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on Risk Management |
| By: | Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Christophe Pérignon (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959) |
| Abstract: | We identify a potential bias in the methodology disclosed in July 2013 by the Basel Committee on Banking Supervision (BCBS) for identifying systemically important financial banks. Contrary to the original objective, the relative importance of the five categories of risk importance (size, cross-jurisdictional activity, interconnectedness, substitutability/financial institution infrastructure, and complexity) may not be equal and the resulting systemic risk scores are mechanically dominated by the most volatile categories. In practice, this bias proved to be serious enough that the substitutability category had to be capped by the BCBS. We show that the bias can be removed by simply standardizing each input prior to computing the systemic risk scores. |
| Keywords: | Systemic risk ; score ; G-SIFIs |
| Date: | 2013–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00867063&r=rmg |
| By: | Chamorro Elosua, Arritokieta; Usategui Díaz de Otalora, José María |
| Abstract: | In this work we clarify the relationships between riskiness, risk acceptance and bankruptcy avoidance. We distinguish between the restriction on the current wealth required to make a gamble acceptable to the decision maker and the restriction on the current wealth required to guarantee no bankruptcy if a gamble is accepted. We focus on the measure of riskiness proposed by Foster and Hart. |
| Keywords: | riskiness measure, objective measures, risk acceptance |
| JEL: | G11 G32 G33 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:dfaeii:10739&r=rmg |
| By: | Ladislav Kristoufek |
| Abstract: | Portfolio diversification and active risk management are essential parts of financial analysis which became even more crucial (and questioned) during and after the years of the Global Financial Crisis. We propose a novel approach to portfolio diversification using the information of searched items on Google Trends. The diversification is based on an idea that popularity of a stock measured by search queries is correlated with the stock riskiness. We penalize the popular stocks by assigning them lower portfolio weights and we bring forward the less popular, or peripheral, stocks to decrease the total riskiness of the portfolio. Our results indicate that such strategy dominates both the benchmark index and the uniformly weighted portfolio both in-sample and out-of-sample. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1310.1444&r=rmg |
| By: | Peter J. Morgan (Asian Development Bank Institute (ADBI)); Victor Pontines |
| Abstract: | The purpose of this study is to better understand the likely impact on Asian economies and financial institutions of various recent global financial reforms, including Basel III capital adequacy and liquidity rules. Part one reviews the lessons of the global financial crisis (GFC) of 2007–09 and their relevance for Asian economies. Part two describes the major regulatory reforms that have been announced and possible concerns about their impacts on emerging economies. Part three reviews the literature aimed at quantifying the impacts of Basel III capital adequacy rules. Part four develops our methodology and analysis of the quantitative impact of Basel III capital adequacy rules on a panel of Southeast Asian financial institutions with emphasis on the effect on economic growth. Finally, the study concludes with a discussion on the policy implications of the results obtained from the previous section for Asian financial sectors and economies. Overall, we find that the Basel III capital adequacy rules are likely to have limited impacts on economic growth in Asia, but other financial regulations, including liquidity standards and rules for over-the-counter (OTC) derivatives, could have stunting effects on financial development in the region. |
| Keywords: | Financial Reform, global financial crisis, Basel III, regulatory reform, Capital Adequacy Ratio, Asian economies, Southeast Asian, financaial institutions |
| JEL: | E17 G01 G18 G21 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:23637&r=rmg |
| By: | Alessandra Cillo; Philippe Delquié |
| Abstract: | We study a Mean-Risk model derived from a behavioral theory of Disappointment with multiple reference points. One distinguishing feature of the risk measure is that it is based on mutual deviations of outcomes, not deviations from a specific target. We prove necessary and sufficient conditions for strict first and second order stochastic dominance, and show that the model is, in addition, a Convex Risk Measure. The model allows for richer, and behaviorally more plausible, risk preference patterns than competing models with equal degrees of freedom, including Expected Utility (EU), Mean-Variance (MV), Mean-Gini (MG), and models based on non-additive probability weighting, such a Dual Theory (DT). For example, in asset allocation, the decision-maker can abstain from diversifying in a risky asset unless it meets a threshold performance, and gradually invest beyond this threshold, which appears more acceptable than the extreme solutions provided by either EU and MV (always diversify) or DT and MG (always plunge). In asset trading, the model allows no-trade intervals, like DT and MG, in some, but not all, situations. An illustrative application to portfolio selection is presented. The model can provide an improved criterion for Mean-Risk analysis by injecting a new level of behavioral realism and flexibility, while maintaining key normative properties. Key words: Risk analysis; Uncertainty modeling; Utility theory; Stochastic dominance; Convex risk measures |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:498&r=rmg |
