New Economics Papers
on Risk Management
Issue of 2013‒06‒24
fifteen papers chosen by

  1. Evaluation of minimum capital requirements for bank loans to SMEs By Düllmann, Klaus; Koziol, Philipp
  2. Distance to Default and the Financial Crisis. By Alistair Milne
  3. Bank Debt Regulations Implications for Bank Capital and Bond Risk By Stig Helberg; Snorre Lindset
  4. Introduction to Risk Parity and Budgeting By Roncalli, Thierry
  5. The Impact of Index-Based Insurance on Informal Risk-Sharing Networks By Boucher, Steve; Delpierre, Matthieu
  6. A Risk Rationing Model By Chiu, Leslie J. Verteramo; Turvey, Calum G.
  7. Ruin probability of a discrete-time risk process with proportional reinsurance and investment for exponential and Pareto distributions By Helena Jasiulewicz; Wojciech Kordecki
  8. Smallholder Risk Management in Developing Countries By Dalila Cervantes-Godoy; Shingo Kimura; Jesús Antón
  9. Farm Support Payments and Risk Balancing: Implications for Financial Riskiness of Canadian Farms By Uzeaa, Florentina Nicoleta; Poon, Kenneth; Sparling, David; Weersink, Alfons
  10. Developing new futures contract versus cross-hedging: a study in the Brazilian rice market By Capitani, Daniel; Mattos, Fabio
  11. Parameter uncertainty in multiperiod portfolio optimization with transaction costs By Victor de Miguel; Alberto Martín Utrera; Francisco J. Nogales
  12. Heteroscedasticity and the Estimation of the Risk Balancing Model By Zhang, Lisha; Moss, Charles B.
  13. Risiken aus Cloud-Computing-Services: Fragen des Risikomanagements und Aspekte der Versicherbarkeit By Haas, Andreas; Hofmann, Annette
  14. On the time spent in the red by a refracted L\'evy risk process By Jean-Fran\c{c}ois Renaud
  15. Farm Wealth Implications of Canadian Agricultural Business Risk Management Programs By Trautman, Dawn E.; Jeffrey, Scott R.; Unterschultz, James R.

  1. By: Düllmann, Klaus; Koziol, Philipp
    Abstract: Our paper addresses firm size as a driver of systematic credit risk in loans to small and medium enterprises (SMEs). Key contributions are the use of a unique data set of SME lending by over 400 German banks and relating systematic risk to the size dependence of regulatory capital requirements. What sets our sample apart is its comprehensive coverage of the particularly rich and well developed credit market for SMEs in Germany. We estimate asset correlations as the key measure of systematic risk from historical default rates. Our results suggest that systematic risk tends to increase with firm size, conditional on the respective rating category. We also compare the size of this effect with the capital relief that has been granted in Basel II for SMEs relative to large firms. For SME loans in the corporate portfolio of the Internal Ratings-Based Approach and also for SME loans treated under the revised standardized approach of Basel II, our asset correlation estimates suggest a significantly larger relative difference from large firms than reflected in the regulatory capital requirements. --
    Keywords: Asset Correlation,Basel II,Minimum Capital Requirements,Single Risk Factor Model
    JEL: G21 G33 C13
    Date: 2013
  2. By: Alistair Milne (School of Business and Economics, Loughborough University, UK)
    Abstract: This paper analyses contingent-claims based measures of distance to default (D2D) for the 41 largest global banking institutions over the period 2006H2 to 20011H2. D2D falls from end-2006 through to end-2008. Cross-sectional differences in D2D prior to the crisis do not predict either bank failure or bank share prices decline, but D2D measured in mid-2008 does have some predictive value for failure by end-year. The ‘option value’ of the bank safety net remains small except at the height of the crisis and there is little indication of bank shareholders consciously using the safety net to shift risk onto taxpayers. (99 words)
    Keywords: bank default, bank moral hazard, bank regulation, bank safety net, contingent claims, early warning systems, global financial crisis, market-based risk measurement, systemic risk, risk shiftingCreation-Date: 110613
    JEL: F15 F54 P33
    Date: 2013–06
  3. By: Stig Helberg (Department of Economics, Norwegian University of Science and Technology); Snorre Lindset (Department of Economics, Norwegian University of Science and Technology)
    Abstract: We use a structural model of default risk to study how optimal bank capital and bond risk are influenced by deposit insurance, implicit guarantees, depositor preference, asset encumbrance, and bail-in resolution frameworks. We find that these features of bank financing, in addition to having an immediate impact on bond debt risk, also change optimal bank capital, countering the first-order effect on bond debt risk. Bondholders' risk is thereby not materially affected, but shareholder value and public sector value are. A gap between optimal capital and required capital represents a cost to shareholders, and increases the risk of regulatory arbitrage. Enhancing capital requirements, and at the same time adopting bank debt regulations that reduce the optimal capital, is to gain some and lose some in terms of financial stability. Based on a small sample of European banks, we find support for the central model predictions.
