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on Risk Management |
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Issue of 2013‒10‒18
seventeen papers chosen by |
| By: | Wolf, Christopher; Bozic, Marin; Newton, John; Thraen, Cameron |
| Keywords: | dairy policy, hedging, margin protection, risk management, Agricultural and Food Policy, Farm Management, Risk and Uncertainty, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaeaci:156713&r=rmg |
| By: | Stéphane Loisel (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429); Julien Trufin (Ecole d'Actuariat - Université Laval) |
| Abstract: | This paper studies a new risk measure derived from the expected area in red introduced in Loisel (2005). Specifically, we derive various properties of a risk measure defined as the smallest initial capital needed to ensure that the expected time-integrated negative part of the risk process on a fixed time interval [0; T] (T can be infinite) is less than a given predetermined risk limit. We also investigate the optimal risk limit allocation: given a risk limit set at company level for the sum of the expected areas in red of all lines, we determine the way(s) to allocate this risk limit to the subsequent business lines in order to minimize the overall capital needs. |
| Keywords: | Ruin probability; risk measure; expected area in red; stochastic ordering; risk limit |
| Date: | 2013–10–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00870224&r=rmg |
| By: | Lucia Esposito (Bank of Italy); Andrea Nobili (Bank of Italy); Tiziano Ropele (Bank of Italy) |
| Abstract: | Changes in interest rates constitute a major source of risk for banks’ business activity and can diversely affect their financial conditions and performance. We use a unique dataset to analyse Italian banks’ exposure to interest rate risk during the crisis, relying on the standardized duration gap approach proposed by the Basel Committee. We provide evidence that banks managed their overall interest rate risk exposure by means of on-balance-sheet restructuring complemented by hedging with financial derivatives. But the complementary relationship between risk-management decisions differs significantly across banks. The different impact of a future increase in interest rates on banks’ economic value will be a matter of concern for policymakers when they return to a less accommodative monetary policy stance. |
| Keywords: | interest rate risk, derivatives, hedging, financial crisis |
| JEL: | E43 G21 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_933_13&r=rmg |
| By: | Kiema, Ilkka (University of Helsinki); Jokivuolle, Esa (Bank of Finland Research) |
| Abstract: | The aim of the Internal Ratings Based Approach (IRBA) of Basel II was that capital suffices for unexpected losses with at least a 99.9% probability. However, because only a fraction of the required regulatory capital (a quarter to a half) had to be loss absorbing capital, the actual solvency probabilities may have been much lower, as the global financial crisis illustrates. Our estimates suggest that under Basel II IRBA the loss-absorbing capital of an average-quality portfolio bank suffices for unexpected losses with a 95%-99% probability. This translates into an expected bank failure rate as high as once in twenty years. Even if the bank's interest income is incorporated into our model, the expected failure rate is still substantial. We show that the expected failure rate increases with loan portfolio riskiness. Our calculations may be viewed as a measure of regulatory "self-delusion" included in Basel II capital requirements. |
| Keywords: | capital requirements; IRBA; Basel II; financial crisis |
| JEL: | G21 G28 |
| Date: | 2013–10–09 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2013_025&r=rmg |
| By: | Eric Dor (IESEG School of Management (LEM-CNRS)) |
| Abstract: | This paper computes the total recapitalization needs of the banking sector of each European country in case of a new systemic financial crisis. These estimations are based on the estimated capital shortages of big individual banks published by the Volatility Laboratory of New York University Stern Business School and the Center for Risk Management of Lausanne. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:e201319&r=rmg |
| By: | Giulio PALOMBA (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali); Luca RICCETTI (Universir… La Sapienza, Roma) |
| Abstract: | It is well known that investors usually assign part of their funds to asset managers who are given the task of beating a benchmark portfolio. On the other hand, the risk management office could impose some restrictions to the asset managers' activity in order to mantain the overall portfolio risk under control. This situation could lead managers to select non efficient portfolios in the total return and absolute risk perspective. In this paper we focus on portfolio efficiency when a tracking error volatility (TEV) constraint holds. First, we define the TEV Constrained-Efficient Frontier (ECTF), a set of TEV constrained portfolios that are mean-variance efficient. Second, we discuss the effects on such boundary when a VaR and/or a variance restriction is also added. |
