New Economics Papers
on Risk Management
Issue of 2012‒01‒18
thirteen papers chosen by

  1. A Goal Programming Model for Optimal Portfolio Diversification By Davide La Torre; Marco Maggis
  2. Risk Measures on $\mathcal{P}(\mathbb{R})$ and Ambiguity for the Value At Risk: $\Lambda V@R$ By Marco Frittelli; Marco Maggis; Ilaria Peri
  3. Macroprudential stress testing of credit risk : a practical approach for policy makers By Buncic, Daniel; Melecky, Martin
  4. The risk effects of acquiring distressed firms By E. BRUYLAND; W. DE MAESENEIRE
  5. The strictest common relaxation of a family of risk measures. By Roorda, B.; Schumacher, J.M.
  6. Complete duality for quasiconvex dynamic risk measures on modules of the $L^{p}$-type By Marco Frittelli; Marco Maggis
  7. Structured portfolio analysis under SharpeOmega ratio By Rania Hentati; Jean-Luc Prigent
  8. Smiles all around: FX joint calibration in a multi-Heston model By Alvise De Col; Alessandro Gnoatto; Martino Grasselli
  9. Developments in Financial Supervision and the Use of Macroprudential Measures in Central America By Fernando L Delgado; Mynor Meza
  10. Forecasting US bond default ratings allowing for previous and initial state dependence in an ordered probit model By Paul Mizen; Serafeim Tsoukas
  11. Bayesian Learning of Impacts of Self-Exciting Jumps in Returns and Volatility By Andras Fulop; Junye Li; Jun Yu
  12. Assessing the Risks to the Japanese Government Bond (JGB) Market By Kiichi Tokuoka; Raphael W. Lam
  13. Are There Spillover Effects from Munis? By Rabah Arezki; Bertrand Candelon; Amadou N. R. Sy

  1. By: Davide La Torre; Marco Maggis
    Abstract: We present a goal programming model for risk minimization of a financial portfolio managed by an agent subject to different possible criteria. We extend the classical risk minimization model with scalar risk measures to general case of set-valued risk measure. The problem we obtain is a set-valued optimization program and we propose a goal programming-based approach to obtain a solution which represents the best compromise between goals and the achievement levels. Numerical examples are provided to illustrate how the method works in practical situations.
    Date: 2012–01
  2. By: Marco Frittelli; Marco Maggis; Ilaria Peri
    Abstract: We propose a generalization of the classical notion of the $V@R_{\lambda}$ that takes into account not only the probability of the losses, but the balance between such probability and the amount of the loss. This is obtained by defining a new class of law invariant risk measures based on an appropriate family of acceptance sets. The $V@R_{\lambda}$ and other known law invariant risk measures turn out to be special cases of our proposal.
    Date: 2012–01
  3. By: Buncic, Daniel; Melecky, Martin
    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 materializing credit risk. The authors apply the proposed approach to a set of Eastern European banks and discuss the results.
    Keywords: Banks&Banking Reform,Debt Markets,Currencies and Exchange Rates,Economic Theory&Research,Bankruptcy and Resolution of Financial Distress
    Date: 2012–01–01
    Abstract: We examine the impact of distressed acquisitions on acquirer volatility and default risk for a worldwide sample of distressed firms using several risk measures. We find that, on average, absolute levels of historical and implied volatility do not change following a distressed acquisition. However, distressed acquisitions generate a significant increase in relative total, systematic and idiosyncratic volatility and default risk, hence risk rises for both shareholders and bondholders. In particular, we show that high market-to-book acquirers, frequent acquirers, low-risk acquirers, higher acquisition premia and deals closed during bull markets are associated with higher levels of post-acquisition risk. Interestingly, high-risk acquirers experience a significant reduction in volatility and default risk. Consequently, risk changes cannot exclusively be explained by transferring risk from distressed target to acquirer. Our results suggest that bidder pre-acquisition levels of performance and risk and market conditions affect the type of distressed acquisitions and consequently the risk effects in such transactions.
