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on Risk Management |
| By: | Leonard I. Nakamura; Kasper Roszbach. |
| Abstract: | In this paper, the authors use credit rating data from two Swedish banks to elicit evidence on banks' loan monitoring ability. They test the banks' ability to forecast credit bureau ratings, and vice versa, and show that bank ratings are able to predict future credit bureau ratings. This is evidence that bank credit ratings, consistent with theory, contain valuable private information. However, the authors also find that public ratings have an ability to predict future bank ratings, implying that internal bank ratings do not fully or efficiently incorporate all publicly available information. This suggests that risk analyses by banks or regulators should be based on both internal bank ratings and public ratings. They also document that the credit bureau ratings add information to the bank ratings in predicting bankruptcy and loan default. The methods the authors use represent a new basket of straightforward techniques that enables both financial institutions and regulators to assess the performance of credit ratings systems. |
| Keywords: | Credit ratings ; Risk assessment |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:10-21&r=rmg |
| By: | E. Luciano |
| Abstract: | This paper examines a new model of credit risk measurement, the Variance Gamma- Merton one, which seems to be adequate for describing single default occurrence and default correlation in turbulent times. It is based on the notion of business time. Business time runs faster than calendar time when the market is very active and a lot of information arrives; it runs at a slower pace than calendar time when few information arrives. We report a calibration to USA spread data, which shows the accurateness of the model at the single default level; we also compare the perfeormance wrt a traditional structural model at the joint default level. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:icr:wpmath:16-2010&r=rmg |
| By: | Shingo Kimura; Jesús Antón; Christine LeThi |
| Abstract: | This Working Paper presents the work on farm level analysis of risk management environment, strategies and policies. Two types of results are presented: statistical indicators of risk exposure at the individual level, and micro model simulation results on risk management strategies. |
| JEL: | Q10 Q13 Q18 R34 R38 |
| Date: | 2010–06–18 |
| URL: | http://d.repec.org/n?u=RePEc:oec:agraaa:26-en&r=rmg |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Pierre-André Maugis (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | We present a new recursive algorithm to construct vine copulas based on an underlying tree structure. This new structure is interesting to compute multivariate distributions for dependent random variables. We proove the asymptotic normality of the vine copula parameter estimator and show that all vine copula parameter estimators have comparable variance. Both results are crucial to motivate any econometrical work based on vine copulas. We provide an application of vine copulas to estimate the VaR of a portfolio, and show they offer significant improvement as compared to a benchmark estimator based on a GARCH model. |
| Keywords: | Vines, multivariate copulas, risk management. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00492124_v1&r=rmg |
| By: | Onour, Ibrahim |
| Abstract: | This paper employs extreme downside risk measures to estimate the impact of the global financial crisis in 2008/2009 on equity markets in major oil producing Middle East countries. The results in the paper indicate the spillover effect of the global crisis varied from a country to another, but most hardly affected market among the group of six markets was Dubai financial market in which portfolio loss reached about 42 per cent. This indicates that Dubai debt crisis, which emerged on surface in 2009, exacerbated the impact of the global financial crisis and prolonged the recovery process in these markets. |
| Keywords: | Value at risk; Fat-tails distribution; Expected Shortfall; Extreme losses. |
| JEL: | G12 F30 C01 |
| Date: | 2010–06–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23332&r=rmg |
| By: | Volker Krätschmer; Henryk Zähle |
| Abstract: | A simple and commonly used method to approximate the total claim distribution of a (possible weakly dependent) insurance collective is the normal approximation. In this article, we investigate the error made when the normal approximation is plugged in a fairly general distribution-invariant risk measure. We focus on the rate of the convergence of the error relative to the number of clients, we specify the relative error’s asymptotic distribution, and we illustrate our results by means of a numerical example. Regarding the risk measure, we take into account distortion risk measures as well as distribution-invariant coherent risk measures. |
| Keywords: | total claim distribution, [phi]- and [alpha]-mixing sequences of random variables, normal approximation, nonuniform Berry-Esseen inequality, distortion risk measure, coherent risk measure, robust representation |
| JEL: | G22 G32 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2010-033&r=rmg |
| By: | Rudolf F. Klein (Department of Economics, West Virginia University); K. Victor Chow (Department of Finance, West Virginia University) |
| Abstract: | To solve the dependency problem between factors, in the context of linear multi-factor models, this study proposes an optimal procedure to find orthogonalized risk premia, which also facilitates the decomposition of the coefficient of determination. Importantly, the new risk premia may diverge significantly from the original ones. The decomposition of risk allows one to explicitly examine the impact of individual factors on the return variation of risky assets, which provides discriminative power for factor selection. The procedure is experimentally robust even for small samples. Empirically we find that even though on average, approximately eighty (sixtyfive) percent of style (industry) portfolios’ volatility is explained by the market and size factors, other factors such as value, momentum and contrarian still play an important role for certain portfolios. The components of systematic risk, while dynamic over time, generally exhibit negative correlation between market, on one side, and size, value, momentum and contrarian, on the other side. |