| Keywords: | asset allocation, efficient portfolio frontiers, tracking error volatility, value at risk |
| JEL: | C61 G10 G11 G23 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wpaper:392&r=rmg |
| By: | Nadja Klein; Michel Denuit; Stefan Lang; Thomas Kneib |
| Abstract: | Generalized additive models for location, scale and shape define a flexible, semi-parametric class of regression models for analyzing insurance data in which the exponential family assumption for the response is relaxed. This approach allows the actuary to include risk factors not only in the mean but also in other parameters governing the claiming behavior, like the degree of residual heterogeneity or the no-claim probability. In this broader setting, the Negative Binomial regression with cell-specific heterogeneity and the zero-inflated Poisson regression with cell-specific additional probability mass at zero are applied to model claim frequencies. Models for claim severities that can be applied either per claim or aggregated per year are also presented. Bayesian inference is based on efficient Markov chain Monte Carlo simulation techniques and allows for the simultaneous estimation of possible nonlinear effects, spatial variations and interactions between risk factors within the data set. To illustrate the relevance of this approach, a detailed case study is proposed based on the Belgian motor insurance portfolio studied in Denuit and Lang (2004). |
| Keywords: | overdispersed count data, mixed Poisson regression, zero-inflated Poisson, Negative Binomial, zero-adjusted models, MCMC, probabilistic forecasts |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2013-24&r=rmg |
| By: | Coble, Keith H.; Barnett, Barry J.; Riley, John Michael |
| Abstract: | Introduction: The context of row crop risk management continues to grow more complex. While the magnitude of price and yield risk changes over time, the development of sophisticated risk management tools and complex government policies may improve growers’ ability to manage risk -- if these instruments are used correctly. Conversely, these instruments may actually increase risk exposure if used incorrectly. Gone are the days when growers had access only to individual yield insurance and national triggered price programs. In 1996, revenue insurance became available for many crop growers. For most major crops, the acreage covered by revenue insurance now far exceeds that covered by yield insurance. The 2008 farm bill created the complex risk policies of ACRE and SURE (Ubilava et al.). Mitchell et al. argue that ACRE, which subsumed multiple revenue risks and integrated with other risk instruments, was difficult for growers to understand and difficult for county USDA officials to implement. Current farm bill proposals are now focused on various shallow loss programs such as Agricultural Risk Coverage (ARC), Stacked Income Protection Plan (STAX) and Supplemental Coverage Option (SCO) which layer risk protection on top of crop insurance. Thus, producers are likely to continue to be confronted with complex risk management tools which may overlap or leave gaps in risk protection. Further, the decision becomes even more complex when one considers the possibility of also using futures or forward contracts. |
| Keywords: | Agricultural and Food Policy, Risk and Uncertainty, |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaeaci:156958&r=rmg |
| By: | Bulow, Jeremy (Stanford University); Klemperer, Paul (University of Oxford) |
| Abstract: | Today's regulatory rules, especially the easily-manipulated measures of regulatory capital, have led to costly bank failures. We design a robust regulatory system such that (i) bank losses are credibly borne by the private sector (ii) systemically important institutions cannot collapse suddenly; (iii) bank investment is counter-cyclical; and (iv) regulatory actions depend upon market signals (because the simplicity and clarity of such rules prevents gaming by firms, and forbearance by regulators, as well as because of the efficiency role of prices). One key innovation is "ERNs" (equity recourse notes--superficially similar to, but importantly distinct from, "cocos") which gradually "bail in" equity when needed. Importantly, although our system uses market information, it does not rely on markets being "right". |
| JEL: | G10 G21 G28 G32 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:2132&r=rmg |
| By: | Allen Yu-Hung LAI (The Institute of Health Economics and Management, ESSEC Business School - Asia Pacific); Seck L. Tan (National University of Singapore) |
