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on Risk Management |
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Issue of 2011‒10‒15
twelve papers chosen by |
| By: | Rama Cont (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie - Paris VI - Université Paris Diderot - Paris 7, Center for Financial Engineering, Columbia University - Columbia University); Romain Deguest (EDHEC RIsk Institute - École des hautes études commerciales du Nord (EDHEC)); Xuedong He (Center for Financial Engineering, Columbia University - Columbia University) |
| Abstract: | Starting from the requirement that risk measures of financial portfolios should be based on their losses, not their gains, we define the notion of loss-based risk measure and study the properties of this class of risk measures. We characterize loss-based risk measures by a representation theorem and give examples of such risk measures. We then discuss the statistical robustness of estimators of loss-based risk measures: we provide a general criterion for qualitative robustness of risk estimators and compare this criterion with sensitivity analysis of estimators based on influence functions. Finally, we provide examples of statistically robust estimators for loss-based risk measures. |
| Keywords: | risk measure, coherent risk measure, Fenchel-Legendre transform, Choquet capacity |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00629929&r=rmg |
| By: | Francis X. Diebold (Department of Economics, University of Pennsylvania); Kamil Yılmaz (Department of Economics, Koç University) |
| Abstract: | We propose several connectedness measures built from pieces of variance decompositions, and we argue that they provide natural and insightful measures of connectedness among financial asset returns and volatilities. We also show that variance decompositions define weighted, directed networks, so that our connectedness measures are intimately-related to key measures of connectedness used in the network literature. Building on these insights, we track both average and daily time-varying connectedness of major U.S. financial institutions' stock return volatilities in recent years, including during the financial crisis of 2007-2008. |
| Keywords: | Risk measurement, risk management, portfolio allocation, market risk, credit risk, systemic risk, asset markets, degree distribution |
| JEL: | C3 G2 |
| Date: | 2011–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:11-031&r=rmg |
| By: | Toni Gravelle; Fuchun Li |
| Abstract: | In this paper, we define a financial institution’s contribution to financial systemic risk as the increase in financial systemic risk conditional on the crash of the financial institution. The higher the contribution is, the more systemically important is the institution for the system. Based on relevant but different measurements of systemic risk, we propose a set of market-based measures on the systemic importance of financial institutions, each designed to capture certain aspects of systemic risk. Multivariate extreme value theory approach is used to estimate these measures. Using six big Canadian banks as the proxy for Canadian banking sector, we apply these measures to identify systemically important banks in Canadian banking sector and major risk contributors from international financial institutions to Canadian banking sector. The empirical evidence reveals that (i) the top three banks, RBC Financial Group, TD Bank Financial Group, and Scotiabank are more systemically important than other banks, although with different order from different measures, while we also find that the size of a financial institution should not be considered as a proxy of systemic importance; (ii) compared to the European and Asian banks, the crashes of U.S. banks, on average, are the most damaging to the Canadian banking sector, while the risk contribution to the Canadian banking sector from Asian banks is quite lower than that from banks in U.S. and euro area; (iii) the risk contribution to the Canadian banking sector exhibits “ home bias ”, that is, cross-country risk contribution tends to be smaller than domestic risk contribution. |
| Keywords: | Financial stability; Financial system regulation and policies; Financial institutions; Econometric and statistical methods |
| JEL: | C14 G21 G32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-19&r=rmg |
| By: | Tobias Adrian; Markus K. Brunnermeier |
| Abstract: | We propose a measure for systemic risk: CoVaR, the value at risk (VaR) of the financial system conditional on institutions being under distress. We define an institution's contribution to systemic risk as the difference between CoVaR conditional on the institution being under distress and the CoVaR in the median state of the institution. From our estimates of CoVaR for the universe of publicly traded financial institutions, we quantify the extent to which characteristics such as leverage, size, and maturity mismatch predict systemic risk contribution. We also provide out of sample forecasts of a countercyclical, forward looking measure of systemic risk and show that the 2006Q4 value of this measure would have predicted more than half of realized covariances during the financial crisis. |
| JEL: | G21 G22 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17454&r=rmg |
| By: | Buncic, Daniel; Martin, Melecky |
| Abstract: | Drawing on the lessons from the global financial crisis and especially from its impact on the banking systems of Eastern Europe, the paper proposes a new practical approach to macroprudential stress testing. The proposed approach incorporates: (i) macroeconomic stress scenarios generated from both a country specific statistical model and historical cross-country crises experience; (ii) indirect credit risk due to foreign currency exposures of unhedged borrowers; (iii) varying underwriting practices across banks and their asset classes based on their relative aggressiveness of lending; (iv) higher correlations between the probability of default and the loss given default during stress periods; (v) a negative effect of lending concentration and residual loan maturity on unexpected losses; and (vi) the use of an economic risk weighted capital adequacy ratio as the relevant outcome indicator to measure the resilience of banks to materialising credit risk. We apply the proposed approach to a set of Eastern European banks and discuss the results. |
| Keywords: | Macroprudential Supervision; Stress Test; Individual Bank Data; Eastern Europe |
| JEL: | E58 G28 G21 |
| Date: | 2011–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:33927&r=rmg |
| By: | Guanghui Huang; Jing Xu; Wenting Xing |
| Abstract: | The problem of stock hedging is reconsidered in this paper, where a put option is chosen from a set of available put options to hedge the market risk of a stock. A formula is proposed to determine the probability that the potential loss exceeds a predetermined level of Value-at-Risk, which is used to find the optimal strike price and optimal hedge ratio. The assumptions that the chosen put option finishes in-the-money and the constraint of hedging budget is binding are relaxed in this paper. A hypothesis test is proposed to determine whether the failure rate of hedging strategy is greater than the predetermined level of risk. The performances of the proposed method and the method with those two assumptions are compared through simulations. The results of simulated investigations indicate that the proposed method is much more prudent than the method with those two assumptions. |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1110.0159&r=rmg |
