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on Risk Management |
| By: | Allan M. Malz |
| Abstract: | This paper describes a set of indicators of systemic risk computed from current market prices of equity and equity index options. It displays results from a prototype version, computed daily from January 2006 to January 2013. The indicators represent a systemic risk event as the realization of an extreme loss on a portfolio of large-intermediary equities. The technique for computing them combines risk-neutral return distributions with implied return correlations drawn from option prices, tying together the single-firm return distributions via a copula to simulate the joint distribution and thus the financial-sector portfolio return distribution. The indicators can be computed daily using only current market prices; no historical data are involved. They are therefore forward-looking and can exploit all the information impounded in current prices. However, the indicators blend both market expectations and the market's desire to protect itself against volatility and tail risk, so they cannot be readily decomposed into these two elements. The paper presents evidence that the indicators have some predictive power for systemic risk events and that they can serve as a meaningful market-adjusted point of comparison for fundamentals-based systemic risk indicators. |
| Keywords: | Systemic risk ; Options (Finance) |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:607&r=rmg |
| By: | Asche, Frank (UiS); Dahl, Roy Endre (UiS); Oglend, Atle (UiS) |
| Abstract: | During the last decade, Value-at-Risk (VaR) has become the most common tool to measure the exposure to short term financial risk for companies in the oil industry, in common with most other sectors. However, VaR has been criticized after the financial crisis for providing too optimistic risk estimates and allowing portfolio managers with inflated credit lines. The crisis hit companies extracting natural resources hard, and the oil and gas industry experienced a severe fall in prices, with Brent oil dropping from 40 to below 0 in just 6 months. During events like the financial crisis, companies need to rely on precise risk estimates to adjust their positions. We show that when asset prices are highly correlated, a typical feature in the oil and gas industry, companies are vulnerable to inaccurate estimates. The findings are also compared to a theoretical study using Monte Carlo. |
| Keywords: | Value-at-Risk; Correlation; Oil; Diversification; Gas; Subordination |
| JEL: | C10 C50 G10 G30 |
| Date: | 2013–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:stavef:2013_003&r=rmg |
| By: | Francesco Cannata (Bank of Italy); Giorgio D’Acunto (Bank of Italy); Alessandro Allegri (Bank of Italy); Marco Bevilacqua (Bank of Italy); Gateano Chionsini (European Banking Authority); Tiziana Lentini (Bank of Italy); Francesco Marino (Bank of Italy); Gianluca Trevisan (Bank of Italy) |
| Abstract: | After a decade of deep transformation, which influenced both lending policies and risk management, Italy’s mutual banks are faced with the upcoming Basel III reform. Economic trends continue to exert pressure on the traditional bank business model. The entry into force of Basel III provides an opportunity to assess the changes under way, and identify potential problems. A simulation exercise conducted on June 2012 data evaluates the position of both mutual banks and central institutions relative to the new rules on capital and liquidity. The exercise paints a picture of broad compliance with the prudential targets, although some elements warrant greater attention. On the one hand, although the banks’ capital endowment is of better quality and higher than the future minimum regulatory requirements, persistent low profitability and the increasing credit risk in the balance sheets might pose a problem in the future; on the other hand, a more efficient allocation of liquidity present in the system seems necessary, including via the introduction of new coordination measures. |
| Keywords: | Basel 3, QIS, impact assessment, bank, capital, liquidity |
| JEL: | G21 G28 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_158_13&r=rmg |
| By: | Francesco Cannata (Bank of Italy); Marco Bevilacqua (Bank of Italy); Simone Enrico Casellina (Bank of Italy); Luca Serafini (Bank of Italy); Gianluca Trevisan (Bank of Italy) |
| Abstract: | In December 2010 the Basel Committee on Banking Supervision published a set of new regulations for banks in response to the financial crisis. This paper aims at evaluating the possible effects of the new framework on banks’ available regulatory capital and risk-weighted assets and assessing their positioning with respect to future leverage and liquidity constraints. The evidence, based on the data collected from a representative sample of 13 Italian banking groups updated to 30 June 2012, show that capital and liquidity positions relatively to the Basel 3 targets have improved considerably over the last two years. Furthermore, compared to banks in other jurisdictions, Italian intermediaries are likely to be less affected by the reform, due to a business model more focused on credit intermediation. Importantly, the estimates cannot be interpreted as a forecast of capital and liquidity needs as they do not incorporate any assumption about future balance-sheet items or banks’ reactions to the changing regulatory and economic environment. |
| Keywords: | Basel 3, QIS, impact assessment, bank, capital, liquidity |
| JEL: | G21 G28 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_157_13&r=rmg |
| By: | Giovanni Pepe (Bank of Italy) |
| Abstract: | Since 1996 the Basel risk-weighting regime has been based on the distinction between the trading and the banking book. For a long time credit items have been weighted less strictly if held in the trading book, on the assumption that they are easy to hedge or sell. The Great Financial Crisis made evident that banks declared a trading intent on positions that proved difficult or impossible to sell quickly. The Basel 2.5 package was developed in 2009 to better align trading and banking books’ capital treatments. Working on a number of hypothetical portfolios I show that the new rules fell short of reaching their target and instead merely reversed the incentives. A model bank can now achieve a material capital saving by allocating its credit securities to the banking book, irrespective of its real intention or capability of holding them until maturity. The advantage of doing so is particularly pronounced when the incremental investment increases the concentration profile of the trading book, as usually happens for exposures towards banks’ home government. Moreover, in these cases trading book requirements are exposed to powerful cliff-edge effects triggered by rating changes. |
| Keywords: | Basel 2.5, trading book, market risk, risk-weighted-assets, capital arbitrage |
| JEL: | G18 G21 G28 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_159_13&r=rmg |
| By: | Thomas M. Eisenbach; Martin C. Schmalz |
| Abstract: | Motivated by individuals' emotional response to risk at different time horizons, we model an 'anxious' agent--one who is more risk averse with respect to imminent risks than distant risks. Such preferences describe well-documented features of 1) individual behavior, 2) equilibrium prices, and 3) institutions. In particular, we derive implications for financial markets, such as overtrading and price anomalies around announcement dates, as well as a downward-sloping term structure of risk premia, which are found empirically. Since such preferences can lead to dynamic inconsistencies with respect to risk trade-offs, we show that costly delegation of investment decisions is a strategy used to cope with 'anxiety.' |
| Keywords: | Risk management ; Risk-taking (Psychology) ; Human behavior ; Investments ; Rate of return |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:610&r=rmg |