    Keywords: Bank debt regulations, optimal bank capital, bond risk.
    JEL: G21 G28 G32
    Date: 2013–06–13
  4. By: Roncalli, Thierry
    Abstract: Although portfolio management didn’t change much during the 40 years after the seminal works of Markowitz and Sharpe, the development of risk budgeting techniques marked an important milestone in the deepening of the relationship between risk and asset management. Risk parity then became a popular financial model of investment after the global financial crisis in 2008. Today, pension funds and institutional investors are using this approach in the development of smart indexing and the redefinition of long-term investment policies. Introduction to Risk Parity and Budgeting provides an up-to-date treatment of this alternative method to Markowitz optimization. It builds financial exposure to equities and commodities, considers credit risk in the management of bond portfolios, and designs long-term investment policy. This book contains the solutions of tutorial exercices which are included in Introduction to Risk Parity and Budgeting.
    Keywords: Risk parity, risk budgeting, portfolio optimization, CAPM, risk premium, beta, Sharpe ratio, shrinkage methods, convex risk measure, Euler allocation, marginal risk, risk contribution, value-at-risk, volatility, expected shortfall, Cornish Fisher expansion, risk factors, smart beta
    JEL: C02 G11
    Date: 2013–06–01
  5. By: Boucher, Steve; Delpierre, Matthieu
    Keywords: Farm Management, Risk and Uncertainty,
    Date: 2013
  6. By: Chiu, Leslie J. Verteramo; Turvey, Calum G.
    Keywords: Community/Rural/Urban Development, Farm Management, Research Methods/ Statistical Methods, Risk and Uncertainty,
    Date: 2013
  7. By: Helena Jasiulewicz; Wojciech Kordecki
    Abstract: In this paper a quantitative analysis of the ruin probability in finite time of discrete risk process with proportional reinsurance and investment of finance surplus is focused on. It is assumed that the total loss on a unit interval has a light-tailed distribution -- exponential distribution and a heavy-tailed distribution -- Pareto distribution. The ruin probability for finite-horizon 5 and 10 was determined from recurrence equations. Moreover for exponential distribution the upper bound of ruin probability by Lundberg adjustment coefficient is given. For Pareto distribution the adjustment coefficient does not exist, hence an asymptotic approximation of the ruin probability if an initial capital tends to infinity is given. Obtained numerical results are given as tables and they are illustrated as graphs.
    Date: 2013–06
  8. By: Dalila Cervantes-Godoy; Shingo Kimura; Jesús Antón
    Abstract: This paper addresses various aspects of risk and risk management for smallholders in developing countries, and presents a quantitative assessment of farm-level risks and risk management strategies in three emerging economies: Brazil, China and Viet Nam. The analysis covers production, income, and poverty risks. Institutional and political settings in developing countries are frequently less developed and this contributes to a greater incidence of market imperfections in key areas such as credit and insurance, and which in turn lowers farmers’ access to risk management tools and strategies. The result is a widespread reliance on informal mechanisms and community strategies. The effects of risk and responses to risk are also different in developing countries, with smallholders often forced to rely on strategies that perpetuate poverty. When risk is an important consideration in a farm household’s decision on sector transition, insurance or safety-net mechanisms could assist these households to make that transition. The analysis of two regions in Viet Nam shows that those households able to successfully transit to the non-farm sector continued to maintain small plots of land for self-consumption, suggesting that agriculture remains a kind of safety net.
