nep-rmg New Economics Papers
on Risk Management
Issue of 2013‒04‒13
nine papers chosen by
Stan Miles
Thompson Rivers University

  1. Robustness and informativeness of systemic risk measures By Löffler, Gunter; Raupach, Peter
  2. Procyclical Leverage and Value-at-Risk By Tobias Adrian; Hyun Song Shin
  3. Exchange Rate Risk Management of Export Firms: New findings from a questionnaire survey By ITO Takatoshi; KOIBUCHI Satoshi; SATO Kiyotaka; SHIMIZU Junko
  4. Understanding and measuring risks in Agency CMOs By Nicholas Arcidiacono; Larry Cordell; Andrew Davidson; Alex Levin
  5. Do we need a separate banking system? An assessment By Lang, Gunnar; Schröder, Michael
  6. Ruin Probabilities for Risk Processes with Non-Stationary Arrivals and Subexponential Claims By Lingjiong Zhu
  7. Exchange Rate Exposure and Exchange Rate Risk Management: The case of Japanese exporting firms By ITO Takatoshi; KOIBUCHI Satoshi; SATO Kiyotaka; SHIMIZU Junko
  8. The Great Financial Crisis: setting priorities for new statistics By Claudio Borio
  9. Revenge of the steamroller: ABCP as a window on risk choices By Carlos Arteta; Mark Carey; Ricardo Correa; Jason Kotter

