nep-rmg New Economics Papers
on Risk Management
Issue of 2008‒09‒13
seven papers chosen by
Stan Miles
Thompson Rivers University

  1. Operational Risk - Scenario Analysis By Milan Rippel; Petr Teply
  2. Co-integration and Causality Analysis on Developed Asian Markets For Risk Management & Portfolio Selection By Herwany, Aldrin; Febrian, Erie
  3. Hedging Effectiveness of Constant and Time Varying Hedge Ratio in Indian Stock and Commodity Futures Markets By Pandey Ajay
  4. Credit risk mitigation and SMEs bank financing in Basel II : the case of the Loan Guarantee Associations By Clara Cardone Riportella; Antonio Trujillo Ponce; Maria Jose Casasola
  5. International Stock Return Predictability Under Model Uncertainty By Schrimpf, Andreas
  6. Volatility, Jumps and Predictability of Returns: a Sequential Analysis By S. Bordignon; D. Raggi
  7. Bank involvement with SMEs : beyond relationship lending By de la Torre, Augusto; Soledad Martinez Peria, Maria; Schmukler , Sergio L.

  1. By: Milan Rippel (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Petr Teply (EEIP, a.s)
    Abstract: Operational risk management and measurement has been paid an increasing attention in last years. The main two reasons are the Basel II requirements that were to be complied with by all international active financial institutions by the end of 2006 and recent severe operational risk loss events. This paper focuses on operational risk measurement techniques and on economic capital estimation methods. A data sample of operational losses provided by an anonymous Central European bank is analyzed using several approaches. Multiple statistical concepts such as the Loss Distribution Approach or the Extreme Value Theory are considered. One of the methods used for operational risk management is a scenario analysis. Under this method, custom plausible loss events defined in a particular scenario are merged with the original data sample and their impact on capital estimates and on the financial institution as a whole is evaluated. Two main problems are assessed in this paper – what is the most appropriate statistical method to measure and model operational loss data distribution and what is the impact of hypothetical plausible events on the financial institution. The g&h distribution was evaluated to be the most suitable one for operational risk modeling because its results are consistent even while using a scenario analysis method. The method based on the combination of historical loss events modeling and scenario analysis provides reasonable capital estimates for the financial institution and allows to measure impact of very extreme events and also to mitigate operational risk exposure.
    Keywords: operational risk, scenario analysis, economic capital, loss distribution approach, extreme value theory
    JEL: G21 G32 C15
    Date: 2008–09
  2. By: Herwany, Aldrin; Febrian, Erie
    Abstract: Both practitioners and academicians demand a linkage model across financial markets, particularly among regional capital markets, for both risk management and portfolio selection purposes. Researchers frequently use co-integration and causality analysis in investigating the dependence or co-movement of three or more stock markets in different countries. However, they conducted the causality in mean tests but not the causality in variance tests. This study assesses the co-integration and causal relations among seven developed Asian markets, i.e Tokyo, Hongkong, Korea, Taiwan, Shanghai, Singapore, and Kuala Lumpur stock exchanges, using more frequent time series data. It employs the recently developed techniques for investigating unit roots, co-integration, time-varying volatility, and causality in variance. For estimating portfolio market risk, this study employs Value-at-Risk with delta-normal approach. The results show whether fund managers would be able to diversify their portfolio in these developed stock markets either in long run or short run.
    Keywords: Risk Management; Causality; Co-integration; Asian Stock Markets
    JEL: D53 G1 G11 G32 G0
    Date: 2008–08–27
  3. By: Pandey Ajay