| Keywords: | Orthogonalization, Systematic Risk, Decomposition, Fama-French Model, Asset Pricing. |
| JEL: | G11 G12 G14 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:wvu:wpaper:10-05&r=rmg |
| By: | Dorje C. Brody; Lane P. Hughston; Andrea Macrina |
| Abstract: | We propose a model for the credit markets in which the random default times of bonds are assumed to be given as functions of one or more independent "market factors". Market participants are assumed to have partial information about each of the market factors, represented by the values of a set of market factor information processes. The market filtration is taken to be generated jointly by the various information processes and by the default indicator processes of the various bonds. The value of a discount bond is obtained by taking the discounted expectation of the value of the default indicator function at the maturity of the bond, conditional on the information provided by the market filtration. Explicit expressions are derived for the bond price processes and the associated default hazard rates. The latter are not given a priori as part of the model but rather are deduced and shown to be functions of the values of the information processes. Thus the "perceived" hazard rates, based on the available information, determine bond prices, and as perceptions change so do the prices. In conclusion, explicit expressions are derived for options on discount bonds, the values of which also fluctuate in line with the vicissitudes of market sentiment. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1006.2909&r=rmg |
| By: | Arianna Agosto (Prometeia spa,Via G. Marconi 43, Bologna, Italy); Enrico Moretto (Department of Economics, University of Insubria, Italy) |
| Abstract: | This paper shows that the use of a time-dependant barrier in a structural model improve its flexibility because it allows to incorporate, as input, the probability of default. The main result achieved is the assessment that the default barrier is, indeed,characterized by a non flat structure. JEL Classification: G13, G33 |
| Keywords: | default structural models, barrier options with exponential boundaries, implied default probability |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:ins:quaeco:qf1005&r=rmg |
| By: | Konstantinos Spiliopoulos; Richard B. Sowers |
| Abstract: | We consider the effect of recovery rates on a pool of credit assets. We allow the recovery rate to depend on the defaults in a general way. Using the theory of large deviations, we study the structure of losses in a pool consisting of a continuum of types. We derive the corresponding rate function and show that it has a natural interpretation as the favored way to rearrange recoveries and losses among the different types. Numerical examples are also provided. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1006.2711&r=rmg |
| By: | Mandira Sarma; Yuko Nikaido |
| Abstract: | In this paper an analytical review of the capital adequacy regime and the present state of capital to risk-weighted asset ratio (CRAR) of the banking sector in India has been presented. In the current regime of Basel I, Indian banking system is performing reasonably well, with an average CRAR of about 12 per cent, which is higher than the internationally accepted level of 8 per cent as well as India’s own minimum regulatory requirement of 9 per cent. As the revised capital adequacy norms, Basel II, are being implemented from March 2008, several issues emerge. These issues from the Indian perspective has been examined.[Working Paper No. 196] |
| Keywords: | Capital Adequacy Ratio, Basel I, Basel II, Reserve Bank of India, SMEs lending |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2559&r=rmg |
| By: | Ronnie L. Loeffen; Pierre Patie |
| Abstract: | We start by showing that the finite-time absolute ruin probability in the classical risk model with constant interest force can be expressed in terms of the transition probability of a positive Ornstein-Uhlenbeck type process, say X. Our methodology applies to the case when the dynamics of the aggregate claims process is a subordinator. From this expression, we easily deduce necessary and sufficient conditions for the infinite-time absolute ruin to occur. We proceed by showing that, under some technical conditions, the transition density of X admits a spectral type representation involving merely the limiting distribution of the process. As a by-product, we obtain a series expansions for the finite-time absolute ruin probability. On the way, we also derive, for the aforementioned risk process, the Laplace transform of the first-exit time from an interval from above. Finally, we illustrate our results by detailing some examples. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1006.2712&r=rmg |
| By: | Chevallier, Julien |
| Abstract: | This article develops a forecasting exercise of the volatility of EUA spot, EUA futures, and CER futures carbon prices (modeled after an AR(1)-GARCH(1,1)) using two dynamic factors as exogenous regressors that were extracted from a Factor Augmented VAR model (Bernanke et al. (2005)). The dataset includes 115 macroeconomic, financial and commodities indicators with daily frequency from April 4, 2008 through January 25, 2010 totalling 463 observations that capture the strong uncertainties emerging on the carbon market. The main result shows that the best forecasting performance for the volatility of carbon prices is achieved for the model including the dynamic factors as exogenous regressors, which can be useful to inform hedging or speculative trading strategies by energy utilities, financial market players and risk managers. |
| Keywords: | Volatility Forecasting; Carbon price; Factor models; |
| JEL: | Q4 C3 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ner:dauphi:urn:hdl:123456789/4349&r=rmg |