nep-rmg New Economics Papers
on Risk Management
Issue of 2011‒11‒01
six papers chosen by
Stan Miles
Thompson Rivers University

  1. An MVAR Framework to Capture Extreme Events in Macroprudential Stress Tests By Paolo Guarda; Abdelaziz Rouabah; John Theal
  2. Lgm Dairy - A Risk Management Tool for Milk Producers By Edwards, William M.; Hook, Ronald
  3. Has the global banking system become more fragile over time ? By Anginer, Deniz; Demirguc-Kunt, Asli
  4. On the network topology of variance decompositions: Measuring the connectedness of financial firms By Francis X. Diebold; Kamil Yilmaz
  5. XL reinsurance with reinstatements and initial premium feasibility in exchangeability hypothesis By Paola Ferretti; Antonella Campana; ;
  6. Exact and asymptotic results for insurance risk models with surplus-dependent premiums By Hansj\"org Albrecher; Corina Constantinescu; Zbigniew Palmowski; Georg Regensburger; Markus Rosenkranz

  1. By: Paolo Guarda; Abdelaziz Rouabah; John Theal
    Abstract: The stress testing literature abounds with reduced-form macroeconomic models that are used to forecast the evolution of the macroeconomic environment in the context of a stress testing exercise. These models permit supervisors to estimate counterparty risk under both baseline and adverse scenarios. However, the large majority of these models are founded on the assumption of normality of the innovation series. While this assumption renders the model tractable, it fails to capture the observed frequency of distant tail events that represent the hallmark of systemic financial stress. Consequently, these kinds of macro models tend to underestimate the actual level of credit risk. This also leads to an inaccurate assessment of the degree of systemic risk inherent in the financial sector. Clearly this may have significant implications for macro-prudential policy makers. One possible way to overcome such a limitation is to introduce a mixture of distributions model in order to better capture the potential for extreme events. Based on the methodology developed by Fong, Li, Yau and Wong (2007), we have incorporated a macroeconomic model based on a mixture vector autoregression (MVAR) into the stress testing framework of Rouabah and Theal (2010) that is used at the Banque centrale du Luxembourg. This allows the counterparty credit risk model to better capture extreme tail events in comparison to models based on assuming normality of the distributions underlying the macro models. We believe this approach facilitates a more accurate assessment of credit risk.
    Keywords: financial stability, stress testing, MVAR, mixture of normals, VAR, tier 1 capital ratio, counterparty risk, Luxembourg banking sector
    JEL: C15 E44 G21
    Date: 2011–10
  2. By: Edwards, William M.; Hook, Ronald
    Date: 2011–10–24
  3. By: Anginer, Deniz; Demirguc-Kunt, Asli
    Abstract: This paper examines time-series and cross-country variations in default risk co-dependence in the global banking system. The authors construct a default risk measure for all publicly traded banks using the Merton contingent claim model, and examine the evolution of the correlation structure of default risk for more than 1,800 banks in more than 60 countries. They find that there has been a significant increase in default risk co-dependence over the three-year period leading to the financial crisis. They also find that countries that are more integrated, and that have liberalized financial systems and weak banking supervision, have higher co-dependence in their banking sector. The results support an increase in scope for intra-national supervisory co-operation, as well as capital charges for"too-connected-to-fail"institutions that can impose significant externalities.
    Keywords: Banks&Banking Reform,Debt Markets,Financial Intermediation,Emerging Markets,Access to Finance
    Date: 2011–10–01
  4. By: Francis X. Diebold; Kamil Yilmaz
    Abstract: The authors propose several connectedness measures built from pieces of variance decompositions, and they argue that they provide natural and insightful measures of connectedness among financial asset returns and volatilities. The authors also show that variance decompositions define weighted, directed networks, so that their connectedness measures are intimately-related to key measures of connectedness used in the network literature. Building on these insights, the authors 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: Portfolio management ; Systemic risk ; Risk management
    Date: 2011
  5. By: Paola Ferretti (Department of Economics, University Of Venice Cà Foscari); Antonella Campana (Department of Economics, University Of Molise); ;
    Abstract: This paper studies excess of loss reinsurance with reinstatements in the case in which the aggregate claims are generated by a discrete distribution, in the framework of risk adjusted premium principle. By regarding to comonotonic exchangeability, a generalized definition of initial premium is proposed and some regularity properties characterizing it are presented, both with reference to conditions on underlying distortion functions both with respect to composing functions. The attention is then focused on conditions ensuring feasibility of generalized initial premiums with reference to the limit on the payment of each claim.
    Keywords: Excess of loss reinsurance; reinstatements; initial premium; exchangeability; distortion risk measures; feasibility.
    JEL: G22
    Date: 2011
  6. By: Hansj\"org Albrecher; Corina Constantinescu; Zbigniew Palmowski; Georg Regensburger; Markus Rosenkranz
    Abstract: In this paper we develop a symbolic technique to obtain asymptotic expressions for ruin probabilities and discounted penalty functions in renewal insurance risk models when the premium income depends on the present surplus of the insurance portfolio. The analysis is based on boundary problems for linear ordinary differential equations with variable coefficients. The algebraic structure of the Green's operators allows us to develop an intuitive way of tackling the asymptotic behavior of the solutions, leading to exponential-type expansions and Cram\'er-type asymptotics. Furthermore, we obtain closed-form solutions for more specific cases of premium functions in the compound Poisson risk model.
    Date: 2011–10

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