| Abstract: | Singapore is vulnerable to both natural and man-made disasters alongside its remarkable economic growth. One of the most significant disasters is the Severe Acute Respiratory Syndrome (SARS) epidemic in 2003. The SARS outbreak was eventually contained through a series of risk mitigating measures introduced by the Singapore government. This would not be possible without the engagement and responsiveness of the general public. This paper begins with a description of Singapore’s historical disaster profiles, the policy and legal framework in the all-hazard management approach. We use a case study to highlight the disaster impacts and insights drawn from Singapore’s risk management experience with specific references to the SARS epidemic. We draw on the lesson-learning from Singapore’s experience in fighting the SARS epidemic, and discuss implications for future practice and research in disaster risk management. The implications are explained in four aspects: staying vigilant at the community level, remaining flexible in a national command structure, the demand for surge capacity, and collaborative governance at regional level. This paper concludes with a presence of the flexible command structure on both the way and the extent it was utilized. This helps to explain the success level of the containment of the SARS epidemic. |
| Keywords: | Disaster risk, SARS, epidemics, infectious disease, Singapore |
| JEL: | Q54 Q52 O53 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:era:wpaper:dp-2013-14&r=rmg |
| By: | Sommarat CHANTARAT (Crawford School of Public Policy, The Australian National University); Kirk PANNANGPETCH (Faculty of Agriculture, Khon Kaen University, Thailand); Nattapong PUTTANAPONG (Faculty of Economics, Thammasat University, Thailand); Thanasin TANOMPONGHANDH (School of Management, Mae Fah Luang University, Thailand) |
| Abstract: | This paper explores innovations in index-based risk transfer products (IBRTPs) as a means to address important insurance market imperfections that have precluded the emergence and sustainability of formal insurance markets in developing countries, where uninsured natural disaster risk remains a leading impediment of economic development. Using a combination of disaggregated nationwide weather, remote sensing and household livelihood data commonly available in developing countries, the paper provides analytical framework and empirical illustration on showing design nationwide and scalable IBRTP contracts, to analyse hedging effectiveness and welfare impacts at the micro level, and to explore cost effective risk-financing options. Thai rice production is used in our analysis with the goal to extend the methodology and implications to enhance development of national and regional disaster risk management in Asia. |
| Keywords: | Natural disaster insurance, index insurance, reinsurance, catastrophe bond, rice production, Thailand. |
| JEL: | Q54 G22 G12 Q11 O53 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:era:wpaper:dp-2013-09&r=rmg |
| By: | Shyam KC |
| Keywords: | Environment - Adaptation to Climate Change Macroeconomics and Economic Growth - Climate Change Economics Environment - Natural Disasters Conflict and Development - Disaster Management Urban Development - Hazard Risk Management |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wboper:16111&r=rmg |
| By: | M. E. Kahil |
| Abstract: | The relationship between micro-structure and macro-structure of complex systems using information geometry has been dealt by several authors. From this perspective, we are going to apply it as a geometrical structure connecting both microeconomics and macroeconomics . The results lead us to introduce new modified quantities into both micro-macro economics that enable us to describe the link between them. The importance of such a scheme is to find out -with some accuracy- a new method can be introduced for examining the stability of an economic system. This type of requirement is expressed by examining the stability of the equations of path deviations for some economic systems as described in a statistical manifold. Such a geometization scheme of economic systems is an important step toward identifying risk management factors and so contributes to the growing literature of econophysics. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1310.2220&r=rmg |
| By: | Davis, Todd D.; Anderson, John D.; Young, Robert E. |
| Abstract: | A stochastic simulation model is used to simulate crop revenues net of farm policy and crop insurance costs. Certainty equivalent analysis is used to rank farm policy and crop insurance alternatives for varying levels of risk aversion. |
| Keywords: | farm management, risk management, Farm Management, Risk and Uncertainty, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaeaci:156753&r=rmg |
| By: | Sophie van Huellen (Department of Economics, SOAS, University of London, UK) |
