nep-rmg New Economics Papers
on Risk Management
Issue of 2011‒07‒21
four papers chosen by
Stan Miles
Thompson Rivers University

  1. GFC-Robust Risk Management Under the Basel Accord Using Extreme Value Methodologies By Michael McAleer; Paulo Araújo Santos; Juan-Ángel Jiménez-Martín; Teodosio Pérez Amaral
  2. Quantum Financial Economics - Risk and Returns By Carlos Pedro Gon\c{c}alves
  3. Risk Procyclicality and Dynamic Hedge Fund Strategies By Francois-Éric Racicot; Raymond Théoret
  4. On the High-Frequency Dynamics of Hedge Fund Risk Exposures By Patton, Andrew J; Ramadorai, Tarun

  1. By: Michael McAleer (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, Complutense University of Madrid, and Institute of Economic Research, Kyoto University); Paulo Araújo Santos (Escola Superior de Gestão e Tecnologia de Santarém and Center of Statistics and Applications University of Lisbon); Juan-Ángel Jiménez-Martín (Department of Quantitative Economics Complutense University of Madrid); Teodosio Pérez Amaral (Department of Quantitative Economics Complutense University of Madrid)
    Abstract: In McAleer et al. (2010b), a robust risk management strategy to the Global Financial Crisis (GFC) was proposed under the Basel II Accord by selecting a Value-at-Risk (VaR) forecast that combines the forecasts of different VaR models. The robust forecast was based on the median of the point VaR forecasts of a set of conditional volatility models. In this paper we provide further evidence on the suitability of the median as a GFC-robust strategy by using an additional set of new extreme value forecasting models and by extending the sample period for comparison. These extreme value models include DPOT and Conditional EVT. Such models might be expected to be useful in explaining financial data, especially in the presence of extreme shocks that arise during a GFC. Our empirical results confirm that the median remains GFC-robust even in the presence of these new extreme value models. This is illustrated by using the S&P500 index before, during and after the 2008-09 GFC. 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, including several tests for independence of the violations. The strategy based on the median, or more generally, on combined forecasts of single models, is straightforward to incorporate into existing computer software packages that are used by banks and other financial institutions.
    Keywords: Value-at-Risk (VaR), DPOT, daily capital charges, robust forecasts, violation penalties, optimizing strategy, aggressive risk management, conservative risk management, Basel, global financial crisis.
    JEL: G32 G11 C53 C22
    Date: 2011–07
  2. By: Carlos Pedro Gon\c{c}alves
    Abstract: Financial volatility risk is addressed through a multiple round evolutionary quantum game equilibrium leading to Multifractal Self-Organized Criticality (MSOC) in the financial returns and in the risk dynamics. The model is simulated and the results are compared with financial volatility data.
    Date: 2011–07
  3. By: Francois-Éric Racicot (Département des sciences administratives, Université du Québec (Outaouais), LRSP et Chaire d'information financière et organisationnelle); Raymond Théoret (Département de finance, Université du Québec (Montréal), Université du Québec (Outaouais), et Chaire d'information financière et organisationnelle)
    Abstract: It is well-known that traditional financial institutions like banks follow procyclical risk strategies (Rajan 2005, 2009, Shin 2009, Jacques 2010) in the sense that they increase their leverage in economic expansions and reduce it in recessions, which leads to a procyclical behaviour for their betas and other risk and financial performance measures. But it is less known that the spectrum of the returns of many hedge fund strategies displays a high volatility at business cycle frequencies. In this paper, we study this unknown stylized fact resorting to two procedures: conditional modelling and Kalman filtering of Funds alphas and betas. We find that hedge fund betas are usually procyclical. Regarding the alpha, it is often high at the beginning of a market upside cycle but as the demand pressure stems from investors, it eventually fades away, which suggests that the alpha puzzle documented in the financial literature is questionable when cast in a dynamic setting.
    Keywords: risk measures; Aggregate risk; Financial stability; Conditional models; Kalman Filter; Spectral analysis.
    JEL: C13 C19 C49 G12 G23
    Date: 2011–07–01
  4. By: Patton, Andrew J; Ramadorai, Tarun
    Abstract: We propose a new method to model hedge fund risk exposures using relatively high frequency conditioning variables. In a large sample of funds, we find substantial evidence that hedge fund risk exposures vary across and within months, and that capturing within-month variation is more important for hedge funds than for mutual funds. We consider different within-month functional forms, and uncover patterns such as day-of-the-month variation in risk exposures. We also find that changes in portfolio allocations, rather than changes in the risk exposures of the underlying assets, are the main drivers of hedge funds' risk exposure variation.
    Keywords: beta; hedge funds; mutual funds; performance evaluation; time-varying risk; window-dressing
    JEL: C22 G11 G23
    Date: 2011–07

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