New Economics Papers
on Risk Management
Issue of 2009‒11‒07
nine papers chosen by

  1. Improved Modeling of Double Default Effects in Basel II - An Endogenous Asset Drop Model without Additional Correlation By Sebastian Ebert; Eva Lütkebohmert
  2. Analytical Framework for Credit Portfolios. Part I: Systematic Risk By Mikhail Voropaev
  3. Macroeconomic Uncertainty and Credit Default Swap Spreads By Christopher F Baum; Chi Wan
  4. From Default Rates to Default Matrices: a complete measurement of Brazilian banks' consumer credit delinquency By Ricardo Schechtman
  5. Bayesian Extreme Value Mixture Modelling for Estimating VaR By Xin Zhao; Carl John Scarrott; Marco Reale; Les Oxley
  6. Futures Contracts as an Instrument for Increasing the Portfolio Performances By Odzaklieska Dragica
  7. Structured Finance, Risk Management, and the Recent Financial Crisis By Georges Dionne
  8. Study of the risk-adjusted pricing methodology model with methods of Geometrical Analysis By Ljudmila A. Bordag
  9. Bank regulation and bank crisis By Sigbjørn Atle Berg; Øyvind Eitrheim

  1. By: Sebastian Ebert; Eva Lütkebohmert
    Abstract: In 2005 the Internal Ratings Based (IRB) approach of `Basel II' was enhanced by a `treatment of double default effects' to account for credit risk mitigation techniques such as ordinary guarantees or credit derivatives. This paper reveals several severe problems of this approach and presents a new method to account for double default effects. This new it asset drop technique can be applied within any structural model of portfolio credit risk. When formulated within the IRB approach of Basel II, it is very well suited for practical application as it does not pose extensive data requirements and economic capital can still be computed
    Keywords: Basel II, double default, IRB approach, regulatory capital, structural credit portfolio models
    JEL: G31 G28
    Date: 2009–10
  2. By: Mikhail Voropaev
    Abstract: Analytical, free of time consuming Monte Carlo simulations, framework for credit portfolio systematic risk metrics calculations is presented. Techniques are described that allow calculation of portfolio-level systematic risk measures (standard deviation, VaR and Expected Shortfall) as well as allocation of risk down to individual transactions. The underlying model is the industry standard multi-factor Merton-type model with arbitrary valuation function at horizon (in contrast to the simplistic default-only case). High accuracy of the proposed analytical technique is demonstrated by benchmarking against Monte Carlo simulations.
    Date: 2009–11
  3. By: Christopher F Baum (Boston College; DIW Berlin); Chi Wan (Carleton University)
    Abstract: This paper empirically investigates the impact of macroeconomic uncertainty on the spreads of credit default swaps (CDS). While existing literature acknowledges the importance of the levels of macroeconomic factors in determining CDS spreads, we show that the second moments of these factors--macroeconomic uncertainty--predict CDS spreads even in the presence of traditional macroeconomic factors such as the risk-free rate and the Treasury term spread.
    Keywords: Macroeconomic uncertainty; CDS spreads; default risk; credit risk
    JEL: D8 G13 C23
    Date: 2009–11–03
  4. By: Ricardo Schechtman
    Abstract: Despite the manifold utilities of monitoring credit default rates, little attention is usually devoted to the underlying default definition. This paper proposes working simultaneously with different default severities, related to several past-due ranges, by means of transition matrices (to be named default matrices). In this way, default, as well as recovery, are depicted in a multidimensional way with the purpose of avoiding missing relevant information. The challenge lies on performing comparisons between default matrices, which requires specific metrics. In this paper, the default matrices are built to measure consumer credit delinquency at four large Brazilian banks. The study is able to draw relevant information from comparisons between estimations techniques, between default criteria, between banks and over time, as well as with recent applied literature on matrices of rating agencies.
    Date: 2009–10
  5. By: Xin Zhao; Carl John Scarrott; Marco Reale; Les Oxley (University of Canterbury)
    Abstract: A new extreme value mixture modelling approach for estimating Value-at-Risk (VaR) is proposed, overcoming the key issues of determining the threshold which defines the distribution tail and accounts for uncertainty due to threshold choice. A two-stage approach is adopted: volatility estimation followed by conditional extremal modelling of the independent innovations. Bayesian inference is used to account for all uncertainties and enables inclusion of expert prior information, potentially overcoming the inherent sparsity of extremal data. Simulations show the reliability and flexibility of the proposed mixture model, followed by VaR forecasting for capturing returns during the current financial crisis.
    Keywords: Extreme values; Bayesian; Threshold estimation; Value-at-Risk
    JEL: C11 G12
    Date: 2009–10–27
  6. By: Odzaklieska Dragica (Faculty of Economics-Prilep, Macedonia)
    Abstract: Investment companies are exploring the best opportunities on financial markets for financial instruments transactions in order to optimize the portfolio structure and to diversify the risk. Trading the financial derivatives is assumed to be one of the most efficient methods to increase the returns and minimize the risk while managing the portfolio. Financial derivatives transactions turn into the most popular mechanism aimed at increasing the portfolio performances. Hence, the purpose of this paper is to explore the financial futures characteristics and types, as well as the impact of the futures strategies on the risk and portfolio returns.
    Keywords: investment companies, financial markets, transactions, portfolio, methods to increase the returns
    JEL: G1 G2 E2
    Date: 2009–05
  7. By: Georges Dionne
    Abstract: Structured finance is often mentioned as the main cause of the latest financial crisis. We argue that structured finance per se did not trigger the last financial crisis. The crisis was propagated around the world because of poor risk management such as agency problems in the securitization market, poor rating and pricing standards, rating agency incentives, lack of market transparency, the search for higher yields by top decision makers and the failure of regulators and central banks to understand the implications of the changing environment.
    Keywords: Structured finance, risk management, financial crisis, collateral debt obligation (CDO), asset back commercial paper (ABCP), rating, pricing, securitization, regulation of financial markets
    JEL: D81 D82 D86 E5 G12 G14 G32 G33
    Date: 2009
  8. By: Ljudmila A. Bordag
    Abstract: Families of exact solutions are found for a nonlinear modification of the Black-Scholes equation. This risk-adjusted pricing methodology model (RAPM) incorporates both transaction costs and the risk from a volatile portfolio. Using the Lie group analysis we obtain the Lie algebra admitted by the RAPM equation. It gives us the possibility to describe an optimal system of subalgebras and correspondingly the set of invariant solutions to the model. On this way we can describe complete set of possible reductions of the nonlinear RAPM model. Reductions are given in form of different second order ordinary differential equations. In some cases they can be reduced as well to first oder equations. We discuss the property of these reductions and corresponding invariant solutions.
    Date: 2009–10
  9. By: Sigbjørn Atle Berg (Norges Bank (Central Bank of Norway)); Øyvind Eitrheim (Norges Bank (Central Bank of Norway))
    Abstract: The Norwegian experiences of the past thirty years illustrate what we believe are two general tendencies in bank regulation. The first one is that a bank crisis will tend to focus regulators' minds and lead to stricter regulations. The second one is that cycles in regulation tend to interact with the economic cycle, in the sense that the rationale for strong regulation tends to become somewhat blurred when the economy is booming. These patterns appear in the Norwegian experience after the banking crisis of 1988-92, and they can presumably also be recognized in many other jurisdictions.
    Keywords: Banking crises, history of bank regulation, capital adequacy, Basel I & II
    JEL: G28 N44
    Date: 2009–10–21

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