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on Risk Management |
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Issue of 2012‒06‒13
thirteen papers chosen by |
| By: | Walter Farkas; Pablo Koch-Medina; Cosimo-Andrea Munari |
| Abstract: | We discuss finiteness (effectiveness), continuity (robustness) and optimality (efficiency) results for capital requirements, or risk measures, defined for financial positions belonging to an ordered topological vector space. Given a set of acceptable financial positions and a pre-specified traded asset (the eligible asset), the associated capital requirement for a financial position represents to the amount of capital that needs to be raised and invested in the eligible asset to make the position acceptable. Our abstract approach allows to provide results that are applicable to a whole range of spaces of financial positions commonly used in the literature. Moreover, it allows to unveil the key properties of acceptance sets and of eligible assets driving the effectiveness and the robustness of the associated capital requirements. In particular, if the underlying space is a Fr\'echet lattice, we provide new finiteness results for required capital, as well as a simplified proof of the Extended Namioka-Klee theorem for risk measures. As an application we present a comprehensive treatment of finiteness and continuity for capital requirements based on Value-at-Risk and Tail-Value-at-Risk acceptability. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1206.0478&r=rmg |
| By: | Cousin, Violaine |
| Abstract: | The complexity of Basel II and III has reached China as well. In a revolutionary turn within seven years, the Chinese bank regulator has introduced capital adequacy as the tool of choice for supervision and ensured that banks in the process remain focused on implementing all the bits of the internationally developed Basel Accords. Will it make Chinese banks really more resilient? |
| Keywords: | bank; regulation; Basel II and III; China |
| JEL: | G38 G28 |
| Date: | 2012–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39142&r=rmg |
| By: | Vicente Medina Martínez (Facultad de Economía); Ángel Pardo Tornero (Dpto. Economía Financiera y Actuarial) |
| Abstract: | The listing of a new asset requires the knowledge of its statistical properties prior to its use for hedging, speculative or risk management purposes. In this paper, we study the stylized facts of European Union Allowances (EUAs) returns. The majority of the phenomena observed, such as heavy tails, volatility clustering, asymmetric volatility and the presence of a high number of outliers are similar to those observed in both commodity futures and financial assets. However, properties such as negative asymmetry, positive correlation with stocks indexes and higher volatility levels during the trading session, typical of financial assets, and the existence of inflation hedge and positive correlation with bonds, typical of commodity futures, are also detected. Therefore, our results indicate that EUAs returns do not behave like common commodity futures or financial assets, and point to the fact that EUAs are a new asset class. |
| Keywords: | European Union Allowances (EUAs), Stylized Fact, Asset Class, Commodity |
| JEL: | G1 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2012-14&r=rmg |
| By: | Bali, Turan G. (Georgetown University); Cakici, Nusret (Fordham University); Chabi-Yo, Fousseni (OH State University) |
| Abstract: | Aumann and Serrano (2008) and Foster and Hart (2009) introduce riskiness measures based on the physical return distribution of gambles. This paper proposes model-free options' implied measures of riskiness based on the risk-neutral distribution of financial securities. In addition to introducing the forward-looking measures of riskiness, the paper investigates the significance of aggregate riskiness in predicting future economic downturns. The results indicate strong predictive power of aggregate riskiness even after controlling for the realized volatility of the U.S. equity market, the implied volatility of S&P 500 index options (VIX) proxying for financial market uncertainty, as well as the TED spread proxying for interbank credit risk and the perceived health of the banking system. |
| JEL: | G11 G12 G14 G33 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2012-09&r=rmg |
| By: | Candelon B.; Straetmans S. (METEOR) |
| Abstract: | The tail of financial returns is typically governed by a power law (i.e. “fat tails”). However,the constancy of the so-called tail index α which dictates the tail decay has been hardlyinvestigated. We study the finite sample properties of some recently proposed endogenous tests forstructural change in α. Given that the finite sample critical values strongly depend on the tailparameters of the return distribution we propose a bootstrap-based version of the structuralchange test. Our empirical application spans a wide variety of long-term developed and emergingfinancial asset returns. Somewhat surprisingly, the tail behavior of emerging stock markets is notmore strongly inclined to structural change than their developed counterparts. Emergingcurrencies, on the contrary, are more prone to shifts in the tail behavior than developedcurrencies. Our results suggest that extreme value theory (EVT) applications in hedging tail risksor in assessing the (changing) propensity to financial crises can assume stationary tail behaviorover long time spans provided one considers portfolios that solely consist of stocks or bonds.However, our break results also indicate it is advisable to use shorter estimation windows whenapplying EVT methods to emerging currency portfolios. |
| Keywords: | Economics ; |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2012014&r=rmg |
| By: | Arnaud Rault; Stéphane Krebs |
| Abstract: | The economic consequences of livestock epidemics have been long studied for purposes of estimating the costs of preventive and curative veterinary measures. In this paper, we show that this catastrophic risk may have wide market consequences, and that the risk management systems are quite limited to compensate long term impacts in the European context of growing trade. Through a detailed literature review, we present the main developments of the economic research aiming at highlighting the economic consequences of animal epidemics such as Foot and Mouth Disease. We acknowledge that a very few studies have focused on the economic dynamics and on the long-run effects occurring after an epidemic disease outbreak. We discuss the relevance of a dynamic approach to reveal that the de-structuring of livestock markets affects the production dynamics as well as the whole agricultural sector. Financial implications and market constraints remain poorly studied in the livestock epidemics literature. We emphasize the growing interest of a dynamic Computable General Equilibrium approach to reveal the overall effects of epidemic outbreaks on the whole economy. This innovative research raises important challenges for the assessment and implementation of risk management policies. |
