nep-rmg New Economics Papers
on Risk Management
Issue of 2009‒01‒31
six papers chosen by
Stan Miles
Thompson Rivers University

  1. Computing Skills in the Market Risk Management in the G-Sec Portfolio by the Banks in India By Das, Rituparna
  2. New recipes for estimating default intensities By Alexander Baranovski; Carsten von Lieres; André Wilch
  3. Banking Stability Measures By Miguel A. Segoviano Basurto; C. A. E. Goodhart
  4. The First Global Financial Crisis of the 21st Century By Reinhart, Carmen; Felton, Andrew
  5. A Banker’s Perspective on the Financial Crisis By Robert Amzallag; Michel Magnan; Bryan Campbell
  6. Time and risk diversification in real estate investments: assessing the ex post economic value By Carolina Fugazza; Massimo Guidolin; Giovanna Nicodano

  1. By: Das, Rituparna
    Abstract: Market Risk Management Process in India is in an evolving process since the Banks in India are still in an early stage of development in the sense that they are lacking statistical database, equipped MIS and adequate supply of trained personnel. Many a good number of banks are suffering from breaches of VaR calculated following internal models. Further they are also finding difficulty in validation with small sizes of sample. Firstly in India the maximum traded security during the first quarter of 2008-09 is the 10 year benchmark G-Sec but the return figures on a security of 10 year maturity are not available since the particular benchmark security has no more a maturity of 10 years after a single day elapsed. The security market is very thin with unutilized arbitrage opportunities and absence of pricing of the characters like convexity. Secondly liquidity in Indian money and G-Sec markets is not sufficient to induce active trading in all instruments of all maturities such as to get an idea of yield movement in every maturity. Thirdly using discreet compounding and discounting is not appropriate in valuation. Fourthly asset returns in reality follow other distributions like beta and log-logistics where the simple and probability weighted measures of average and standard deviation are different and hence 99% VaR estimate is well above the estimate based on the assumption of Normal Distribution. Finally it is not mandatory in India to compute VaR but Duration does not provide risk measurement across the categories of assets and, hence, aggregation of risk for the entire trading book.
    Keywords: Value at Risk; Fixed Income; G-Sec; Modified Duration; Capital Charge; Vertical Disallowance; Horizontal Disallowance; Portfolio; Zero Coupon; Term Structure; Yield Curve; YTM; Nelson-Siegel; CCIL; RBI
    JEL: D81
    Date: 2009–01–25
  2. By: Alexander Baranovski; Carsten von Lieres; André Wilch
    Abstract: This paper presents a new approach to deriving default intensities from CDS or bond spreads that yields smooth intensity curves required e.g. for pricing or risk management purposes. Assuming continuous premium or coupon payments, the default intensity can be obtained by solving an integral equation (Volterra equation of 2nd kind). This integral equation is shown to be equivalent to an ordinary linear differential equation of 2nd order with time dependent coefficients, which is numerically much easier to handle. For the special case of Nelson Siegel CDS term structure models, the problem permits a fully analytical solution. A very good and at the same time simple approximation to this analytical solution is derived, which serves as a recipe for easy implementation. Finally, it is shown how the new approach can be employed to estimate stochastic term structure models like the CIR model.
    Keywords: CDS spreads, bond spreads, default intensity, credit derivatives pricing, spread risk modelling, credit risk modelling, loan book valuation, CIR model
    JEL: C13 C20 C22
    Date: 2009–01
  3. By: Miguel A. Segoviano Basurto; C. A. E. Goodhart
    Abstract: This paper defines a set of banking stability measures which take account of distress dependence among the banks in a system, thereby providing a set of tools to analyze stability from complementary perspectives by allowing the measurement of (i) common distress of the banks in a system, (ii) distress between specific banks, and (iii) distress in the system associated with a specific bank. Our approach defines the banking system as a portfolio of banks and infers the system's multivariate density (BSMD) from which the proposed measures are estimated. The BSMD embeds the banks' default inter-dependence structure that captures linear and non-linear distress dependencies among the banks in the system, and its changes at different times of the economic cycle. The BSMD is recovered using the CIMDO-approach, a new approach that in the presence of restricted data, improves density specification without explicitly imposing parametric forms that, under restricted data sets, are difficult to model. Thus, the proposed measures can be constructed from a very limited set of publicly available data and can be provided for a wide range of both developing and developed countries.
    Keywords: Financial stability , Financial risk , Banking systems , Data analysis , Economic models ,