    Keywords: Distressed acquisitions; M&A; Default risk; Volatility; Risk factors
    Date: 2011–09
  5. By: Roorda, B. (Tilburg University); Schumacher, J.M. (Tilburg University)
    Date: 2011
  6. By: Marco Frittelli; Marco Maggis
    Abstract: We provide a dual representation of quasiconvex conditional risk measures $% \rho $ defined on $L^{0}$ modules of the $L^{p}$ type. This is a consequence of more general result which extend the usual Penot-Volle representation for quasiconvex real valued maps. We establish, in the conditional setting, a complete duality between quasiconvex risk measures and the appropriate class of dual functions.
    Date: 2012–01
  7. By: Rania Hentati (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne); Jean-Luc Prigent (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise)
    Abstract: This paper deals with performance measurement of financial structured products. For this purpose, we introduce the SharpeOmega ratio, based on put as downside risk measure. This allows to take account of the asymmetry of the return probability distribution. We provide general results about the optimization of some standard structured portfolios with respect to the SharpeOmega ratio. We determine in particular the optimal combination of risk free, stock and call/put instruments with respect to this performance measure. We show that, contrary to Sharpe ratio maximization (Goetzmann et al., 2002), the payoff of the optimal structured portfolio is not necessarily increasing and concave. We also discuss about the interest of the asset management industry to reward high Sharpe Omega ratios.
    Keywords: Structured portfolio, Performance measure, SharpeOmega ratio.
    Date: 2012–01
  8. By: Alvise De Col (UBS AG); Alessandro Gnoatto (Universit\`a degli Studi di Padova - Dipartimento di Matematica; Mathematisches Institut, LMU M\"unchen); Martino Grasselli (Universit\`a degli Studi di Padova - Dipartimento di Matematica; D\'epartement Math\'ematiques et Ing\'enierie Financi\`ere, ESILV, Paris La D\'efense)
    Abstract: Multi-currency FX derivatives offer a challenging playground to the mathematical modelling of correlations. Quotes of liquidly traded vanilla options on cross FX rates, e.g. EUR/JPY, can be used to extract a great deal of information about the complex implied correlation structure between the corresponding main FX rates, e.g. USD/JPY and EUR/USD. Including all this information in a financial model means being able to fit simultaneously all volatility smiles, a very demanding task. In this paper we propose a first solution to this problem in the class of stochastic volatility models. We introduce a novel multi-factor stochastic volatility Heston-based model, which is able to reproduce consistently typical multi-dimensional FX vanilla markets, while retaining the (semi)-analytical tractability typical of affine models and relying on a reasonable number of parameters. A successful joint calibration to real market data is presented together with various in- and out-of-sample calibration exercises to highlight the robustness of the parameters estimation. The proposed model is symmetric with respect to the choice of the risk-free currency, opening up to new approaches for coherent pricing and risk management of derivatives depending on multiple currencies.
    Date: 2012–01
  9. By: Fernando L Delgado; Mynor Meza
    Abstract: Improvements in financial regulation and supervision in the Central American region (CAPDR) have strengthened financial stability. Prudential instruments with potential macroeconomic effects have been introduced. Nonetheless, compared with the larger Latin American and selected industrial countries, there is still important scope for CAPDR to enhance financial supervision and regulation. Based on two surveys, and the analysis of the Basel Core Principles, the paper determines that some weaknesses exist in risk-based supervision, and that macroprudential measures have scarcely been deployed.
