New Economics Papers
on Risk Management
Issue of 2009‒05‒30
four papers chosen by

  1. Risk Management Lessons from the Global Financial Crisis By Jayanth R Varma
  2. An economic capital model integrating credit and interest rate risk in the banking book. By Piergiorgio Alessandri; Mathias Drehmann
  3. The Impact of Group-Based Credit on Demand for Productive Inputs and Agricultural Productivity in Rural Kenya By Mghenyi, Elliot
  4. Stock market integration in the Latin American markets: further evidence from nonlinear modeling By Fredj Jawadi; Nicolas Million; Mohamed El Hedi Arouri

  1. By: Jayanth R Varma
    Abstract: During the global financial turmoil of 2007 and 2008, no major derivative clearing house in the world encountered distress while many banks were pushed to the brink and beyond. An important reason for this is that derivative exchanges have avoided using value at risk, normal distributions and linear correlations. This is an important lesson. The global financial crisis has also taught us that in risk management, robustness is more important than sophistication and that it is dangerous to use models that are over calibrated to short time series of market prices. The paper applies these lessons to the important exchange traded derivatives in India and recommends major changes to the currentmargining systems to improve their robustness. It also discusses directions in which global best practices in exchange risk management could be improved to take advantage of recent advances in computing power and finance theory. The paper argues that risk management should evolve towards explicit models based on coherent risk measures (like expected shortfall), fat tailed distributions and non linear dependence structures (copulas).[W.P. No.2009-02-06]
    Keywords: Risk Management; Global Financial Crisis; Derivative Exchanges; Value at Risk; SPAN system; Coherent Risk Measures; Expected Shortfall; Robustness; Regime Switching; Risk Coverage Levels; Indian Derivative Markets; Stock Index Futures; Currency Derivatives
    Date: 2009
  2. By: Piergiorgio Alessandri (Bank of England, Threadneedle Street, London, EC2R 8AH, UK.); Mathias Drehmann (Bank for International Settlements, Centralbahnplatz 2, CH-4002 Basel, Switzerland.)
    Abstract: Banks typically determine their capital levels by separately analysing credit and interest rate risk, but the interaction between the two is significant and potentially complex. We develop an integrated economic capital model for a banking book where all exposures are held to maturity. Our simulations show that capital is mismeasured if risk interdependencies are ignored: adding up economic capital against credit and interest rate risk derived separately provides an upper bound relative to the integrated capital level. The magnitude of the difference depends on the structure of the balance sheet and on the repricing characteristics of assets and liabilities. JEL Classification: G21, E47, C13.
    Keywords: Economic capital, risk management, credit risk, interest rate risk, asset and liability management.
    Date: 2009–04
  3. By: Mghenyi, Elliot
    Keywords: Agricultural credit, joint liability, productive inputs, productivity, Agricultural Finance, International Development, Productivity Analysis, Risk and Uncertainty, D24, Q14, R34,
    Date: 2009
  4. By: Fredj Jawadi (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre, LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Nicolas Million (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre); Mohamed El Hedi Arouri (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre, LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans)
    Abstract: This article studies the financial integration between the six main Latin American markets and the US market in a nonlinear framework. Using the threshold cointegration techniques of Hansen and Seo (2002), we show significant threshold stock market linkages between Mexico, Chile and the US. Thus, the dynamics of these markets depends simultaneously on local and global risk factors. More importantly, our results show an on-off threshold financial integration process that is activated only when the stock price adjustment exceeds some level.
    Date: 2009

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