New Economics Papers
on Risk Management
Issue of 2013‒09‒26
ten papers chosen by

  1. Colombia: Financial System Stability Assessment By International Monetary Fund. Monetary and Capital Markets Department
  2. Input-Output-based Measures of Systemic Importance By Aldasoro, Iñaki; Angeloni, Ignazio
  3. The Manipulation of Basel Risk-Weights By Mariathasan, Mike; Merrouche, Ouarda
  4. The Bahamas: Financial Sector Stability Assessment By International Monetary Fund. Western Hemisphere Dept.
  5. Financial Interconnectedness and Financial Sector Reforms in the Caribbean By Sumiko Ogawa; Joonkyu Park; Diva Singh; Nita Thacker
  6. Nigeria: Financial Sector Stability Assessment By International Monetary Fund. African Dept.
  7. A semi-APARCH approach for comparing long-term and short-term risk in Chinese financial market and in mature financial markets By Yuanhua Feng; Lixin Sun
  8. On lower and upper bounds for Asian-type options: a unified approach By Alexander Novikov; Nino Kordzakhia
  9. Testing for Multiple Bubbles: Historical Episodes of Exuberance and Collapse in the S&P 500 By Peter C.B. Phillips; Shu-Ping Shi; Jun Yu
  10. Modeling the Volatility of the Dow Jones Islamic Market World Index Using a Fractionally Integrated Time Varying GARCH (FITVGARCH) Model By Adnen Ben Nasr; Ahdi N. Ajmi; Rangan Gupta