    Keywords: Bank regulations , Bank supervision , Banking sector , Basel Core Principles , Central America , Costa Rica , Dominican Republic , El Salvador , Financial stability , Guatemala , Panama ,
    Date: 2011–12–20
  10. By: Paul Mizen; Serafeim Tsoukas
    Abstract: In this paper, we investigate the ability of a number of different ordered probit models to predict ratings based on firm-specific data on business and financial risks. We investigate models based on momentum, drift and ageing and compare them against alternatives that take into account the initial rating of the firm and its previous actual rating. Using data on US bond issuing firms rated by Fitch over the years 2000 to 2007 we compare the performance of these models in predicting the rating in-sample and out-of-sample using root mean squared errors, Diebold-Mariano tests of forecast performance and contingency tables. We conclude that initial and previous states have a substantial influence on rating prediction.
    Keywords: Credit ratings, probit, state dependence
    JEL: G24 G33 C25 C53
    Date: 2011–08
  11. By: Andras Fulop (Finance Department, ESSEC Business School, Paris-Singapore, Cergy-Pontoise Cedex, France 95021); Junye Li (Finance Department, ESSEC Business School, Paris-Singapore, 100 Victoria Street, Singapore 188064); Jun Yu (Sim Kee Boon Institute for Financial Economics, School of Economics, and Lee Kong Chian School of Business, Singapore Management University, 90 Stamford Road, Singapore 178903)
    Abstract: The paper proposes a new class of continuous-time asset pricing models where negative jumps play a crucial role. Whenever there is a negative jump in asset returns, it is simultaneously passed on to diffusion variance and the jump intensity, generating self-exciting co-jumps of prices and volatility and jump clustering. To properly deal with parameter uncertainty and in-sample over-fitting, a Bayesian learning approach combined with an efficient particle filter is employed. It not only allows for comparison of both nested and non-nested models, but also generates all quantities necessary for sequential model analysis. Empirical investigation using S&P 500 index returns shows that volatility jumps at the same time as negative jumps in asset returns mainly through jumps in diffusion volatility. We find substantial evidence for jump clustering, in particular, after the recent financial crisis in 2008, even though parameters driving dynamics of the jump intensity remain difficult to identify.
    Keywords: Self-Excitation, Volatility Jump, Jump Clustering, Extreme Events, Parameter Learning, Particle Filters, Sequential Bayes Factor, Risk Management
    JEL: C11 C13 C32 G12
    Date: 2012–01
  12. By: Kiichi Tokuoka; Raphael W. Lam
    Abstract: Despite the rise in public debt, Japanese Government Bond (JGB) yields have remained low and stable, supported by steady inflows from the household and corporate sectors, high domestic ownership of JGBs, and safe-haven flows from heightened sovereign risks in Europe. Over time, however, the market’s capacity to absorb new debt will likely shrink as population ages and risk appetite recovers. In the short term, a decline in fund supply from the corporate sector, where financial surpluses are abnormally high, and spillovers from global financial distress could push up JGB yields. Fiscal reforms to reduce public debt more quickly and lengthen the maturity of government bonds will help limit these risks.
    Keywords: Banks , Bond markets , Corporate sector , Financial risk , Fiscal policy , Public debt , Risk management , Sovereign debt ,
    Date: 2011–12–15
  13. By: Rabah Arezki; Bertrand Candelon; Amadou N. R. Sy
    Abstract: This paper studies the spillover effects both within the bond markets for individual U.S. states and between the latter and the market for U.S. Treasury securities. We perform the Forbes and Rigobon (2002) spillover test using daily bond yield data over the period 2005 to 2011. Results are twofold. First, we find that between most markets for individual U.S. state bonds there are negative spillovers. In other words, an increase in borrowing costs in one U.S. state results in better borrowing conditions for other states. Second, we find no substantial spillover effect between shocks originating from state securities and from federal markets, except for a few large issuers. Using causality tests in the frequency domain, we find that the Treasury bond market directly causes changes in the markets for municipal bonds in both the short and long run. There is also some evidence of causality from the municipal to the Treasury bond market, but only of a long-run nature. Our results shed some light on the policy debate on the nature of spillover effects within fiscal unions.
    Keywords: Bond markets , Bonds , Fiscal analysis , Risk management , Spillovers , United States ,
    Date: 2011–12–09

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