nep-rmg New Economics Papers
on Risk Management
Issue of 2009‒07‒03
fourteen papers chosen by
Stan Miles
Thompson Rivers University

  1. Banking risk management in the context of financial-economic crisis By Ogarca, Angela
  2. What do we know about banks securitisation? the spanish experience By Clara Cardone Riportella; Reyes Samaniego Medina; Antonio Trujillo Ponce
  3. Risk Management in the Midst of the Global Financial Crisis By D Subbarao
  4. Forecasting realized (co)variances with a block structure Wishart autoregressive model By Bonato, Matteo; Caporin, Massimiliano; Ranaldo, Angelo
  5. CORPORATE GOVERNANCE AND RISK MANAGEMENT - A GENERAL APPROACH By Stefanescu, Aurelia; Rusanu, Dan Radu; Nicolae, Florina; Mitea Popia, Carmen Crina
  6. Financial (in)stability, supervision and liquidity injections : a dynamic general equilibrium approach By Gregory, DE WALQUE; Olivier, PIERRARD; Abdelaziz, ROUABAH
  7. Crash Risk in Currency Markets By Farhi, Emmanuel; Fraiberger, Samuel P.; Gabaix, Xavier; Rancière, Romain; Verdelhan, Adrien
  8. On Models of Stochastic Recovery for Base Correlation By Li, Hui
  9. Measuring Energy Supply Risks: A G7 Ranking By Manuel Frondel; Nolan Ritter; Christoph M. Schmidt
  10. Market Valuation of Accrued Social Security Benefits By John Geanakoplos; Stephen P. Zeldes
  11. Financial Portfolio Selection in a Nonstationary Gaussian Framework By Bianchi, Sergio; Pantanella, Alexandre; Pianese, Augusto
  12. CRISIS AND RISK MANAGEMENT By Popescu, Angela; Stefanescu, Roxana
  13. The asset management of privately pension fund managed in crisis conditions By Negru, Titel
  14. The Clustering of Extreme Movements: Stock Prices and the Weather By Burton G. Malkiel; Atanu Saha; Alex Grecu

  1. By: Ogarca, Angela (Universitatea Spiru Haret, Facultatea de Finante si Banci)
    Abstract: The risk can have a considerable impact on the value of the bank, an impact as such (usually under the form of losses directly supported), as well as an induced impact caused by the effects on the customers, staff, partners and even on bank authority. Bank risk can be defined as a phenomenon that can appear during bank operations development and that can provoke negative effects on respective activities, through deteriorating the businesses quality, through profit diminishing or even loss recording. A global management of risks must ensure to the banking company the possibility to identify and appraise, control the risks, diminish their influence and not lastly, to finance the risks. Global management of banking risks must be a component of banking management system and must be used in this respect.
    Keywords: banking risk; management of risks; performances; banking management
    JEL: G21 M20
    Date: 2009–06–16
  2. By: Clara Cardone Riportella; Reyes Samaniego Medina; Antonio Trujillo Ponce
    Abstract: The present work analyses the reasons why Spanish financial entities have carried out securitisation programs in the period 2000-2007 on such a scale that Spain has become the European country with the largest issue volumes, second only to the U.K. The results obtained after the application of a logistic regression model to a sample of 408 observations indicate that liquidity and the search for improved performance are the decisive factors in securitisation. The hypotheses of transfer of credit risk and arbitrage in regulatory capital are not confirmed; therefore the normative development of Basel II cannot be expected to affect the volumes issued in future years. The study is complemented with a more detailed analysis, differentiating between programs of asset and liability securitisation
    Keywords: Securitisation, ABS, CDO, Credit risk transfer, Regulatory capital arbitrage
    JEL: G21 G28
    Date: 2009–06
  3. By: D Subbarao
    Abstract: The global economy is passing through its deepest financial and economic crisis of our time. Protecting the Indian economy from the worst impact of the crisis has been a big challenge for the government and the Reserve Bank. The industries, business and investors had to go through challenging adjustments in these difficult times. [Speech delivered at the Financial Management Summit 2009 organized by the Economic Times, Mumbai].