| By: | van Winsen, Frankwin; Wauters, Erwin; Lauwers, Ludwig H.; de Mey, Yann; Van Passel, Steven; Vancauteren, Mark |
| Abstract: | Although risk management in farming is a well-documented subject in scientific literature, this same literature is usually used only by other scientist and is not aiding individual farmers in their management. Risk perception and risk attitude are well described determinants of risk behaviour but rarely combined in an integrated approach for risk behaviour research. Furthermore in most literature risk attitude is taken as a given stable personality trait on which the optimal behaviour should be based. We argue that risk attitude can be manageable in order to derive optimal risk behaviour. Based on these findings we develop a comprehensive theoretical basic model on farmers risk behaviour. Furthermore a participatory approach involving the stakeholder, the farmer, to build on this model is presented. This presented model has as final purpose of guiding research on establishing risk management tools applicable by farmers. |
| Keywords: | risk management, risk perception, risk attitude, risk behaviour, Risk and Uncertainty, |
| Date: | 2011–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaae11:115749&r=rmg |
| By: | Søren Asmussen (Department of Mathematical Sciences - Aarhus University); Romain Biard (Department of Mathematical Sciences - Aarhus University) |
| Abstract: | A risk process with constant premium rate $c$ and Poisson arrivals of claims is considered. A threshold $r$ is defined for claim interarrival times, such that if $k$ consecutive interarrival times are larger than $r$, then the next claim has distribution $G$. Otherwise, the claim size distribution is $F$. Asymptotic expressions for the infinite horizon ruin probabilities are given for both light- and the heavy-tailed cases. A basic observation is that the process regenerates at each $G$-claim. Also an approach via Markov additive processes is outlined, and heuristics are given for the distribution of the time to ruin. |
| Keywords: | Ruin theory ; Subexponential distribution ; Large deviations ; Markov additive process ; Finite horizon ruin |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00569254&r=rmg |
| By: | Meuwissen, Miranda P.M.; Van Asseldonk, Marcel A.P.M.; Pietola, Kyosti; Hardaker, J. Brian; Huirne, Ruud B.M. |
| Abstract: | The ecosystem and the economic subsystem are interlinked. In fact, it is the overconsumption of scarce resources or the overproduction of bad outputs at economic system level that causes a great part of the imbalances at the ecosystem level. Some imbalances do not originate at the economic system level, but are due to external factors. Given the possibility of external shocks, respecting static sustainability thresholds is not a guarantee for system sustainability. In a dynamic setting, the concept of resilience is therefore helpful. In this paper we show how this concept can complement the traditional efficiency approach to come to a sustainable value creating economic system. |
| Keywords: | Income volatility, Income insurance, Expert elicitation, Price insurance, Risk and Uncertainty, |
| Date: | 2011–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaae11:114649&r=rmg |
| By: | Ahmad Zaini, Afzan; Adnan , Hamimah; Che Haron, Roziha |
| Abstract: | Abstract - Often times, contractors failed to identify, plan, strategize, analyzed, execute, monitor, control and manage the risk involves during construction phase in Malaysia. Consequently, the contractor failed to complete the project on schedule, within client’s budget and quality. The idea of introducing formal risk management among Malaysian contractors during construction phase is seem to be a proactive approach to achieve the project objectives. This paper intends to identify the application of formal risk management among the contractors during the construction phase in Malaysia. Questionnaires and interviews were used. It was found that although the risk management process in Malaysian construction industry has been introduced, most of them are not well structured and not being implemented in a formal manner. Therefore, it is suggested that these contractors should try to implement formal risk management and hope that the construction industry in Malaysia can enjoy the benefits and lead our industry effectively into the next stage of building the nation. |
| Keywords: | Keywords : Risk Management; Contractors; Construction Phase; Malaysia |
| JEL: | G3 D8 L7 |
| Date: | 2010–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:33883&r=rmg |
| By: | Inter-American Development Bank (IDB) |
| Abstract: | This documents contains Disaster Risk and Disaster Management indicators for Belize calculated according to the methodology developed by the Bank. This System of Indicators had three specific objectives: i) improvement in the use and presentation of information on risk. This assists policymakers in identifying investment priorities to reduce risk (such as prevention and mitigation measures), and directs the post disaster recovery process; ii) to provide a way to measure key elements of vulnerability for countries facing natural phenomena. This report presents only the updated or new results for the country and there will be not found detailed methodological explanations because they are not the scope of this report. |
| Keywords: | Environment & Natural Resources :: Disasters, Financial Sector :: Financial Risk, disaster risk, risk managment, Belize, disaster risk indicators |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:42358&r=rmg |
| By: | Jason Allen; Ali Hortaçsu; Jakub Kastl |
| Abstract: | This paper explores the reliability of using prices of credit default swap contracts (CDS) as indicators of default probabilities during the 2007/2008 financial crisis. We use data from the Canadian financial system to show that these publicly available risk measures, while indicative of initial problems of the financial system as a whole, do not seem to correspond to risks implied by the cross-sectional heterogeneity in bank behavior in short-term lending markets. Strategies in, and reliance on the payments system as well as special liquidity-supplying tools provided by the central bank seem to be more important additional indicators of distress of individual banks, or lack thereof than the CDSs. It therefore seems that central banks should utilize high-frequency data on liquidity demand to obtain a better picture of financial health of individual participants of the financial system. |
| Keywords: | Financial Institutions; Financial markets; Payment, clearing, and settlement systems |
| JEL: | G28 E42 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:11-17&r=rmg |