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on Risk Management |
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Issue of 2011‒09‒16
ten papers chosen by |
| By: | Garita, Gus |
| Abstract: | The contribution of this paper to the literature is three-fold: (1) it empirically uncovers the directionality and persistence of systemic risk surrounding "the great recession"; (2) it quantifies the reaction of the macro-economy to financial (banking) system shocks; and (3) it unearths feedback effects from the macro-economy to the (in)stability of a banking system. These contributions are attained by looking at the extremal dependence structure among banks, by presenting a multivariate framework for identifying and modeling their joint-tail distributions, and by constructing an aggregate system-wide distress index, a risk-stability index, which quantifies the systemic risk of a bank. |
| Keywords: | Persistence; distress; contagion; panel VAR |
| JEL: | C10 E44 |
| Date: | 2011–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:33135&r=rmg |
| By: | Wickens, Michael R. |
| Abstract: | This paper takes the view that a major contributing factor to the financial crisis of 2008 was a failure to correctly assess and price the risk of default. In order to analyse default risk in the macroeconomy, a simple general equilibrium model with banks and financial intermediation is constructed in which default-risk can be priced. It is shown how the credit spread can be attributed largely to the risk of default and how excess loan creation may emerge due different attitudes to risk by borrowers and lenders. The model can also be used to analyse systemic risk due to macroeconomic shocks which may be reduced by holding collateral. |
| Keywords: | Default; Financial crisis; Financial intermediation; Liquidity shortages; Risk |
| JEL: | E44 E51 G12 G21 G33 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8556&r=rmg |
| By: | Stefan Lutz |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:1120&r=rmg |
| By: | Kay Giesecke; Konstantinos Spiliopoulos; Richard B. Sowers; Justin A. Sirignano |
| Abstract: | We prove a law of large numbers for the loss from default and use it for approximating the distribution of the loss from default in large, potentially heterogenous portfolios. The density of the limiting measure is shown to solve a non-linear SPDE, and the moments of the limiting measure are shown to satisfy an infinite system of SDEs. The solution to this system leads to %the solution to the SPDE through an inverse moment problem, and to the distribution of the limiting portfolio loss, which we propose as an approximation to the loss distribution for a large portfolio. Numerical tests illustrate the accuracy of the approximation, and highlight its computational advantages over a direct Monte Carlo simulation of the original stochastic system. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1109.1272&r=rmg |
| By: | Allen N. Berger; W. Scott Frame; Vasso Ioannidou |
| Abstract: | This paper offers a possible explanation for the conflicting empirical results in the literature concerning the relation between loan risk and collateral. Specifically, we posit that different economic characteristics or types of collateral pledges may be associated with the empirical dominance of the four different risk-collateral channels implied by economic theory. For our sample, collateral overall is associated with lower loan risk premiums and a higher probability of ex post loan nonperformance (delinquency or default). This finding suggests that the dominant reason collateral is pledged is that banks require collateral from observably riskier borrowers ("lender selection" effect), while lower risk premiums arise because secured loans carry lower losses given default ("loss mitigation" effect). We also find that the risk-collateral channels depend on the economic characteristics and types of collateral. The lender selection effect appears to be especially important for outside collateral, the "risk-shifting" or "loss mitigation" effects for liquid collateral, and the "borrower selection" effect for nondivertible collateral. Among collateral types, we find that the lender selection effect is particularly strong for residential real estate collateral and that the risk shifting effect is important for pledged deposits and bank guarantees. Our results suggest that the conflicting results in the extant risk-collateral literature may be because different samples may be dominated by collateralized loans with different economic characteristics or different types of collateral. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2011-12&r=rmg |
| By: | Lluís Bermúdez (Departament de Matemàtica Econòmica, Financera i Actuarial. RISC-IREA. University of Barcelona. Spain); Antoni Ferri (Departament d'Econometria, Estadística i Economia Espanyola. RISC-IREA. University of Barcelona. Spain); Montserrat Guillén (Departament d'Econometria, Estadística i Economia Espanyola. RISC-IREA. University of Barcelona. Spain) |
| Abstract: | This paper analyses the impact of using different correlation assumptions between lines of business when estimating the risk-based capital reserve, the Solvency Capital Requirement (SCR), under Solvency II regulations. A case study is presented and the SCR is calculated according to the Standard Model approach. Alternatively, the requirement is then calculated using an Internal Model based on a Monte Carlo simulation of the net underwriting result at a one-year horizon, with copulas being used to model the dependence between lines of business. To address the impact of these model assumptions on the SCR we conduct a sensitivity analysis. We examine changes in the correlation matrix between lines of business and address the choice of copulas. Drawing on aggregate historical data from the Spanish non-life insurance market between 2000 and 2009, we conclude that modifications of the correlation and dependence assumptions have a significant impact on SCR estimation. |
