New Economics Papers
on Risk Management
Issue of 2012‒10‒06
twelve papers chosen by

  1. Estimation Adjusted VaR By Christian Gouriéroux; Jean-Michel Zakoian
  2. Quadratic hedging schemes for general GARCH models By Alexandru Badescu; Robert J. Elliott; Juan-Pablo Ortega
  3. Canadian Bank Balance-Sheet Management: Breakdown by Types of Canadian Financial Institutions By David Xiao Chen; H. Evren Damar; Hani Soubra; Yaz Terajima
  4. Efficient estimation of conditional risk measures in a semiparametric GARCH model By Yang Yan; Dajing Shang; Oliver Linton
  5. Determinants of SME Loan Default: The Importance of Borrower-Level Heterogeneity By McCann, Fergal; McIndoe-Calder, Tara
  6. Determinants of US financial fragility conditions By Fabio C. Bagliano; Claudio Morana
  7. Stabilization of farm income in the new risk management policy of the EU: a preliminary assessment for Italy through FADN data By Dell'Aquila, Crescenzo; Cimino, Orlando
  8. The Reactive Volatility Model By Sebastien Valeyre; Denis Grebenkov; Sofiane Aboura; Qian Liu
  9. Time-varying Betas of the Banking Sector By Tomáš Adam; Sona Benecká; Ivo Jánský
  10. Ruin problems with worsening risks or with infinite mean claims By Dominik Kortschak; Stéphane Loisel; Pierre Ribereau
  11. Trade Credit and the Propagation of Corporate Failure: An Empirical Analysis By Jacobson, Tor; von Schedvin, Erik
  12. Coordination Incentives in Cross-Border Macroprudential Regulation By Alexis Derviz; Jakub Seidler

  1. By: Christian Gouriéroux (Crest et Université de Toronto); Jean-Michel Zakoian (Canada et University Lille 3)
    Abstract: Standard risk measures, such as the Value-at-Risk (VaR), or the Expected Shortfall, have to be estimated and their estimated counterparts are subject to estimation uncertainty. Replacing, in the theoretical formulas, the true parameter value by an estimator based on n observations of the Profit and Loss variable, induces an asymptotic bias of order 1/n in the coverage probabilities. This paper shows how to correct for this bias by introducing a new estimator of the VaR, called Estimation adjusted VaR (EVaR). This adjustment allows for a joint treatment of theoretical and estimation risks, taking into account for their possible dependence. The estimator is derived for a general parametric dynamic model and is particularized to stochastic drift and volatility models. The finite sample properties of the EVaR estimator are studied by simulation and an empirical study of the S&P Index is proposed
    Keywords: Value-at-Risk,Estimation Risk,Bias Correction, ARCH Model
    Date: 2012–09
  2. By: Alexandru Badescu; Robert J. Elliott; Juan-Pablo Ortega
    Abstract: In this paper we propose different schemes for option hedging when asset returns are modeled by dynamics from a general class of GARCH models. Since the minimal martingale measure fails to produce a probability measure in this setting, we construct local risk minimization hedging strategies with respect to a risk neutral measure. Local risk minimization is investigated in the context of Gaussian driven models, and two other minimum variance hedges are proposed in order to extend Duan's delta hedge. These two methods are constructed using local risk minimizing hedges for bivariate diffusion limits of GARCH models. Numerical experiments are carried out in order to compare the different hedging schemes; in particular, the sensitivity of the hedging strategies with respect to several pricing measures is tested for a special class of non-Gaussian GARCH models for European style options with different moneyness and maturities.
    Date: 2012–09
  3. By: David Xiao Chen; H. Evren Damar; Hani Soubra; Yaz Terajima
    Abstract: The authors document leverage, capital and liquidity ratios of banks in Canada. These ratios are important indicators of different types of risk with respect to a bank’s balance-sheet management. Particular attention is given to the observations by different types of banks, including small banks that historically received less attention. In addition, the authors compare leverage and capital ratios for banks in Canada and the United States in the period leading up to the recent crisis. They find that in Canada, most of the risks indicated by these balance-sheet ratios are concentrated among large banks that are more likely able to withstand shocks due to their diversified portfolios. Some smaller banks, however, reveal vulnerability against liquidity risks. Regarding a Canada - U.S. comparison, small U.S. banks show more vulnerability than their larger counterparts, as well as an increasing trend in vulnerability prior to the crisis. In contrast, the ratios for small Canadian banks show increasing resilience.
