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on Risk Management |
| By: | Thilo A. Schmitt; Desislava Chetalova; Rudi Sch\"afer; Thomas Guhr |
| Abstract: | The instability of the financial system as experienced in recent years and in previous periods is often linked to credit defaults, i.e., to the failure of obligors to make promised payments. Given the large number of credit contracts, this problem is amenable to be treated with approaches developed in statistical physics. We introduce the idea of ensemble averaging and thereby uncover generic features of credit risk. We then show that the often advertised concept of diversification, i.e., reducing the risk by distributing it, is deeply flawed when it comes to credit risk. The risk of extreme losses remain due to the ever present correlations, implying a substantial and persistent intrinsic danger to the financial system. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1309.5245&r=rmg |
| By: | Simon Gilchrist; Egon Zakrajsek |
| Abstract: | Estimating the effect of Federal Reserve's announcements of Large-Scale Asset Purchase (LSAP) programs on corporate credit risk is complicated by the simultaneity of policy decisions and movements in prices of risky financial assets, as well as by the fact that both interest rates of assets targeted by the programs and indicators of credit risk reacted to other common shocks during the recent financial crisis. This paper employs a heteroskedasticity-based approach to estimate the structural coefficient measuring the sensitivity of market-based indicators of corporate credit risk to declines in the benchmark market interest rates prompted by the LSAP announcements. The results indicate that the LSAP announcements led to a significant reduction in the cost of insuring against default risk--as measured by the CDX indexes--for both investment- and speculative-grade corporate credits. While the unconventional policy measures employed by the Federal Reserve to stimulate the economy have substantially lowered the overall level of credit risk in the economy, the LSAP announcements appear to have had no measurable effect on credit risk in the financial intermediary sector. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-56&r=rmg |
| By: | Rama Cont (Laboratoire de Probabilités et Modèles Aléatoires CNRS); Lakshithe Wagalath (IESEG School of Management) |
| Abstract: | We propose a tractable framework for quantifying the impact of fire sales on the volatility and correlations of asset returns in a multi-asset setting. Our results enable to quantify the impact of fire sales on the covariance structure of asset returns and provide a quantitative explanation for spikes in volatility and correlations observed during liquidation of large portfolios. These results allow to test for the presence of fire sales during a given period of time and to estimate the impact and magnitude of fire sales from observation of market prices: we give conditions for the identifiability of model parameters from time series of asset prices, propose an estimator for the magnitude of fire sales in each asset class and study the consistency and large sample properties of the estimator. We illustrate our estimation methodology with two empirical examples: the hedge fund losses of August 2007 and the Great Deleveraging following the default of Lehman Brothers in Fall 2008. |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:f201301&r=rmg |
| By: | Ying Jiao; Olivier Klopfenstein; Peter Tankov |
| Abstract: | Motivated by the asset-liability management of a nuclear power plant operator, we consider the problem of finding the least expensive portfolio, which outperforms a given set of stochastic benchmarks. For a specified loss function, the expected shortfall with respect to each of the benchmarks weighted by this loss function must remain bounded by a given threshold. We consider different alternative formulations of this problem in a complete market setting, establish the relationship between these formulations, present a general resolution methodology via dynamic programming in a non-Markovian context and give explicit solutions in special cases. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1309.5094&r=rmg |
| By: | Luis Brandao-Marques; Ricardo Correa; Horacio Sapriza |
| Abstract: | Government support to banks through the provision of explicit or implicit guarantees affects the willingness of banks to take on risk by reducing market discipline or by increasing charter value. We use an international sample of rated banks and find that government support is associated with more risk taking by banks, especially prior and during the 2008-2009 financial crisis. We also find that restricting banks’ range of activities ameliorates the link between government support and bank risk taking. We conclude that strengthening market discipline by reducing bank complexity is needed to address this moral hazard problem |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1086&r=rmg |
| By: | Pierre Blanc; R\'emy Chicheportiche; Jean-Philippe Bouchaud |
| Abstract: | We decompose, within an ARCH framework, the daily volatility of stocks into overnight and intraday contributions. We find, as perhaps expected, that the overnight and intraday returns behave completely differently. For example, while past intraday returns affect equally the future intraday and overnight volatilities, past overnight returns have a weak effect on future intraday volatilities (except for the very next one) but impact substantially future overnight volatilities. The exogenous component of overnight volatilities is found to be close to zero, which means that the lion's share of overnight volatility comes from feedback effects. The residual kurtosis of returns is small for intraday returns but infinite for overnight returns. We provide a plausible interpretation for these findings, and show that our IntraDay/Overnight model significantly outperforms the standard ARCH framework based on daily returns for Out-of-Sample predictions. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1309.5806&r=rmg |
| By: | Peter Debbaut; Andra C. Ghent; Marianna Kudlyak |
| Abstract: | Young borrowers are the least experienced financially and, conventionally, thought to be most prone to financial mistakes. We study the relationship between age and financial problems related to credit cards. Our results challenge the notion that young borrowers are bad borrowers. We show that young borrowers are among the least likely to experience a serious credit card default. We then exploit the 2009 CARD Act to identify which individuals self-select into obtaining a credit card early in life. We find that individuals who choose early credit card use default less and are more likely to get a mortgage while young. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:13-09&r=rmg |