    Keywords: developing countries, agricultural policy, smallholders, agricultural risk, risk management strategies
    JEL: G21 G22 O13 Q10 Q11 Q12 Q13 R38
    Date: 2013–06–10
  9. By: Uzeaa, Florentina Nicoleta; Poon, Kenneth; Sparling, David; Weersink, Alfons
    Abstract: The risk balancing literature suggests that business risk management (BRM) programs may, through risk balancing (offsetting adjustments between business risk and financial risk), lead farmers to take on more financial risk than they would take otherwise, which, in turn, increases the risk of equity loss. Business risk management continues to be the central objective of Canadian agricultural policy, and this was re-enforced with the recent introduction of the Growing Forward II policy framework. However, it is not known whether Canadian BRM programs designed to offset business risk lead to increased financial risk and possibly higher levels of overall risk for individual farm operations. This paper aims to empirically examine the impact of Canadian BRM programs on the financial riskiness of farms using a longitudinal farm data set from Ontario. Results show that: 1) the lag of payment of Canadian Agricultural Income Stabilization/AgriStability diminishes the effectiveness of BRM programs in reducing business risk; 2) a relatively small share of farms exhibit risk balancing behaviour, and 3) BRM payments have no impact on the likelihood of risk balancing. Taken together, these findings suggest that the impact of BRM programs on the financial riskiness of farms is limited.
    Keywords: Risk Balancing, Business Risk, Financial Risk, Farm-Level Data, Correlation Analysis, Binary Dependent Panel Models, Demand and Price Analysis, Farm Management, Financial Economics, International Relations/Trade,
    Date: 2013
  10. By: Capitani, Daniel; Mattos, Fabio
    Keywords: Agribusiness, Marketing, Risk and Uncertainty,
    Date: 2013–05
  11. By: Victor de Miguel; Alberto Martín Utrera; Francisco J. Nogales
    Abstract: We study the impact of parameter uncertainty in multiperiod portfolio selection with trading costs. We analytically characterize the expected loss of a multiperiod investor, and we find that it is equal to the product of two terms. The first term corresponds with the single-period utility loss in the absence of transaction costs, as characterized by Kan and Zhou (2007), whereas the second term captures the multiperiod effects on the overall utility loss. To mitigate the impact of parameter uncertainty, we propose two multiperiod shrinkage portfolios. The first multiperiod shrinkage portfolio combines the Markowitz portfolio with a target portfolio. This method diversifies the effects of parameter uncertainty and reduces the risk of taking inefficient positions. The second multiperiod portfolio shrinks the investor's trading rate. This novel technique smooths the investor trading activity and it also may help to considerably reduce the impact of parameter uncertainty. Finally, we test the out-of-sample performance of our considered portfolio strategies with simulated and empirical datasets, and we find that ignoring transaction costs, parameter uncertainty, or both, results into large losses in the investor's performance
    Keywords: Estimation error, Shrinkage portfolios, Trading costs, Out-of-sample performance