| Abstract: | The close relationship between commodity future and cash prices is critical for the effectiveness of risk management and the functioning of price discovery. However, in recent years, commodity futures prices, across the board, have appeared increasingly detached from prices on physical markets. This paper argues that while various factors, identified in previous literature, which introduced limits to arbitrage have facilitated non-convergence, the actual extent of non-convergence in these markets is caused by essential differences in the mechanisms of price formation on physical and derivative markets. With reference to the particular case of the CBOT wheat market, the paper shows that the size of the spread between futures and cash prices can be theoretically and empirically linked to the increasing inflow of financial investment into commodity futures markets. |
| Keywords: | commodity futures, commodity price formation, financialisation, nonconvergence |
| JEL: | D82 D84 G13 G14 Q11 Q14 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:soa:wpaper:185&r=rmg |
| By: | Sann VATHANA (Council for Agrictultural and Rural Development, Social Protection Coordination Unit, Cambodia (CARD-SPCU)); Sothea OUM (Economic Research Institute for ASEAN and East-Asia (ERIA)); Ponhrith KAN (CARD-SPCU); Colas CHERVIER (CARD-SPCU) |
| Abstract: | The pattern of risks faced by the poor and vulnerable in rural areas of Cambodia, as a consequence of natural disaster, is posing an increasing threat to their livelihoods. One third of the past three years has been taken up either with flooding or with drought, and the drought periods were more prolonged than the floods. The damage caused by flood and drought was comparable, although the flood of 2011 was the most extensive of the disasters. This paper presents impacts of disasters on household welfare and the linking of social protection interventions to address the entitlement failure of poor and vulnerable people suffering from the impacts of flood and drought. There is a strong need at the policy level to design social protection interventions to emphasize ex-ante instruments rather than the ex post response to natural disasters as focusing on emergency assistance and relief. Cash transfers programs provide direct assistance in the form of cash to the poor. Ex-ante cash transfer programs can play a crucial role in encouraging poor households to invest in business rather than spending on food. Microfinance schemes can also help ex-ante income diversification that can bolster households against widespread natural disasters. |
| Keywords: | Natural disaster, Entitlement failure |
| JEL: | Q54 I31 H55 O53 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:era:wpaper:dp-2013-10&r=rmg |
| By: | Alankar, Ashwin (AllianceBernstein); Blausten, Peter (Oak Hill Advisors); Scholes, Myron S. (Stanford University and Stamos Capital Management) |
| Abstract: | Traditional academic literature has relied on so-called "limits to arbitrage" theories to explain why investment managers are unable to eliminate the effects of investor "irrational" preferences (either the asset-pricing anomalies or the behavioral finance literature) on asset pricing. We demonstrate, however, that investment managers may not eliminate the observed asset-pricing anomalies because they may contribute to their existence. We show that if managers face constraints such as a "tracking-error constraint," coupled with the need to hold liquidity to meet redemptions or to actively-manage investments, they optimally hold higher-volatility securities in their portfolios. Investment constraints, such as tracking-error constraints, however, reduce the principal-agent problems inherent in delegated asset management and serve as effective risk-control tools. Liquidity reserves allow managers to meet redemptions or redeploy risks efficiently. We prove that investment managers will combine a portfolio of active risks (a so-called "alpha portfolio") for a given level of liquidity with a hedging portfolio designed to control tracking error. As the demand for either liquidity or active management increases presumably because of confidence in alpha, the cost of maintaining the tracking-error constraint increases in that the investment managers must finance these demands by selling more lower-volatility securities and holding more higher volatility securities. With more demand for the "alpha" portfolio, managers are forced to buy more of the tracking-error control portfolio. Investment managers and their investors are willing to hold inefficient portfolios and to give up returns, if necessary, to control the tracking-error of their portfolios. Given the liquidity and tracking-error constraints, investment managers concentrate more of their holdings in higher volatility (higher beta) securities. Empirically, we show that active investment managers, such as mutual funds, hold portfolios that concentrate in higher volatility securities. Moreover, when they change their holdings of their "alpha" portfolios (reduce or increase their tracking error by choice), the relative prices of higher volatility stocks change according to the predictions of the model. That is, if investment managers move closer to a market portfolio, the prices of lower-volatility stocks rise more than the prices of higher-volatility stocks given changes in the prices of other market factors. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:2135&r=rmg |