    Keywords: global, India, indian economy, financial, economic government, industry, industries, investors, financial,
    Date: 2009
  4. By: Bonato, Matteo (University of Zurich); Caporin, Massimiliano (University of Padova); Ranaldo, Angelo (Swiss National Bank)
    Abstract: In modelling and forecasting volatility, two main trade-offs emerge: mathematical tractability versus economic interpretation and accuracy versus speed. The authors attempt to reconcile, at least partially, both trade-offs. The former trade-off is crucial for many financial applications, including portfolio and risk management. The speed/accuracy trade-off is becoming more and more relevant in an environment of large portfolios, prolonged periods of high volatility (as in the current financial crisis), and the burgeoning phenomenon of algorithmic trading in which computer-based trading rules are automatically implemented. The increased availability of high-frequency data provides new tools for forecasting variances and covariances between assets. However, there is scant literature on forecasting more than one realised volatility. Following Gourieroux, Jasiak and Sufana (Journal of Econometrics, forthcoming), the authors propose a methodology to model and forecast realised covariances without any restriction on the parameters while maintaining economic interpretability. An empirical application based on variance forecasting and risk evaluation of a portfolio of two US treasury bills and two exchange rates is presented. The authors compare their model with several alternative specifications proposed in the literature. Empirical findings suggest that the model can be efficiently used in large portfolios.
    Keywords: Wishart process; realized volatility; Granger causality; volatility spillover; Value-at-Risk
    JEL: C13 C16 C22 C51 C53
    Date: 2009–06–24
  5. By: Stefanescu, Aurelia (Universitatea Spiru Haret, Facultatea de Finante si Banci); Rusanu, Dan Radu (Universitatea Spiru Haret, Facultatea de Finante si Banci); Nicolae, Florina (Universitatea Spiru Haret, Facultatea de Finante si Banci); Mitea Popia, Carmen Crina (Universitatea Spiru Haret, Facultatea de Finante si Banci)
    Abstract: The financial scandals that took place over the last years has generated the question of potential conflicts between the objectives of risk management and those connected with maximization of the company's value represented by board of directors. In the present article we debate the related conflicts between those in charge with risk management and with corporate governance. In the present research
    Keywords: corporate governance; risk management; board of directors; financial scandals
    JEL: G38 H29
    Date: 2009–06–16
  6. By: Gregory, DE WALQUE; Olivier, PIERRARD; Abdelaziz, ROUABAH
    Abstract: We develop a dynamic stochastic general equilibrium model with an heterogeneous banking sector. We introduce endogenous default probabilities for both firms and banks, and allow for bank regulation and liquidity injection into the interbank market. Our aim is to understand the interactions between the banking sector and the rest of the economy, as well as the importance of supervisory and monetary authorities to restore financial stability. The model is calibrated against real US data and used for simulations. We show that Based regulation reduces the steady state but improves the resilience of the economy to shocks, and that moving from Basel I to Basel II is procyclical. We also show that liquidity injections relieve financial instability but have ambiguous effects on output fluctuations
    Keywords: DGSE; Banking sector; Default risk; Supervision; Central Bank
    JEL: E13 E20 G21 G28
    Date: 2009–02–05
  7. By: Farhi, Emmanuel; Fraiberger, Samuel P.; Gabaix, Xavier; Rancière, Romain; Verdelhan, Adrien
    Abstract: How much of carry trade excess returns can be explained by the presence of disaster risk? To answer this question, we propose a simple structural model that includes both Gaussian and disaster risk premia and can be estimated even in samples that do not contain disasters. The model points to a novel estimation procedure based on currency options with potentially different strikes. We implement this procedure on a large set of countries over the 1996-2008 period, forming portfolios of hedged and unhedged carry trade excess returns by sorting currencies based on their forward discounts. We find that disaster risk premia account for about 25% of expected carry trade excess returns in advanced countries.