    Date: 2009–01–12
  4. By: Reinhart, Carmen; Felton, Andrew
    Abstract: Global financial markets are showing strains on a scale and scope not witnessed in the past three-quarters of a century. What started with elevated losses on U.S.-subprime mortgages has spread beyond the borders of the United States and the confines of the mortgage market. Many risk spreads have ballooned, liquidity in some market segments has dried up, and large complex financial institutions have admitted significant losses. Bank runs are no longer the subject exclusively of history.These events have challenged policymakers, and the responses have varied across region. The European Central Bank has injected reserves in unprecedented volumes. The Bank of England participated in the bail-out and, ultimately, the nationalization of a depository, Northern Rock. The U.S. Federal Reserve has introduced a variety of new facilities and extended its support beyond the depository sector. These events have also challenged economists to explain why the crisis developed, how it is unfolding, and what can be done. This volume compiles contributions by leading economists in VoxEU over the past year that attempt to answer these questions. We have grouped these contributions into three sections corresponding to those three critical questions.
    Keywords: sub-prime; financial crises; monertary policy; real estate prices;default
    JEL: E4
    Date: 2008–07
  5. By: Robert Amzallag; Michel Magnan; Bryan Campbell
    Abstract: During the last several years Robert Amzallag as Senior Fellow at CIRANO has taken an active interest in the research and transfer activities undertaken by the Finance Group. He has suggested initiatives that would be relevant to the financial industry in Montreal, particularly in derivative products and concerning practical issues in governance at the director’s level. As the former President and CEO at BNP Paribas (Canada), Mr. Amzallag is certainly well placed to offer insightful commentary on the financial crisis that has preoccupied us over the last several months.<p> Mr. Amzallag’s presentation combines a retrospective analysis of root causes of the crisis followed by some thoughts on what’s to come. As to causes, he isolates three trends that have been gathering force over several decades. These include the erosion of certain stabilizing factors, particularly in the credit market, that has lead to extreme concentrations of risk. Looking to the future, Mr. Amzallag cautiously explores the consequences of several scenarios or responses to the crisis. The first two represent the pursuit of policies reflecting established political sensibilities involving different degrees of government intervention. The third represents a more thoughtful re-appraisal of the different functions that the key players—governments, central banks, regulators and financial institutions —should pursue and should be left to pursue. <p> We have also invited CIRANO Fellow Michel Magnan, Professor of Accounting at Concordia’s John Molson School of Business to present an overview of the controversy surrounding marking to market, an issue highlighted by Mr. Amzallag as an important aspect of the crisis. Professor Michel Magnan takes up the technical but crucial issue of whether fair-value accounting [FVA] was an inadvertent messenger of the financial crisis or was an actual contributor to the crisis. The point is far from academic. <p> By way of appendices to these presentations, the Finance Group has prepared a graphic tool that permits the time-series presentation of key financial indicators against the historical background of the crisis. As well, we have prepared a primer on structured products, including synthetic CDOs, that have played a lead role in the current crisis. This presentation leads naturally to the software module developed at CIRANO that explores the risk management dimensions of these products. <P>
    Date: 2009–01–01
  6. By: Carolina Fugazza; Massimo Guidolin; Giovanna Nicodano
    Abstract: Welfare gains to long-horizon investors may derive from time diversification that exploits non-zero intertemporal return correlations associated with predictable returns. Real estate may thus become more desirable if its returns are negatively serially correlated. While it could be important for long horizon investors, time diversification has been mostly investigated in asset menus without real estate and focusing on in-sample experiments. This paper evaluates ex post, out-of-sample gains from diversification when E-REITs belong to the investment opportunity set. We find that diversification into REITs increases both the Sharpe ratio and the certainty equivalent of wealth for all investment horizons and for both Classical and Bayesian (who account for parameter uncertainty) investors. The increases in Sharpe ratios are often statistically significant. However, the out-of sample average Sharpe ratio and realized expected utility of long-horizon portfolios are frequently lower than that of a one-period portfolio, which casts doubts on the value of time diversification.
    Keywords: Real estate investment
    Date: 2009

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