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on Risk Management |
| By: | Herbertsson, Alexander (Department of Economics, School of Business, Economics and Law, Göteborg University); Jang, Jiwook (Department of Actuarial Studies, Faculty of Business and Economics, Macquarie University); Schmidt, Thorsten (Department of Mathematics, University of Chemnitz) |
| Abstract: | We value CDS spreads and kth-to-default swap spreads in a tractable shot noise model. The default dependence is modelled by letting the individual jumps of the default intensity be driven by a common latent factor. The arrival of the jumps is driven by a Poisson process. By using conditional independence and properties of the shot noise processes we derive tractable closed-form expressions for the default distribution and the ordered survival distributions in a homogeneous portfolio. These quantities are then used to price and study CDS spreads and kth-to-default swap spreads as function of the model parameters. We study the kth-to-default spreads as function of the CDS spread, as well as other parameters in the model. All calibrations lead to perfect fits.<p> |
| Keywords: | Credit risk; intensity-based models; dependence modelling; shot noise; CDS; kth-to-default swaps |
| JEL: | C02 C63 G13 G32 G33 |
| Date: | 2009–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0359&r=rmg |
| By: | Michel Fliess (LIX - Laboratoire d'informatique de l'école polytechnique - CNRS : UMR7161 - Polytechnique - X, INRIA Saclay - Ile de France - ALIEN - INRIA - Polytechnique - X - CNRS : UMR - Ecole Centrale de Lille); Cédric Join (INRIA Saclay - Ile de France - ALIEN - INRIA - Polytechnique - X - CNRS : UMR - Ecole Centrale de Lille, CRAN - Centre de recherche en automatique de Nancy - CNRS : UMR7039 - Université Henri Poincaré - Nancy I - Institut National Polytechnique de Lorraine - INPL) |
| Abstract: | We derive two new technical indicators for trading systems and risk management. They stem from trends in time series, the existence of which has been recently mathematically demonstrated by the same authors (A mathematical proof of the existence of trends in financial time series, Proc. Int. Conf. Systems Theory: Modelling, Analysis and Control, Fes, 2009), and from higher order quantities which replace the familiar statistical tools. Recent fast estimation techniques of algebraic flavor are utilized. The first indicator tells us if the future price will be above or below the forecasted trendline. The second one predicts abrupt changes. Several promising numerical experiments are detailed and commented. |
| Keywords: | Quantitative Finance, technical analysis, trading systems, risk management, trends, technical indicators, time series |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:inria-00370168_v3&r=rmg |
| By: | Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Francesco Marchionne (Universita Politecnica delle Marche) |
| Abstract: | The ultimate point of origin of the great financial crisis of 2007-2009 can be traced back to an extremely indebted US economy. The collapse of the real estate market in 2006 was the close point of origin of the crisis. The failure rates of subprime mortgages were the first symptom of a credit boom tuned to bust and of a real estate shock. But large default rates on subprime mortgages cannot account for the severity of the crisis. Rather, low-quality mortgages acted as an accelerant to the fire that spread through the entire financial system. The latter had become fragile as a result of several factors that are unique to this crisis: the transfer of assets from the balance sheets of banks to the markets, the creation of complex and opaque assets, the failure of ratings agencies to properly assess the risk of such assets, and the application of fair value accounting. To these novel factors, one must add the now standard failure of regulators and supervisors in spotting and correcting the emerging weaknesses. Accounting data fail to reveal the full extent of the financial maelstrom. Ironically, according to these data, US banks appear to be still adequately capitalized. Yet, bank undercapitalization is the biggest stumbling block to a resolution of the financial crisis. |
| Keywords: | accounting, banks, credit, crisis, fair values, risk aversion, undercapitalization |
| JEL: | G21 N20 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:iuk:wpaper:2009-02&r=rmg |
| By: | Kerstin Bernoth; Andreas Pick |
| Abstract: | This paper considers the issue of forecasting financial fragility of banks and insurances using a panel data set of performance indicators, namely distance-to- default, taking unobserved common factors into account. We show that common factors are important in the performance of banks and insurances, analyze the influences of a number of observable factors on banking and insurance performance, and evaluate the forecasts from our model. We find that taking unobserved common factors into account reduces the the root mean square forecasts error of firm specific forecasts by up to 11% and of system forecasts by up to 29% relative to a model based only on observed variables. Estimates of the factor loadings suggest that the correlation of financial institutions has been relatively stable over the forecast period. |
| Keywords: | Financial stability, financial linkages, banking, insurances, unobserved common factors, forecasting |
| JEL: | C53 G21 G22 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp882&r=rmg |
| By: | Peroni, Chiara |
| Abstract: | This paper studies determinants of risk premia using a non-parametric term-structure model of the corporate spread. The model, which measures the extra return of defaultable corporate bonds on their government counterparts, involves the rate of inflation, a key macroeconomic variable that is found to explain the spread non-linearly. This study shows that non-linear methods are useful to investigate features of credit risk and that they give better results than their linear counterparts, enabling testing of affine term-structure specifications. The paper also shows how the non-linear model can be used to forecast the future course of the spread. |
