|
on Risk Management |
|
Issue of 2013‒10‒05
eight papers chosen by |
| By: | Florian Hett (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany); Alexander Schmidt (Goethe University Frankfurt and GSEFM, Germany) |
| Abstract: | We show that market discipline, defined as the extent to which frm specific risk characteristics are reflected in market prices, eroded during the recent financial crisis in 2008. We design a novel test of changes in market discipline based on the relation between firm specific risk characteristics and debt-to-equity hedge ratios. We find that market discipline already weakened after the rescue of Bear Stearns before disappear- ing almost entirely after the failure of Lehman Brothers. The effect is stronger for investment banks and large financial institutions, while there is no comparable effect for non-financial firms. |
| Keywords: | Bailout, Implicit Guarantees, Too-Big-To-Fail, Market Discipline |
| JEL: | G14 G21 G28 H81 |
| Date: | 2013–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:jgu:wpaper:1305&r=rmg |
| By: | Peter C. B. Phillips (Yale University); Shu-Ping Shi (The Australian National University); Jun Yu (Sim Kee Boon Institute for Financial Economics, Singapore Management University) |
| Abstract: | Recent work on econometric detection mechanisms has shown the e¤ectiveness of recur- sive procedures in identifying and dating ?nancial bubbles. These procedures are useful as warning alerts in surveillance strategies conducted by central banks and ?scal 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 mecha- nisms that are inherent in multiple bubble phenomena within the same sample period. To meet this challenge the present paper develops a new recursive ?exible 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 de- livers a consistent date-stamping strategy for the origination and termination of multiple bubbles. Simulations show that the test signi?cantly 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 identi?es 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: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:skb:wpaper:cofie-03-2013&r=rmg |
| By: | Nicolas Arregui; Mohamed Norat; Mohamed; Antonio; Jodi G.; Eija; Fabiana; Jay; Christopher; Rodolfo; Mamoru |
| Abstract: | This paper reviews tools used to identify and measure interconnectedness and raises the awareness of policymakers as to potential cross-sectional implications of prudential tools aimed at controlling interconnectedness. The paper examines two sets of tools—developed at the IMF and externally—to identify the implications of interconnectedness in systemic risk and how these tools have been applied in IMF surveillance. The paper then proposes a preliminary framework to analyze some key internationally-agreed-upon and national prudential tools and finds that while many prudential tools are effective in reducing interconnectedness, the interaction among these tools is far less clear cut. |
| Date: | 2013–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/199&r=rmg |
| By: | Christoffer Kok; Mattia Montagna |
| Abstract: | In this paper, we develop an agent-based multi-layered interbank network model based on a sample of large EU banks. The model allows for taking a more holistic approach to interbank contagion than is standard in the literature. A key finding of the paper is that there are non-negligible non-linearities in the propagation of shocks to individual banks when taking into account that banks are related to each other in various market segments. In a nutshell, the contagion effects when considering the shock propagation simultaneously across multiple layers of interbank networks can be substantially larger than the sum of the contagion-induced losses when considering the network layers individually. In addition, a bank “systemic importance” measure based on the multi-layered network model is developed and is shown to outperform standard network centrality indicators |
| Keywords: | Financial Contagion, interbank market, Network theory |
| JEL: | C45 C63 D85 G21 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1873&r=rmg |
| By: | Stefano De Marco; Caroline Hillairet; Antoine Jacquier |
| Abstract: | We study the shapes of the implied volatility when the underlying distribution has an atom at zero. We show that the behaviour at small strikes is uniquely determined by the mass of the atom at least up to the third asymptotic order, regardless of the properties of the remaining (absolutely continuous, or singular) distribution on the positive real line. We investigate the structural difference with the no-mass-at-zero case, showing how one can-a priori-distinguish between mass at the origin and a heavy-left-tailed distribution. An atom at zero is found in stochastic models with absorption at the boundary, such as the CEV process, and can be used to model default events, as in the class of jump-to-default structural models of credit risk. We numerically test our model-free result in such examples. Note that while Lee's moment formula tells that implied variance is \emph{at most} asymptotically linear in log-strike, other celebrated results for exact smile asymptotics such as Benaim and Friz (09) or Gulisashvili (10) do not apply in this setting-essentially due to the breakdown of Put-Call symmetry-and we rely here on an alternative treatment of the problem. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1310.1020&r=rmg |
| By: | Davide Furceri; Aleksandra Zdzienicka |
| Abstract: | The aim of this paper is to assess the effectiveness of risk sharing mechanisms in the euro area and whether a supranational fiscal risk sharing mechanism could insure countries against very severe downturns. Using an unbalanced panel of 15 euro area countries over the period 1979-2010, the results of the paper show that: (i) the effectiveness of risk sharing mechanisms in the euro area is significantly lower than in existing federations (such as the U.S. and Germany) and (ii) it falls sharply in severe downturns just when it is needed most; (iii) a supranational fiscal stabilization mechanism, financed by a relatively small contribution, would be able to fully insure euro area countries against very severe, persistent and unanticipated downturns. |
| Date: | 2013–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/198&r=rmg |
| By: | Paraschiv, Florentina |
| Abstract: | With the liberalization of global power markets, modeling of exchange traded electricity contracts has attracted significantly the attention of both academic and industry. In this paper we offer an overview of the most common deseasonalization techniques and modeling approaches in the literature. We extract the deterministic component of EEX Phelix hourly electricity prices and we discuss different financial and time series models for their stochastic component. Additionally, we apply Extreme Value Theory (EVT) to investigate the tails of the price changes distribution. Generally our results suggest EVT to be of interest to both risk managers and portfolio managers in the highly volatile electricity markets. |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:usg:sfwpfi:2013:14&r=rmg |
| By: | Patrick Bolton; Xavier Freixas; Leonardo Gambacorta; Paolo Emilio Mistrulli |
| Abstract: | We study how relationship lending and transaction lending vary over the business cycle. We develop a model in which relationship banks gather information on their borrowers, which allows them to provide loans for profitable firms during a crisis. Due to the services they provide, operating costs of relationship-banks are higher than those of transaction-banks. In our model, where relationship-banks compete with transaction-banks, a key result is that relationship- banks charge a higher intermediation spread in normal times, but offer continuation-lending at more favorable terms than transaction banks to profitable firms in a crisis. Using detailed credit register information for Italian banks before and after the Lehman Brothers' default, we are able to study how relationship and transaction-banks responded to the crisis and we test existing theories of relationship banking. Our empirical analysis confirms the basic prediction of the model that relationship banks charged a higher spread before the crisis, offered more favorable continuation-lending terms in response to the crisis, and suffered fewer defaults, thus confirming the informational advantage of relationship banking. |
| Keywords: | Relationship Banking, Transaction Banking, Crisis |
| JEL: | E44 G21 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1385&r=rmg |