| Keywords: | Solvency II, Solvency Capital Requirement, Standard Model, Internal Model, Monte Carlo simulation, Copulas. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:xrp:wpaper:xreap2011-12&r=rmg |
| By: | Oleg Sokolinskiy (Erasmus University Rotterdam); Dick van Dijk (Erasmus University Rotterdam) |
| Abstract: | This paper develops a novel approach to modeling and forecasting realized volatility (RV) measures based on copula functions. Copula-based time series models can capture relevant characteristics of volatility such as nonlinear dynamics and long-memory type behavior in a flexible yet parsimonious way. In an empirical application to daily volatility for S&P500 index futures, we find that the copula-based RV (C-RV) model outperforms conventional forecasting approaches for one-day ahead volatility forecasts in terms of accuracy and efficiency. Among the copula specifications considered, the Gumbel C-RV model achieves the best forecast performance, which highlights the importance of asymmetry and upper tail dependence for modeling volatility dynamics. Although we find substantial variation in the copula parameter estimates over time, conditional copulas do not improve the accuracy of volatility forecasts. |
| Keywords: | Nonlinear dependence; long memory; copulas; volatility forecasting |
| JEL: | C22 C53 |
| Date: | 2011–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20110125&r=rmg |
| By: | Antonio Parbonetti; Andrea Menini; Michel Magnan |
| Abstract: | The recent financial crisis has led to a critical evaluation of the role that fair value accounting may have played in undermining the stability of the financial system. Reacting to the pressures of banking regulators and governments, standard-setters have brought forward additional guidance on the application of fair value accounting. This paper examines if and how fair value reporting by U.S. commercial banks during the 1996-2009 period influences the quality of information used by financial analysts. Our results show that, overall, the greater the extent of a bank’s assets and liabilities reported at fair value, the more dispersed are analysts’ earnings forecasts. Moreover, as the proportion of assets measured at fair value increases, properties of analysts’ forecasts become less desirable, showing a decrease in the precision of public or private information. The informational properties of fair value disclosure decrease as we move from level 2 to mark-to-model data (level 3). Nevertheless, additional analyses suggest that the disclosure of levels has been beneficial to investors as it enhanced private information precision resulting in more accurate and less dispersed analysts’ forecasts. Finally, the disclosure about the valuation of assets that are measured at fair value on a non-recurring basis reduces accuracy and public information precision while enhancing dispersion. <P>La récente crise financière a amené une réévaluation du rôle que l’utilisation de la comptabilité à la juste valeur peut avoir sur la stabilité du système bancaire. Suite à l’intervention des organismes de réglementation des banques et de certains gouvernements, les normalisateurs comptables ont élaboré davantage les paramètres de mise en œuvre de la comptabilité à la juste valeur. Cette recherche examine si et comment l’utilisation de la comptabilité à la juste valeur par les banques américaines entre 1996 et 2009 a influencé la qualité de l’information accessible aux analystes financiers pour la préparation de leurs prévisions. Nos résultats montrent, qu’en général, plus grande est la proportion de l’actif et du passif d’une banque qui repose sur la comptabilité à la juste valeur, plus grande est la dispersion des prévisions de bénéfices effectuées par les analystes. En outre, une augmentation de la proportion de l’actif mesuré à la juste valeur est associée avec un environnement informationnel moins favorable pour les analystes (diminution dans la précision de l’information privée et de l’information publique). Cet effet est accentué pour l’actif ou le passif mesuré de niveau 3 (mesure selon modèle). Cependant, la décision récente de divulguer les niveaux d’évaluation à la juste valeur (niveaux 1, 2 et 3) a amélioré la précision et le consensus des prévisions de bénéfice des analystes. Finalement, la divulgation de l’évaluation d’actifs qui sont mesurés à la juste valeur mais sur une base ponctuelle et non-récurrente semble réduire la précision des prévisions de bénéfice. |
| Keywords: | Fair value accounting, governance, risk management, earnings forecasts analysts, valuation of assets disclosure, Comptabilité à la juste valeur, gouvernance, prévisions de bénéfices des analystes, divulgation de l’évaluation d’actifs |
| Date: | 2011–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2011s-56&r=rmg |
| By: | Gaurab Aryal; Isabelle Perrigne; Quang Vuong |
| Abstract: | In contrast to Aryal, Perrigne and Vuong (2009), this note shows that in an insurance model with multidimensional screening when only information on whether the insuree has been involved in some accident is available, the joint distribution of risk and risk aversion is not identified. |
| JEL: | C14 L62 D82 D86 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2011-552&r=rmg |
| By: | Vladimir Vovk |
| Abstract: | A simple example shows that losing all money is compatible with a very high Sharpe ratio (as computed after losing all money). However, the only way that the Sharpe ratio can be high while losing money is that there is a period in which all or almost all money is lost. This note explores the best achievable Sharpe and Sortino ratios for investors who lose money but whose one-period returns are bounded below (or both below and above) by a known constant. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1109.0706&r=rmg |