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on Risk Management |
| By: | Gilles Dufrenot (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Anne Peguin-Feissolle (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579) |
| Abstract: | This paper presents a 2-regime SETAR model with different long-memory processes in both regimes. We briefly present the memory properties of this model and propose an estimation method. Such a process is applied to the absolute and squared returns of five stock indices. A comparison with simple FARIMA models is made using some forecastibility criteria. Our empirical results suggest that our model offers an interesting alternative competing framework to describe the persistent dynamics in modeling the returns. |
| Keywords: | SETAR - Long-memory - Stock indices - Forecasting |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:paris1:halshs-00185369_v1&r=rmg |
| By: | Alexander Subbotin (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Higher School of Economics - State University) |
| Abstract: | We decompose volatility of a stock market index both in time and scale using wavelet filters and design a probabilistic indicator for valatilities, analogous to the Richter scale in geophysics. The peak-over-threshold method is used to fit the generalized Pareto probability distribution for the extreme values in the realized variances of wavelet coefficients. The indicator is computed for the daily Dow Jones Industrial Averages index data from 1986 to 2007 and for the intraday CAC 40 data from 1995 to 2006. The results are used for comparison and structural multi-resolution analysis of extreme events on the stock market and for the detection of financial crises. |
| Keywords: | Stock market, volatility, wavelets, multi-resolution analysis, financial crisis. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:paris1:halshs-00261514_v1&r=rmg |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | In this paper we deal with the problem of non-stationarity encountered in a lot of data sets, mainly in financial and economics domains, coming from the presence of multiple seasonnalities, jumps, volatility, distorsion, aggregation, etc. Existence of non-stationarity involves spurious behaviors in estimated statistics as soon as we work with finite samples. We illustrate this fact using Markov switching processes, Stopbreak models and SETAR processes. Thus, working with a theoretical framework based on the existence of an invariant measure for a whole sample is not satisfactory. Empirically alternative strategies have been developed introducing dynamics inside modelling mainly through the parameter with the use of rolling windows. A specific framework has not yet been proposed to study such non-invariant data sets. The question is difficult. Here, we address a discussion on this topic proposing the concept of meta-distribution which can be used to improve risk management strategies or forecasts. |
| Keywords: | Non-stationarity, switching processes, SETAR processes, jumps, forecast, risk management, copula, probability distribution function. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:paris1:halshs-00270708_v1&r=rmg |
| By: | Jacobson, Tor (Research Department, Central Bank of Sweden); Kindell, Rikard (Svenska Handelsbanken); Lindé, Jesper (Monetary Policy Department, Central Bank of Sweden); Roszbach, Kasper (Research Department, Central Bank of Sweden) |
| Abstract: | This paper studies the relation between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. Using a logit approach on a panel data set for all incorporated Swedish businesses over 1990- 2002, we find strong evidence for a substantial and stable impact of aggregate fluctuations. Macroeffects differ across industries in an economically intuitive way. Out-of-sample evaluations show our approach is superior to both models that exclude macro information and best fitting naive forecasting models. While firm-specific factors are useful in ranking firms’ relative riskiness, macroeconomic factors capture fluctuations in the absolute risk level. |
| Keywords: | Default; default-risk model; business cycles; aggregate fluctuations; microdata; logit; firm-specific variables; macroeconomic variables |
| JEL: | C35 C41 C52 E44 G21 G33 |
| Date: | 2008–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0226&r=rmg |
| By: | Jakub Seidler (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper focuses on the key credit risk parameter–Loss Given Default (LGD). We describe its general properties and determinants with respect to seniority of debt, characteristics of debtors or macroeconomic conditions. Further, we illustrate how the LGD can be extracted from market observable information with help of the adjusted Mertonian structural approach. We present a derivation of the formula for expected LGD and show its sensitivity analysis with respect to other structural parameters of the company. Finally, we estimate the 5-year expected LGDs for companies listed on Prague Stock Exchange and find out, that the average LGD for this analyzed sample is around 20%. To the author’s best knowledge, those are the first implied market estimates of LGD in the Czech Republic. |
| Keywords: | loss given default, credit risk, structural models |
| JEL: | C02 G13 G33 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2008_26&r=rmg |
| By: | Olga Bohachova |
