nep-rmg New Economics Papers
on Risk Management
Issue of 2008‒10‒13
five papers chosen by
Stan Miles
Thompson Rivers University

  1. Derivatives Usage in Risk Management by Non-Financial Firms: Evidence from Greece By KAPITSINAS, SPYRIDON
  2. Testing the CAPM: Evidences from Italian Equity Markets By Canegrati, Emanuele
  3. Fitting vast dimensional time-varying covariance models By Robert F. Engle; Neil Shephard; Kevin Sheppard
  4. The Subprime Panic By Gary B. Gorton
  5. The Impact of Derivatives Usage on Firm Value: Evidence from Greece By KAPITSINAS, SPYRIDON

    Abstract: This paper presents evidence on the use of derivative contracts in the risk management process of Greek non-financial firms. The survey was conducted by sending a questionnaire to 110 non-financial firms and its results are compared with the findings of previous surveys: 33.9% of non-financial firms in Greece use derivatives, mainly to hedge their exposure to interest rate risk. The major source of concern for derivatives users is the accounting treatment of the contracts and the disclosure requirement. Non-financial firms in Greece use sophisticated methods of risk assessment and report having a documented corporate policy with respect to the use of derivatives, while at the same time consider the domestic economic environment not to be favorable of derivatives usage. Firms that chose not to use derivatives responded that they do so mainly because of insufficient exposure to risks.
    Keywords: risk management; financial risk; derivatives; corporate finance; Greece.
    JEL: G32
    Date: 2008–09–30
  2. By: Canegrati, Emanuele
    Abstract: The aim of the following work is to exploit principal econometric tecniques to test the Capital Asset Pricing Model theory in Italian equity markets. CAPM is a financial model which describes expected returns of any assets (or asset portfolio) as a function of the expected return on the market portfolio. In this paper I will first explain the meaning of the market risk and I will measure it via the estimation of beta coeffcients, which are seen as a measure of assets sensitivity to market portfolio fluctuations. The theoretical framework is based on the Sharpe (1964) and Lintner (1965) version of the CAPM and on the Pettengill's hypothesis (1995) over the relationship between betas and returns. Secondly, I will test the presence of specific effects which usually occur in financial markets; in particular, I will check the presence of the well-known January effect and detect the existence of structural breaks over the considered period of time.
    Keywords: CAPM; Structural breaks; January effect
    JEL: G14 G11
    Date: 2008–09–10
  3. By: Robert F. Engle; Neil Shephard; Kevin Sheppard
    Abstract: Building models for high dimensional portfolios is important in risk management and asset allocation. Here we propose a novel and fast way of estimating models of time-varying covariances that overcome an undiagnosed incidental parameter problem which has troubled existing methods when applied to hundreds or even thousands of assets. Indeed we can handle the case where the cross-sectional dimension is larger than the time series one. The theory of this new strategy is developed in some detail, allowing formal hypothesis testing to be carried out on these models. Simulations are used to explore the performance of this inference strategy while empirical examples are reported which show the strength of this method. The out of sample hedging performance of various models estimated using this method are compared.
    Keywords: ARCH Models, Composite Likelihood, Dynamic Conditional Correlations, Incidental Parameters, Quasi-Likelihood, Time-Varying Covariances
    JEL: C14 C32
    Date: 2008
  4. By: Gary B. Gorton
    Abstract: Understanding the ongoing credit crisis or panic requires understanding the designs of a number of interlinked securities, special purpose vehicles, and derivatives, all related to subprime mortgages. I describe the relevant securities, derivatives, and vehicles to show: (1) how the chain of interlinked securities was sensitive to house prices; (2) how asymmetric information was created via complexity; (3) how the risk was spread in an opaque way; and (4) how trade in the ABX indices (linked to subprime bonds) allowed information to be aggregated and revealed. These details are at the heart of the origin of the Panic of 2007. The events of the panic are described.
    JEL: G1 G2
    Date: 2008–10
    Abstract: This paper presents evidence on the use of derivative contracts in the risk management process of Greek non-financial firms and its potential impact on firm value. The sample of the research consists of 81 Greek non-financial firms with exposure to financial risks that are listed in the Athens Stock Exchange and have their annual report published according to the International Financial Reporting Standards (I.F.R.S) for the years 2004-2006. The subject of investigation is whether hedging with derivatives materially increases firm value as many related research has proven, or whether hedging does not affect firm value and can be attributed to managerial or other motives. Having used Tobin’s Q as a proxy for firm value a positive and significant effect of hedging on it is verified, 4.6% of firm value on average, not only concerning the general use of derivatives, but also the use of foreign exchange derivatives and interest rate derivatives in particular. Controlling for managerial motives does not change the sign of the hedging premium, nor its magnitude.
    Keywords: risk management; financial risk; derivatives; corporate finance; Greece.
    JEL: G32
    Date: 2008–09–30

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