    Keywords: carry trade; currency crisis; currency options; disaster risk; exchange rate; financial crisis
    JEL: F3 F31 G14
    Date: 2009–06
  8. By: Li, Hui
    Abstract: This paper discusses various ways to add correlated stochastic recovery to the base correlation framework for pricing CDOs. Several recent models are extended to more general framework. The pros and cons of these models for calibration to single name CDS and index CDO tranches are discussed. It is shown that negative forward recovery rate under fixed systematic factor appears in these models. This suggests that current static copula models of correlated default and recovery processes are inherently inconsistent.
    Keywords: CDO; Gaussian Copula; Base Correlation; Stochastic Recovery; Correlated Loss Given Default
    JEL: G13
    Date: 2009–06
  9. By: Manuel Frondel; Nolan Ritter; Christoph M. Schmidt
    Abstract: The security of energy supply has again become a similarly hot topic as it was during the oil crises in the 1970s, not least due to the recent historical oil price peaks. In this paper, we analyze the energy security situation of the G7 countries using a statistical risk indicator and empirical energy data for the years 1978 through 2007.We find that Germany’s energy supply risk has risen substantially since the oil price crises of the 1970s, whereas France has managed to reduce its risk dramatically, most notably through the deployment of nuclear power plants. As a result of the legally stipulated nuclear phase-out, Germany’s supply risk can be expected to rise further and to approach the level of Italy.Due to its resource poverty, Italy has by far the highest energy supply risk among G7 countries.
    Keywords: Herfindahl Index, Energy Supply Risk Indicator
    JEL: C43 Q41
    Date: 2009–04
  10. By: John Geanakoplos (Cowles Foundation, Yale University); Stephen P. Zeldes (Graduate School of Business, Columbia University)
    Abstract: One measure of the health of the Social Security system is the difference between the market value of the trust fund and the present value of benefits accrued to date. How should present values be computed for this calculation in light of future uncertainties? We think it is important to use market value. Since claims on accrued benefits are not currently traded in financial markets, we cannot directly observe a market value. In this paper, we use a model to estimate what the market price for these claims would be if they were traded. In valuing such claims, the key issue is properly adjusting for risk. The traditional actuarial approach -- the approach currently used by the Social Security Administration in generating its most widely cited numbers -- ignores risk and instead simply discounts "expected" future flows back to the present using a risk-free rate. If benefits are risky and this risk is priced by the market, then actuarial estimates will differ from market value. Effectively, market valuation uses a discount rate that incorporates a risk premium. Developing the proper adjustment for risk requires a careful examination of the stream of future benefits. The U.S. Social Security system is "wage-indexed": future benefits depend directly on future realizations of the economy-wide average wage index. We assume that there is a positive long-run correlation between average labor earnings and the stock market. We then use derivative pricing methods standard in the finance literature to compute the market price of individual claims on future benefits, which depend on age and macro state variables. Finally, we aggregate the market value of benefits across all cohorts to arrive at an overall value of accrued benefits. We find that the difference between market valuation and "actuarial" valuation is large, especially when valuing the benefits of younger cohorts. Overall, the market value of accrued benefits is only 4/5 of that implied by the actuarial approach. Ignoring cohorts over age 60 (for whom the valuations are the same), market value is only 70% as large as that implied by the actuarial approach.
    Keywords: Social security, Market value, Risk adjustment, Actuarial value, Wage bonds, Unfunded obligations
    JEL: E6 H55 D91 G1 G12
    Date: 2009–06
  11. By: Bianchi, Sergio (University of Cassino); Pantanella, Alexandre (University of Cassino); Pianese, Augusto (University of Cassino)
    Abstract: We introduce the selection of financial portfolios in a nonstationary Gaussian framework that assumes the price process to be modelled by a multifractional Brownian motion (mBm). This process captures the time-changing regularity of the sample paths as a result of the impact of the new information on markets. The key variable is the pointwise Holder exponent, H(t), which summarizes the level of regularity at a given point along the trajectories of the process. Therefore, the exponent H(t) can be viewed as a local (instantaneous) indicator of risk. By the exponents of the individual assets, we derive in closed form the pointwise Hholder exponent of a portfolio and stress the analogies with the classical Markowitz result. Furthermore, we compare the composition of the efficient frontier defined using the new risk measure with respect to Markowitz's one, obtained in the last quarter of the year 2008, a period characterized by a deep financial crisis and unusual movements for the stock prices.
