nep-rmg New Economics Papers
on Risk Management
Issue of 2013‒07‒05
eight papers chosen by
Stan Miles
Thompson Rivers University

  1. Moderate deviations for importance sampling estimators of risk measures By Pierre Nyquist
  2. A global urban risk index By Brecht, Henrike; Deichmann, Uwe; Wang, Hyoung Gun
  3. Risk Without Return By Lisa R. Goldberg; Ola Mahmoud
  4. Portfolio Optimization in R By M. Andrecut
  5. Managing the Agricultural Revenue Risk in Brazil: Implications for Developing a Crop Insurance Program By Ozaki, Vitor Augusto; Adami, Andreia Cristina de Oliveira
  6. Debt dilution and sovereign default risk By Leonardo Martinez; Cesar Sosa Padilla; Juan Hatchondo
  7. The Meaning of Probability of Default for Asset-backed Loans By David Chisholm; Graham Andersen
  8. Spatio-Temporal Modeling of Lightning Fires on Forestland: A Compensation Scheme By Chen, Xuan; Goodwin, Barry K.

  1. By: Pierre Nyquist
    Abstract: Importance sampling has become an important tool for the computation of tail-based risk measures. Since such quantities are often determined mainly by rare events standard Monte Carlo can be inefficient and importance sampling provides a way to speed up computations. This paper considers moderate deviations for the weighted empirical process, the process analogue of the weighted empirical measure, arising in importance sampling. The moderate deviation principle is established as an extension of existing results. Using a delta method for large deviations established by Gao and Zhao (Ann. Statist., 2011) together with classical large deviation techniques, the moderate deviation principle for the weighted empirical process is extended to functionals of the weighted empirical process which correspond to risk measures. The main results are moderate deviation principles for importance sampling estimators of the quantile function of a distribution and Expected Shortfall.
    Date: 2013–06
  2. By: Brecht, Henrike; Deichmann, Uwe; Wang, Hyoung Gun
    Abstract: Which cities have the highest risk of human and economic losses due to natural hazards? And how will urban exposure to major hazards change over the coming decades? This paper develops a global urban disaster risk index that evaluates the mortality and economic risks from disasters in 1,943 cities in developing countries. Concentrations of population, infrastructure, and economic activities in cities contribute to increased exposure and susceptibility to natural hazards. The three components of this risk measure are urban hazard characteristics, exposure, and vulnerability. For earthquakes, cyclones, floods, and landslides, single hazard risk indices are developed. In addition, a multi-hazard index gives a holistic picture of current city risk. Demographic-economic projection of city population growth to 2050 suggests that exposure to earthquake and cyclone risk in developing country cities will more than double from today's levels. Global urban risk analysis, as presented in this paper, can inform the prioritization of resources for disaster risk management and urban planning and promote the shift toward managing risks rather than emergencies.
    Keywords: Population Policies,Hazard Risk Management,Food&Beverage Industry,Natural Disasters,Insurance&Risk Mitigation
    Date: 2013–06–01
  3. By: Lisa R. Goldberg; Ola Mahmoud
    Abstract: Risk-only investment strategies have been growing in popularity as traditional in- vestment strategies have fallen short of return targets over the last decade. However, risk-based investors should be aware of four things. First, theoretical considerations and empirical studies show that apparently dictinct risk-based investment strategies are manifestations of a single effect. Second, turnover and associated transaction costs can be a substantial drag on return. Third, capital diversification benefits may be reduced. Fourth, there is an apparent connection between performance and risk diversification. To analyze risk diversification benefits in a consistent way, we introduce the Risk Diversification Index (RDI) which measures risk concentrations and complements the Herfindahl-Herschman Index (HHI) for capital concentrations.
    Date: 2013–06
  4. By: M. Andrecut
    Abstract: We consider the problem of finding the efficient frontier associated with the risk-return portfolio optimization model. We derive the analytical expression of the efficient frontier for a portfolio of $N$ risky assets, and for the case when a risk-free asset is added to the model. Also, we provide an R implementation, and we discuss in detail a numerical example of a portfolio of several risky common stocks.
