nep-rmg New Economics Papers
on Risk Management
Issue of 2012‒12‒10
ten papers chosen by
Stan Miles
Thompson Rivers University

  1. Tails of Inflation Forecasts and Tales of Monetary Policy By Andrade, P.; Ghysels, E.; Idier, J.
  2. Optimal portfolio model based on WVAR By Tianyu Hao
  3. Optimal portfolio for a robust financial system By Yoshiharu Maeno; Satoshi Morinaga; Hirokazu Matsushima; Kenichi Amagai
  4. Fiscal Sustainability in the Presence of Systemic Banks : the Case of EU Countries By Agnès Bénassy-Quéré; Guillaume Roussellet
  5. Parameter estimation of a Levy copula of a discretely observed bivariate compound Poisson process with an application to operational risk modelling By J. L. van Velsen
  6. A Dynamic Inflation Hedging Trading Strategy Using a CPPI By Fulli-Lemaire, Nicolas
  7. Rethinking Capital Structure Arbitrage By Avino, Davide; Lazar, Emese
  8. The term structure of bond market liquidity conditional on the economic environment: An analysis of government guaranteed bonds By Schuster, Philipp; Uhrig-Homburg, Marliese
  9. Forecasting Covariance Matrices: A Mixed Frequency Approach By Roxana Halbleib; Valeri Voev
  10. Eliciting earnings risk from labor and capital income By Sarah Meyer; Mark Trede

