New Economics Papers
on Risk Management
Issue of 2013‒02‒08
seven papers chosen by

  1. Forecasting systemic impact in financial networks By Nikolaus Hautsch; Julia Schaumburg; Melanie Schienle;
  2. Incentives through the cycle: microfounded macroprudential regulation By Giovanni di Iasio; Mario Quagliariello
  3. Banks’ Capital Buffer, Risk and Performance in the Canadian Banking System: Impact of Business Cycles and Regulatory Changes By Guidara, Alaa; Lai, Van Son; Soumaré, Issouf; Tchana Tchana, Fulbert
  4. Implied Basket Correlation Dynamics By Wolfgang Karl Härdle; Elena Silyakova; ;
  5. Finance and Economic Development in a Model with Credit Rationing By Jean-Louis Arcand, Enrico Berkes, Ugo Panizza
  6. Financial Systemic Stability: Challenging Aspects of Central Banks By Wanvimol Sawangngoenyuang; Sukrita Sa-nguanpan; Worawut Sabborriboon
  7. Stress Testing Liquidity Risk: The Case of the Brazilian Banking System. By Benjamin M. Tabak; Solange M. Guerra; Rodrigo C. Miranda; Sergio Rubens S. de Souza

  1. By: Nikolaus Hautsch; Julia Schaumburg; Melanie Schienle;
    Abstract: We propose a methodology for forecasting the systemic impact of financial institutions in interconnected systems. Utilizing a five-year sample including the 2008/9 financial crisis, we demonstrate how the approach can be used for timely systemic risk monitoring of large European banks and insurance companies. We predict firms’ systemic relevance as the marginal impact of individual downside risks on systemic distress. The so-called systemic risk betas account for a company’s position within the network of financial interdependencies in addition to its balance sheet characteristics and its exposure towards general market conditions. Relying only on publicly available daily market data, we determine time-varying systemic risk networks, and forecast systemic relevance on a quarterly basis. Our empirical findings reveal time-varying risk channels and firms’ specific roles as risk transmitters and/or risk recipients.
    Keywords: Forecasting systemic risk contributions, time-varying systemic risk network, model selection with regularization in quantiles
    JEL: G01 G18 G32 G38 C21 C51 C63
    Date: 2013–01
  2. By: Giovanni di Iasio (Bank of Italy); Mario Quagliariello (European Banking Authority)
    Abstract: We provide a micro-based rationale for macroprudential capital regulation by developing a model in which bankers can privately undertake a costly effort and reduce the probability of adverse shocks to their asset holdings that force liquidation (deterioration risk). Low fundamental risk of assets guarantees benevolent funding conditions and banks are able to expand their balance sheets. The high continuation value would, in principle, improve incentives. However, the rise in asset demand and prices may jeopardize bankers' efforts whenever the liquidation price is high enough. This imposes socially inefficient liquidation which can be corrected with a capital requirement that aligns bankers' incentives. We show that a microprudential regulatory regime that disregards the equilibrium effect of asset prices on incentives performs poorly as low fundamental risk may induce high deterioration risk. Overall, the model suggests a theoretical foundation for the countercyclical capital buffer of Basel III, since it prescribes a macroprudential regulatory regime in which the equilibrium feedback effect is fully taken into account.
    Keywords: macroprudential regulation, incentives, financial stability, Basel III, Value-at-Risk, market-based financial intermediaries, financial crises
    JEL: E44 D86 G18
    Date: 2013–01
  3. By: Guidara, Alaa; Lai, Van Son; Soumaré, Issouf; Tchana Tchana, Fulbert
    Abstract: Using quarterly financial statements and stock market data from 1982 to 2010 for the six largest Canadian chartered banks, this paper documents positive co-movement between Canadian banks’ capital buffer and business cycles. The adoption of Basel Accords and the balance sheet leverage cap imposed by Canadian banking regulations did not change this cyclical behaviour of Canadian bank capital. We find Canadian banks to be well-capitalized and that they hold a larger capital buffer in expansion than in recession, which may explain how they weathered the recent subprime financial crisis so well. This evidence that Canadian banks ride the business and regulatory periods underscores the appropriateness of a both micro- and a macro-prudential “through-the-cycle” approach to capital adequacy as advocated in the proposed Basel III framework to strengthen the resilience of the banking sector.