    Date: 2013–07
  5. By: Ozaki, Vitor Augusto; Adami, Andreia Cristina de Oliveira
    Abstract: Since 2003 crop insurance programs became the focus of agricultural policy in Brazil. Given the increasing interest in insurance, accurate calculation of premium values is of great importance. We address the issue of the revenue distribution at the farm-level and its implication to the Brazilian crop insurance contract. We estimate the probability of loss by using the Skew-normal distribution of revenue in the West of Parana (South of Brazil). Results show that insurers (empirical) rates tend to underestimate the risk in the lower coverage levels (50% and 60%). At the level of 70% of coverage the Empirical Rate and the Skew-Normal Rate are similar on average.
    Keywords: revenue insurance, premium rate, skew-normal distribution, agricultural policy, Agricultural and Food Policy, Risk and Uncertainty,
    Date: 2013
  6. By: Leonardo Martinez (International Monetary Fund); Cesar Sosa Padilla (University of Maryland); Juan Hatchondo (Federal Reserve Bank of Richmond)
    Abstract: We measure the effects of debt dilution on sovereign default risk and show how these effects can be mitigated with debt contracts promising borrowing-contingent payments. First, we calibrate a baseline model `a la Eaton and Gersovitz (1981) to match features of the data. In this model, bondsâ values can be diluted. Second, we present a model in which sovereign bonds contain a covenant promising that after each time the government borrows it it pays to the holder of each bond issued in previous periods the difference between the bond market price that would have been observed absent current-period borrowing and the observed market price. This covenant eliminates debt dilution by making the value of each bond independent from future borrowing decisions. We quantify the effects of dilution by comparing the simulations of the model with and without borrowing-contingent payments. We find that dilution accounts for 84% of the default risk in the baseline economy. Similar default risk reductions can be obtained with borrowing-contingent payments that depend only on the bond market price. Using borrowing-contingent payments is welfare enhancing because it reduces the frequency of default episodes.
    Date: 2012
  7. By: David Chisholm; Graham Andersen
    Abstract: The authors examine the concept of probability of default for asset-backed loans. In contrast to unsecured loans it is shown that probability of default can be defined as either a measure of the likelihood of the borrower failing to make required payments, or as the likelihood of an insufficiency of collateral value on foreclosure. Assuming expected loss is identical under either definition, this implies a corresponding pair of definitions for loss given default. Industry treatment of probability of default for asset-backed loans appears to inconsistently blend the two types of definition. The authors develop a mathematical treatment of asset-backed loans which consistently applies each type of definition in a framework to produce the same expected loss and allows translation between the two frameworks.
    Date: 2013–06
  8. By: Chen, Xuan; Goodwin, Barry K.
    Abstract: In the US forestry industry, wildre has always been one of the leading causes of damage. This topic is of growing interest as wildre has caused huge losses in recent years. Among all causes, lightning has always been the leading hazard. Unlike human related wildres for which timber owners may be able to trace the responsible persons to claim losses, forestland owners essentially have no means to recover their losses against lightning{induced wildre. In light of the fact that there are very few risk management instruments available to compensate timber losses. Following this line of inquiry, our paper studies risks of lightning induced wildre, conditioning on crucial informational variables, across both spatial units and time periods. A non{parametric bootstrapping method is used to quantify the risks. Some relevant observable variables, such as environment and climate factors, are found to be statistically signicant factors related to wildre risks. A group index insurance scheme has been proposed and its associated actuarially fair premium rates have been estimated. Implications for wildre management policies are also discussed.
    Keywords: lightning re, index insurance, spatio-temporal correlation, Land Economics/Use, Risk and Uncertainty,
    Date: 2013

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