  1. By: Andrade, P.; Ghysels, E.; Idier, J.
    Abstract: We introduce a new measure called Inflation-at-Risk (I@R) associated with (left and right) tail inflation risk. We estimate I@R using survey-based density forecasts. We show that it contains information not covered by usual inflation risk indicators which focus on inflation uncertainty and do not distinguish between the risks of low or high future inflation outcomes. Not only the extent but also the asymmetry of inflation risks evolve over time. Moreover, changes in this asymmetry have an impact on future inflation realizations as well as on the current interest rate central banks target.
    Keywords: inflation expectations, risk, uncertainty, survey data, inflation dynamics, monetary policy.
    JEL: E31 E37 E43 E52
    Date: 2012
  2. By: Tianyu Hao
    Abstract: This article is focused on using a new measurement of risk-- Weighted Value at Risk to develop a new method of constructing initiate from the TVAR solving problem, based on MATLAB software, using the historical simulation method (avoiding income distribution will be assumed to be normal), the results of previous studies also based on, study the U.S. Nasdaq composite index, combining the Simpson formula for the solution of TVAR and its deeply study; then, through the representation of WVAR formula discussed and indispensable analysis, also using the Simpson formula and the numerical calculations, we have done the empirical analysis and review test. this paper is based on WVAR which possesses better properties, taking the idea of portfolio into the multi-index comprehensive evaluation, to build innovative WVAR based portfolio selection under the framework of a theoretical model; in this framework, a description of risks is designed by WVAR, its advantage is no influence by income distribution, meanwhile various optimization problems have a unique solution; then take AHP weights to different indicators deal on this basis, after that we put a nonlinear satisfaction portfolio selected model forward and conduct tests of empirical analysis, finally we use weighted linear approach to convert the portfolio model into a single-objective problem, which is easier to solve, then we use the data of two ETFs to construct portfolio, and compare the performance of portfolio constructed by Mean-Weighted V@R and by Mean-Variance.
    Date: 2012–11
  3. By: Yoshiharu Maeno; Satoshi Morinaga; Hirokazu Matsushima; Kenichi Amagai
    Abstract: This study presents an ANSeR model (asset network systemic risk model) to quantify the risk of financial contagion which manifests itself in a financial crisis. The transmission of financial distress is governed by a heterogeneous bank credit network and an investment portfolio of banks. Bankruptcy reproductive ratio of a financial system is computed as a function of the diversity and risk exposure of an investment portfolio of banks, and the denseness and concentration of a heterogeneous bank credit network. An analytic solution of the bankruptcy reproductive ratio for a small financial system is derived and a numerical solution for a large financial system is obtained. For a large financial system, Large diversity among banks in the investment portfolio makes financial contagion more damaging on the average. But large diversity is essentially effective in eliminating the risk of financial contagion in the worst case of financial crisis scenarios. A bank-unique specialization portfolio is more suitable than a uniform diversification portfolio and a system-wide specialization portfolio in strengthening the robustness of a financial system.
    Date: 2012–11
  4. By: Agnès Bénassy-Quéré (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique); Guillaume Roussellet (ENSAE - École Nationale de la Statistique et de l'Administration Économique - ENSAE ParisTech)
    Abstract: We provide a first attempt to include off-balance sheet, implicit insurance to SIFIs into a consistent assessment of fiscal sustainability, for 27 countries of the European Union. We first calculate tax gaps à la Blanchard (1990) and Blanchard et al. (1990). We then introduce two alternative measures of implicit off-balance sheet liabilities related to the risk of a systemic bank crisis. The first one relies of microeconomic data at the bank level. The second one relies on econometric estimations of the probability and the cost of a systemic banking crisis, based on historical data. The former approach provides an upper evaluation of the fiscal cost of systemic banking crises, whereas the latter one provides a lower one. Hence, we believe that the combined use of these two methodologies helps to gauge the range of fiscal risk.
    Keywords: Fiscal sustainability; tax gap; systemic banking risk; off-balance sheet liabilities
    Date: 2012–11
  5. By: J. L. van Velsen
    Abstract: A method is developed to estimate the parameters of a Levy copula of a discretely observed bivariate compound Poisson process without knowledge of common shocks. The method is tested in a small sample simulation study. Also, the method is applied to a real data set and a goodness of fit test is developed. With the methodology of this work, the Levy copula becomes a realistic tool of the advanced measurement approach of operational risk.
    Date: 2012–12
  6. By: Fulli-Lemaire, Nicolas
    Abstract: This article tries to solve the portfolio inflation hedging problem by introducing a new class of dynamic trading strategies derived from classic portfolio insurance techniques adapted to the real world. These strategies aim at yielding higher returns on a risk-adjusted basis than regular inflation hedging portfolio allocation while achieving a lower cost than comparable option-based guaranteed real value strategies.
    Keywords: ALM; Inflation Hedging; Portfolio Insurance; CPPI
    JEL: G1 C6 C5
    Date: 2012–01–02
  7. By: Avino, Davide; Lazar, Emese
    Abstract: It is well known that the capital structure arbitrage strategy generated negative Sharpe ratios over the period 2005-2009. In this paper we introduce four new alternative strategies that, while still based on the discrepancy between the CDS market spread and its equity-implied spread, exploit the information provided by the time-varying price discovery of the equity and CDS markets. We implement the strategies for both US and European obligors and find that these outperform traditional arbitrage trading during the financial crisis. Moreover, the new strategies show higher Sharpe ratios when CDS and equity-implied spreads are cointegrated. The correlation of the new trading rules with hedge fund index returns is low or negative even during the crisis, which suggests that the new rules can be used for portfolio diversification at times when risk reduction is hard to achieve.
    Keywords: credit spreads; price discovery; credit derivatives; information flow; convergence trading; financial crisis; limit of arbitrage
    JEL: G14 G11 G01
    Date: 2012–11–14
  8. By: Schuster, Philipp; Uhrig-Homburg, Marliese
    Abstract: We analyze the term structure of illiquidity premiums as the difference between the yield curves of two major bond segments that are both government guaranteed but differ in their liquidity. We show that its characteristics strongly depend on the economic situation. In crisis times, illiquidity premiums are higher with the largest increase for short-term maturities. Moreover, their reaction to changes in fundamentals is only significant during crises: premiums of all maturities depend on inventory risk, short maturities are highly sensitive to liquidity preferences (flight-to-liquidity). Therefore, calibrating risk management models in normal times underestimates illiquidity risk and misjudges term structure effects. --
    Keywords: bond liquidity,term structure of illiquidity premiums,regime-switching,financial crisis,flight-to-liquidity
    JEL: G01 G11 G12 G13
    Date: 2012
  9. By: Roxana Halbleib (Department of Economics, University of Konstanz, Germany); Valeri Voev (School of Economics and Management, Aarhus University, Denmark)
    Abstract: In this paper we introduce a new method of forecasting covariance matrices of large dimensions by exploiting the theoretical and empirical potential of using mixed-frequency sampled data. The idea is to use high-frequency (intraday) data to model and forecast daily realized volatilities combined with low frequency (daily) data as input to the correlation model. The main theoretical contribution of the paper is to derive statistical and economic conditions, which ensure that a mixed-frequency forecast has a smaller mean squared forecast error than a similar pure low-frequency or pure high-frequency specification. The conditions are very general and do not rely on distributional assumptions of the forecasting errors or on a particular model specification. Moreover, we provide empirical evidence that, besides overcoming the computational burden of pure high-frequency specifications, the mixed-frequency forecasts are particularly useful in turbulent financial periods, such as the previous financial crisis and always outperforms the pure low-frequency specifications.
    Keywords: Multivariate volatility, Volatility forecasting, High-frequency data, Realized variance, Realized covariance
    JEL: C32 C53
    Date: 2012–10–12
  10. By: Sarah Meyer (University of Münster); Mark Trede (University of Münster)
    Abstract: Earnings risk is an inherently subjective concept. Observing volatile earnings paths does not necessarily imply that the perceived earnings risk is large. If a drastic change in earnings is known well in advance, there is no additional risk involved. Individuals are likely to have more information about their earnings prospects than the observing econometrician. Since it is the subjectively perceived earnings risk that in uences economic decisions like consumption, we need to develop methods that allow to elicit the perceived risk from observable variables. This paper suggests an estimation method based on variables that are not only observable in principle, but can be observed in fact in many panel data sets.
    Date: 2012–11

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