New Economics Papers
on Risk Management
Issue of 2010‒01‒30
eleven papers chosen by

  1. Policy perspectives on OTC derivatives market infrastructure By Darrell Duffie; Ada Li; Theo Lubke
  2. Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets By Christoph Trebesch; Udaibir S. Das; Michael G. Papaioannou
  3. Public Debt Sustainability and Management in a Compound Option Framework By Andre Santos; Jorge A. Chan-Lau
  4. Evaluating Value-at-Risk models via Quantile Regression By Wagner Piazza Gaglianone; Luiz Renato Lima; Oliver Linton; Daniel Smith
  5. Downside Risk Efficiency Under Market Distress By Jesús Gonzalo; José Olmo
  6. Stability of the optimal reinsurance with respect to the risk measure By Alejandro Balbás; Beatriz Balbás; Antonio Heras
  7. Inherited or Earned? Performance of Foreign Banks in Central and Eastern Europe By Emilia Magdalena Jurzyk; Olena Havrylchyk
  8. Crucial relationship among energy commodity prices By Cristina Bencivenga; Giulia Sargenti
  9. Forecasting Romanian Financial System Stability using a Stochastic Simulation Model By Claudiu Tiberiu Albulescu
  10. Using Premia and Nsp for Constructing a Risk Management Benchmark for Testing Parallel Architecture By Jean-Philippe Chancelier; J\'er\^ome Lelong; Bernard Lapeyre
  11. Información y persuasión en los mercados financieros By Estrada, Fernando

