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on Risk Management |
| By: | Juan-Angel Jimenez-Martin (Dpto. de Fundamentos de Análisis Económico II, Universidad Complutense); Michael McAleer; Teodosio Pérez-Amaral (Dpto. de Fundamentos de Análisis Económico II, Universidad Complutense) |
| Abstract: | The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing sensibly from a variety of risk models, discuss the selection of optimal risk models, consider combining alternative risk models, discuss the choice between a conservative and aggressive risk management strategy, and evaluate the effects of the Basel II Accord on risk management. We also examine how risk management strategies performed during the 2008-09 financial crisis, evaluate how the financial crisis affected risk management practices, forecasting VaR and daily capital charges, and discuss alternative policy recommendations, especially in light of the financial crisis. These issues are illustrated using Standard and Poor’s 500 Index, with an emphasis on how risk management practices were monitored and encouraged by the Basel II Accord regulations during the financial crisis. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:0918&r=rmg |
| By: | Andrea Bastianin (Fondazione Eni Enrico Mattei) |
| Abstract: | In this paper I have used copula functions to forecast the Value-at-Risk (VaR) of an equally weighted portfolio comprising a small cap stock index and a large cap stock index for the oil and gas industry. The following empirical questions have been analyzed: (i) are there nonnormalities in the marginals? (ii) are there nonnormalities in the dependence structure? (iii) is it worth modelling these nonnormalities in risk- management applications? (iv) do complicated models perform better than simple models? As for questions (i) and (ii) I have shown that the data do deviate from the null of normality at the univariate, as well as at the multivariate level. When considering the dependence structure of the data I have found that asymmetries show up in their unconditional distribution, as well as in their unconditional copula. The VaR forecasting exercise has shown that models based on Normal marginals and/or with symmetric dependence structure fail to deliver accurate VaR forecasts. These findings confirm the importance of nonnormalities and asymmetries both in-sample and out-of-sample. |
| Keywords: | Copula functions, Forecasting, Value-At-Risk |
| JEL: | C32 C52 C53 Q43 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2009.24&r=rmg |
| By: | Dominique Guegan (Centre d'Economie de la Sorbonne - Paris School of Economics); Bertrand Hassani (CNCE et Centre d'Economie de la Sorbonne) |
| Abstract: | Operational risks inside banks and insurance companies is currently an important task. The computation of a risk measure associated to these risks lies on the knowledge of the so-called Loss Distribution Function. Traditionally this distribution function is computed via the Panjer algorithm which is an iterative algorithm. In this paper, we propose an adaptation of this last algorithm in order to improve the computation of convolutions between Panjer class distributions and continuous distributions. This new approach permits to reduce drastically the variance of the estimated VAR associated to the operational risks. |
| Keywords: | Operational risk, Panjer algorithm, Kernel, numerical integration, convolution. |
| JEL: | C1 C6 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:09023&r=rmg |
| By: | 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); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | Operational risks inside banks and insurance companies is currently an important task. The computation of a risk measure associated to these risks lies on the knowledge of the so-called Loss Distribution Function. Traditionally this distribution function is computed via the Panjer algorithm which is an iterative algorithm. In this paper, we propose an adaptation of this last algorithm in order to improve the computation of convolutions between Panjer class distributions and continuous distributions. This new approach permits to reduce drastically the variance of the estimated VAR associated to the operational risks. |
| Keywords: | Operational risk, Panjer algorithm, Kernel, numerical integration, convolution. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00384398_v1&r=rmg |
| By: | Sinha, Pankaj; Taneja, Varundeep Singh; Gothi, Vineet |
| Abstract: | Recently, a lot of questions were raised about the financial health of commercial banks in India. This paper analyzes the Indian banks' riskiness and the probability of book-value insolvency under the framework developed by Hannan and Hanweck (1988). A risk index, known as Z score, for Global Trust Bank that became insolvent in 2004 suggests that the framework developed by Hannan and Hanweck (1988) is also relevant in the Indian context. For a random sample of 15 Indian Banks (public & private sector), we determine the riskiness/probability of book value insolvency over the years and also carry out a relative comparison between public and private sector banks in India. Results obtained in the study show that the probability of book value insolvency of Indian Banks has reduced over years and the probability of book value insolvency is lower in case of public sector banks in comparison to private sector banks. |
| Keywords: | Riskiness; insolvency; Z-statistic |
| JEL: | E58 O16 |
| Date: | 2009–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:15251&r=rmg |
| By: | Jan Piplack; Stefan Straetmans |
| Abstract: | This paper assesses the linkages between the most important U.S.financial asset classes (stocks, bonds, T-bills and gold) during periods of financial turmoil. Our results have potentially important implications for strategic asset allocation and pension fund management. We use multivariate extreme value theory to estimate the exposure of one asset class to extreme movements in the other asset classes. By applying structural break tests to those measures we study to what extent linkages in extreme asset returns and volatilities are changing over time. Univariate results andch bivariate comovement results exhib significant breaks in the 1970s and 1980s corresponding to the turbulent times of e.g. the oil shocks, Volcker's presidency of the Fed or the stock market crash of 1987. |
| Keywords: | Flight to quality, financial market distress, extreme value theory |
| JEL: | G15 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0909&r=rmg |
| By: | Pravin Krishna; Mine Zeynep Senses |
| Abstract: | This paper studies empirically the links between international trade and labor income risk faced by workers in the United States. We use longitudinal data on workers to estimate time-varying individual income risk at the industry level. We then combine our estimates of persistent labor income risk with measures of exposure to international trade to analyze the relationship between trade and labor income risk. Importantly, by contrasting estimates from various sub-samples of workers, such as those who switched to a different industry (or sector) with those who remained in the same industry throughout the sample, we study the relative importance of the different channels through which international trade affects individual income risk. Finally, we use these estimates to conduct a welfare analysis evaluating the benefits or costs of trade through the income risk channel. We find import penetration to have a statistically significant association with labor income risk in the United States, with economically significant welfare effects. |
| JEL: | F1 F16 F4 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14992&r=rmg |