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on Risk Management |
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Issue of 2009‒09‒19
fourteen papers chosen by |
| By: | Erie Febrian (Finance & Risk Management Study Group (FRMSG) FE UNPAD); Aldrin Herwany (Research Division, Laboratory of Management FE UNPAD) |
| Abstract: | In measuring risk, practitioners have practiced one of the two extreme approaches for so long, i.e. historical simulation or risk metrics. Meanwhile, academicians tend to apply methods based on the latest development in financial econometrics. In this study, we try to assess one of important issues in financial econometric development that focuses on market risk measurement and management employing asset-based models, i.e. models that apply dimensional covariance matrix, which is relevant to practice world. We compare covariance matrix model with Exponential Smoothing Model and GARCH Derivation and the Associated Derivation Models, using JSX Stock price Index data in 2000-2005. The result of this study shows how applicable the observed financial econometric instrument in Financial Market Risk Management practice. |
| Keywords: | Risk Management, Volatility Model |
| JEL: | G0 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:unp:wpaper:200907&r=rmg |
| By: | Keel, Simon; Ardia, David |
| Abstract: | An important aspect of portfolio risk management is the analysis of the overall risk with respect to the allocations to the underlying assets. Marginal risk is the traditional tool used by portfolio managers to accomplish this. However, this metric is only meaningful when a position is levered or when the proceeds of the sale of a position are put in the cash account of the portfolio. This paper proposes an extension of the traditional marginal risk approach as a means of overcoming this deficiency. The new concept, named generalized marginal risk, addresses situations where the change in a position results in changes to other positions as well. For instance, this is the case when there are in- or outows of capital in the portfolio as well as reallocations within the portfolio. A detailed illustration of the new metric is provided for a synthetic portfolio within the elliptical framework and its financial relevance is demonstrated using a portfolio of equities. |
| Keywords: | Marginal risk; component risk; generalized marginal risk; Value-at-Risk; expected shortfall; elliptical distribution |
| JEL: | C16 G11 C44 G10 |
| Date: | 2009–09–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17258&r=rmg |
| By: | Antonio Carlos Magalhães da Silva; Jaqueline Terra Moura Marins; Myrian Beatriz Eiras das Neves |
| Abstract: | Using data drawn from the Brazilian Central Bank Credit Information System (SCR), this paper investigates the loss incurred by financial institutions given clients defaults - Loss Given Default (LGD) - in Brazilian credit market from January 2003 to September 2007. According to Basel II, it is necessary to calculate LGD to evaluate credit risk in IRB Advanced approach. Selecting a sample of 9.557 non-retail credit operations, we calculate their LGD based on the opportunity cost incurred during the default period and on the principal loss. Other recovery costs were not taken into account. According to the results, the empirical probability distribution of LGD is bimodal, ranging on average between 47% and 92%. Using a Tobit model, we verified that variables related to economic activity level, collateral, exposure size and renegotiation influenced LGD behavior. Results were similar to Dermine and Carvalho (2006), Asarnow and Edwards (1995), Schuermann (2004) and Hurt and Felsovalyi (1998). |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:193&r=rmg |
| By: | Aldrin Herwany (Research Division, Laboratory of Management FE UNPAD); Erie Febrian (Finance & Risk Management Study Group (FRMSG) FE UNPAD) |
| Abstract: | Both practitioners and academicians demand a linkage model across financial markets, particularly among regional capital markets, for both risk management and portfolio selection purposes. Researchers frequently use co-integration and causality analysis in investigating the dependence or co-movement of three or more stock markets in different countries. However, they conducted the causality in mean tests but not the causality in variance tests. This study assesses the co-integration and causal relations among seven developed Asian markets, i.e Tokyo, Hongkong, Korea, Taiwan, Shanghai, Singapore, and Kuala Lumpur stock exchanges, using more frequent time series data. It employs the recently developed techniques for investigating unit roots, co-integration, time-varying volatility, and causality in variance. For estimating portfolio market risk, this study employs Value-at-Risk with delta-normal approach. The results show whether fund managers would be able to diversify their portfolio in these developed stock markets either in long run or short run. |
| Keywords: | Risk Management, Causality, Co-integration, Asian Stock Markets |
| JEL: | G0 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:unp:wpaper:200909&r=rmg |
