nep-rmg New Economics Papers
on Risk Management
Issue of 2012‒12‒15
eight papers chosen by
Stan Miles
Thompson Rivers University

  1. Equity Investment Regulation and Bank Risk: Evidence from Japanese Commercial Banks By Konishi, Masaru
  2. A Generalization of the Aumann-Shapley Value for Risk Capital Allocation Problems By Boonen, T.J.; De Waegenaere, A.M.B.; Norde, H.W.
  3. Les Dérivés de Crédit: Étude Des Répercussions de la Prime de Risque de la Variance (PRV) Sur Les (Credit Default Swap) By Ghada Zgolli
  4. Risk Management and Climate Change By Howard Kunreuther; Geoffrey Heal; Myles Allen; Ottmar Edenhofer; Christopher B. Field; Gary Yohe
  5. Credit risk and disaster Risk By Francois Gourio
  6. Non-bank financial institutions: assessment of their impact on the stability of the financial system By Patrice Muller; Graham Bishop; Shaan Devnani; Mark Lewis; Rohit Ladher
  7. Bargaining for Over-The Counter Risk Redistributions: The Case of Longevity Risk By Boonen, T.J.; De Waegenaere, A.M.B.; Norde, H.W.
  8. Fiscal Consolidations and Banking Stability By Jacopo Cimadomo; Sebastian Hauptmeier; Tom Zimmermann

