam); Diks, C.G.H. (Universiteit van Amsterdam); Panchenko, V. (University of New South Wales) |
| 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. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ams:ndfwpp:08-03&r=rmg |
| By: | Vink, D.; Thibeault, A. (Vlerick Leuven Gent Management School) |
| Abstract: | The capital market in which the asset-backed securities are issued and traded is composed of three main categories: ABS, MBS and CDOs. We were able to examine a total number of 3,951 loans (worth €730.25 billion) of which 1,129 (worth €208.94 billion) have been classified as ABS. MBS issues represent 2,224 issues (worth €459.32 billion) and 598 are CDO issues (worth €61.99 billion). We have investigated how common pricing factors compare for the main classes of securities. Due to the differences in the assets related to these securities, the relevant pricing factors for these securities should differ, too. Taking these three classes as a whole, we have documented that the assets attached as collateral for the securities differ between security classes, but that there are also important univariate differences to consider. We found that most of the common pricing characteristics between ABS, MBS and CDO differ significantly. Furthermore, applying the same pricing estimation model to each security class revealed that most of the common pricing characteristics associated with these classes have a different impact on the primary market spread exhibited by the value of the coefficients. The regression analyses we performed demonstrated econometrically that ABS, MBS, and CDOs are in fact different financial instruments. |
| Keywords: | asset securitization, asset-backed securitisation, bank lending, default risk, risk management, spreads, leveraged financing |
| JEL: | G21 G24 G32 |
| Date: | 2008–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:vlg:vlgwps:2008-04&r=rmg |
| By: | Jose Olmo (Department of Economics, City University, London); William Pouliot (Department of Economics, City University, London) |
| Abstract: | The implementation of appropriate statistical techniques for monitoring conditional VaR models, i.e, backtesting, reported by institutions is fundamental to determine their exposure to market risk. Backtesting techniques are important since the severity of the departures of the VaR model from market results determine the penalties imposed for inadequate VaR models. In this paper we make six contributions to backtesting techniques. In particular, we show that the Kupiec test can be viewed as a combination of CUSUM change point tests; we detail the lack of power of CUSUM methods in detecting violations of VaR as soon as these occur; we develop an alternative technique based on weighted U-statistic type processes that have power against wrong specifications of the risk measure and early detection; we show these new backtesting techniques are robust to the presence of estimation risk; we construct a new class of weight functions that can be used to weight our processes; and our methods are applicable both under conditional and unconditional VaR settings. |
| Keywords: | Asymmetries, crises; Extreme values; Hypothesis testing; Leverage effect; Nonlinearities; Threshold models |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:0809&r=rmg |
| By: | Repullo, Rafael; Suarez, Javier |
| Abstract: | We analyze the cyclical effects of moving from risk-insensitive (Basel I) to risk-sensitive (Basel II) capital requirements in the context of a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period. Banks anticipate that shocks to their earnings as well as the cyclical position of the economy can impair their capacity to lend in the future and, as a precaution, hold capital buffers. We find that the new regulation changes the behavior of these buffers from countercyclical to procyclical. Yet, the higher buffers maintained in expansions are insufficient to prevent a significant contraction in the supply of credit at the arrival of a recession. We show that cyclical adjustments in the confidence level behind Basel II can reduce its procyclical effects without compromising banks' long-run solvency. |
| Keywords: | banking regulation; Basel II; business cycles; capital requirements; credit crunch; loan defaults; relationship banking |
| JEL: | E43 G21 G28 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6862&r=rmg |
| By: | Ralf Becker; Adam Clements; Andrew McClelland |
| Abstract: | Much research has investigated the differences between option implied volatilities and econometric model-based forecasts in terms of forecast accuracy and relative informational content. Implied volatility is a market determined forecast, in contrast to model-based forecasts that employ some degree of smoothing to generate forecasts. Therefore, implied volatility has the potential to reflect information that a model-based forecast could not. Specifically, this paper considers two issues relating to the informational content of the S&P 500 VIX implied volatility index. First, whether it subsumes information on how historical jump activity contributed to the price volatility, followed by whether the VIX reflects any incremental information relative to model based forecasts pertaining to future jumps. It is found that the VIX index both subsumes information relating to past jump contributions to volatility and reflects incremental information pertaining to future jump activity, relative to modelbased forecasts. This is an issue that has not been examined previously in the literature and expands our understanding of how option markets form their volatility forecasts. |
| Keywords: | Implied volatility, VIX, volatility forecasts, informational efficiency, jumps |
| JEL: | C12 C22 G00 G14 |
| Date: | 2008–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:qut:auncer:2008-4&r=rmg |
| By: | Paul Cashin; Rupa Duttagupta |
| Abstract: | This paper uses a Binary Classification Tree (BCT) model to analyze banking crises in 50 emerging market and developing countries during 1990-2005. The BCT identifies key indicators and their threshold values at which vulnerability to banking crisis increases. The three conditions identified as crisis-prone-(i) very high inflation, (ii) highly dollarized bank deposits combined with nominal depreciation or low liquidity, and (iii) low bank profitability-highlight that foreign currency risk, poor financial soundness, and macroeconomic instability are key vulnerabilities triggering banking crises. The main results survive under alternative robustness checks, confirming the importance of the BCT approach for monitoring banking system vulnerabilities. |
| Date: | 2008–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/93&r=rmg |