nep-rmg New Economics Papers
on Risk Management
Issue of 2010‒12‒04
seven papers chosen by
Stan Miles
Thompson Rivers University

  1. Risk Management In Mudharabah And Musharakah Financing Of Islamic Banks By Irawan Febianto
  2. Optimal mean-variance investment strategy under value-at-risk constraints By Jun Ye; Tiantian Li
  3. A New Index of Currency Mismatch and Systemic Risk By Romain Ranciere; Aaron Tornell; Athanasios Vamvakidis
  4. Seven Pillars of Wisdom By Giovanni Barone-Adesi
  5. Financial Contagion through Bank Deleveraging: Stylized Facts and Simulations Applied to the Financial Crisis By Thierry Tressel
  6. On fair pricing of emission-related derivatives By Juri Hinz; Alex Novikov
  7. Weighted trimmed likelihood estimator for GARCH models By Chalabi, Yohan / Y.; Wuertz, Diethelm

  1. By: Irawan Febianto (Laboratory Management Faculty of Economics (LMFE))
    Abstract: The low level participation of the Islamic banks in mudharabah and musharakah financing models has become one of the problems in the development of the industry. This arrangements are unique to Islamic banking and account for its superiority over conventional banking on grounds of ethics and efficiency, but the majority of Islamic banks have limited themselves to less risky trade-financing assets, which tend to be a shorter maturity. This paper tries to analyzes why Islamic banks are reluctant to indulge in mudharabah and musharakah financing. It introduces the theoretical model of balance sheet to compare them to the practices of Islamic banking. Then this paper analyze the reasons why Islamic banks tend to avoid such financing models. In the end it explore the risk management concept that might solve the problem.
    Keywords: Islamic banks, profit and loss sharing arrangements, risk management
    JEL: G0
    Date: 2010–11
  2. By: Jun Ye; Tiantian Li
    Abstract: This paper is devoted to study the effects arising from imposing a value-at-risk (VaR) constraint in mean-variance portfolio selection problem for an investor who receives a stochastic cash flow which he/she must then invest in a continuous-time financial market. For simplicity, we assume that there is only one investment opportunity available for the investor, a risky stock. Using techniques of stochastic linear-quadratic (LQ) control, the optimal mean-variance investment strategy with and without VaR constraint are derived explicitly in closed forms, based on solution of corresponding Hamilton-Jacobi-Bellman (HJB) equation. Furthermore, some numerical examples are proposed to show how the addition of the VaR constraint affects the optimal strategy.
    Date: 2010–11
  3. By: Romain Ranciere; Aaron Tornell; Athanasios Vamvakidis
    Abstract: This paper constructs a new measure of currency mismatch in the banking sector that controls for bank lending to unhedged borrowers. This measure explicitly takes into account the indirect exchange rate risk that banks undertake when they lend to borrowers that will not be able to repay in the event of a sharp depreciation. Such systemic risk taking is not captured by indicators that are based only on banks’ balance sheet data. The new measure is constructed for 10 emerging European economies and for a broader sample that includes 19 additional emerging economies, for the period 1998 - 2008. Comparisons with previous currency mismatch measures that do not adjust for unhedged foreign currency borrowing illustrate the advantages of the new approach. In particular, the new measure flagged the indirect currency mismatch vulnerabilities that were building up in a number of emerging economies before the recent global crisis. Measuring currency mismatch more accurately can help country authorities in their efforts to address vulnerabilities at the right time, avoiding hurting growth prospects.
    Keywords: Banking sector , Cross country analysis , Currencies , Economic models , Emerging markets , Europe , External borrowing , Financial crisis , Fiscal risk , Loans , Sovereign debt , Time series ,
    Date: 2010–11–17
  4. By: Giovanni Barone-Adesi (The Swiss Finance Institute, University of Lugano, Switzerland; The Rimini Centre for Economic Analysis (RCEA), Italy)
    Abstract: The persistence of financial instability calls into question the adequacy of the current regulatory regime. A critical review of the three pillars at the core of current financial regulation exposes some structural flaws. Four new pillars are proposed and compared with measures proposed to shore up the current financial architecture.
    Date: 2010–01
  5. By: Thierry Tressel
    Abstract: The financial crisis has highlighted the importance of various channels of financial contagion across countries. This paper first presents stylized facts of international banking activities during the crisis. It then describes a simple model of financial contagion based on bank balance sheet identities and behavioral assumptions of deleveraging. Cascade effects can be triggered by bank losses or contractions of interbank lending activities. As a result of shocks on assets or on liabilities of banks, a global deleveraging of international banking activities can occur. Simple simulations are presented to illustrate the use of the model and the relative importance of contagion channels, relying on bank losses of advanced countries’ banking systems during the financial crisis to calibrate the shock. The outcome of the simulations is compared with the deleveraging observed during the crisis suggesting that leverage is a major determinant of financial contagion.
    Keywords: Banks , Cross country analysis , Economic models , External shocks , Global Financial Crisis 2008-2009 , Globalization , International banking ,
    Date: 2010–10–19
  6. By: Juri Hinz; Alex Novikov
    Abstract: Tackling climate change is at the top of many agendas. In this context, emission trading schemes are considered as promising tools. The regulatory framework for an emission trading scheme introduces a market for emission allowances and creates a need for risk management by appropriate financial contracts. In this work, we address logical principles underlying their valuation.
    Date: 2010–11
  7. By: Chalabi, Yohan / Y.; Wuertz, Diethelm
    Abstract: Generalized autoregressive heteroskedasticity (GARCH) models are widely used to reproduce stylized facts of financial time series and today play an essential role in risk management and volatility forecasting. But despite extensive research, problems are still encountered during parameter estimation in the presence of outliers. Here we show how this limitation can be overcome by applying the robust weighted trimmed likelihood estimator (WTLE) to the standard GARCH model. We suggest a fast implementation and explain how the additional robust parameter can be automatically estimated. We compare our approach with other recently introduced robust GARCH estimators and show through the results of an extensive simulation study that the proposed estimator provides robust and reliable estimates with a small computation cost. Moreover, the proposed fully automatic method for selecting the trimming parameter obviates the tedious fine tuning process required by other models to obtain a “robust” parameter, which may be appreciated by practitioners.
    Keywords: GARCH Models; Robust Estimators; Outliers; Weighted Trimmed Likelihood Estimator (WTLE); Quasi Maximum Likelihood Estimator (QMLE)
    JEL: C40
    Date: 2010–10

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