| Abstract: | This paper explores the links between macroeconomic conditions and individual bank risk. Using capital adequacy ratios as a broad measure of risk sustainability, a linear mixed effects model for a large international panel of banks for the years 2001-2005 is estimated. In OECD countries, banks tend to hold higher capital ratios during business cycle highs, this effect being even stronger for a subsample of EU banks. In non-OECD countries, periods of higher economic growth are associated with lower capital ratios. This indicates procyclical behavior. Banks accumulate risks more rapidly in economically good times and some of these risks materialize as asset quality deteriorates during subsequent recessions. Furthermore, higher inflation rates are associated with higher capital ratios of banks, implying that inflation-induced economic uncertainty stimulates banks to restrict credit. As far as regulatory and institutional environment is concerned, econometric estimates show that banks in non-OECD countries with deposit insurance tend to be more risky, whereas evidence of a negative relationship between concentration of the banking sector and banks’ risk taking is statistically less robust. |
| Keywords: | international banking, macroeconomic conditions, banking risk |
| JEL: | F37 F41 G21 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:iaw:iawdip:44&r=rmg |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Cyril Caillault (FORTIS Investments - Fortis investments) |
| Abstract: | Using non-parametric (copulas) and parametric models, we show that the bivariate distribution of an Asian portfolio is not stable along all the period under study. We suggest several dynamic models to compute two market risk measures, the Value at Risk and the Expected Shortfall: the RiskMetric methodology, the Multivariate GARCH models, the Multivariate Markov-Switching models, the empirical histogram and the dynamic copulas. We discuss the choice of the best method with respect to the policy management of bank supervisors. The copula approach seems to be a good compromise between all these models. It permits taking financial crises into account and obtaining a low capital requirement during the most important crises. |
| Keywords: | Value at Risk - Expected Shortfall - Copula - RiskMetrics - Risk management -GARCH models - Switching models. |
| Date: | 2008–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:paris1:halshs-00185374_v1&r=rmg |
| By: | Ricardo Mestre (Corresponding author: European Central Bank, DG Research, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Peter McAdam (European Central Bank, DG Research, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We evaluate residual projection strategies in the context of a large-scale macro model of the euro area and smaller benchmark time-series models. The exercises attempt to measure the accuracy of model-based forecasts simulated both out-of-sample and in-sample. Both exercises incorporate alternative residual-projection methods, to assess the importance of unaccounted-for breaks in forecast accuracy and off-model judgment. Conclusions reached are that simple mechanical residual adjustments have a significant impact of forecasting accuracy irrespective of the model in use, ostensibly due to the presence of breaks in trends in the data. The testing procedure and conclusions are applicable to a wide class of models and thus of general interest. JEL Classification: C52, E30, E32, E37. |
| Keywords: | Macro-model, Forecast Projections, Out-of-Sample, In-Sample, Forecast Accuracy, Structural Break. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080950&r=rmg |
| By: | Tobias Adrian; Markus K. Brunnermeier |
| Abstract: | We define CoVaR as the value at risk (VaR) of financial institutions conditional on other institutions being in distress. The increase of CoVaR relative to VaR measures spillover risk among institutions. We estimate CoVaR using quantile regressions and document significant CoVaR increases among financial institutions. We identify six risk factors that allow institutions to offload tail risk and show that such hedging reduces the wedge between CoVaR and VaR. We argue that financial institutions should report CoVaR in addition to VaR, and we draw implications for risk management, regulation, and systemic risk. We define co-expected shortfall as a sum of CoVaRs. |
| Keywords: | Risk ; Risk management ; Financial institutions |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:348&r=rmg |
| By: | Tor Jacobson; Rikard Kindell; Jesper Linde; Kasper Roszbach |
| Abstract: | This paper studies the relation between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. Using a logit approach on a panel data set for all incorporated Swedish businesses over 1990-2002, we find strong evidence for a substantial and stable impact of aggregate fluctuations. Macroeffects differ across industries in an economically intuitive way. Out-of-sample evaluations show our approach is superior to both models that exclude macro information and best fitting naive forecasting models. While firm-specific factors are useful in ranking firms’relative riskiness, macroeconomic factors capture fluctuations in the absolute risk level. |
| Keywords: | Business failures |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:08-21&r=rmg |
| By: | Mathieu Gatumel (Axa - AXA); Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | The paper aims to present the insurance linked securities market behaviour, that has changed a lot the past three years, both in terms of structure and in terms of ceded risks. After having introduced some stylized facts characterizing the insurance linked securities we capture their market price of risk, following the methodologies of Wang (2004), Lane (2000) and Fermat Capital Management (2005). A dynamical study of the insurance linked securities is also provided in order to understand the elements driving the spreads : the consequences of the catastrophic events, the seasonality and the diversification effects between some different risks are highlighted. |
| Keywords: | Insurance linked securities, cat. bonds, market price of risk. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:paris1:halshs-00235354_v1&r=rmg |