nep-rmg New Economics Papers
on Risk Management
Issue of 2011‒02‒12
six papers chosen by
Stan Miles
Thompson Rivers University

  1. International Evidence on GFC-robust Forecasts for Risk Management under the Basel Accord By Michael McAleer; Juan-Ángel Jiménez-Martín; Teodosio Pérez-Amaral
  2. Systemic risk contributions By Xin Huang; Hao Zhou; Haibin Zhu
  3. Evaluating and managing systemic risk in the European Union By Avadanei, Anamaria; Ghiba, Nicolae
  4. Minimizing Shortfall By Lisa R. Goldberg; Michael Y. Hayes; Ola Mahmoud
  5. Regulating Asset Price Risk By Philippe Bacchetta, Cédric Tille, Eric van Wincoop
  6. On the Construction of Common Size, Value and Momentum Factors in International Stock Markets: A Guide with Applications By Peter S. Schmidt; Andreas Schrimpf; Urs von Arx; Alexander F. Wagner; Andreas Ziegler

  1. By: Michael McAleer (University of Canterbury); Juan-Ángel Jiménez-Martín; Teodosio Pérez-Amaral
    Abstract: A risk management strategy that is designed to be robust to the Global Financial Crisis (GFC), in the sense of selecting a Value-at-Risk (VaR) forecast that combines the forecasts of different VaR models, was proposed in McAleer et al. (2010c). The robust forecast is based on the median of the point VaR forecasts of a set of conditional volatility models. Such a risk management strategy is robust to the GFC in the sense that, while maintaining the same risk management strategy before, during and after a financial crisis, it will lead to comparatively low daily capital charges and violation penalties for the entire period. This paper presents evidence to support the claim that the median point forecast of VaR is generally GFC-robust. We investigate the performance of a variety of single and combined VaR forecasts in terms of daily capital requirements and violation penalties under the Basel II Accord, as well as other criteria. In the empirical analysis, we choose several major indexes, namely French CAC, German DAX, US Dow Jones, UK FTSE100, Hong Kong Hang Seng, Spanish Ibex35, Japanese Nikkei, Swiss SMI and US S&P500. The GARCH, EGARCH, GJR and Riskmetrics models, as well as several other strategies, are used in the comparison. Backtesting is performed on each of these indexes using the Basel II Accord regulations for 2008-10 to examine the performance of the Median strategy in terms of the number of violations and daily capital charges, among other criteria. The Median is shown to be a profitable and safe strategy for risk management, both in calm and turbulent periods, as it provides a reasonable number of violations and daily capital charges. The Median also performs well when both total losses and the asymmetric linear tick loss function are considered.
    Keywords: Median strategy; Value-at-Risk (VaR); daily capital charges; robust forecasts; violation penalties; optimizing strategy; aggressive risk management; conservative risk management; Basel II Accord; global financial crisis (GFC)
    JEL: G32 G11 C53 C22
    Date: 2011–01–01
  2. By: Xin Huang; Hao Zhou; Haibin Zhu
    Abstract: We adopt a systemic risk indicator measured by the price of insurance against systemic financial distress and assess individual banks' marginal contributions to the systemic risk. The methodology is applied using publicly available data to the 19 bank holding companies covered by the U.S. Supervisory Capital Assessment Program (SCAP), with the systemic risk indicator peaking around $1.1 trillion in March 2009. Our systemic risk contribution measure shows interesting similarity to and divergence from the SCAP expected loss measure. In general, we find that a bank's contribution to the systemic risk is roughly linear in its default probability but highly nonlinear with respect to institution size and asset correlation.
    Date: 2011
  3. By: Avadanei, Anamaria; Ghiba, Nicolae
    Abstract: The financial crisis has exposed the weaknesses in national and international economies, the disruption of the financial systems all over the world. The aim of this paper is to point out the importance of systemic risk management in the European Union (EU). Structured on two parts, the study presents the evaluation methods of the systemic risk in the mentioned area and the main proposals for the financial stability reconstruction. To conclude, deep reforms are needed: an adequate financial regulation and supervision, the evaluation of the performance over time, new rules for improving capital and liquidity and a better communication between institutions in order to prevent and neutralize possible distress.
    Keywords: Systemic risk; financial crisis; European Union
    JEL: G32
    Date: 2010–10–20
  4. By: Lisa R. Goldberg; Michael Y. Hayes; Ola Mahmoud
    Abstract: This paper describes an empirical study of shortfall optimization with Barra Extreme Risk. We compare minimum shortfall to minimum variance portfolios in the US, UK, and Japanese equity markets using Barra Style Factors (Value, Growth, Momentum, etc.). We show that minimizing shortfall generally improves performance over minimizing variance, especially during down-markets, over the period 1985-2010. The outperformance of shortfall is due to intuitive tilts towards protective factors like Value, and away from aggressive factors like Growth and Momentum. The outperformance is largest for the shortfall that measures overall asymmetry rather than the extreme losses.
    Date: 2011–02
  5. By: Philippe Bacchetta, Cédric Tille, Eric van Wincoop (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: There has been a long debate about whether speculators are stabilizing or not. We consider a model where speculators have a stabilizing role in normal times, but may also provoke large risk panics. The very feature that makes arbitrageurs liquidity providers in normal times, namely their tolerance of risk, enables a large increase in asset price risk during a financial panic. We show that a policy that discourages balance sheet risk reduces the magnitude of financial panics, as well as asset price risk in both normal and panic states.
    Keywords: Asset Pricing, Risk Management, Leverage.
    JEL: E44 G11 G18
    Date: 2011–01
  6. By: Peter S. Schmidt (University of Zurich, Switzerland); Andreas Schrimpf (Aarhus University, Denmark); Urs von Arx (University of Zurich, ETH Zurich, Switzerland); Alexander F. Wagner (University of Zurich, Switzerland); Andreas Ziegler (University of Zurich, ETH Zurich, Switzerland)
    Abstract: Demand is growing for a better understanding of how assets are priced in countries outside of the U.S. While financial data are available for many firms world-wide, it is important to have a reliable and replicable method of constructing high-quality systematic risk factors from these data. This paper first documents that appropriately screened data from Thomson Reuters Datastream and Thomson Reuters Worldscope can be used to replicate closely not only U.S. market returns and the corresponding momentum risk factor (as existing work has suggested), but also the widely-used U.S. size and value risk factors. We then build novel pan-European and country-specific momentum, size, and value risk factors. By comparing our pan-European market returns and risk factors with their counterparts in the U.S., we find that they are astonishingly highly correlated. The factors we compute are made available to other researchers.
    Keywords: Risk factors; value, size, momentum, international equity markets, asset pricing anomalies
    JEL: C89 G12 G15
    Date: 2011–02

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