New Economics Papers
on Risk Management
Issue of 2009‒02‒07
twelve papers chosen by

  1. Stages of the 2007/2008 Global Financial Crisis Is There a Wandering Asset-Price Bubble? By Orlowski, Lucjan T.
  2. Annual Default Rates and Probably Less Than Long-Run Average Annual Default Rates By Kiefer, Nicholas M.
  3. EAD calibration for corporate credit lines By Gabriel Jiménez; Jose A. Lopez; Jesús Saurina
  4. Risk Management Failures: What Are They and When Do They Happen? By Stulz, Rene M.
  5. Can Credit Default Swaps Predict Financial Crises: An Empirical Test on Emerging Markets By Neziri, Hekuran
  6. Default Estimation, Correlated Defaults, and Expert Information By Kiefer, Nicholas M.
  7. Enterprise-level risk assessment of geographically diversified commercial farms: a copula approach By Larsen, Ryan; Vedenov, Dmitry; Leatham, David
  8. Hazardous times for monetary policy: What do twenty-three million bank loans say about the effects of monetary policy on credit risk-taking? By Gabriel Jiménez; Steven Ongena; José Luis Peydró; Jesús Saurina
  9. Evaluation of Risk Management Methods for Satsuma Mandarin By Lindsey, Jeanne K.; Duffy, Patricia A.; Nelson, Robert G.; Ebel, Robert C.; Dozier, William A.
  10. Risk-adjusted forecasts of oil prices By Patrizio Pagano; Massimiliano Pisani
  11. Cotton Price Risk Management across Different Countries By Wang, Qizhi; Chidmi, Benaissa
  12. The Impact of the Average Crop Revenue Election (ACRE) Program on the Effectiveness of Crop Insurance By Hong, Sung Wook; Power, Gabriel J.; Vedenov, Dmitry V.

