nep-rmg New Economics Papers
on Risk Management
Issue of 2009‒04‒25
ten papers chosen by
Stan Miles
Thompson Rivers University

  1. Credit Losses in Economic Downturns - Empirical Evidence for Hong Kong Mortgage Loans By Daniel Rosch; Harald Scheule
  2. Measuring portfolio credit risk correctly: why parameter uncertainty matters By Nikola Tarashev
  3. Forecasting VaR and Expected Shortfall using Dynamical Systems: A Risk Management Strategy By Cyril Caillault; Dominique Guegan
  4. Incorporating the Dynamics of Leverage into Default Prediction By Gunter Löffler; Alina Maurer
  5. Medidas de Riesgo Financiero y una Aplicación a las Variaciones de Depósitos del Sistema Financiero Boliviano By Gonzales-Martínez, Rolando
  6. Romanian commercial banks and credit risk in financing SME By Covaci, Brindusa
  7. U.S. Stock Market Crash Risk, 1926-2006 By David S. Bates
  8. Asymptotic behavior of the finite-time expected time-integrated negative part of some risk processes By Romain Biard; Stéphane Loisel; Claudio Macci; Noel Veraverbeke
  9. Predicting Betas: Two new methods. By Mª Victoria Esteban González; Fernando Tusell Palmer
  10. Time Charters with Purchase Options in Shipping: Valuation and Risk Management By Jørgensen, Peter Løchte; De Giovanni, Domenico

