nep-rmg New Economics Papers
on Risk Management
Issue of 2009‒10‒03
five papers chosen by
Stan Miles
Thompson Rivers University

  1. Modellierung des Kreditrisikos im Portfoliofall By Cremers, Heinz; Walzner, Jens
  2. The economic function of credit rating agencies: what does the watchlist tell us? By Bannier, Christina E.; Hirsch, Christian
  3. When You’ve Seen One Financial Crisis… By Simon van Norden
  4. Modelling the Global Financial Crisis By Warwick J McKibbin; Andy Stoeckel
  5. Options introduction and volatility in the EU ETS By Julien Chevallier; Yannick Le Pen; Benoît Sévi

  1. By: Cremers, Heinz; Walzner, Jens
    Abstract: The current financial market crisis has impressively demonstrated the importance of an effective credit risk management for financial institutions. At the same time, the use and the valuation of credit derivatives has been widely criticised as a result of the crisis. Over the past decade, credit derivatives emerged as an important part of credit risk management as these offer a broad range of possibilities to reduce credit risk through active credit portfolio management. This has represented a quantum leap in the further development of credit risk management. Credit risk management without using credit derivatives no longer seems to be an appropriate alternative. However, correct valuation of these derivatives is still challenging. The crisis has demonstrated that the issue is less about using credit derivatives than about developing valid valuation techniques. A sound understanding of already existing credit pricing models is necessary for such a development. These models are the key focus of this working paper.
    Keywords: Credit risk pricing models,asset-based models,asset-value models,structural models,intensity-based models,reduced-form models,credit derivatives,credit default swap,pricing,valuation,default spread,risk management,credit portfolio management
    JEL: C22 G11 G12 G21 G32
    Date: 2009
  2. By: Bannier, Christina E.; Hirsch, Christian
    Abstract: Credit rating agencies do not only disclose simple ratings but announce watchlists (rating reviews) and outlooks as well. This paper analyzes the economic function underlying the review procedure. Using Moody's rating data between 1982 and 2004, we find that for borrowers of high creditworthiness, rating agencies employ watchlists primarily in order to improve the delivery of information. For low-quality borrowers, in contrast, the review procedure seems to have developed into an implicit contract `a la Boot, Milbourn, and Schmeits (2006), inducing the companies on watch to abstain from risk-augmenting actions. The agencies' economic role hence appears to have been enhanced from a pure information certification towards an active monitoring function.
    Keywords: Credit Rating Agencies,Credit Rating,Watchlist,Rating Review,Market Reaction,Event Study
    JEL: G14 G29 G33
    Date: 2009
  3. By: Simon van Norden
    Abstract: Financial market crises may differ, but severe banking crises typically share many common features. The most recent crisis shares many features with the US Savings and Loan crisis of the 1980s and early 90s as well as some features of the LTCM crisis of 1998. More generally, banking crises are commonly associated with real estate market collapses. Effectively reducing the risk of future crisis requires some combination of reducing the potential size of real estate market collapses and the banking sector’s exposure to real estate losses. <P>Les crises des marchés des capitaux peuvent différer, mais les crises bancaires graves partagent en général de nombreuses caractéristiques. La crise la plus récente ressemble à de nombreux égards à la crise américaine de l’épargne et du crédit (Savings and Loans) des années 80 et du début des années 90, ainsi qu’à la crise LTCM en 1998. De façon plus générale, les crises bancaires sont souvent associées aux effondrements du marché immobilier. Pour réduire efficacement le risque de crises futures, il faut réduire l’ampleur potentielle des effondrements du marché immobilier, diminuer la vulnérabilité du secteur bancaire aux pertes du marché immobilier, ou les deux.
    Keywords: Financial Crisis, banking crisis, bubbles, real estate, financial regulation, regulatory reform , crises financières, crises bancaires, marché immobilier, réglementation financière
    Date: 2009–09–01
  4. By: Warwick J McKibbin; Andy Stoeckel
    Abstract: This paper models the global financial crisis as a combination of shocks to global housing markets and sharp increases in risk premia of firms, households and international investors in an intertemporal (or DSGE) global model. The model has six sectors of production and trade in 15 major economies and regions. The paper shows that a ‘switching’ of expectations about risk premia shocks in financial markets can easily generate the severe economic contraction in global trade and production currently being experienced in 2009 and subsequent events. The results show that the future of the global economy depends critically on whether the shocks to risk are expected to be permanent or temporary. The best representation of the crisis may be one where initial long lasting pessimism about risk is unexpectedly revised to a more moderate scenario. This suggests a rapid recovery in countries not experiencing a balance sheet adjustment problem.
    Date: 2009–09
  5. By: Julien Chevallier; Yannick Le Pen; Benoît Sévi
    Abstract: To improve risk management in the European Union Emissions Trading Scheme (EU ETS), the European Climate Exchange (ECX) has introduced option instruments in October 2006 after regulatory authorization. The central question we address is: can we identify a potential destabilizing effect of the introduction of options on the underlying market (EU ETS futures)? Indeed, the literature on commodities futures suggest that the introduction of derivatives may either decrease (due to more market depth) or increase (due to more speculation) volatility. As the identi¯cation of these effects ultimately remains an empirical question, we use daily data from April 2005 to April 2008 to document volatility behavior in the EU ETS. By instrumenting various GARCH models, endogenous break tests, and rolling window estimations, our results overall suggest that the introduction of the option market had no effect on the volatility in the EU ETS. These finding are robust to other likely in°uences linked to energy and commodity markets.
    Keywords: EU ETS, Option prices, Volatility, GARCH, Rolling Estimation, Endogenous Structural Break Detection
    JEL: Q48 Q57 Q58
    Date: 2009

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