| By: | Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute and Center for International Research on the Japanese Economy (CIRJE), Faculty of Economics, University of Tokyo); Bernardo da Veiga (School of Economics and Finance, Curtin University of Technology); Suhejla Hoti (Department of Treasury and Finance, Western Australia) |
| Abstract: | The country risk literature argues that country risk ratings have a direct impact on the cost of borrowings as they reflect the probability of debt default by a country. An improvement in country risk ratings, or country creditworthiness, will lower a country's cost of borrowing and debt servicing obligations, and vice-versa. In this context, it is useful to analyse country risk ratings data, much like financial data, in terms of the time series patterns, as such an analysis provides policy makers and industry stakeholders with a more accurate method of forecasting future changes in the risks and returns associated with country risk ratings. |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2009cf659&r=rmg |
| By: | Erie Febrian (Finance & Risk Management Study Group (FRMSG) FE UNPAD); Aldrin Herwany (Research Division, Laboratory of Management FE UNPAD) |
| Abstract: | The development in forecasting techniques has been quite significant, which is indicated by the evolution on how researchers perceive characteristics of financial data. The researchers used to employ mean in their prediction model, but nowadays they tend to employ variance in developing the model. In addition, they also move from the static approaches (e.g., Autoregreesive (AR), Moving Average (MA), ARMA and ARIMA) to the dynamic ones (especially estimation model employing volatility change that just won Nobel prize in 2004). In this research, we try to develop the best prediction model by using volatility model, such as ARCH, GARCH, TARCH and EGARCH, and employing listed stocks of government-owned companies (GOCs) as the sample. The result proves that the employed volatility model and its derivatives are fairly accurate in predicting fluctuation of GOCs stock prices, which are reflected by the associated returns. In addition, the resulted model is capable to measure risk of the observed stock, as well as appropriate price of an asset. |
| Keywords: | Forecasting, Volatility Model, Risk and Return |
| JEL: | G0 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:unp:wpaper:200908&r=rmg |
| By: | Erie Febrian (Finance & Risk Management Study Group (FRMSG) FE UNPAD); Aldrin Herwany (Research Division, Laboratory of Management FE UNPAD) |
| Abstract: | Volatility forecasting is an imperative research field in financial markets and crucial component in most financial decisions. Nevertheless, which model should be used to assess volatility remains a complex issue as different volatility models result in different volatility approximations. The concern becomes more complicated when one tries to use the forecasting for asset distribution and risk management purposes in the linked regional markets. This paper aims at observing the effectiveness of the contending models of statistical and econometric volatility forecasting in the three South-east Asian prominent capital markets, i.e. STI, KLSE, and JKSE. In this paper, we evaluate eleven different models based on two classes of evaluation measures, i.e. symmetric and asymmetric error statistics, following Kumar’s (2006) framework. We employ 10-year data as in sample and 6-month data as out of sample to construct and test the models, consecutively. The resulting superior methods, which are selected based on the out of sample forecasts and some evaluation measures in the respective markets, are then used to assess the markets cointegration. We find that the best volatility forecasting models for JKSE, KLSE, and STI are GARCH (2,1), GARCH(3,1), and GARCH (1,1), respectively. We also find that international portfolio investors cannot benefit from diversification among these three equity markets as they are cointegrated. |
| Keywords: | Volatility Forecasting, Capital Market, Risk Management |
| JEL: | G0 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:unp:wpaper:200911&r=rmg |
| By: | Johannes Schoder (Socioeconomic Institute, University of ZurichAuthor-Name: Michele Sennhauser; Socioeconomic Institute, University of Zurich); Peter Zweifel (Socioeconomic Institute, University of Zurich) |
| Abstract: | This paper sheds light on some unexpected consequences of health insurance regulation that may pose a big challenge to insurers’ risk management. Because mandated uniform contributions to health insurance trigger risk selection efforts risk adjustment (RA) schemes become necessary. A good deal of research into the optimal RA formula has been performed (Ellis and Van de Ven [2000]). A recent proposal has been to add ”Hospitalization exceeding three days during the previous year” as an indicator of high risk (Beck et al. [2006]). Applying the new formula to an individual Swiss health insurer, its payments into the RA scheme are postdicted to explode, reaching up to 13 percent of premium income. Its mistake had been to successfully implement Managed Care, resulting in low rates of hospitalization. The predicted risk management response is to extend hospital stays beyond three days, contrary to stated policy objectives also of the United States. |