| By: | Kent Smetters; Xingtan Zhang |
| Abstract: | While the Sharpe ratio is still the dominant measure for ranking risky assets, a substantial effort has been made over the past three decades to find a way to account for non-Normally distributed risks. This paper derives a generalized ranking measure which, under a regularity condition, correctly ranks risks relative to the original investor problem for a broad probability space. Moreover, like the Sharpe ratio, the generalized measure maintains wealth separation for the broad HARA utility class. Besides being effective in the presence of “fat tails,” the generalized measure is also a foundation for multi-asset class portfolio optimization due to its ability to pairwise rank two risks following two different probability distributions. This paper also explores the theoretical foundations of risk ranking, including proving a key impossibility theorem: any ranking measure that is valid for non-Normal distributions cannot generically be free from investor preferences. Finally, this paper shows that the generalized ratio provides substantially more ranking power than simpler approximation measures that have sometimes been used in the past to account for non-Normal higher moments, even if those approximations are extended to include an infinite number of higher moments. |
| JEL: | G11 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19500&r=rmg |
| By: | Julie Rozenberg (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales [EHESS] - École des Ponts ParisTech (ENPC) - AgroParisTech); Stéphane Hallegatte (METEO-FRANCE - Météo-France - Météo France); Adrien Vogt-Schilb (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales [EHESS] - École des Ponts ParisTech (ENPC) - AgroParisTech); Olivier Sassi (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales [EHESS] - École des Ponts ParisTech (ENPC) - AgroParisTech); Céline Guivarch (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales [EHESS] - École des Ponts ParisTech (ENPC) - AgroParisTech); Henri Waisman (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales [EHESS] - École des Ponts ParisTech (ENPC) - AgroParisTech); Jean-Charles Hourcade (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales [EHESS] - École des Ponts ParisTech (ENPC) - AgroParisTech) |
| Abstract: | Despite the inextricable link between oil scarcity and climate change, the interplay between these two issues is paradoxically an underworked area. This article uses a global energy-economy model to address the link between future oil supply and climate change and assesses in a common framework both the costs of climate policies and oil scarcity. It shows that, in the context of a limited and uncertain amount of ultimately recoverable oil resources, climate policies reduce the world vulnerability to peak oil. Climate policies, therefore, appear as a hedging strategy against the uncertainty on oil resources, in addition to their main aim of avoiding dangerous climate change. This co-benefit is estimated at the net present value of US$11,500 billion. Eventually, reducing the risk of future economic losses due to oil scarcity may appear as a significant side-benefit of climate policies to many decision-makers. |
| Date: | 2013–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00866449&r=rmg |
| By: | Ajay Singh; Dinghai Xu |
| Abstract: | In this paper, we apply tools from the random matrix theory (RMT) to estimates of correlations across volatility of various assets in the S&P 500. The volatility inputs are estimated by modeling price fluctuations as GARCH(1,1) process. The corresponding correlation matrix is constructed. It is found that the distribution of a significant number of eigenvalues of the volatility correlation matrix matches with the analytical result from the RMT. Furthermore, the empirical estimates of short and long-range correlations among eigenvalues, which are within the RMT bounds, match with the analytical results for Gaussian Orthogonal ensemble (GOE) of the RMT. To understand the information content of the largest eigenvectors, we estimate the contribution of GICS industry groups in each eigenvector. In comparison with eigenvectors of correlation matrix for price fluctuations, only few of the largest eigenvectors of volatility correlation matrix are dominated by a single industry group. We also study correlations among `volatility return' and get similar results. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1310.1601&r=rmg |
| By: | Larry G. Epstein (Department of Economics, Boston University); Emmanuel Farhi; Tomasz Strzaleck |
| Abstract: | Though risk aversion and the elasticity of intertemporal substitution have been the subjects of careful scrutiny when calibrating preferences, the long-run risks literature as well as the broader literature using recursive utility to address asset pricing puzzles have ignored the full implications of their parameter specica- tions. Recursive utility implies that the temporal resolution of risk matters and a quantitative assessment of how much it matters should be part of the calibration process. This paper gives a sense of the magnitudes of implied timing premia. Its objective is to inject temporal resolution of risk into the discussion of the quantitative properties of long-run risks and related models. |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2013-002&r=rmg |