| Keywords: | risk premium; corporate spread; default; additive models; non-parametric estimation. |
| JEL: | G12 C14 E44 |
| Date: | 2008–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:15010&r=rmg |
| By: | Itoh, Yuki |
| Abstract: | Recently because of Basel II and the subprime mortgage crisis, the quantification of recovery size and recovery rate for the debt of a defaulted company is a serious problem for financial institutions and their supervision, but there has been no study of structure of recovery process. Existent recovery models do not regard recovery progress before the time of achievement of recovery. We directly model recovery process for the debt of a single defaulted company. We model the recovery process by a homogeneous compound Poisson process and extend our model to an inhomogeneous compound Poisson process. Interest rate is explicitly used in our model. By our model, the relationship between cumulative recovery, the increment of recovery, the initial debt amount, the last recovery possible time and interest rate can be analyzed. We derive the expectation and the variance of the survival value of the debt and recovery rate, and also derive the probability distribution function and the expectation of the recovery completion time. For this paper we present the numerical methods of calculating the expectation and the variance based on Panjer recursion formula and the fast Fourier transformation, and give numerical result. The methods of calculating the transition density of an inhomogeneous compound Poisson process is necessary for calculating the expectation and the variance of those in the inhomogeneous compound Poisson model, however little attention has been given to such methods. Therefore we propose the new procedure for calculating it by a piecewise homogeneous compound Poisson process. |
| Keywords: | Recovery rate, Credit risk, Basel, inhomogeneous compound Poisson process, Loan |
| JEL: | C61 C63 G10 G21 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:hit:econdp:2008-08&r=rmg |
| By: | Söderberg, Jonas (Centre for Labour Market Policy Research (CAFO)) |
| Abstract: | This paper examines whether the pairwise comovement between stocks quoted on the Stockholm stock exchange can be correctly quantified by the Gaussian copula, i.e., by linear correlation. Two different methods are used to test whether the dependence on the Swedish stock market can be modeled by the Gaussian copula. From these tests, we come to the conclusion that the Gaussian copula is not an appropriate choice of copula for the Swedish stock market. We also come to the same conclusion when observing sector and industry indices on the Swedish stock market. However, if performing a GARCH filtering of the return series, there is a substantial decrease in the number of pairs of either stocks or indices for which the Gaussian copula can be rejected. For the two test methods, a notable difference in the rejection rate of the Gaussian copula can also be observed. |
| Keywords: | Risk management; Gaussian copula; Swedish stock markets; GARCH filtering |
| JEL: | C52 G11 G32 |
| Date: | 2008–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:vxcafo:2009_009&r=rmg |
| By: | Kokholm, Thomas (Department of Business Studies, Aarhus School of Business); Nicolato, Elisa (Department of Business Studies, Aarhus School of Business) |
| Abstract: | In reduced form default models, the instantaneous default intensity is classically the modeling object. Survival probabilities are then given by the Laplace transform of the cumulative hazard defined as the integrated intensity process. Instead, recent literature has shown a tendency towards specifying the cumulative hazard process directly. Within this framework we present a new model class where cumulative hazards are described by self-similar additive processes, also known as Sato processes. Furthermore we also analyze specifications obtained via a simple deterministic time-change of a homogeneous Levy process. While the processes in these two classes share the same average behavior over time, the associated intensities exhibit very different properties. Concrete specifications are calibrated to data on the single names included in the iTraxx Europe index. The performances are compared with those of a recently proposed class of intensity models based on Ornstein-Uhlenbeck type processes. It is shown how the time-inhomogeneous Levy models achieve comparable calibration errors with fever parameters, and with more stable parameter estimates over time. However, the calibration performances of the Sato processes and the time-change specifications are practically indistinguishable |
| Keywords: | credit default swap; reduced form model; Sato process; time-changed Lévy process; cumulative hazard |
| Date: | 2009–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:hhb:aarbfi:2009-01&r=rmg |
| By: | Onour, Ibrahim |
| Abstract: | This paper investigates sensitivity of U.S. natural gas price to crude oil price changes, using time-varying coefficient models. Identification of the range of variation of the sensitivity of natural gas price to oil price change allows more accurate assessment of upper and minimum risk levels that can be utilized in pricing natural gas derivatives such as gas futures and option contracts, and gas storage facility contracts. |
| Keywords: | Natural gas; Sensitivity; GARCH; Volatility; Skewness; Kurtosis |
| JEL: | C22 C01 |
| Date: | 2009–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14937&r=rmg |