    Keywords: Financial institutions; Financial stability; Financial system regulation and policies
    JEL: G21 G28
    Date: 2012
  4. By: Yang Yan; Dajing Shang; Oliver Linton (Institute for Fiscal Studies and Cambridge University)
    Abstract: This paper proposes efficient estimators of risk measures in a semiparametric GARCH model defined through moment constraints. Moment constraints are often used to identify and estimate the mean and variance parameters and are however discarded when estimating error quantiles. In order to prevent this efficiency loss in quantile estimation we propose a quantile estimator based on inverting an empirical likelihood weighted distribution estimator. It is found that the new quantile estimator is uniformly more efficient than the simple empirical quantile and a quantile estimator based on normalized residuals. At the same time, the efficiency gain in error quantile estimation hingeson the efficiency of estimators of the variance parameters. We show that the same conclusion applies to the estimation of conditional Expected Shortfall. Our comparison also leads to interesting implications of residual bootstrap for dynamic models. We find that these proposed estimators for conditional Value-at-Risk and expected shortfall are asymptotically mixed normal. This asymptotic theory can be used to construct confidence bands for these estimators by taking account of parameter uncertainty. Simulation evidence as well as empirical results are provided.
    Keywords: Empirical Likelihood; Empirical process; GARCH; Quantile; Value-at-Risk; Expected Shortfall.
    JEL: C14 C22 G22
    Date: 2012–09
  5. By: McCann, Fergal (Central Bank of Ireland); McIndoe-Calder, Tara (Central Bank of Ireland)
    Abstract: Using unique borrower-level balance sheet information for a cross-section of 6,000 Irish SME loans, this paper tests the determinants of default at the micro level. Typical financial ratios, such as the ratio of the loan to total assets, the current ratio, leverage ratio, liquidity ratio and profitability ratio, are found to be significant predictors of default. Further, the length of time the borrowing firm’s owner has been with the firm mitigates the likelihood of default. Conditional on the above, significant sector-level effects remain. The paper moves beyond average effects of the above-mentioned variables by repeating the analysis across seven sectors of economic activity, and across the quintiles of firm size, exposure and credit quality. The share of defaults is shown to fall as firms get larger, and to rise as loans get larger relative to assets. The results suggest that different warning signals can be identified, particularly for borrowers of different sizes and with small versus large loans. These results contribute to the literature on “fundamentals-based” modelling of corporate default risk, and represent one of very few sets of results on the determinants of default in SME lending in particular.
    Date: 2012–09
  6. By: Fabio C. Bagliano (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy); Claudio Morana (Department of Economics, University of Milan-Bicocca)
    Abstract: The recent financial crisis has highlighted the fragility of the US (and other countries') financial system under several respects. In this paper, the properties of a summary index of financial fragility, obtained by combining information conveyed by the "Agency", "Ted" and "BAA-AAA" spreads, timely capturing changes in credit and liquidity risk, distress in the mortgage market, and corporate default risk, are investigated over the 1986-2010 period. The empirical results show that observed fluctuations in the financial fragility index can be attributed to identified (global and domestic) macroeconomic (20%) and financial disturbances (40% to 50%), over both short- and long-term horizons, as well as to oil-supply shocks in the long-term (25%). The investigation of specific episodes of financial distress, occurred in 1987, 1998 and 2000, and, more recently, over the 2007-2009 period, shows that sizable fluctuations in the index are largely determined by financial shocks, while macroeconomic disturbances have generally had a stabilizing effect.
