New Economics Papers
on Risk Management
Issue of 2012‒04‒23
six papers chosen by

  1. Revisiting Risk-Weighted Assets By Vanessa Le Leslé; Sofiya Avramova
  2. The Variance of Standard Option Returns By Adi Ben-Meir; Jeremy Schiff
  3. Bank Stress Tests as an Information Device for Emerging Markets: The Case of Russia By Zuzana Fungáèová; Petr Jakubík
  4. Bank Risk and Non-Interest Income Activities in the Indonesian Banking Industry By Wahyu Yuwana Hidayat; Makoto Kakinaka; Hiroaki Miyamoto
  5. Time-Changed Ornstein-Uhlenbeck Processes And Their Applications In Commodity Derivative Models By Lingfei Li; Vadim Linetsky
  6. Returns in Commodities Futures Markets and Financial Speculation: A Multivariate GARCH Approach By Matteo Manera; Marcella Nicolini; Ilaria Vignati

  1. By: Vanessa Le Leslé; Sofiya Avramova
    Abstract: In this paper, we provide an overview of the concerns surrounding the variations in the calculation of risk-weighted assets (RWAs) across banks and jurisdictions and how this might undermine the Basel III capital adequacy framework. We discuss the key drivers behind the differences in these calculations, drawing upon a sample of systemically important banks from Europe, North America, and Asia Pacific. We then discuss a range of policy options that could be explored to fix the actual and perceived problems with RWAs, and improve the use of risk-sensitive capital ratios.
    Keywords: Asia and Pacific , Bank regulations , Bank supervision , Banking sector , Capital , Credit risk , Cross country analysis , Europe , North America , Risk management ,
    Date: 2012–03–28
  2. By: Adi Ben-Meir; Jeremy Schiff
    Abstract: The vast majority of works on option pricing operate on the assumption of risk neutral valuation, and consequently focus on the expected value of option returns, and do not consider risk parameters, such as variance. We show that it is possible to give explicit formulae for the variance of European option returns (vanilla calls and puts, as well as barrier options), and that for American options the variance can be computed using a PDE approach, involving a modified Black-Scholes PDE. We show how the need to consider risk parameters, such as the variance, and also the probability of expiring worthless (PEW), arises naturally for individual investors in options. Furthermore, we show that a volatility smile arises in a simple model of risk-seeking option pricing.
    Date: 2012–04
  3. By: Zuzana Fungáèová (Bank of Finland, Institute for Economies in Transition (BOFIT)); Petr Jakubík (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: The recent financial crisis emphasised the need for effective financial stability analyses and tools for detecting systemic risk. This paper looks at assessment of banking sector resilience through stress testing. We argue such analyses are valuable even in emerging economies that suffer from limited data availability, short time series and structural breaks. We propose a top-down stress test methodology that employs relatively limited information to overcome this data problem. Moreover, as credit growth in emerging economies tends to be rather volatile, we rely on dynamic approach projecting key balance sheet items. Application of our proposed stress test framework to the Russian banking sector reveals a high sensitivity of the capital adequacy ratio to the economic cycle that shows up in both of the two-year macroeconomic scenarios considered: a baseline and an adverse one. Both scenarios indicate the need for capital increase in the Russian banking sector. Furthermore, given that Russia’s banking sector is small and fragmented relative to advanced economies, the loss of external financing can cause profound economic stress, especially for medium-sized and small enterprises. The Russian state has a low public debt-to-GDP ratio and plays decisive role in the banking sector. These factors allow sufficient fiscal space for recapitalisation of problematic banks under both of our proposed baseline and adverse scenarios.
    Keywords: stress testing, bank, Russia
    JEL: G28 P34 G21
    Date: 2012–02
  4. By: Wahyu Yuwana Hidayat (Bank Indonesia); Makoto Kakinaka (International University of Japan); Hiroaki Miyamoto (International University of Japan)
    Abstract: The recent trend of product diversification in the Indonesian banking industry underscores the importance of non-interest income activities. This study examines the relationship between product diversification and bank risk over the period of 2002-2008. Our analysis shows clear evidence that the effect of product diversification on bank risk depends highly on the bankfs asset size. Specifically, the degree of product diversification is negatively associated with bank risk for small-sized banks. Conversely, the degree of product diversification is positively related to bank risk for large-sized banks. This finding suggests that deregulation encouraging banks to become more involved in non-traditional activities may have an adverse effect on the overall banking system where large-sized banks are playing a significant role in Indonesia.
    Keywords: Bank risk, Product diversification, Non-interest income activities
    Date: 2012–04
  5. By: Lingfei Li; Vadim Linetsky
    Abstract: This paper studies subordinate Ornstein-Uhlenbeck (OU) processes, i.e., OU diffusions time changed by L\'{e}vy subordinators. We construct their sample path decomposition, show that they possess mean-reverting jumps, study their equivalent measure transformations, and the spectral representation of their transition semigroups in terms of Hermite expansions. As an application, we propose a new class of commodity models with mean-reverting jumps based on subordinate OU process. Further time changing by the integral of a CIR process plus a deterministic function of time, we induce stochastic volatility and time inhomogeneity, such as seasonality, in the models. We obtain analytical solutions for commodity futures options in terms of Hermite expansions. The models are consistent with the initial futures curve, exhibit Samuelson's maturity effect, and are flexible enough to capture a variety of implied volatility smile patterns observed in commodities futures options.
    Date: 2012–04
  6. By: Matteo Manera (University of Milan-Bicocca, Milan and Fondazione Eni Enrico Mattei, Milan); Marcella Nicolini (University of Pavia, Pavia and Fondazione Eni Enrico Mattei, Milan); Ilaria Vignati (Fondazione Eni Enrico Mattei, Milan)
    Abstract: This paper analyses futures prices for four energy commodities (light sweet crude oil, heating oil, gasoline and natural gas) and five agricultural commodities (corn, oats, soybean oil, soybeans and wheat), over the period 1986-2010. Using CCC and DCC multivariate GARCH models, we find that financial speculation is poorly significant in modelling returns in commodities futures while macroeconomic factors help explaining returns in commodities futures. Moreover, spillovers between commodities are present and the conditional correlations among commodities are high and time-varying.
    Keywords: Energy, Commodities, Futures Markets, Financial Speculation, Multivariate GARCH
    JEL: C32 G13 Q11 Q43
    Date: 2012–04

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