  1. By: Daniel Rosch (Leibniz University of Hannover); Harald Scheule (University of Melbourne)
    Abstract: Recent studies find a positive correlation between default and loss given default rates of credit portfolios. In response, financial regulators require financial institutions to base their capital on the 'Downturn' loss rate given default which is also known as Downturn LGD. This article proposes a concept for the Downturn LGD which incorporates econometric properties of credit risk as well as the information content of default and loss given default models. The concept is compared to an alternative proposal by the Department of the Treasury, the Federal Reserve System and the Federal Insurance Corporation. An empirical analysis is provided for Hong Kong mortgage loan portfolios.
    Keywords: Basel II, Business Cycle, Capital Adequacy, Correlation, Credit Risk, Economic Downturn, Expected Loss, Fixed Income, Loss Given Default, Probability of Default, Value-at-Risk
    JEL: G20 G28 C51
    Date: 2008–08
  2. By: Nikola Tarashev
    Abstract: Why should risk management systems account for parameter uncertainty? In order to answer this question, this paper lets an investor in a credit portfolio face non-diversifiable estimation-driven uncertainty about two parameters: probability of default and asset-return correlation. Bayesian inference reveals that - for realistic assumptions about the portfolio's credit quality and the data underlying parameter estimates - this uncertainty substantially increases the tail risk perceived by the investor. Since incorporating parameter uncertainty in a measure of tail risk is computationally demanding, the paper also derives and analyzes a closed-form approximation to such a measure.
    Keywords: correlated defaults, estimation error, risk management
    Date: 2009–04
  3. By: Cyril Caillault (Fortis Investments - Fortis investments); 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: Using non-parametric 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 RiskMetrics 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 ; Copulas ; Risk management ; GARCH models ; Markov switching models
    Date: 2009–04
  4. By: Gunter Löffler; Alina Maurer
    Abstract: A firm’s current leverage ratio is one of the core characteristics of credit quality used in statistical default prediction models. Based on the capital structure literature, which shows that leverage is mean-reverting to a target leverage, we forecast future leverage ratios and include them in the set of default risk drivers. The analysis is done with a discrete duration model. Out-of-sample analysis of default events two to five years ahead reveals that the discriminating power of the duration model increases substantially when leverage forecasts are included. We further document that credit ratings contain information beyond the one contained in standard variables but that this information is unrelated to forecasts of leverage ratios.
    Keywords: default prediction, discrete duration model, leverage targeting, mean reversion, credit rating
    JEL: G32 G33
    Date: 2009–04
  5. By: Gonzales-Martínez, Rolando
    Abstract: This paper describes three measures of financial risk –Value at Risk (VaR) based on the Gaussian distribution, VaR based on extreme value theory and conditional VaR (expected shortfall) – and shows an application of these measures to the withdrawals of deposits in the Bolivian financial system. The results suggest that it’s important to consider the statistical assumptions of these measures, in order to avoid underestimate or overestimate the true financial risks.
    Keywords: Valor en Riesgo; Riesgo de liquidez; corridas de depósitos
    JEL: C65 G32
    Date: 2008–09
  6. By: Covaci, Brindusa
    Abstract: Romania’s integration in the European Union brought about some major changes in our banking system. One of the direct consequences is the fierce competition between banks for supremacy on the market. According to this, the Romanian banks saw in the SMEs sector a true potential for reaching their goal and they proceeded to conquer it by conceiving unique products, specially designed to reach the financial needs of this segment. Moreover, banks often come up with new attractive offers and cost reductions for the SMEs (Small and Mediu Sized Enterprises) sector. In this context, some answers need to be done: the effective risk banks accept to take by providing the offers, specific risks in financing this sector, the problem of the balance between risk and profit return (or market share increase).
    Keywords: credit risk; risk management; financing SME; bank policies
    JEL: D53 E44
    Date: 2008–11–23
  7. By: David S. Bates
    Abstract: This paper applies the Bates (RFS, 2006) methodology to the problem of estimating and filtering time- changed Lévy processes, using daily data on U.S. stock market excess returns over 1926-2006. In contrast to density-based filtration approaches, the methodology recursively updates the associated conditional characteristic functions of the latent variables. The paper examines how well time-changed Lévy specifications capture stochastic volatility, the “leverage†effect, and the substantial outliers occasionally observed in stock market returns. The paper also finds that the autocorrelation of stock market excess returns varies substantially over time, necessitating an additional latent variable when analyzing historical data on stock market returns. The paper explores option pricing implications, and compares the results with observed prices of options on S&P 500 futures.
    JEL: C22 C46 G1 G13
    Date: 2009–04
  8. By: Romain Biard (SAF - EA2429 - Laboratoire de Science Actuarielle et Financière - Université Claude Bernard - Lyon I); Stéphane Loisel (SAF - EA2429 - Laboratoire de Science Actuarielle et Financière - Université Claude Bernard - Lyon I); Claudio Macci (Dipartimento di Matematica - Università di Roma "Tor Vergata"); Noel Veraverbeke (Center for Statistics - Hasselt University)
    Abstract: In the renewal risk model, we study the asymptotic behavior of the expected time-integrated negative part of the process. This risk measure has been introduced by Loisel (2005). Both heavy-tailed and light-tailed claim amount distributions are investigated. The time horizon may be finite or infinite. We apply the results to an optimal allocation problem with two lines of business of an insurance company. The asymptotic behavior of the two optimal initial reserves are computed.
    Keywords: Ruin theory; heavy-tailed and light-tailed claim size distribution; risk measure; optimal reserve allocation
    Date: 2009–03–31
  9. By: Mª Victoria Esteban González (Facultad de CC. EE. y Empresariales, UPV/EHU); Fernando Tusell Palmer (Facultad de CC. EE. y Empresariales, UPV/EHU)
    Abstract: Betas play a central role in modern finance. The estimation of betas from historical data and their extrapolation into the future is of considerable practical interest. We propose two new methods: the first is a direct generalization of the method in Blume (1975), and the second is based on Procrustes rotation in phase space. We compare their performance with various competitors and draw some conclusions.
    Keywords: risk prediction, systematic risk, beta coefficients, Procustes rotation
    JEL: G11 G12
    Date: 2009–04–21
  10. By: Jørgensen, Peter Løchte (Department of Business Studies, Aarhus School of Business); De Giovanni, Domenico (Department of Business Studies, Aarhus School of Business)
    Abstract: The paper studies the valuation and optimal management of Time Charters with Purchase Options (T/C-POPs) which is a specific type of asset lease with embedded options that is common in shipping markets. T/C-POPs are economically significant and sometimes account for more than half of the stock market value of listed shipping companies. The main source of risk in markets for maritime transportation is the freight rate, and we therefore specify a single-factor continuous time model for the dynamic evolution of freight rates which allows us to price a wide variety of freight rate related derivatives including various forms of T/C-POPs using contingent claims valuation techniques. Our model allows for the derivation of closed valuation formulas for some simple freight rate derivatives while the more complex ones are analyzed using numerical (finite difference) procedures. We accompany our theoretical results with illustrative numerical examples as we proceed
    Keywords: ship valuation; options on ships; leasing; lease contracts with options; optimal stopping
    Date: 2008–10–06

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