    Keywords: financial fragility, US, macro-?nance interface, international business cycle, factor vector autoregressive models, ?financial crisis, Great Recession
    JEL: C22 E32 G12
    Date: 2012–09
  7. By: Dell'Aquila, Crescenzo; Cimino, Orlando
    Abstract: Risk management and income stabilization have been gaining increasing attention in the EU’s agricultural policy debate, also in connection to the recent proposal of a specific package of measures hypothesized in the ongoing CAP reform. The paper summarizes the current policy picture at EU and Italian levels, deepening country specific issues of construction of an income stabilization tool and providing a quantitative appreciation of the financial importance of a generalized measure of income stabilization for Italian farms. Estimates of farms’ losses and compensations are differentiated by type of farming and dimension of farms. The results are discussed looking at the perspectives of the new policies under scrutiny
    Keywords: risk management, income stabilization, agricultural policy, FADN, Agricultural and Food Policy, Risk and Uncertainty, Q18,
    Date: 2012–06
  8. By: Sebastien Valeyre; Denis Grebenkov; Sofiane Aboura; Qian Liu
    Abstract: We present a new volatility model, simple to implement, that combines various attractive features such as an exponential moving average of the price and a leverage effect. This model is able to capture the so-called "panic effect", which occurs whenever systematic risk becomes the dominant factor. consequently, in contrast to other models, this new model is as reactive as the implied volatility indices. We also test the reactivity of our model using extreme events taken from the 470 most liquid European stocks over the last decade. We show that the reactive volatility model is more robust to extreme events, and it allows for the identification of precursors and replicas of extreme events.
    Date: 2012–09
  9. By: Tomáš Adam (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Sona Benecká (Czech National Bank); Ivo Jánský (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper analyses the evolution of systematic risk of banking industries in eight advanced countries using weekly data from 1990 to 2012. The estimation of time-varying betas is done by means of a Bayesian state space model with stochastic volatility, whose results are contrasted with those of the standard M-GARCH and rolling-regression models. We show that both country specific and global events affect the perceived systematic risk, while the impact of the latter differs largely across countries. Finally, our results do not support the previous findings that systematic risk of the banking sector was underestimated before the last financial crisis.
    Keywords: CAPM, Time-varying Beta, Multivariate GARCH, Bayesian State Space Models, Stochastic Volatility
    JEL: C11 G12 G21
    Date: 2012–07
  10. By: Dominik Kortschak (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429); Stéphane Loisel (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429); Pierre Ribereau (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429)
    Abstract: In this paper, we obtain asymptotic ruin probabilities in two models where claim amounts become more and more adverse, because of phenomena like climate change or some kind of sectorial inflation. The method we use also enables us to study a risk model in which claims have infinite mean. In such models, ruin probability can be controlled by a strong increase in the premium income rate, which causes premium to become unacceptable for customers. We provide numerical illustrations of the impact of the (uncertain) speed of change in the parameter of the claim size distribution, both in terms of ruin and in terms of time at which premium becomes too high.
    Date: 2012–09–27
  11. By: Jacobson, Tor (Research Department, Central Bank of Sweden); von Schedvin, Erik (Research Department, Central Bank of Sweden)
    Abstract: We quantify the importance of trade credit chains for the propagation of corporate bankruptcies. Our results show that trade creditors (suppliers) that issue more trade credit are more exposed to trade debtor (customer) failures, both in terms of the likelihood of experiencing a debtor failure and the loss given failure. We further document that the credit loss invoked by a debtor failure imposes a substantially enhanced bankruptcy risk on the creditors. The propagation mechanism is mitigated for creditors that are less levered, cash rich, and highly profitable, and enhanced in R&D intense industries and during economic downturns.
    Keywords: Trade credit; Credit chains; Bankruptcy; Contagion
    JEL: G30 G33
    Date: 2012–08–01
  12. By: Alexis Derviz (Czech National Bank); Jakub Seidler (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: We discuss (dis)incentives for fair cooperation related to delegating macroprudential policy decisions to a supranational body, as well as their welfare implications. The question is studied by means of a signaling game of imperfect information between two national regulators. The model concentrates on informational frictions in an environment with otherwise fully aligned preferences. We show that even in the absence of evident conflicting goals, the non-transferrable nature of some regulatory information creates misreporting incentives. However, the major problem is not the reporting accuracy but the institutional arrangement focused on maximal multilateral satisfaction to the detriment of credible enforcement of rules. The main application is meant to be systemic risk management by the relevant EU institutions.
    Keywords: macroprudential regulation, integration, autonomy, information, reporting
    JEL: F55 H77 D02 C72 D83
    Date: 2012–07

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