New Economics Papers
on Risk Management
Issue of 2008‒10‒28
eight papers chosen by

  1. Systemic Banking Crises: A New Database By Luc Laeven; Fabian Valencia
  2. ABS, MBS and CDO compared: an empirical analysis By Vink, Dennis
  3. An Empirical Analysis of Asset-Backed Securitization By Vink, Dennis
  4. Commodities and the Market Price of Risk By Shaun K. Roache
  5. Are Weak Banks Leading Credit Booms? Evidence from Emerging Europe By Deniz Igan; Natalia T. Tamirisa
  6. Sector Classification through non-Gaussian Similarity By Maximilian Vermorken; Ariane Szafarz; Hugues Pirotte
  7. Macroeconomic Factors and Stock Market Movement: Evidence from Ghana By Adam, Anokye M.; Tweneboah , George
  8. Minimum Funding Ratios for Defined-Benefit Pension Funds By Arjen Siegmann

  1. By: Luc Laeven; Fabian Valencia
    Abstract: This paper presents a new database on the timing of systemic banking crises and policy responses to resolve them. The database covers the universe of systemic banking crises for the period 1970-2007, with detailed data on crisis containment and resolution policies for 42 crisis episodes, and also includes data on the timing of currency crises and sovereign debt crises. The database extends and builds on the Caprio, Klingebiel, Laeven, and Noguera (2005) banking crisis database, and is the most complete and detailed database on banking crises to date.
    Keywords: Financial crisis , Banking sector , Banking crisis , Sovereign debt , Databases , Currencies , Spillovers , Economic recovery , Fiscal sustainability , Working Paper ,
    Date: 2008–09–19
  2. By: Vink, Dennis
    Abstract: The capital market in which 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 3,466 loans (worth €548.85 billion) of which 1,102 (worth €163.90 billion) have been classified as ABS. MBS issues represent 1,782 issues (worth €320.83 billion), and 582 are CDO issues (worth €64.12 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 suggest that ABS, MBS and CDOs are in fact different instruments, as implied by the differences in impact of the pricing factors on the loan spread between these security classes.
    Keywords: asset securitization; asset-backed securitisation; bank lending; default risk; risk management; spreads; leveraged financing
    JEL: G12 G0 G21
    Date: 2007–08–28
  3. By: Vink, Dennis
    Abstract: In this study we provide empirical evidence demonstrating a relationship between the nature of the assets and the primary market spread. The model also provides predictions on how other pricing characteristics affect spread, since little is known about how and why spreads of asset-backed securities are influenced by loan tranche characteristics. We find that default and recovery risk characteristics represent the most important group in explaining loan spread variability. Within this group, the credit rating dummies are the most important variables to determine loan spread at issue. Nonetheless, credit rating is not a sufficient statistic for the determination of spreads. We find that the nature of the assets has a substantial impact on the spread across all samples, indicating that primary market spread with backing assets that cannot easily be replaced is significantly higher relative to issues with assets that can easily be obtained. Of the remaining characteristics, only marketability explains a significant portion of the spreads’ variability. In addition, variations of the specifications were estimated in order to asses the robustness of the conclusions concerning the determinants of loan spreads.
    Keywords: asset securitization; asset-backed securitisation; bank lending; default risk; risk management; leveraged financing.
    JEL: G21 G20
    Date: 2007–08–28
  4. By: Shaun K. Roache
    Abstract: Commodities are back following a stellar run of price performance, attracting financial investor attention. What are the fundamental reasons to hold commodities? One reason is the exposure offered to underlying risk factors. In this paper, I assess the macro risk exposure offered by commodity futures and test whether these risks are priced, using Merton's (1973) intertemporal capital asset pricing model for a sample of commodity prices covering the period January 1973 - February 2008. I find that commodity futures offer a hedge against lower interest rates and that investors are willing to accept lower expected returns for this position. Although some commodities are also a hedge against U.S. dollar depreciation, this risk is not priced.
    Keywords: Commodity prices , Risk management , Interest rates , Asset prices , Economic models , Investment , Working Paper ,
    Date: 2008–09–15
  5. By: Deniz Igan; Natalia T. Tamirisa
    Abstract: This paper examines the behavior of bank soundness indicators during episodes of brisk loan growth, using bank-level data for central and eastern Europe and controlling for the feedback effect of credit growth on bank soundness. No evidence is found that rapid loan expansion has weakened banks during the last decade, but over time weaker banks seem to have started to expand at least as fast as, and in some markets faster than, stronger banks. These findings suggest that during credit booms supervisors need to carefully monitor the soundness of rapidly expanding banks and stand ready to take action to limit the expansion of weak banks.
    Keywords: Banking sector , Bank soundness , Credit expansion , Europe , Emerging markets , Bank credit , Risk management , Working Paper ,
    Date: 2008–09–15
  6. By: Maximilian Vermorken (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.); Ariane Szafarz (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and DULBEA, Université Libre de Bruxelles, Brussels.); Hugues Pirotte (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels)
    Abstract: Standard sector classification frameworks present drawbacks that might hinder portfolio manager. This paper introduces a new non-parametric approach to equity classification. Returns are decomposed into their fundamental drivers through Independent Component Analysis (ICA). Stocks are then classified according to the relative importance of identified fundamental drivers for their returns. A method is developed permitting the quantification of these dependencies, using a similarity index. Hierarchical clustering allows for grouping the stocks into new classes. The resulting classes are compared with those from the 2-digit GICS system for U.S. blue chip companies. It is shown that specific relations between stocks are not captured by the GICS framework. The method is applied on two different samples and tested for robustness.
    Keywords: equity sectors, industry classification, portfolio management
    JEL: G11 G19
    Date: 2008–10
  7. By: Adam, Anokye M.; Tweneboah , George
    Abstract: This study examines the role of macroeconomic variables on stock prices movement in Ghana. We use the Databank stock index to represent Ghana 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), and (d) the exchange rate as macroeconomic variables. We analyze both long-run and short-run dynamic relationships between the stock market index and the economic variable with quarterly data for the above variables from 1991.1 to 2006.4 using Johansen's multivariate cointegration test and innovation accounting techniques. We established that there is cointegration between macroeconomic variables identified and Stock prices in Ghana indicating long run relationship. Results of Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) indicate that interest rate and Foreign Direct Investment (FDI) are the key determinants of the share price movements in Ghana.
    Keywords: Cointegration; Innovation Accounting; Foreign Direct Investment (FDI)
    JEL: E44 C22 G10
    Date: 2008–10
  8. By: Arjen Siegmann
    Abstract: We compute minimum funding ratios for Defined Benefit (DB) plans based on the expected utility that can be achieved in a Defined Contribution (DC) pension scheme. Using Monte Carlo simulation, expected utility is computed for three different specifications of utility: power utility, mean-shortfall and mean-downside deviation. Depending on risk aversion and the level of sophistication assumed for the DC-scheme, minimum acceptable funding ratios are between 0.87 and 1.20. If the DC-scheme is constrained to a fixed-contribution setup, minimum funding ratios are between 0.87 and 0.98. Furthermore, the attractiveness of the DB plan increases with the expected equity premium and the fraction invested in stocks. We conclude that the expected value of intergenerational solidarity, implicit in the DB pension fund, can be large. Given a pension fund with a funding ratio of 1.30, a participant in a DC plan has to pay a 2.7 to 6.1%-point higher contribution to achieve equal expected utility.
    Keywords: defined-benefit pension fund; individual efficiency; defined-contribution
    JEL: E24 E52 J50
    Date: 2008–09

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