  1. By: Löffler, Gunter; Raupach, Peter
    Abstract: Recent literature has proposed new methods for measuring the systemic risk of financial institutions based on observed stock returns. In this paper we examine the reliability and robustness of such risk measures, focusing on CoVaR, marginal expected shortfall, and option-based tail risk estimates. We show that CoVaR exhibits undesired characteristics in the way it responds to idiosyncratic risk. In the presence of contagion, the risk measures provide conflicting signals on the systemic risk of infectious and infected banks. Finally, we explore how limited data availability typical of practical applications may limit the measures' performance. We generate systemic tail risk through positions in standard index options and describe situations in which systemic risk is misestimated by the three measures. The observations raise doubts about the informativeness of the proposed measures. In particular, a direct application to regulatory capital surcharges for systemic risk could create wrong incentives for banks. --
    Keywords: Systemic Risk,CoVaR,Marginal Expected Shortfall,Tail Risk
    JEL: G21 G28
    Date: 2013
  2. By: Tobias Adrian; Hyun Song Shin
    Abstract: The availability of credit varies over the business cycle through shifts in the leverage of financial intermediaries. Empirically, we find that intermediary leverage is negatively aligned with the banks' Value-at-Risk (VaR). Motivated by the evidence, we explore a contracting model that captures the observed features. Under general conditions on the outcome distribution given by Extreme Value Theory (EVT), intermediaries maintain a constant probability of default to shifts in the outcome distribution, implying substantial deleveraging during downturns. For some parameter values, we can solve the model explicitly, thereby endogenizing the VaR threshold probability from the contracting problem.
    JEL: G21 G32
    Date: 2013–04
  3. By: ITO Takatoshi; KOIBUCHI Satoshi; SATO Kiyotaka; SHIMIZU Junko
    Abstract: In this paper, we present new findings of Japanese firms' exchange rate risk managements based on a questionnaire survey sent to all Tokyo Stock Exchange listed firms in 2009. Using their responses, we conduct empirical analysis to investigate the relation between respective risk management tools including the choice of invoice currency and the price revision strategy (pass-through). Results show the following: first, firms with higher sales and greater dependency on foreign markets more actively engage in currency hedging including financial and operational hedging. Second, Japanese firms use both financial and operational hedging complementarily. Third, U.S. dollar invoicing is supported by both financial and operational hedging. Fourth, yen-invoicing substitutes for both financial and operational hedging. Fifth, pass-through also substitutes for financial hedging. These findings indicate that Japanese firms use operational hedging, financial hedging strategies, and pass-through policies depending on their choice of invoicing currency.
    Date: 2013–04
  4. By: Nicholas Arcidiacono; Larry Cordell; Andrew Davidson; Alex Levin
    Abstract: The Agency CMO market, an often overlooked corner of mortgage finance, has experienced tremendous growth over the past decade. This paper explains the rationale behind the construction of Agency CMOs, quantifies risks embedded in Agency CMOs using a traditional and a novel approach, and offers valuable lessons learned when interpreting these risk measures. Among these lessons is that to fully understand the risks in Agency CMOs a full bond-by-bond analysis is necessary and that interest rate risk is not the only risk that needs to be considered when conducting risk management with CMOs.
    Keywords: Mortgage-backed securities ; Risk management
    Date: 2013
  5. By: Lang, Gunnar; Schröder, Michael
    Abstract: Motivated by the current discussion on different separate banking systems, we provide an overview of the different systems, question them and outline their effect on systemic stability and the German banking sector. The results show that the various separate banking systems only play a minor role in reducing and limiting systemic risk. They only marginally contribute to solving conflicts of interest and can even be detrimental to banking business diversification. A separate banking system could, however, facilitate banking supervision by reducing the banking system's complexity. Furthermore, credible threats to not support investment banks with federal resources in times of crisis could lead to a more adequate incentives structure of suppliers of equity and outside capital. More efficient measures to further reduce systemic risk in the financial sector should, however, use different levers, such as additional minimum regulatory capital requirements. --
    Keywords: Banking Regulation,Commercial and Investment Banking,Financial Crises
    JEL: G01 G18 G24
    Date: 2013
  6. By: Lingjiong Zhu
    Abstract: In this paper, we obtain the finite-horizon and infinite-horizon ruin probability asymptotics for risk processes with claims of subexponential tails for non-stationary arrival processes that satisfy a large deviation principle. As a result, the arrival process can be dependent, non-stationary and non-renewal. We give three examples of non-stationary and non-renewal point processes: Hawkes process, Cox process with shot noise intensity and self-correcting point process. We also show some aggregate claims results for these three examples.
    Date: 2013–04
  7. By: ITO Takatoshi; KOIBUCHI Satoshi; SATO Kiyotaka; SHIMIZU Junko
    Abstract: In this paper, we estimate Japanese firms' exchange rate exposure and investigate the impact of exchange rate risk management on them. By using the results of the questionnaire survey sent to all Tokyo Stock Exchange listed firms in 2009, we conduct empirical analysis to investigate whether each risk management tool—financial and operational hedging, the choice of invoice currency, and the price revision strategy (pass-through)—specifically affects their foreign exchange exposure. As a result, we confirm the following characteristics: first, firms with larger dependency on foreign markets have larger foreign exchange exposure. Second, the higher is the U.S. dollar invoicing share, the larger is the foreign exchange exposure, but it is reduced by using both financial and operational hedging. Third, yen invoicing itself reduces the foreign exchange exposure. These findings indicate that Japanese firms utilize operational and financial hedging strategies and price revision policy depending on their choice of invoicing currency.
    Date: 2013–04
  8. By: Claudio Borio
    Abstract: Every financial crisis brings in its wake demands for more information; the latest one is no exception. Because, in deceptively tranquil times, it is well-nigh impossible to foster the consensus necessary to improve data availability, such a window of opportunity must not be missed. To be sure, the main reason why crises occur is not lack of statistics but the failure to interpret them correctly and to take remedial action. But better statistics can no doubt be a big help. Priorities for new data collections include better property prices and, above all, comprehensive financial information for banks on a consolidated and global basis, covering their balance sheets but also their income statements. This could be usefully complemented with corresponding information on the international geography of these banks' operations and, for crisis management purposes, with much more timely and granular data on their bilateral exposures. The collection of information should be based on sound governance arrangements, flexible and cost-efficient. The BIS can play and is playing a very active role.
    Keywords: financial crisis, systemic risk, banking statistics, property prices
    Date: 2013–04
  9. By: Carlos Arteta; Mark Carey; Ricardo Correa; Jason Kotter
    Abstract: We empirically examine financial institutions' motivations to take systematic bad-tail risk in the form of sponsorship of credit-arbitrage asset-backed commercial paper vehicles. A run on debt issued by such vehicles played a key role in causing and propagating the liquidity crisis that began in the summer of 2007. We find evidence consistent with important roles for both owner-manager agency problems and government-induced distortions, especially government control or ownership of banks.
    Date: 2013

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