New Economics Papers
on Risk Management
Issue of 2011‒10‒22
six papers chosen by

  1. Ryzyko struktury: Rys koncepcyjny By Staszkiewicz, Piotr W.
  2. Credit Risk in General Equilibrium By Jürgen Eichberger; Klaus Rheinberger; Martin Summer
  3. Risk management and the implementation of the Basel Accord in emerging countries: An application to Pakistan. By Masood, Omar; Fry, J. M.
  4. Updating the Option Implied Probability of Default Methodology By Vilsmeier, Johannes
  5. A logistic regression approach to estimating customer profit loss due to lapses in insurance By Montserrat Guillén; Ana María Pérez-Marín; Montserrat Guillén
  6. A Model of Mortgage Default By John Y. Campbell; João F. Cocco

  1. By: Staszkiewicz, Piotr W.
    Abstract: The article presents the initial proposal for the group risk measurement based on the comparison of two interconnected sets of webs. The risk scalar has been presented both for each separated subsidiary as well as for the group itself. It was shown the risk profile of the group could be aggregated into a single value, and some consequences of that attribute was discussed. The practical aspects of the proposed solution were outlined.
    Keywords: Risk; Risk model; Basel; Accord; CRD; Capiatl groups; Economic capital; Capital alocation; Capital requirements; Subsidiaries; Strukture; VAR; CVAR; Related parties; Fair value; Parent entity; Measurement; Solvency; Transaction value;
    JEL: M41 G22 G31 G32 G21 P34
    Date: 2010–09–01
  2. By: Jürgen Eichberger (University of Heidelberg, Alfred-Weber-Institut für Wirtschaftswissenschaften); Klaus Rheinberger; Martin Summer
    Abstract: Credit risk models used in quantitative risk management treat credit risk analysis conceptually like a single person decision problem. From this perspective an exogenous source of risk drives the fundamental parameters of credit risk: probability of default, exposure at default and the recovery rate. In reality these parameters are the result of the interaction of many market participants: They are endogenous. The authors develop a general equilibrium model with endogenous credit risk that can be viewed as an extension of the capital asset pricing model. They analyze equilibrium prices of securities as well as equilibrium allocations in the presence of credit risk. The authors use the model to discuss the conceptual underpinnings of the approach to risk weight calibration for credit risk taken by the Basel Committee. JEL classification: G32, G33, G01, D52
    Keywords: Credit Risk, Endogenous Risk, Systemic Risk, Banking Regulation
    Date: 2011–09–09
  3. By: Masood, Omar; Fry, J. M.
    Abstract: This paper addresses an important contemporary issue; namely the implementation of the Basel Accord worldwide. The Basel Accord provides a series of measures to improve the stability of the world’s financial system but its implementation poses a number of challenges for both developing and emerging economies. Pakistan faces a number of unique challenges in this regard due to its recent economic expansion and the fact that the rate at which the Basel Accord is being adopted lags behind that of other countries. This paper throws light on this and a number of related issues due to a combination of the novelty of the survey data from risk managers coupled with a rigorous statistical analysis. Results reflect that the Basel Accord is generally well regarded due to its underlying aims of improved capital standards and a scientific treatment of risk. However, operational risk emerges as a key barrier to implementation in Pakistan. A number of further obstacles are highlighted, which, do seem to have been addressed although only with a partial degree of success. Privately owned banks appear to be more technically competent and more favourably disposed towards implementation than publicly owned banks.
    Keywords: Risk Management; Basel Accord; Banking; Financial Regulation; Emerging Markets
    JEL: C10 O53 G21
    Date: 2011–10–17
  4. By: Vilsmeier, Johannes
    Abstract: In this paper we ‘update’ the option implied probability of default (option iPoD) approach recently suggested in the literature. First, a numerically more stable objective function for the estimation of the risk neutral density is derived whose integrals can be solved analytically. Second, it is reasoned that the originally proposed approach for the estimation of the PoD has some serious drawbacks and hence an alternative procedure is suggested that is based on the Lagrange multipliers. Carrying out numerical evaluations and a practical application we find that the framework provides very promising results.
    Keywords: Option Implied Probability of Default; Risk Neutral Density; Cross Entropy
    Date: 2011–10–12
  5. By: Montserrat Guillén (Departament d'Econometria, Estadística i Economia Espanyola. RFA-IREA. University of Barcelona. Spain); Ana María Pérez-Marín (Departament d'Econometria, Estadística i Economia Espanyola. RFA-IREA. University of Barcelona. Spain); Montserrat Guillén (Departament d'Econometria, Estadística i Economia Espanyola. RFA-IREA. University of Barcelona. Spain)
    Abstract: This article focuses on business risk management in the insurance industry. A methodology for estimating the profit loss caused by each customer in the portfolio due to policy cancellation is proposed. Using data from a European insurance company, customer behaviour over time is analyzed in order to estimate the probability of policy cancelation and the resulting potential profit loss due to cancellation. Customers may have up to two different lines of business contracts: motor insurance and other diverse insurance (such as, home contents, life or accident insurance). Implications for understanding customer cancellation behaviour as the core of business risk management are outlined.
    Keywords: Policy cancellation, customer loyalty, profit loss, customer behavior.
    Date: 2011–10
  6. By: John Y. Campbell; João F. Cocco
    Abstract: This paper solves a dynamic model of a household's decision to default on its mortgage, taking into account labor income, house price, inflation, and interest rate risk. Mortgage default is triggered by negative home equity, which results from declining house prices in a low inflation environment with large mortgage balances outstanding. Not all households with negative home equity default, however. The level of negative home equity that triggers default depends on the extent to which households are borrowing constrained. High loan-to-value ratios at mortgage origination increase the probability of negative home equity. High loan-to-income ratios also increase the probability of default by tightening borrowing constraints. Comparing mortgage types, adjustable-rate mortgage defaults occur when nominal interest rates increase and are substantially affected by idiosyncratic shocks to labor income. Fixed-rate mortgages default when interest rates and inflation are low, and create a higher probability of a default wave with a large number of defaults. Interest-only mortgages trade off an increased probability of negative home equity against a relaxation of borrowing constraints, but overall have the highest probability of a default wave.
    JEL: E21 G21 G33
    Date: 2011–10

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