    Keywords: Capital Buffer; Risk; Performance; Basel Accords; Regulation; Business Cycles; Canadian Banks
    JEL: G28 G21
    Date: 2013–01–31
  4. By: Wolfgang Karl Härdle; Elena Silyakova; ;
    Abstract: Equity basket correlation is an important risk factor. It characterizes the strength of linear dependence between assets and thus measures the degree of portfolio diversification. It can be estimated both under the physical measure from return series, and under the risk neutral measure from option prices. The difference between the two estimates motivates a so called "dispersion strategy". We study the performance of this strategy on the German market over the recent 2 years and propose several hedging schemes based on implied correlation (IC) forecasts. Modeling IC is a challenging task both in terms of computational burden and estimation error. First the number of correlation coefficients to be estimated would grow with the size of the basket. Second, since the IC is implied from option prices it is not constant over maturities and strikes. Finally, the IC changes over time. The dimensionality of the problem is reduced by an assumption that the correlation between all pairs of equities is constant (equicorrelation). The IC surface (ICS) is then approximated from implied volatilities of stocks and implied volatility of the basket. To analyze this structure and the dynamics of the ICS we employ a dynamic semiparametric factor model (DSFM).
    Keywords: correlation risk, dimension reduction, dispersion strategy, dynamic factor models, implied correlation
    JEL: C14 C32 G12 G13 G15 G17
    Date: 2012–11
  5. By: Jean-Louis Arcand, Enrico Berkes, Ugo Panizza (Graduate Institute of International Studies)
    Abstract: This paper develops a simple model with credit rationing and endogenous default risk in which the expectation of a bailout may lead to a financial sector which is too large with respect to the the social optimum. The paper concludes with a short discussion of how this model could be used as a building block for models aimed at endogenizing the probability of a bailout, and discussing the relationship between the size of the finanancial sector and economic growth in the presence of default risk.
    Date: 2013–02–01
  6. By: Wanvimol Sawangngoenyuang (Bank of Thailand); Sukrita Sa-nguanpan (Bank of Thailand); Worawut Sabborriboon (Bank of Thailand)
    Abstract: Since 2007 global financial crisis, many central banks have tended to focus on financial stability much more than ever. Lessons learned from recent crises witness that in a period of sustained economic growth with low and stable inflation, financial imbalances could adversely affect financial system and real economy, which eventually leads to financial crises. In addition, the cost of crises becomes increasingly expensive over time because crises themselves have been more systemic. Risk from one financial institution can easily transfer to others and then to the whole financial market. Thus, current crises highlight the importance of financial stability role of central banks in two main aspects, crisis prevention and crisis management. The paper indicates that in recent financial crises, many central banks have stepped beyond their traditional roles in order to ensure financial system stability. Some instruments and measures that central banks have implemented can be considered as unconventional ones. Looking forward, these practices then lead to new challenges for central banks in three main aspects: risk identification, risk mitigation, and policy issuance process. Eventually, this paper also provides policy implications to Bank of Thailand, based on international experiences and lessons learned from recent crises.
    Keywords: Financial Systemic Stability
    Date: 2012–10–21
  7. By: Benjamin M. Tabak; Solange M. Guerra; Rodrigo C. Miranda; Sergio Rubens S. de Souza
    Abstract: This paper discusses the effects of the recent financial crisis on the Brazilian banking system. It discusses how liquidity risks have risen during the crisis and preventive measures that were taken in order to cope with these risks. It presents the liquidity stress testing approach that is under use in the Central Bank of Brazil and results from a survey on liquidity stress testing that has been applied to banks that operate in the Brazilian banking system.
    Date: 2012–12

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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.