| Keywords: | Health insurance, regulation, risk adjustment, risk management |
| JEL: | I18 L51 H51 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:soz:wpaper:0916&r=rmg |
| By: | Clodoaldo Aparecido Annibal |
| Abstract: | One of the main variables observed in the performance evaluation of banking credit is the index that measures the default rate. Different approaches are used, or were proposed, to perform the calculation of this index. However, the difficulty of defining default leads to the creation of different measures which sometimes fail to measure the stricto sense default. This paper aims to describe and analyze, using the Credit Information System of Central Bank of Brazil (SCR), among other sources, the behavior of three major default rates found in literature. The difference in the behavior of each index is observed using a system that seeks to simulate a portfolio of personal loans and using statistical techniques for analyzing time series of real data. The conclusion is that the most appropriate indicator to measure the default, in the stricto sense, is obtained based on the number of delayed operations. |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:192&r=rmg |
| By: | Patricia L. Tecles; Benjamin M. Tabak; Roberta B. Staub |
| Abstract: | This paper evaluates the loans market in Brazil in the 2003 to 2008 period. It measures diversification and nonperforming loans for Banks credit portfolios. We employ the credit risk bureau database, which classifies loans by sector and risk. Results show an increase in higher risk loans and diversification in low risk loans. The non-performing loans figures have shown a downward trend for most economic activities. |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:191&r=rmg |
| By: | Böger, Andreas; Heidorn, Thomas; Rupprecht, Stephan |
| Abstract: | This paper gives an overview of the capital requirements for banks. Regulatory capital is analyzed, followed by the discussion of economic capital. These ideas are used to explain risk adjusted performance measures. |
| Keywords: | Regulatorisches Kapital,ökonomisches Kapital,RAROC,RORAC |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fsfmwp:121&r=rmg |
| By: | Basher, Syed; Balli, Faruk; Louis, Rosmy |
| Abstract: | This paper incorporates recent developments in the literature to quantify the amount of interprovincial risk-sharing in Canada. We find that both capital market and the federal tax-transfer system play an almost equally important role (about 26 percent each) in smoothing shocks to gross provincial product, while only 18 percent of shocks are smoothed by credit markets. The remaining 30 percent are not smoothed. Our results bring to light the critical role that Alberta plays in trading-off credit market smoothing for more capital market risk-sharing to the rest of Canada. Our pairwise risk-sharing analysis has brought up some interesting questions and arguments that are often neglected in discussions of regional risk-sharing. For example, one aspect of the pairwise analysis sheds light on the assessment of the economic effects of Quebec separation. |
| Keywords: | Risk-sharing; pairwise risk-sharing; federal taxes and transfer; panel data; cross-section dependence. |
| JEL: | H77 C33 E21 F36 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17299&r=rmg |
| By: | Patrick Eugster (Socioeconomic Institute, University of ZurichAuthor-Name: Michele Sennhauser; Socioeconomic Institute, University of Zurich); Peter Zweifel (Socioeconomic Institute, University of Zurich) |
| Abstract: | When premiums are community-rated, risk adjustment (RA) serves to mitigate competitive insurers’ incentive to select favorable risks. However, unless fully prospective, it also undermines their incentives for efficiency. By capping its volume, one may try to counteract this tendency, exposing insurers to some financial risk. This in term runs counter the quest to refine the RA formula, which would increase RA volume. Specifically, the adjuster, ”Hospitalization or living in a nursing home during the previous year” will be added in Switzerland starting 2012. This paper investigates how to minimize the opportunity cost of capping RA in terms of increased incentives for risk selection. |
| Keywords: | Health insurance, regulation, risk adjustment, risk management |
| JEL: | I18 L51 H51 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:soz:wpaper:0915&r=rmg |
| By: | Schalast, Christoph; Bolder, Markus; Radünz, Claus; Siepmann, Stephanie; Weber, Thorsten |
| Abstract: | The report describes the current developments of the German market for Non Performing Loans/Distressed Debt as it is influenced by the financial crisis/credit crunch. Furthermore the sale of (small and medium sized) real estate portfolios since summer 2007 is analysed in more detail. |
| Keywords: | Non performing loans,distressed debt,portfolio management,workout,outsourcing,servicing,banking and regulation law,bankers duty of secrecy,failing banks,corporate loans,consumer loans,real estate loans |
| JEL: | K12 K19 K22 K29 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fsfmwp:112&r=rmg |