    Keywords: Multifractional Brownian Motion; Portfolio's selection; Hurst exponent
    JEL: F23
    Date: 2009–06–16
  12. By: Popescu, Angela (Universitatea Spiru Haret, Facultatea de Finante si Banci); Stefanescu, Roxana (Universitatea Spiru Haret, Facultatea de Finante si Banci)
    Abstract: The main causes of economic crisis are unfavorable evolution of the macro-economic behavior and poor uncautious corporate governance of banks and authorities in decisions involving the granting of loans by banks and mixing factor in a political activity which must be held in essentially on economic criteria. Risk management is the art of making decisions in a world governed by uncertainty. Risk management is a process of identification, analysis and response to risks to which an organization is exposed. This process involves analyzing internal and external environment in which the organization operates, identify risks, qualitative and quantitative evaluation of their development and implementation of response, monitoring risks, identifying new situations and develop an environment to assure communication about risk.
    Keywords: sub-prime loans; mortgage securitization; financial innovations; transparency; shadow of the banking system; regulatory practices
    JEL: G32
    Date: 2009–06–16
  13. By: Negru, Titel (Universitatea Spiru Haret, Facultatea de Finante si Banci)
    Abstract: The investment of pension assets is one of the core functions performed by private pension arrangements. In order to promote both the performance and the financial security of pension plan benefits, it is critical that this function is implemented and managed responsibly. Policymakers have therefore a key role to ensure that regulations encourage prudent management of pension fund assets so as to meet the retirement income objectives of the pension plan. The investment function varies depending on the type of pension plan. In the case of defined benefit plans, the goal of the investment function is to generate the highest possible returns consistent with the liabilities and liquidity needs of the pension plan, and in light of the risk tolerances of affected parties. In a defined contribution plan, the main goal of the investment function is to generate gains that accrue to individual member account balances in light of her investment goals
    Keywords: individual account; unit responsible; voluntary pension; money market; capital markets; currency market; market derivative financial instruments; market risk; specific risc; interest rate risk; foreign exchange risk; credit risc; pension fund assets managed private; personal assets; total net assets; share daily fund; administration commission; commission storage; commission trading; banking commission; prospectuses private pension scheme; the rate of return of the fund; daily yield of a fund
    JEL: H55 I18
    Date: 2009–06–16
  14. By: Burton G. Malkiel (Princeton University); Atanu Saha (AlixPartners); Alex Grecu (Huron Consulting Group)
    Abstract: A striking feature of the United States stock market is the tendency of days with very large movements of stock prices to be clustered together. We define an extreme movement in stock prices as one that can be characterized as a three sigma event; that is, a daily movement in the broad stock-market index that is three or more standard deviations away from the average movement. We find that such extreme movements are typically preceded by, but not necessarily followed by, unusually large stock-price movements. Interestingly, a similar clustering of extreme observations of temperature in New York City can be observed. A particularly robust finding in this paper is that extreme movements in stock prices are usually preceded by larger than average daily movements during the preceding three-day period. This suggests that investors might fashion a market timing strategy, switching from stocks to cash in advance of predicted extreme negative stock returns. In fact, we have been able to simulate market timing strategies that are successful in avoiding nearly eighty percent of the negative extreme move days, yielding a significantly lower volatility of returns. We find, however, that a variety of alternative strategies do not improve an investor’s long-run average return over the return that would be earned by the buy-and-hold investor who simply stayed fully-invested in the stock market.
    Keywords: Volatility clustering, duration analysis, portfolio strategy
    Date: 2009–02

This nep-rmg issue is ©2009 by Stan Miles. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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.