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on Risk Management |
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Issue of 2008‒07‒05
four papers chosen by |
| By: | TCHANA TCHANA , Fulbert |
| Abstract: | This paper assesses empirically whether banking regulation is effective at preventing banking crises. We use a monthly index of banking system fragility, which captures almost every source of risk in the banking system, to estimate the effect of regulatory measures (entry restriction, reserve requirement, deposit insurance, and capital adequacy requirement) on banking stability in the context of a Markov-switching model. We apply this method to the Indonesian banking system, which has been subject to several regulatory changes over the last couple of decades, and at the same time, has experienced a severe systemic crisis. We draw from this research the following findings: (i) entry restriction reduces crisis duration and also the probability of their occurrence; (ii) larger reserve requirements reduce crisis duration, but increase banking instability; (iii) deposit insurance increases banking system stability and reduces crisis duration. (vi) capital adequacy requirement improves stability and reduces the expected duration of banking crises. |
| Keywords: | Banking Crises; Banking System Fragility Index; Banking Regulation; Markov Switching Regression |
| JEL: | G28 C25 G21 |
| Date: | 2008–06–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9299&r=rmg |
| By: | Wolfgang Härdle; Nikolaus Hautsch; Uta Pigorsch |
| Abstract: | Measuring and modeling financial volatility is the key to derivative pricing, asset allocation and risk management. The recent availability of high-frequency data allows for refined methods in this field. In particular, more precise measures for the daily or lower frequency volatility can be obtained by summing over squared high-frequency returns. In turn, this so-called realized volatility can be used for more accurate model evaluation and description of the dynamic and distributional structure of volatility. Moreover, non-parametric measures of systematic risk are attainable, that can straightforwardly be used to model the commonly observed time-variation in the betas. The discussion of these new measures and methods is accompanied by an empirical illustration using high-frequency data of the IBM incorporation and of the DJIA index. |
| Keywords: | Realized Volatility, Realized Betas, Volatility Modeling |
| JEL: | C13 C14 C22 C52 C53 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2008-045&r=rmg |
| By: | Tatom, John / A. |
| Abstract: | In 1991, Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The Act provided for risk-based deposit insurance premiums, put explicit limits on the application of a “too big to fail” principle for banks and required that examiners implement “prompt corrective action” (PCA) standards for banks. Essentially these steps were to improve the functioning of the FDIC, especially removing discretion of the examiners in the process of addressing the risk of failure of banks and providing explicit requirements of managing the deteriorating risk of failure and providing for rising insurance premiums for such banks. In particular, PCA established a set of capital benchmarks and required regulator actions that removed privileges for banks to manage their capital and payments of income to share holders and bank creditors as the capital position of the bank deteriorated and the risk of failure rose. In effect regulators could take preemptive action to keep banks from depleting their capital as their capital positions deteriorate. These provisions have drawn increasing public attention in the past year for very different reasons. First, Senate Bill 40, The National Insurance Act (NIA), which provides new opportunities for insurance companies to obtain their charters and to be regulated by a federal government entity instead of only the state governments, also requires that the new federal regulator develop and apply prompt corrective action provisions to the supervision of federally chartered insurance companies. The second reason that these provisions have drawn attention recently is the near failure and sale of Bear Stearns. The Federal Reserve helped arrange the sale of Bear Stearns in March 2008, with the sale to be completed shortly, to preempt its failure and consequent effects on other financial institutions. At about the same time the U.S. Department of Treasury released it long awaited “Blueprint for a Modernized Federal Financial Regulatory Structure,” that called for the Board of Governors of the Federal Reserve System to have broad regulatory power over all financial institutions on issues related to financial market stability. These actions call attention to the absence of regulatory oversight powers by the Fed, in particular, enabling legislation that would allow the Fed to close investment banks or other failed or failing institutions in the same way that they can or must close such banks. PCA is on the horizon for insurance companies, investment banks and other financial institutions subject to regulation. |
| Keywords: | Prompt corrective action; capital requirements; financial regulatory reform; Basel II |
| JEL: | G22 G28 G21 |
| Date: | 2008–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9327&r=rmg |
| By: | Adam, Anokye M.; Tweneboah , George |
| Abstract: | This study examines the impact of macroeconomic variables on stock prices. We use the Databank stock index to represent the stock market and (a) inward foreign direct investments, (b) the treasury bill rate (as a measure of interest rates), (c) the consumer price index (as a measure of inflation), (d)Average crude oil prices , and (e) the exchange rate as macroeconomic variables. We analyse quarterly data for the above variables from 1991.1 to 2007.4. employing cointegration test, vector error correction models (VECM). These tests examine both long-run and short-run dynamic relationships between the stock market index and the economic variables. The paper established that there is cointegration between macroeconomic variable and Stock prices in Ghana indicating long run relationship. The VECM analyses shows that the lagged values of interest rate and inflation has a significant influence on the stock market. The inward foreign direct investments, the oil prices , and the exchange rate demonstrate weak influence on price changes. In terms of policy implication, the establishment of lead lag relation indicate that the DSI is not informational efficient with respect to interest rate, inflation inward FDI, Exchange rate and world Oil prices. |
| Keywords: | Stock Index; Stock duration; Cointegration; Efficient Market Hypothesis; Total derivative |
| JEL: | C32 C50 G10 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9301&r=rmg |