    Abstract: This paper examines hedging effectiveness of futures contract on a financial asset and commodities in Indian markets. In an emerging market context like India, the growth of capital and commodity futures market would depend on effectiveness of derivatives in managing risk. For managing risk, understanding optimal hedge ratio is critical for devising effective hedging strategy. We estimate dynamic and constant hedge ratio for S&P CNX Nifty index futures, Gold futures and Soybean futures. Various models (OLS, VAR, and VECM) are used to estimate constant hedge ratio. To estimate dynamic hedge ratios, we use VAR-MGARCH. We compare in-sample and out-of-sample performance of these models in reducing portfolio risk. It is found that in most of the cases, VAR-MGARCH model estimates of time varying hedge ratio provide highest variance reduction as compared to hedges based on constant hedge ratio. Our results are consistent with findings of Myers (1991), Baillie and Myers (1991), Park and Switzer (1995a,b), Lypny and Powella (1998), Kavussanos and Nomikos (2000), Yang (2001), and Floros and Vougas (2006).
    Keywords: Hedging Effectiveness,Hedge ratio,Bivariate GARCH, S&P CNX Nifty index and futures, Commodity futures
    Date: 2008–06–09
  4. By: Clara Cardone Riportella; Antonio Trujillo Ponce; Maria Jose Casasola
    Abstract: The objective of this paper is to analyse the impact of the techniques foreseen in the Basel Agreement II (BII) for mitigating the risk of default on bank loans to small and medium enterprises (SMEs). In particular, we will conduct an analysis of the effect of the guarantees that the Loan Guarantee Association (LGA) offer to the SMEs on the assignment of capital requirements of the financial entities under BII. At the same time, the study will examine the effect of this guarantee on the credit risk premium that the financial entities should charge their clients, and whether this foreseeable decrease in the interest rates applicable to the SMEs is compensated by the cost of the guarantee. The results show that, considering that the cost of the LGA guarantee in Spain is around 0.68%, it will be advantageous for an SME with the annual sales of less than or equal to €5 million to request this guarantee whenever the probability of default (PD) of the LGA is <1.1%, if the approach utilised by the financial entity is the Internal Ratings-Based (IRB) and the SME is considered as corporate; however, if the SME is included in a regulatory retail portfolio, then the limit for the PD of the LGA decreases to 0.71%. On the other hand, when the approach utilised is the Standardised one, then will be profitable for an SME treated as retail to request this guarantee whenever the PD of the LGA is <3.35% (3.95% for corporate exposures).
    Keywords: Credit risk mitigation, Bank financing of SMEs, Basel II, Loan Guarantee Association
    JEL: G21 G28 G32
    Date: 2008–09
  5. By: Schrimpf, Andreas
    Abstract: This paper examines return predictability when the investor is uncertain about the right state variables. A novel feature of the model averaging approach used in this paper is to account for finite-sample bias of the coefficients in the predictive regressions. Drawing on an extensive international dataset, we find that interest-rate related variables are usually among the most prominent predictive variables, whereas valuation ratios perform rather poorly. Yet, predictability of market excess returns weakens substantially, once model uncertainty is accounted for. We document notable dierences in the degree of in-sample and out-of-sample predictability across different stock markets. Overall, these findings suggests that return predictability is not a uniform and a universal feature across international capital markets.
    Keywords: Stock Return Predictability, Bayesian Model Averaging, Model Uncertainty, International Stock Markets
    JEL: E44 G12 G14 G15
    Date: 2008
  6. By: S. Bordignon; D. Raggi
    Date: 2008–05
  7. By: de la Torre, Augusto; Soledad Martinez Peria, Maria; Schmukler , Sergio L.
    Abstract: The"conventional wisdom"in academic and policy circles argues that, while large and foreign banks are generally not interested in serving SMEs, small and niche banks have an advantage in doing so because they can overcome SME opaqueness through relationship lending. This paper shows that there is a gap between this view and what banks actually do. Banks perceive SMEs as a core and strategic business and seem well positioned to expand their links with SMEs. The recent intensification of bank involvement with SMEs in various emerging markets documented in this paper is neither led by small or niche banks nor highly dependent on relationship lending. Rather, all types of banks are catering to SMEs and larger, multiple-service banks have in fact a comparative advantage in offering a wide range of products and services on a large scale, through the use of new technologies, business models, and risk management systems.
    Keywords: Banks&Banking Reform,Access to Finance,,Financial Intermediation,Debt Markets
    Date: 2008–06–01

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