  1. By: International Monetary Fund. Monetary and Capital Markets Department
    Keywords: Financial system stability assessment;Financial sector;Banks;Bank supervision;Basel Core Principles;Stress testing;Liquidity management;Bank resolution;Insurance supervision;Capital markets;Pensions;Financial stability;Risk management;Colombia;
    Date: 2013–02–22
  2. By: Aldasoro, Iñaki; Angeloni, Ignazio
    Abstract: The analyses of intersectoral linkages of Leontief (1941)and Hirschman (1958) provide a natural way to study the transmission of risk among interconnected banks and to measure their systemic importance. In this paper we show how classic input-output analysis can be applied to banking and how to derive six indicators that capture different aspects of systemic importance, using a simple numerical example for illustration. We also discuss the relationship with other approaches, most notably network centrality measures, both formally and by means of a simulated network.
    Keywords: banks, input-output, systemic risk, too-interconnected-to fail, networks, interbank markets
    JEL: C67 G00 G01 G20
    Date: 2013–08
  3. By: Mariathasan, Mike; Merrouche, Ouarda
    Abstract: In this paper, we examine the relationship between banks’ approval for the internal ratings-based (IRB) approaches of Basel II and the ratio of risk-weighted over total assets. Analysing a panel of 115 banks from 21 OECD countries that were eventually approved for applying the IRB to their credit portfolio, we find that risk-weight density is lower once regulatory approval is granted. The effect persists when we control for different loan categories, and we provide evidence showing that it cannot be explained by flawed modelling, or improved risk-measurement alone. Consistent with theories of risk-weight manipulation, we find the decline in risk-weights to be particularly prevalent among weakly capitalised banks, when the legal framework for supervision is weak, and in countries where supervisors are overseeing many IRB banks. We conclude that part of the decline in reported riskiness under the IRB results from banks’ strategic risk-modelling.
    Keywords: Basel II; capital regulation; internal ratings-based approach
    JEL: G20 G21 G28
    Date: 2013–05
  4. By: International Monetary Fund. Western Hemisphere Dept.
    Keywords: Financial sector;Banks;Bank supervision;Basel Core Principles;Financial safety nets;Deposit insurance;Risk management;Insurance;Capital markets;Pension funds;Payment systems;Financial system stability assessment;Bahamas, The;
    Date: 2013–04–11
  5. By: Sumiko Ogawa; Joonkyu Park; Diva Singh; Nita Thacker
    Abstract: Financial sector linkages have increased continuously in the Caribbean with cross border capital flows and financial conglomerates dominating the financial system. While the greater interconnectedness can heighten systemic risks and likelihood of contagion, it can have positive impacts provided the regional authorities take steps to prevent the systemic risk. In this context, financial sector reform measures aimed at bolstering and harmonizing prudential regulations in line with international best practices, the strengthening and enhancement of financial sector supervision to include cross border linkages through consolidated supervision, increased cooperation across supervisors in the region, and the establishment of deposit insurance and crisis resolution frameworks will be critical to maintain financial sector stability and minimize the repercussions of any negative shocks.
    Keywords: Financial sector;Caribbean;Economic integration;Banks;Nonbank financial sector;Credit risk;Bank supervision;Bank reforms;Financial soundness indicators;financial interconnectedness, financial sector in the Caribbean region, regulatory and supervision system
    Date: 2013–07–31
  6. By: International Monetary Fund. African Dept.
    Keywords: Financial sector;Banks;Islamic banking;Stress testing;Liquidity management;Bank supervision;Deposit insurance;Risk management;Payment systems;Anti-money laundering;Combating the financing of terrorism;Financial system stability assessment;Reports on the Observance of Standards and Codes;Nigeria;
    Date: 2013–05–28
  7. By: Yuanhua Feng (University of Paderborn); Lixin Sun (Shandong University)
    Abstract: The aim of this paper is to analyze the long-term and short-term risk components in Chinese financial market and to compare them with those in mature financial markets. For this purpose a most recently proposed Semi-APARCH is applied to the Shanghai Index and the Shenzhen Index, and four financial indexes in mature markets. A few important empirical findings are achieved. Firstly, the current long-term risk in Chinese financial market is stable and at a low level. Secondly, the dependence level between long-term risk in Chinese financial market and that in mature financial market is not high. Thirdly, the short-term risk in Chinese financial market differs to that in a mature financial market at least in two ways: 1) The leverage effect in Chinese financial market is much lower than that in a mature financial market. 2) The innovations in Chinese financial returns is nearly heavy-tailed distributed. This is however not the case in a mature market.
    Keywords: Chinese financial market, mature financial markets, long-term risk, short-term risk, semiparametric APARCH
    JEL: C14 G10
    Date: 2013–12
  8. By: Alexander Novikov; Nino Kordzakhia
    Abstract: In the context of dealing with financial risk management problems it is desirable to have accurate bounds for option prices in situations when pricing formulae do not exist in the closed form. A unified approach for obtaining upper and lower bounds for Asian-type options, including options on VWAP, is proposed in this paper. The bounds obtained are applicable to the continuous and discrete-time frameworks for the case of time-dependent interest rates. Numerical examples are provided to illustrate the accuracy of the bounds.
    Date: 2013–09
  9. By: Peter C.B. Phillips (Cowles Foundation, Yale University); Shu-Ping Shi (Australian National University); Jun Yu (Singapore Management University)
    Abstract: Recent work on econometric detection mechanisms has shown the effectiveness of recursive procedures in identifying and dating financial bubbles. These procedures are useful as warning alerts in surveillance strategies conducted by central banks and fiscal regulators with real time data. Use of these methods over long historical periods presents a more serious econometric challenge due to the complexity of the nonlinear structure and break mechanisms that are inherent in multiple bubble phenomena within the same sample period. To meet this challenge the present paper develops a new recursive flexible window method that is better suited for practical implementation with long historical time series. The method is a generalized version of the sup ADF test of Phillips, Wu and Yu (2011, PWY) and delivers a consistent date-stamping strategy for the origination and termination of multiple bubbles. Simulations show that the test significantly improves discriminatory power and leads to distinct power gains when multiple bubbles occur. An empirical application of the methodology is conducted on S&P 500 stock market data over a long historical period from January 1871 to December 2010. The new approach successfully identifies the well-known historical episodes of exuberance and collapse over this period, whereas the strategy of PWY and a related CUSUM dating procedure locate far fewer episodes in the same sample range.
    Keywords: Date-stamping strategy, Flexible window, Generalized sup ADF test, Multiple bubbles, Rational bubble, Periodically collapsing bubbles, Sup ADF test
    JEL: C15 C22
    Date: 2013–09
  10. By: Adnen Ben Nasr (Laboratoire BESTMOD, ISG de Tunis, Universite de Tunis, Tunisia.); Ahdi N. Ajmi (College of Science and Humanities in Slayel, Salman bin Abdulaziz University, Kingdom of Saudi Arabia); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: Appropriate modeling of the process of volatility has implications for portfolio selection, the pricing of derivative securities and risk management. Further, a large body of research has suggested that both long memory and structural changes simultaneously characterize the structure of financial returns volatility. Given this, in this paper, we aim to model conditional volatility of the returns of the Dow Jones Islamic Market World Index (DJIM), interest on which has come to the fore following the need for renovation of the conventional financial system, in the wake of the recent global financial crisis. To model the conditional volatility of the DJIM returns, accounting for both long memory and structural changes, we allow the parameters in the conditional variance equation of the Fractionally Integrated Generalized Autoregressive Conditional Heteroskedasticity (FIGARCH) model to be time dependent, such that the parameters evolve smoothly over time based on a logistic smooth transition function, yielding a Fractionally Integrated Time Varying Generalized Autoregressive Conditional Heteroskedasticity (FITVGARCH) model. Our results show that, in terms of model diagnostics and information criteria, the FITVGARCH model performs better than the FIGARCH model in explaining conditional volatility of the DJIM returns, thus, highlighting the need to model simultaneously long-memory and structural changes in the volatility process of asset returns.
    Keywords: Volatility modeling, Long memory, Structural changes, Model specification
    Date: 2013–09

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