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on Risk Management |
| By: | Giandomenico, Rossano |
| Abstract: | The article presents a survey of the principal quantitative tools adopted by the major financial institutions in the credit market, pointing out their limits and new directions. |
| Keywords: | Implied Default Probability; Implied Correlation; Implied Time to Default |
| JEL: | G13 |
| Date: | 2010–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21793&r=rmg |
| By: | Gabriel Jiménez (Banco de España); Jose A. Lopez (Federal Reserve Bank Of San Francisco); Jesús Saurina (Banco de España) |
| Abstract: | A common assumption in the academic literature is that franchise value plays a key role in limiting bank risk-taking. As market power is the primary source of franchise value, reduced competition in banking markets has been seen as promoting banking stability. We test this hypothesis using data for the Spanish banking system. We find that standard measures of market concentration do not affect bank risk-taking. However, we find a negative relationship between market power measured using Lerner indexes based on bank-specific interest rates and bank risk. Our results support the franchise value paradigm. |
| Keywords: | bank competition, franchise value, Lerner index, credit risk, financial stability. |
| JEL: | G21 L11 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1005&r=rmg |
| By: | Yener Altunbas (Centre for Banking and Financial Studies, Bangor University, Bangor, Gwynedd LL57 2DG, United Kingdom.); Leonardo Gambacorta (Bank for International Settlements, Monetary and Economics Department, Centralbahnplatz 2, CH-4002 Basel, Switzerland.); David Marqués-Ibáñez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper investigates the relationship between short-term interest rates and bank risk. Using a unique database that includes quarterly balance sheet information for listed banks operating in the European Union and the United States in the last decade, we find evidence that unusually low interest rates over an extended period of time contributed to an increase in banks' risk. This result holds for a wide range of measures of risk, as well as macroeconomic and institutional controls. JEL Classification: E44, E55, G21. |
| Keywords: | bank risk, monetary policy, credit crisis. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101166&r=rmg |
| By: | Jean Tirole |
| Abstract: | The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistics, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity and analyses how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyses optimal combinations thereof; it stresses the need for macro-prudential policies. |
| Keywords: | liquidity, contagion, bailouts, regulation |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:303&r=rmg |
| By: | Andreas Fuster; Paul S. Willen |
| Abstract: | Shiller (2003) and others have argued for the creation of financial instruments that allow households to insure risks associated with their lifetime labor income. In this paper, we argue that while the purpose of such assets is to smooth consumption across states of nature, one must also consider the assets' effects on households' ability to smooth consumption over time. We show that consumers in a realistically calibrated life-cycle model would generally prefer income-linked loans (with a rate positively correlated with income shocks) to an income-hedging instrument (a limited liability asset whose returns correlate negatively with income shocks) even though the assets offer identical opportunities to smooth consumption across states. While for some parameterizations of our model the welfare gains from the presence of income-linked assets can be substantial (above 1 percent of certainty-equivalent consumption), the assets we consider can only mitigate a relatively small part of the welfare costs of labor income risk over the life cycle. |
| Keywords: | Risk management |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:10-1&r=rmg |
| By: | Jozef Barunik (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Prague); Lukas Vacha (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Prague); Miloslav Vosvrda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Prague) |
| Abstract: | In the paper we research statistical properties of the Central European stock markets. We focus mainly on the tail behavior of the Czech, Polish, and Hungarian stock markets and compare them to the benchmark U.S. and German stock markets. We fit the data of the 4-year period from March 2005 to March 2009 with the stable probability distribution model and discuss its tail behavior. As the estimation of the tail exponent is very sensitive to the size of the data set, the estimates can be misleading for short daily samples. Thus, we employ high-frequency 1-minute data, which proves to be a good choice as it reveals interesting findings about the distributional properties. Furthermore, we study the difference in stock market behavior before and during the financial crisis. |
| Keywords: | financial crisis, tail behavior, stock markets, stable probability distribution |
| JEL: | G14 C13 C16 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2010_04&r=rmg |
| By: | Esteban Pérez Caldentey; Matías Vernengo |
| Abstract: | Modern finance has a conceptually unified theoretical core that includes the efficient market hypothesis (EMH), the relationship between risk and return based on the Capital Asset Pricing Model (CAPM), the Modigliani-Miller theorems (M&M) and the Black-Scholes-Merton approach to option pricing. The core has been instrumental to the growth of the financial services industry, financial innovation, globalization, and deregulation. The significant impact of the core is explained by their success in elevating finance to the category of a science by extracting the acquisitiveness associated with economic freedom from the workings of a free market society. This success was somewhat of a paradox. The core theories/theorems were based on wildly unrealistic assumptions and did not stand out for their empirical strength. Overcoming this paradox required a methodological twist whereby theories were devised to create rather than to interpret or predict reality. This view led to a series of financial practices that increased the fragility and vulnerability of financial institutions setting the context for the occurrence of financial crises including the current one. |
| Keywords: | History of Finance, Economic Methodology |
| JEL: | B23 B41 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:uta:papers:2010_04&r=rmg |