
on Risk Management 
Issue of 2013‒05‒24
four papers chosen by 
By:  Svend Rasmussen (Department of Food and Resource Economics, University of Copenhagen) 
Abstract:  Current methods of risk management focus on efficiency and do not provide operational answers to the basic question of how to optimise and balance the two objectives, maximisation of expected income and minimisation of risk. This paper uses the Capital Asset Pricing Model (CAPM) to derive an operational criterion for the optimal risk management of firms. The criterion assumes that the objective of the firm manager is to maximise the market value of the firm and is based on the condition that the application of risk management tools has a symmetric effect on the variability of income around the mean. The criterion is based on the expected consequences of risk management on relative changes in the variance of return on equity and expected income. The paper demonstrates how the criterion may be used to evaluate and compare the effect of different risk management tools, and it illustrates how the criterion should be applied to integrate risk management at the strategic, tactical and operational level. The paper concludes that the derived criterion for optimal risk management provides a valuable theoretical tool for the economic evaluation of the consequences of risk management. 
Keywords:  firm value, CAPM, optimal risk management, return on equity, risk, expected income 
Date:  2013–05 
URL:  http://d.repec.org/n?u=RePEc:foi:wpaper:2013_10&r=rmg 
By:  Jacek Jakubowski; Mariusz Niew\k{e}g\l owski 
Abstract:  At first, we solve a problem of finding a riskminimizing hedging strategy on a general market with ratings. Next, we find a solution to this problem on Markovian market with ratings on which prices are influenced by additional factors and rating, and behavior of this system is described by SDE driven by Wiener process and compensated Poisson random measure and claims depend on rating. To find a tool to calculate hedging strategy we prove a FeynmanKac type theorem. This result is of independent interest and has many applications, since it enables to calculate some conditional expectations using related PIDE's. We illustrate our theory on two examples of market. The first is a general exponential L\'{e}vy model with stochastic volatility, and the second is a generalization of exponential L\'{e}vy model with regimeswitching. 
Date:  2013–05 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1305.4132&r=rmg 
By:  Philipp König; Kartik Anand; Frank Heinemann; 
Abstract:  Bank liability guarantee schemes have traditionally been viewed as costless measures to shore up investor confidence and stave off bank runs. However, as the experiences of some European countries, most notably Ireland, have demonstrated, the credibility and effectiveness of these guarantees is crucially intertwined with the sovereign’s funding risks. Employing methods from the literature on global games, we develop a simple model to explore the systemic linkage between the rollover risks of a bank and a government, which are connected through the government’s guarantee of bank liabilities. We show the existence and uniqueness of the joint equilibrium and derive its comparative static properties. In solving for the optimal guarantee numerically, we show how its credibility may be improved through policies that promote balance sheet transparency. We explain the asymmetry in risktransfer between sovereign and banking sector, following the introduction of a guarantee as being attributed to the resolution of strategic uncertainties held by bank depositors and the opacity of the banks’ balance sheets. 
Keywords:  bank debt guarantees, transparency, bank default, sovereign default, global games 
JEL:  G01 G28 D89 
Date:  2013–05 
URL:  http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2013025&r=rmg 
By:  Tao Ma; R. A. Serota 
Abstract:  We prove that Student's tdistribution provides one of the better fits to returns of S&P component stocks and the generalized inverse gamma distribution best fits VIX and VXO volatility data. We further argue that a more accurate measure of the volatility may be possible based on the fact that stock returns can be understood as the product distribution of the volatility and normal distributions. We find Brown noise in VIX and VXO time series and explain the mean and the variance of the relaxation times on approach to the steadystate distribution. 
Date:  2013–05 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1305.4173&r=rmg 