  1. By: Konishi, Masaru
    Abstract: Using data from Japanese banks, this paper empirically investigates the relation between equity investment and bank risk during the period of banking crisis. Empirical evidence suggests that bank risk is positively associated with the ratio of shareholding to equity capital, suggesting that limiting shareholding can reduce commercial banks’ exposure to market risk. However, regulators should not expect that restricting banks from shareholding automatically leads to less bank failures in a financial system. This is because unhealthy banks voluntarily refrain from holding a large amount of firms’ shares relative to their equity capital, and bank risk is less sensitive to shareholding at unhealthy banks than at healthy banks.
    Keywords: Bank risk, Bank shareholding, Separation of banking and commerce
    JEL: G21 G28 G30
    Date: 2012–10
  2. By: Boonen, T.J.; De Waegenaere, A.M.B.; Norde, H.W. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: This paper analyzes risk capital allocation problems. For risk capital allocation problems, the aim is to allocate the risk capital of a firm to its divisions. Risk capital allocation is of central importance in risk-based performance measurement. We consider a case in which the aggregate risk capital is determined via a coherent risk measure. The academic literature advocates an allocation rule that, in game-theoretic terms, is equivalent to using the Aumann-Shapley value as solution concept. This value is however not well-defined in case a differentiability condition is not satisfied. As an alternative, we introduce an allocation rule inspired by the Shapley value in a fuzzy setting. We take a grid on a fuzzy participation set, define paths on this grid and construct an allocation rule based on a path. Then, we define a rule as the limit of the average over these allocations, when the grid size converges to zero. We introduce this rule for a broad class of coherent risk measures. We show that if the Aumann-Shapley value is well-defined, the allocation rule coincides with it. If the Aumann-Shapley value is not defined, which is due to non-differentiability problems, the allocation rule specifies an explicit allocation. It corresponds with the Mertens value, which is originally characterized in an axiomatic way (Mertens, 1988), whereas we provide an asymptotic argument.
    Keywords: capital allocation;risk capital;Aumann-Shapley value;non-differentiability;fuzzy games.
    JEL: C71 G32
    Date: 2012
  3. By: Ghada Zgolli (CEROS - Centre d'Etudes et de Recherches sur les Organisations et la Stratégie - Université Paris X - Paris Ouest Nanterre La Défense : EA4429)
    Abstract: Using a new dataset of bid and offer quotes for credit default swaps, we investigate the relationship between theoretical determinants of default risk and actual market premia using cross sectional regressions. These theoretical determinants are variance risk premia, implied volatility and the riskless interest rate. We find that estimated coefficients for these variables are consistent with theory and that the estimates are highly significant both statistically and economically. The explanatory power of the theoretical variables for levels of default swap premia is approximately 98%. The explanatory power for the differences in the premia is approximately 64%. Implied Volatility and PRV by themselves also have substantial explanatory power for credit default swap premia. A principal component analysis of the residuals and the premia shows that there is only weak evidence for a residual common factor and also suggests that the theoretical variables explain a significant amount of the variation in the data. We therefore conclude that variance risk premia, volatility and the risk free rate are important determinants of credit default swap premia, as predicted by theory
    Keywords: credit default swap, credit risk, structural model, variance risk premia, implied volatility, historical volatility
    Date: 2012–12–06
  4. By: Howard Kunreuther; Geoffrey Heal; Myles Allen; Ottmar Edenhofer; Christopher B. Field; Gary Yohe
    Abstract: The selection of climate policies should be an exercise in risk management reflecting the many relevant sources of uncertainty. Studies of climate change and its impacts rarely yield consensus on the distribution of exposure, vulnerability, or possible outcomes. Hence policy analysis cannot effectively evaluate alternatives using standard approaches such as expected utility theory and benefit-cost analysis. This Perspective highlights the value of robust decision-making tools designed for situations, such as evaluating climate policies, where generally agreed-upon probability distributions are not available and stakeholders differ in their degree of risk tolerance. This broader risk management approach enables one to examine a range of possible outcomes and the uncertainty surrounding their likelihoods.
    JEL: Q54
    Date: 2012–12
  5. By: Francois Gourio
    Abstract: Credit spreads are large, volatile and countercyclical, and recent empirical work suggests that risk premia, not expected credit losses, are responsible for these features. Building on the idea that corporate debt, while safe in ordinary recessions, is exposed to economic depressions, this paper embeds a trade-off theory of capital structure into a real business cycle model with a small, exogenously time-varying risk of economic disaster. The model replicates the level, volatility and cyclicality of credit spreads, and variation in the corporate bond risk premium amplifies macroeconomic fluctuations in investment, employment and GDP.
    Keywords: Risk - Mathematical models ; Credit ; Debt
    Date: 2012
  6. By: Patrice Muller; Graham Bishop; Shaan Devnani; Mark Lewis; Rohit Ladher
    Abstract: The study paper examines how non-bank financial institutions (in particular money market funds, private equity firms, hedge funds, pension funds and insurance undertakings, central counterparties, and UCITS and ETFs) have performed over the last decade and during the financial crisis. The report addresses the risks run by each of this type of institutions (credit, counterparty, liquidity, redemption, and fire sales risk), and highlights also the risks arising from a number of activities frequently undertaken by these institutions, in particular securitisation (a.o. agency risk), securities lending (a.o. counterparty risk) and repos (a.o. liquidity risk). The report finally provides a selected overview of approaches for the measurement of financial instability and financial distress.
    JEL: G23
    Date: 2012–11
  7. By: Boonen, T.J.; De Waegenaere, A.M.B.; Norde, H.W. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: Existing literature regarding the natural hedge potential that arises from combining liabilities with different sensitivities focuses on the optimal liability mix, but does not address the question whether and how changes in the liability mix can be obtained. In the absence of a well-functioning market, parties could change their liability mix through Over-the-Counter risk redistributions. This, however, requires that each involved party benefits (weakly) from the redistribution. In this paper we first show that under relatively mild conditions, there is more than one risk redistribution that satisfies this criterion. We then explicitly model the bargaining process by which firms will agree to a particular redistribution. We allow for heterogeneous beliefs regarding the underlying probability distribution, which may arise from using different models to predict future mortality rates. We use this model to quantify the potential benefits.
    Keywords: longevity risk;bargaining;risk redistribution;Over-The-Counter trade.
    JEL: C71 C78 G22 J11
    Date: 2012
  8. By: Jacopo Cimadomo; Sebastian Hauptmeier; Tom Zimmermann
    Abstract: We empirically investigate the effects of fiscal policy on bank balance sheets, focusing on episodes of fiscal consolidation. To this aim, we employ a very rich data set of individual banks’ balance sheets, combined with a newly compiled data set on fiscal consolidations. We find that standard capital adequacy ratios such as the Tier-1 ratio tend to improve following episodes of fiscal consolidation. Our results suggest that this improvement results from a portfolio re-balancing from private to public debt securities which reduces the risk-weighted value of assets. In fact, if fiscal adjustment efforts are perceived as structural policy changes that improve the sustainability of public finances and, therefore, reduces credit risk, the banks’ demand for government securities increases relative to other assets.
    Keywords: Fiscal consolidations;bank balance sheets;portfolio re-balancing;banking stability
    JEL: E62 G11 G21 H30
    Date: 2012–11

This nep-rmg issue is ©2012 by Stan Miles. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.