  1. By: Orlowski, Lucjan T.
    Abstract: This study identifies five distinctive stages of the current global financial crisis: the meltdown of the subprime mortgage market; spillovers into broader credit market; the liquidity crisis epitomized by the fallout of Northern Rock, Bear Stearns and Lehman Brothers with counterparty risk effects on other financial institutions; the commodity price bubble, and the ultimate demise of investment banking in the U.S. The study argues that the severity of the crisis is influenced strongly by changeable allocations of global savings coupled with excessive credit creation, which lead to over-pricing of varied types of assets. The study calls such process a “wandering asset-price bubble”. Unstable allocations elevate market, credit and liquidity risks. Monetary policy responses aimed at stabilizing financial markets are proposed.
    Keywords: Subprime mortgage crisis, credit crisis, liquidity crisis, market risk, credit risk, default risk, counterparty risk, Basel II
    JEL: G12 G15 G21 G24
    Date: 2008
  2. By: Kiefer, Nicholas M. (Cornell U and US Department of the Treasury)
    Abstract: Banks using either the Foundation or Advanced option of the Internal Ratings Based approach to credit risk under Basel II must estimate long-run annual average default probabilities for buckets of homogeneous assets. The one-factor model underlying the capital calculations in Basel II has implications for the distribution of average (across assets) default rates over time. One of these implications is that the average default rate in any period is probably smaller than the overall average default rate (over time and assets). The lesson for practioners is that the short-term default experience of new, very safe assets is likely to underpredict the true long-run default rate for these assets.
    Date: 2008–05
  3. By: Gabriel Jiménez; Jose A. Lopez; Jesús Saurina
    Abstract: Managing the credit risk inherent to a corporate credit line is similar to that of a term loan, but with one key difference. For both instruments, the bank should know the borrower's probability of default (PD) and the facility's loss given default (LGD). However, since a credit line allows the borrowers to draw down the committed funds according to their own needs, the bank must also have a measure of the line's exposure at default (EAD). Our study, which is based on a census of all corporate lending within Spain over the last 20 years, provides the most comprehensive overview of corporate credit line use and EAD calculations to date. Our analysis shows that defaulting firms have significantly higher credit line usage rates and EAD values up to five years prior to their actual default. Furthermore, we find that there are important variations in EAD values due to credit line size, collateralization, and maturity. While our results are derived from data for a single country, they should provide useful benchmarks for further academic, business and policy research into this underdeveloped area of credit risk management.
    Keywords: Commercial loans ; Bank loans ; Credit
    Date: 2009
  4. By: Stulz, Rene M. (Ohio State U and ECGI)
    Abstract: A large loss is not evidence of a risk management failure because a large loss can happen even if risk management is flawless. I provide a typology of risk management failures and show how various types of risk management failures occur. Because of the limitations of past data in assessing the probability and the implications of a financial crisis, I conclude that financial institutions should use scenarios for credible financial crisis threats even if they perceive the probability of such events to be extremely small.
    Date: 2008–10
  5. By: Neziri, Hekuran
    Abstract: We explore the informational value of credit default swaps and the extent to which they may be linked to financial crises. After developing a theoretical framework to model the relationship between credit default swap market and equity and currency markets, we apply an empirical study which uses logistic regressions and a panel data sample of emerging markets to assess the ability of these financial instruments to predict crises. Regarding them as reflections of future expectations of investors on the outcomes of currency and equity markets, we find credit default swaps to be a significant indicator explaining the periods proceeding financial crises, at least in equity markets. The inclusion of credit default swaps as a factor in models that predict crises and their ability to improve predictions in equity market is a major contribution of this study to the existing literature.
    Keywords: Credit Default Swaps; Stock Market Crises; Currency Crises; Emerging Market Debt
    JEL: F3
    Date: 2008–12–10
  6. By: Kiefer, Nicholas M. (Cornell U and US Department of the Treasury)
    Abstract: Capital allocation decisions are made on the basis of an assessment of creditworthiness. Default is a rare event for most segments of a bank's portfolio and data information can be minimal. Inference about default rates is essential for efficient capital allocation, for risk management and for compliance with the requirements of the Basel II rules on capital standards for banks. Expert information is crucial in inference about defaults. A Bayesian approach is proposed and illustrated using prior distributions assessed from industry experts. A maximum entropy approach is used to represent expert information. The binomial model, most common in applications, is extended to allow correlated defaults yet remain consistent with Basel II. The application shows that probabilistic information can be elicited from experts and econometric methods can be useful even when data information is sparse.
    Date: 2008–04
  7. By: Larsen, Ryan; Vedenov, Dmitry; Leatham, David
    Abstract: As agriculture becomes more industrialized, the role of risk measures such as value-at-risk (VaR) will become more utilized. In this case it was applied to geographical diversification and also modifying the traditional VaR estimation by incorporating a copula dependence parameter into the VaR estimation. In addition, an alternative risk measure was also calculated, CVaR. The CVaR, unlike VaR, is a coherent risk measure. Thus it does not suffer from many of the shortcomings of the VaR. The land portfolio consisted of Dryland wheat production acres in Texas, Colorado, and Montana. Three series of net returns were calculated for each region. Based on the VaR and the CVaR, the portfolio was optimized based on minimizing the expected loss based on historical net revenues. The results showed that diversification could be reduced by producing in all three areas.  
    Keywords: Copula, CVaR, Risk-Management, Geographical Diversification, Agribusiness, Farm Management, Risk and Uncertainty,
    Date: 2009
  8. By: Gabriel Jiménez (Banco de España); Steven Ongena (Center–Tilburg University); José Luis Peydró (European Central Bank); Jesús Saurina (Banco de España)
    Abstract: We identify the impact of short-term interest rates on credit risk-taking by analyzing a comprehensive credit register from Spain, a country where for the last twenty years monetary policy was mostly decided abroad. Discrete choice, within borrower comparison and duration analyses show that lower overnight rates prior to loan origination lead banks to lend more to borrowers with a worse credit history and to grant more loans with a higher per period probability of default. Lower overnight rates during the life of the loan reduce this probability. Bank, borrower and market characteristics determine the impact of overnight rates on credit risk-taking.
    Keywords: monetary policy, low interest rates, financial stability, lending standards, credit risk-taking, credit composition, business cycle, liquidity risk
    JEL: E44 E5 G21
    Date: 2009–01
  9. By: Lindsey, Jeanne K.; Duffy, Patricia A.; Nelson, Robert G.; Ebel, Robert C.; Dozier, William A.
    Abstract: Simulation of production budgets were used to compare net discounted returns and the distribution of returns under alternative risk-mitigation scenarios. Results indicate that the combination of freeze protection and crop insurance increases expected net discounted 20-year returns while decreasing the downside risk. Break-even prices ranged from $.257 to $.289 per pound. Crop insurance returns were constant across price.
    Keywords: Satsuma oranges, freeze protection, crop insurance, production budget, simulation, Crop Production/Industries, Farm Management, Risk and Uncertainty, C63, D81, Q12,
    Date: 2009
  10. By: Patrizio Pagano (Bank of Italy, via Nazionale 91, I - 00184 Rome, Italy.); Massimiliano Pisani (Bank of Italy, via Nazionale 91, I - 00184 Rome, Italy.)
    Abstract: This paper documents the existence of a significant forecast error on crude oil futures. We interpret it as a risk premium, which, in part, could have been explained by means of a real-time US business cycle indicator, such as the degree of capacity utilization in manufacturing. This result is robust to the specification of the estimating equation and to the considered business cycle indicator. An out-of-the-sample prediction exercise reveals that futures adjusted to take into account this time-varying component produce significantly better forecasts than those of unadjusted futures, of futures adjusted for the average forecast error and of the random walk, particularly at horizons of more than 6 months. JEL Classification: E37, E44, G13, Q4.
    Keywords: Oil, Forecasting, Futures.
    Date: 2009–01
  11. By: Wang, Qizhi; Chidmi, Benaissa
    Abstract: Cotton price relationships between major cotton producers and New York cotton December future price are investigated by the regression model, the VAR model and the error-correction model, the error-correction model generates the hedge ratios that display the largest value in size in most of the cases except Australia. The results indicate that the price relationships between US, China and Australia and New York Future market prices are much higher than the relationships between other cotton producers and New York Future market prices.
    Keywords: cotton price, New York future market prices, the regression model, the VAR model, the error-correction model, Agribusiness, Agricultural Finance,
    Date: 2009–01–16
  12. By: Hong, Sung Wook; Power, Gabriel J.; Vedenov, Dmitry V.
    Abstract: This paper analyzes the effect of the ACRE program adopted in the final version of the 2007 Farm Bill on the risk-reducing effectiveness of insurance products. To the best of our knowledge this is a first attempt to analyze the effect of the ACRE program on the risk management decisions of crop producers. In particular, we compare the risk-reducing effectiveness of the two most common insurance contracts — APH and CRC — under the provisions of the 2002 Farm Bill and under ACRE program for representative cotton producer in Texas and corn producer in Illinois. These particular crop/region combinations are selected so as to represent situations of low and high price-yield correlations, respectively.
    Keywords: Crop insurance, Farm Bill, ACRE, Agribusiness, Agricultural and Food Policy, Agricultural Finance, Crop Production/Industries, Risk and Uncertainty,
    Date: 2009–01–15

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.