  1. By: Darrell Duffie; Ada Li; Theo Lubke
    Abstract: In the wake of the recent financial crisis, over-the-counter (OTC) derivatives have been blamed for increasing systemic risk. Although OTC derivatives were not a central cause of the crisis, the complexity and limited transparency of the market reinforced the potential for excessive risk-taking, as regulators did not have a clear view into how OTC derivatives were being used. We discuss how the New York Fed and other regulators could improve weaknesses in the OTC derivatives market through stronger oversight and better regulatory incentives for infrastructure improvements to reduce counterparty credit risk and bolster market liquidity, efficiency, and transparency. Used responsibly with these reforms, over-the-counter derivatives can provide important risk management and liquidity benefits to the financial system.
    Keywords: Derivative securities ; Over-the-counter markets ; Federal Reserve Bank of New York ; Credit ; Systemic risk ; Financial market regulatory reform
    Date: 2010
  2. By: Christoph Trebesch; Udaibir S. Das; Michael G. Papaioannou
    Abstract: "Top down" spillovers of sovereign default risk can have serious consequences for the private sector in emerging markets. This paper analyzes the effects of these spillovers using firm-level data from 31 emerging market economies. We assess how sovereign risk affects corporate access to international capital markets, in the form of external credit (loans and bond issuances) and equity issuances. The study first analyzes the impact of sovereign debt crises during the 1980s and 1990s. It goes on to examine the 1993 to 2007 period, using additional measures of sovereign risk-sovereign bond spreads and sovereign ratings-as explanatory variables. Overall, we find that sovereign default risk is a crucial determinant of private sector access to capital, be it external debt or equity. We also find that crisis resolution patterns matter and that defaults towards private creditors have stronger adverse consequences than defaults to official creditors.
    Date: 2010–01–12
  3. By: Andre Santos; Jorge A. Chan-Lau
    Abstract: This paper introduces the Asset and Liability Management (ALM) compound option model. The model builds on the observation that the public sector net worth in a multi-period setting corresponds to the value of an option on an option on total government assets. Hence, the ALM compound option model is better suited for analyzing and evaluating the risk profile of public debt than existing one-period models, and is especially useful for analyzing the soundness of exit strategies from the large fiscal expansions undertaken by G-20 countries in the wake of the recent financial crisis. As an illustration, the model is used to analyze the risk profile and sustainability of Australia's public debt under different policies.
    Keywords: Asset management , Australia , Credit risk , Debt management , Debt sustainability , Economic models , Group of Twenty , Public debt , Public sector , Risk management ,
    Date: 2010–01–11
  4. By: Wagner Piazza Gaglianone; Luiz Renato Lima; Oliver Linton; Daniel Smith
    Abstract: This paper is concerned with evaluating value at risk estimates. It is well known that using only binary variables, such as whether or not there was an exception, sacrifices too much information. However, most of the specification tests (also called backtests) available in the literature, such as Christoffersen (1998) and Engle and Maganelli (2004) are based on such variables. In this paper we propose a new backtest that does not rely solely on binary variables. It is shown that the new backtest provides a sufficient condition to assess the finite sample performance of a quantile model whereas the existing ones do not. The proposed methodology allows us to identify periods of an increased risk exposure based on a quantile regression model (Koenker & Xiao, 2002). Our theoretical findings are corroborated through a Monte Carlo simulation and an empirical exercise with daily S&P500 time series.
    Keywords: Value-at-Risk, Backtesting, Quantile Regression
    JEL: C12 C14 C52 G11
    Date: 2009–05
  5. By: Jesús Gonzalo; José Olmo
    Abstract: In moments of financial distress downside risk measures like lower partial moments are more appropriate than the standard variance to characterize risk. The goal of this paper is to study how to choose optimal portfolios in these periods. In order to do this we extend the definition of lower partial moments to this environment, derive the corresponding mean-risk dominance set and define the concept of stochastic dominance under distress. The paper shows the close connection between the mean-risk dominance set and the stochastic dominance frontier in these situations. The advantage of using stochastic dominance is that we can readily compare investors' preferences over investment portfolios in a meaningful way regardless their degree of risk aversion. We do this by proposing a hypothesis test. Our novel family of test statistics for testing stochastic dominance under distress makes allowance for testing orders of dominance higher than one, for general forms of dependence between portfolios and can be extended to residuals of regression models. These results are illustrated in an empirical application for data from US stocks. We show that mean- variance strategies are stochastically dominated by meanrisk efficient portfolios in episodes of financial distress.
    Keywords: Downside risk, Lower partial moments, Market distress, Mean-risk models, Mean-variance models,Stochastic dominance
    JEL: C1 C2 G1
    Date: 2009–06
  6. By: Alejandro Balbás; Beatriz Balbás; Antonio Heras
    Abstract: The optimal reinsurance problem is a classic topic in Actuarial Mathematics. Recent approaches consider a coherent or expectation bounded risk measure and minimize the global risk of the ceding company under adequate constraints. However, there is no consensus about the risk measure that the insurer must use, since every risk measure presents advantages and shortcomings when compared with others. This paper deals with a discrete probability space and analyzes the stability of the optimal reinsurance with respect to the risk measure that the insurer uses. We will demonstrate that there is a “stable optimal retention” that will show no sensitivity, insofar as it will solve the optimal reinsurance problem for many risk measures, thus providing a very robust reinsurance plan. This stable optimal retention is a stop-loss contract, and it is easy to compute in practice. A fast algorithm will be given and a numerical example presented.
    Keywords: Optimal reinsurance, Risk measure, Sensitivity, Stable optimal retention, Stop-loss reinsurance
    JEL: G22 G11
    Date: 2010–01
  7. By: Emilia Magdalena Jurzyk; Olena Havrylchyk
    Abstract: Using a combination of propensity score matching and difference-in-difference techniques we investigate the impact of foreign bank ownership on the performance and market power of acquired banks operating in Central and Eastern Europe. This approach allows us to control for selection bias as larger but less profitable banks were more likely to be acquired by foreign investors. We show that during three years after the takeover, banks have become more profitable due to cost minimization and better risk management. They have additionally gained market share, because they passed their lower cost of funds to borrowers in terms of lower lending rates. Previous studies failed to pick up the improvements in performance of takeover banks, because they did not account for the performance of financial institutions before acquisitions.
    Keywords: Bank restructuring , Banking sector , Central and Eastern Europe , Economic models , Foreign investment , Profits , Risk management ,
    Date: 2010–01–08
  8. By: Cristina Bencivenga; Giulia Sargenti (Department of Economic Theory and Quantitative Methods for Political Choices,Sapienza University of Rome,)
    Abstract: This study investigates the short and long run relationship between crude oil, natural gas and electricity prices in US and in European commodity markets. The relationship between energy commodities may have several implications for the pricing of derivative products and for risk management purposes. Using daily price data over the period 2001-2009 we perform a correlation analysis to study the short run relationship, while the long run relationship is analyzed using a cointegration framework. The results show an erratic relationship in the short run while in the long run an equilibrium may be identi ed having di erent features for the European and the US markets.
    Keywords: Energy, commodities, prices.
    Date: 2010
  9. By: Claudiu Tiberiu Albulescu (CRIEF, University of Poitiers)
    Abstract: The aim of this paper is to develop an aggregate stability index for the Romanian financial system, which is meant to enhance the set of analysis used by authorities to assess the financial system stability. The index takes into consideration indicators related to financial system development, vulnerability, soundness and also indicators which characterise the international economic climate. Another purpose of our study is to forecast the financial stability level, using a stochastic simulation model. The outcome of the study shows an improvement of the Romanian financial system stability during the period 1999-2007. The constructed aggregate index captures the financial turbulences periods like 1998-1999 Romanian banking crisis and 2007 subprime crisis. The forecasted values of the index show a deterioration of financial stability in 2009, influenced by the estimated decline of the financial and economic activity.
    Keywords: financial stability, aggregate financial stability index, forecasting systemic stability, stochastic simulation model
    JEL: C43 C51 C53
    Date: 2009
  10. By: Jean-Philippe Chancelier (CERMICS); J\'er\^ome Lelong (LJK); Bernard Lapeyre (CERMICS)
    Abstract: Financial institutions have massive computations to carry out overnight which are very demanding in terms of the consumed CPU. The challenge is to price many different products on a cluster-like architecture. We have used the Premia software to valuate the financial derivatives. In this work, we explain how Premia can be embedded into Nsp, a scientific software like Matlab, to provide a powerful tool to valuate a whole portfolio. Finally, we have integrated an MPI toolbox into Nsp to enable to use Premia to solve a bunch of pricing problems on a cluster. This unified framework can then be used to test different parallel architectures.
    Date: 2010–01
  11. By: Estrada, Fernando
    Abstract: This paper aims to defend the importance of the information and persuasion in financial markets. The conviction relates to the developments of Argumentation Theory (AT). Understand that economic agents react according to the information they have, and that beliefs play an important role because it motivates the decisions to be made in certain circumstances. This paper is the first part will be illustrated in a second installment to the study of specific cases.
    Keywords: Economics of Networks; Neuroeconomics; Behavioral & Experimental Finance; Real Estate; Risk Management
    JEL: D11 D84 C71 D82 C72
    Date: 2010–01–19

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