| Keywords: | animal epidemic outbreaks, catastrophic risk, risk management |
| JEL: | G32 Q17 Q18 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:rae:wpaper:201105&r=rmg |
| By: | Gammadigbé, Vigninou |
| Abstract: | In this paper we evaluate the resilience of the banking system of WAEMU to macroeconomic shocks. From banks data, aggregated by country from 1990 to 2010, we identify the microeconomic and macroeconomic determinants of banks profitability of the Union using the generalized method of moments (GMM) in a dynamic panel data model. We then perform the exercises of stress by evaluating the sensitivity of the banks coefficient of profitability to various adverse scenarios.The results show that banks of the Union are more vulnerable to monetary shocks than real activity. They support especially soundness of the banking sector as a whole in respond to changes in its macroeconomic environment, so that the risk of degradation of profitability related to impact of the real economy are contained. |
| Keywords: | Stress testing; dynamic panel data models; Generalized method of moments; coefficient of profitability; WAEMU |
| JEL: | C23 G21 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39214&r=rmg |
| By: | Michael Brei (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense); Carlos Winograd (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, Université d'Evry - Val d'Essonne - Université d'Evry - Val d'Essonne, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA) |
| Abstract: | This paper analyzes the risk taking of branches and subsidiaries of international bank holding institutions from the perspective of host country regulators in two Latin American financial systems: Argentina and Uruguay. Using both theory and empirics, we analyze differences in the risk attitudes of these institutions in the run up to the major financial crises of 2001-02. The empirical part of this paper is based on a rich bank-level dataset on corporate structures, balance sheets, and ownership of banks. We find that foreign banks branches have taken on fewer risks than subsidiaries and relate this to differences in the legal responsibility of parent banks. This research not only shows original results concerning banks corporate strategies in the face of country risk, but also contributes to the debate on appropriate banking regulation. |
| Keywords: | Financial Crises ; Argentina ; Uruguay ; Bank Corporate |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00703738&r=rmg |
| By: | Musolino, Francesco; Carfì, David |
| Abstract: | The aim of this paper is to propose a methodology to stabilize the currency markets by adopting Game Theory. Our idea is to save the Euro from the speculative attacks (due the crisis of the Euro-area States), and this goal is reached by the introduction, by the normative authority, of a financial transactions tax. Specifically, we focus on two economic operators: a real economic subject (as for example the Ferrari S.p.A., our first player), and a financial institute of investment (the Unicredit Bank, our second player). The unique solution which allows both players to win something, and therefore the only one collectively desirable, is represented by an agreement between the two subjects. So the Ferrari artificially causes an inconsistency between currency spot and futures markets, and the Unicredit takes the opportunity to win the maximum possible collective sum, which later will be divided with the Ferrari by contract. |
| Keywords: | Currency Markets; Financial Risk; Financial Crisis; Game Theory; Speculation |
| JEL: | G1 D53 C7 E44 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39240&r=rmg |
| By: | Duffy, David |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:ec7&r=rmg |
| By: | Brière, Marie; Signori, Ombretta |
| Abstract: | The unconventional monetary policies implemented in the wake of the subprime crisis and the recent increase in inflation volatility have revived the debate on medium to long-term resurgence of inflation. This paper presents the optimal strategic asset allocation for investors seeking to hedge inflation risk. Using a vector-autoregressive model, we investigate the optimal choice for an investor with a fixed target real return at different horizons, with shortfall probability constraint. We show that the strategic allocation differs sharply across regimes. In a volatile macroeconomic environment, inflation-linked bonds, equities, commodities and real estate play an essential role. In a stable environment (“Great Moderation”), nominal bonds play the most significant role, with equities and commodities. An ambitious investor in terms of required real return should have a larger weighting in risky assets, especially commodities. |
| Keywords: | portfolio optimisation; Inflation hedge; shortfall risk; pension finance; |
| JEL: | G23 E31 G11 G12 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:ner:dauphi:urn:hdl:123456789/7744&r=rmg |
| By: | Allan M. Lavell |
| Abstract: | This presentation was commissioned by the Regional Policy Dialogue and presented in the meeting Disaster Risk Reduction: Best Practices for Climate-Resilient Coastal Development held in Bridgetown, Barbados on 20 and 21 of October 2011. It discusses the disaster nexus between risk management, climate change and its adaptation in the Caribbean. |
| Keywords: | Environment & Natural Resources :: Climate Change, Environment & Natural Resources :: Disasters |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:71438&r=rmg |
| By: | Lorenzo Ricci; David Veredas |
| Abstract: | We introduce TailCoR, a new measure for tail correlation that is a function of linear and non–linear contributions, the latter characterized by the tails. TailCoR can be exploited in a number of financial applications, such as portfolio selection where the investor faces risks of linear and tail nature –a case that we cover in detail. Moreover, TailCoR has the following advantages: i) it is exact for any probability level as it is not based on tail asymptotic arguments (contrary to tail dependence coefficients), ii) it is distribution free, and iii) it is simple and no optimizations are needed. Monte Carlo simulations and calibrations reveal its goodness in finite samples. An empirical illustration to a panel of European sovereign bonds shows that prior to 2009 linear correlations were in the vicinity of one and non–linear correlations were inexistent. Since the beginning of the crisis the linear correlations have decreased sharply and non–linear correlations appeared and increased significantly in 2010–2011. |
| JEL: | C32 C51 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/119282&r=rmg |