    Date: 2013–06
  12. By: Zhang, Lisha; Moss, Charles B.
    Keywords: Research Methods/ Statistical Methods, Risk and Uncertainty,
    Date: 2013
  13. By: Haas, Andreas; Hofmann, Annette
    Abstract: Unternehmen stehen heute aufgrund ökonomischer Anreize verstärkt vor der Entscheidung, die bisher intern gelagerte Datenverarbeitung und Geschäftsprozesse auf einen externen Anbieter von Cloud-Computing-Dienstleistungen auszulagern. Diese neuartige Form des IT-Outsourcing verändert jedoch die Risikosituation, der Anbieter und Nachfrager ausgesetzt sind, teilweise erheblich. Heutige Cyber-Versicherungsprodukte sind noch nicht auf versicherungstechnische und vertragsrechtliche Besonderheiten des Cloud Computing ausgelegt. Zudem führen die stark interdependenten Netzwerkstrukturen von Cloud-Anbietern, verbunden mit einer fehlenden Unabhängigkeit der Einzelrisiken in einer Cloud-Infrastruktur zu starken Kumulproblemen im Schadenfall und eröffnen Fragen der grundsätzlichen Versicherbarkeit. Die Analyse zeigt, dass neben einer Anpassung heutiger Versicherungsprodukte auf den Kontext Cloud-Computing auch innovative Risikodiversifikationsmöglichkeiten geschaffen werden sollten, um Risiken aus Cloud-Computing-Services auf ein Versicherungsunternehmen zu transferieren. Dieser Artikel erörtert die Risikosituation bei der Nutzung von Cloud-Services, bietet eine Klassifikation der Risiken an und diskutiert zentrale Fragen der Versicherbarkeit sowie Lösungsansätze für das Risikomanagement. -- Cloud-Computing services are changing the risk situation of IT-outsourcing and represent a challenge for the insurance industry. The most important problem to guarantee insurability of these emerging risks is that they are not stochastically independent. On the one hand, the interdependent network structure of these risks implies a significant contagion risk; on the other hand, new risks emerge that have not been addressed by existing (cyber risk) policies so far. Insurance concepts should be supported by innovative risk diversification concepts for cloud computing service. Addressing and classifying the new risks resulting from Cloud-Computing services, this article discusses insurability issues and risk management solutions.
    Date: 2013
  14. By: Jean-Fran\c{c}ois Renaud
    Abstract: In this paper, we introduce an insurance ruin model with adaptive premium rate, thereafter refered to as restructuring/refraction, in which classical ruin and bankruptcy are distinguished. In this model, the premium rate is increased as soon as the wealth process falls into the red zone and is brought back to its regular level when the process recovers. The analysis is mainly focused on the time a refracted L\'evy risk process spends in the red zone (analogous to the duration of the negative surplus). Building on results from Kyprianou and Loeffen (2010) and Loeffen et al. (2012), we identify the distribution of various functionals related to occupation times of refracted spectrally negative L\'evy processes. For example, these results are used to compute the probability of bankruptcy and the probability of Parisian ruin in this model with restructuring.
    Date: 2013–06
  15. By: Trautman, Dawn E.; Jeffrey, Scott R.; Unterschultz, James R.
    Abstract: This paper examines the effect of Canadian agricultural business risk management (BRM) programs on farm financial performance. Monte Carlo simulation is used to model stochastic prices and production for a representative Alberta cropping operation. Net present value (NPV) analysis is used to evaluate BRM program participation. Participation is modeled for AgriInvest, AgriStability, and AgriInsurance. Adoption of select BMPs is also modeled to examine the impact of BRM programs on incentives to adopt environmental stewardship practices. Results indicate that BRM program participation significantly improves farm financial performance with a corresponding reduction in risk. Much of the benefit from participation comes from subsidization associated with the programs. While recent changes to BRM programs result in reduced support, the impact on representative farm performance is small. BRM program participation reinforces incentives to adopt BMPs that already have positive net benefits (e.g., crop rotation BMPs) and increases the magnitude of disincentives (i.e., net costs) associated with adoption of land use BMPs such as wetland restoration or buffer strips. The results from this analysis raise questions related to both risk management and environmental policy in terms of policy effectiveness, efficiency and compatibility.
    Keywords: risk management, Monte Carlo simulation, environmental stewardship, Crop Production/Industries, Farm Management, Land Economics/Use, Production Economics, Risk and Uncertainty, C15, Q12, Q15, Q18, Q28,
    Date: 2013

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