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on Risk Management |
| 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:cesptp:halshs-00185374_v1&r=rmg |
| By: | CHOLLETE, Loran (Norwegian School of Economics and Business Administration (NHH)); HEINEN, Andréas (Universidad Carlos III de Madrid); VALDESOGO, Alfonso (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)) |
| Abstract: | In order to capture observed asymmetric dependence in international financial returns, we construct a multivariate regime-switching model of copulas. We model dependence with one Gaussian and one canonical vine copula regime. Canonical vines are constructed from bivariate conditional copulas and provide a very flexible way of characterizing dependence in multivariate settings. We apply the model to returns from the G5 and Latin American regions, and document two main findings. First, we discover that models with canonical vines generally dominate alternative dependence structures. Second, the choice of copula is important for risk management, because it modifies the Value at Risk (VaR) of international portfolio returns. |
| Keywords: | asymmetric dependence, canonical vine copula, international returns, regime-switching, risk management, Value-at-Risk. |
| JEL: | C32 C35 G10 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvco:2008013&r=rmg |
| By: | Loran , CHOLLETTE; Andreas , HEINEN; Alfonso , VALDESOGO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)) |
| Abstract: | In order to capture observed asymmetric dependence in international financial returns, we construct a multivariate regime-switching model of copula. We model dependence with one Gaussian and one canonical vine copula regime. Canonical vines are construted from bivariate conditional copulas and provide a very flexible way of characterizig dependence in multivariate settings. We apply the model to returns from the G5 and Latin American regions, and document two main findings. First, we discover that models with canonical vines generally dominate alternative dependence structures. Second, the choice of copula is important for risk management, because it modifies the Value at Risk (VaR) of international portfolio returns. |
| Keywords: | asymmetric dependence, canonical vine copula, international returns, regime-switching, risk management, Value-at-Risk |
| JEL: | C32 C35 G10 |
| Date: | 2008–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2008011&r=rmg |
| By: | Jesús P. Colino; Winfried Stute |
| Abstract: | A no-arbitrage framework to model interest rates with credit risk, based on the LIBOR additive process, and an approach to price corporate bonds in incomplete markets, is presented in this paper. We derive the no-arbitrage conditions under different conditions of recovery, and we obtain new expressions in order to estimate the probabilities of default under risk-neutral measure. |
| Keywords: | Credit-risk, Semimartingales, Interest-rate modelling |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws085417&r=rmg |
| By: | Sibbertsen, Philipp; Stahl, Gerhard; Luedtke, Corinna |
| Abstract: | Model risk as part of the operational risk is a serious problem for financial institutions. As the pricing of derivatives as well as the computation of the market or credit risk of an institution depend on statistical models the application of a wrong model can lead to a serious over- or underestimation of the institution’s risk. Because the underlying data generating process is unknown in practice evaluating the model risk is a challenge. So far, definitions of model risk are either application-oriented including risk induced by the statistician rather than by the statistical model or research-oriented and too abstract to be used in practice. Especially, they are not data-driven. We introduce a data driven notion of model risk which includes the features of the research-oriented approach by extending it by a statistical model building procedure and therefore compromises between the two definitions at hand. We furthermore suggest the application of robust estimates to reduce the model risk and advocate the application of stress tests with respect to the valuation of the portfolio. |
| Keywords: | risk evaluation, model risk, robust estimation, stress tests |
| JEL: | C50 G32 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-409&r=rmg |
| By: | Maximilian J. B. Hall (Dept of Economics, Loughborough University); Paul Hamalainen (University of Essex, Colchester, Essex, England, CO4 3SQ); Adrian Pop (University of Nantes, 44322 Nantes Cedex 3, France); Barry Howcroft (Loughborough University, Loughborough, Leicestershire, England, LE11 3TU) |
| Abstract: | The academic literature has regularly argued that market discipline can support regulatory authority discipline to monitor banking sector stability. This includes, amongst other things, using forward-looking market prices to identify those credit institutions that are most at risk of failure. The paper’s key aim is to analyse whether market investors signalled potential problems at Northern Rock in advance of the bank announcing that it had negotiated emergency lending facilities at the Bank of England in September 2007. A further aim of the paper is to examine the signalling qualities of four financial market instruments so as to explore both the relative and individual qualities of each. Therefore, the paper’s findings contribute to the market discipline literature on using market data to identify bank risk-taking and enhancing supervisory monitoring. In addition, the paper tests for evidence of an implicit “too-big-to-fail” policy in UK banking. Our analysis suggests that private market participants did signal impending financial problems at Northern Rock in advance of the bank announcing that it had negotiated emergency lending facilities. These findings lend some empirical support to proposals for the supervisory authorities to use market information more extensively to improve the identification of troubled banks. |
| Keywords: | Banking regulation, bank failures, market discipline, early warning signals. |
| JEL: | G14 G21 G28 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2008_11&r=rmg |
| By: | Winther, K. Tobias |
| Abstract: | This book presents a simple, yet very powerful, conceptual framework, which can be used to estimate market sizes, prices and their interdependency for new products based on historical market data for existing products in related areas. Even in situations where insufficient data is available the methods can be used in a semi-quantitative manner to evaluate the market potential for a given product or find ways to improve upon the product to make it more successful in the marketplace. The methods are explained in detail, examples of practical applications are provided; and the foundation in existing economic theory is discussed. |
| Keywords: | Business planning; car market; change management; cost; decision making; enabling mindset; enabling technology; innovation; market power; market size; marketing research; modeling; new product adoption; optimization; pricing; profit optimization; profit; radical innovation; risk; risk adjusted value; risk management; scenario planning; strategic planning; strategy; theory-structured learning; technology adoption; utilityscape; value; value chain; value creation; value driver; value net. |
| JEL: | D40 M30 |
| Date: | 2008–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11346&r=rmg |