nep-rmg New Economics Papers
on Risk Management
Issue of 2012‒06‒05
eight papers chosen by
Stan Miles
Thompson Rivers University

  1. Two Models of Stochastic Loss Given Default By Simone Farinelli; Mykhaylo Shkolnikov
  2. Determining marginal contributions of the economic capital of credit risk portfolio: an analytical approach By Morone, Marco; Cornaglia, Anna; Mignola, Giulio
  3. Understanding Liquidity and Credit Risks in the Financial Crisis By Gefang, Deborah; Koop, Gary; Potter, Simon M.
  4. The Insufficiency of Traditional Safety Nets: What Bank Resolution Fund for Europe? By Maria J. Nieto; Gillian G. Garcia
  5. The Term-Structure of Sovereign Default Risk in Colombia and its Determinants By Jair Ojeda-Joya; José E. Gómez-González
  6. The Real Output Costs of Financial Crisis: A Loss Distribution Approach By Kapp, Daniel; Vega, Marco
  7. The impact of foreign investors on the risk-taking of Japanese firms By Nguyen, Pascal
  8. Board size and corporate risk-taking: Further evidence from Japan By Nakano, Makoto; Nguyen, Pascal

  1. By: Simone Farinelli; Mykhaylo Shkolnikov
    Abstract: We propose two structural models for stochastic losses given default which allow to model the credit losses of a portfolio of defaultable financial instruments. The credit losses are integrated into a structural model of default events accounting for correlations between the default events and the associated losses. We show how the models can be calibrated and analyze the impact of correlations between the occurrences of defaults and recoveries by testing our models for a representative sample portfolio.
    Date: 2012–05
  2. By: Morone, Marco; Cornaglia, Anna; Mignola, Giulio
    Abstract: We address the problem of decomposing the risk of a multi-factor credit portfolio into marginal contributions through a fast analytical approach: it is based on Taylor polynomial expansion of the overall risk and on the subsequent partial derivatives with respect to the single exposures, exploiting the Euler principle. The proposed approximation, which also accommodates for an efficient treatment of obligors with similar risk profile, is suitable for large and complex bank portfolios; furthermore, it proves to perform quite well if tested against numerical techniques, among which we chose the Harrel-Davis estimator. The latter, aside from representing a benchmark measure, should however be applied in the case of very small and concentrated portfolios. In addition, a comparison with the most usual variance-covariance approach is drawn, emphasising its drawbacks in the correct representation of risk allocation.
    Keywords: Credit VaR; Portfolio credit risk; Economic capital; Analytical VaR contributions; Euler allocation; Harrel-Davis estimator;
    JEL: C15 G32
    Date: 2012–06
  3. By: Gefang, Deborah; Koop, Gary; Potter, Simon M.
    Abstract: This paper develops a structured dynamic factor model for the spreads between London Interbank Offered Rate (LIBOR) and overnight index swap (OIS) rates for a panel of banks. Our model involves latent factors which reflect liquidity and credit risk. Our empirical results show that surges in the short term LIBOR-OIS spreads during the 2007-2009 fi nancial crisis were largely driven by liquidity risk. However, credit risk played a more signifi cant role in the longer term (twelve-month) LIBOR-OIS spread. The liquidity risk factors are more volatile than the credit risk factor. Most of the familiar events in the financial crisis are linked more to movements in liquidity risk than credit risk.
    Date: 2011
  4. By: Maria J. Nieto; Gillian G. Garcia
    Abstract: This paper analyzes the rationale for Bank Recovery and Resolution Funds (BRRFs) in the context of the present European Union’s (EU) decentralized safety net. As compared to pure micro and macro prudential regulation, BRRF’s objective is to limit losses given financial institutions´ default while allowing for a balanced share of costs between private investors and tax payers. Most important, BRRFs contribute to shifting the government’s tradeoff between bailing out and restructuring in favor of restructuring, to the extent that there is also an effective bank resolution legal framework. In turn, banks´ contributions to BRRFs aim at discouraging their excess systemic risk creation particularly through financial system leverage. The paper makes some reflections on the governance aspects of BRRFs that would require minimum harmonization in the EU, emphasizing that BRRFs are only one institutional component of financial institutions´ effective and credible resolution regime. This paper focuses on depository institutions, but the rationale of BRRFs could be extended to other credit institutions.
    Date: 2012–05
  5. By: Jair Ojeda-Joya; José E. Gómez-González
    Abstract: We study the determinants of sovereign default risk in Colombia by focusing on different time spans of risk which are indicated by yield spreads of government bonds with different maturities. Cointegration regressions are performed to analyze whether the drivers of short-run default risk are different from those of long-run default risk. Our results show that government indebtedness indicators are important determinants of default risk for yield spreads of bonds with maturities shorter than 7 years. In contrast, increases in investment and output growth indicators lower default risk at all maturities. A lower current account balance or a higher exchange rate volatility increase default risk for maturities lower than 10 years. Finally, an openness indicator is found to have positive effects on default risk for maturities longer than 7 years. This last effect is probably due to the increasing external vulnerability that results when a country becomes more integrated to the global economy.
    Date: 2012–05–21
  6. By: Kapp, Daniel (University of Paris); Vega, Marco (Banco Central de Reserva del Perú; Universidad Católica del Perú)
    Abstract: We study cross-country GDP losses due to financial crises in terms of frequency (number of loss events per period) and severity (loss per occurrence). We perform the Loss Distribution Approach (LDA) to estimate a multi-country aggregate GDP loss probability density function and the percentiles associated to extreme events due to financial crises. We find that output losses arising from financial crises are strongly heterogeneous and that currency crises lead to smaller output losses than debt and banking crises. Extreme global financial crises episodes, occurring with a one percent probability every five years, lead to losses between 2.95% and 4.54% of world GDP.
    Keywords: Financial Crisis, Severity, Frequency, Loss Distribution Approach
    JEL: C15 G01 G17 G22 G32
    Date: 2012–05
  7. By: Nguyen, Pascal
    Abstract: Consistent with a bank-centered governance system, Japanese firms exhibit an exceptionally low level of performance variability. The increased involvement of foreign investors motivated by shareholder value is thus likely to have triggered a major shift in their risk-taking behavior. My results confirm this assumption as all standard measures of performance volatility appear to have significantly increased with the level of foreign ownership. Controlling for endogeneity provides higher point estimates supporting anecdotal evidence that foreign investors have targeted firms taking unusually low risk. Overall, the evidence highlights the considerable impact that this category of investors can have on a firm’s decisions and, by consequence, on its performance.
    Keywords: foreign ownership; monitoring; risk taking; performance volatility
    JEL: G34
    Date: 2012–04–10
  8. By: Nakano, Makoto; Nguyen, Pascal
    Abstract: Evidence based on US firms suggests that large boards restrain risk taking. We investigate whether a similar effect exists in Japan. Our results confirm that firms with larger boards exhibit lower performance variability relative to firms with smaller boards. However, this effect is less significant when firms have plenty of investment opportunities, but considerably stronger when firms have few growth options. This new finding is consistent with recent evidence indicating that larger boards are not necessarily detrimental to firm performance. The results are shown to be robust to the endogeneity of board structure and the use of alternative risk measures and estimation methods.
    Keywords: corporate governance; board size; risk taking; investment opportunities; performance volatility; bankruptcy risk
    JEL: G34
    Date: 2012–05–24

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