New Economics Papers
on Risk Management
Issue of 2013‒11‒02
eleven papers chosen by

  1. The Maturity Structure of Corporate Hedging: the Case of the U.S. Oil and Gas Industry By Mohamed Mnasri; Georges Dionne; Jean-Pierre Gueyie
  2. A Representation of Risk Measures By Massimiliano AMARANTE
  3. On the strategic value of risk management By Léautier, Thomas-Olivier; Rochet, Jean-Charles
  4. Restructuring the "one-way CSA" counterparty risk in a CDO By Lorenzo Giada; Claudio Nordio
  5. Currency hedging strategies, strategic benchmarks and the Global and Euro Sovereign financial crises By Caporin, Massimiliano; Jimenez-Martin, Juan-Angel; Gonzalez-Serrano, Lydia
  6. Cost-benefit analysis of the african risk capacity facility: By Clarke, Daniel J.; Hill, Ruth Vargas
  7. Systemic Risk Identification, Modelling, Analysis, and Monitoring: An Integrated Approach By Antoaneta Sergueiva
  8. Portfolio Performance Measure and A New Generalized Utility-based N-moment Measure By Monica Billio; Gregory Jannin; Bertrand Maillet; Loriana Pelizzon
  9. Structural Credit Risk Model with Stochastic Volatility: A Particle-filter Approach By Di Bu; Yin Liao
  10. A wavelet-based copula approach for modeling market risk in agricultural commodity markets By RIADH ALOUI; MOHAMED SAFOUANE BEN AISSA; DUC KHUONG NGUYEN
  11. Density approach in modelling multi-defaults By Nicole El Karoui; Monique Jeanblanc; Ying Jiao

  1. By: Mohamed Mnasri; Georges Dionne; Jean-Pierre Gueyie
    Abstract: This paper investigates how firms design the maturity of their hedging programs, and the real effects of maturity choice on firm value and risk. Using a new dataset on hedging activities of 150 U.S. oil and gas producers, we find strong evidence that hedging maturity is influenced by investment programs, market conditions, production specificities, and hedging contract features. We also give empirical evidence of a non-monotonic relationship between hedging maturity and measures of financial distress. We further investigate the motivations of early termination of contracts. Finally, we show that longer hedging maturities could attenuate the impacts of commodity price risk on firm value and risk.
    Keywords: Risk management, maturity choice, early termination, economic effects, oil and gas industry
    JEL: D8 G32
    Date: 2013
  2. By: Massimiliano AMARANTE
    Abstract: We provide a representation theorem for risk measures satisfying (i) monotonicity; (ii) positive homogeneity; and (iii) translation invariance. As a simple corollary to our theorem, we obtain the usual representation of coherent risk measures (i.e., risk measures that are, in addition, sub-additive; see Artzner et al.
    Keywords: risk measures, capacity, Choquet integral
    JEL: G11 C65
    Date: 2013
  3. By: Léautier, Thomas-Olivier; Rochet, Jean-Charles
    Abstract: This article examines how …rms facing volatile input prices and holding some degree of market power in their product market link their risk management and their production or pricing strategies. This issue is relevant in many industries ranging from manufacturing to energy retailing, where risk averse …rms decide on their hedging strategies before their product market strategies. We …nd that hedging modi…es the pricing and production strategies of …rms. This strategic e¤ect is channelled through the risk-adjusted expected cost, i.e., the expected marginal cost under the probability measure induced by shareholders risk aversion. It has opposite e¤ects depending on the nature of product market competition: hedging toughens quantity competition while it softens price competition. Finally, if …rms can decide not to commit on their hedging position, this can never be an equilibriumoutcome: committing is always a best response to non committing. In the Hotelling model, committing is a dominant strategy for all …rms.
    Keywords: Risk Management, Price and Quantity Competition.
    Date: 2013–09–14
  4. By: Lorenzo Giada; Claudio Nordio
    Abstract: We show how to restructure the counterparty risk faced by the originator of a securitization or covered bond arising from an interest rate hedging swap assisted by a "one-way" collateral agreement. This risk emerges when the swap is negotiated between the special purpose vehicle and a third party that covers itself through a back-to-back swap with the originator. We show that the counterparty risk of the originator may be removed by adding a chain of back-to-back credit derivatives between the three parties (originator, counterparty and vehicle).
    Date: 2013–10
  5. By: Caporin, Massimiliano; Jimenez-Martin, Juan-Angel; Gonzalez-Serrano, Lydia
    Abstract: This paper investigates dynamic currency hedging benefits, with a further focus on the impact of currency hedging before and during the recent financial crises originated from the subprime and the Euro sovereign bonds. We take the point of view of a Euro-based institutional investor who considers passive investment strategies in portfolios holding European, British and US assets. We analyze the impact of the model specification to improve the risk-return tradeoff when currency risk is hedged. Hedging strategies of currency risk, using exchange rates futures and driven by several multivariate GARCH models, depend on the portfolio composition and period analyzed. Dynamic covariance models provide limited evidences of a decrease in hedging rations compared to naïve hedging strategies based on linear regressions or variance smoothing. Nevertheless, those results are coupled with better performances of dynamic covariance models in terms of hedging effectiveness an improved Sharpe ratios. The empirical evidences are observed both in-sample as well as in an out-of-sample exercise.
    Keywords: Multivariate GARCH, conditional correlations, currency futures, optimal hedge ratios, hedging strategies
    JEL: C32 C52 C58 G01 G11 G32
    Date: 2013–10–22
  6. By: Clarke, Daniel J.; Hill, Ruth Vargas
    Abstract: The African Risk Capacity (ARC), has been proposed as a pan-Africa drought risk pool to insure against drought risk in Africa south of the Sahara. If fully operationalized, the ARC will mark a major change in how donors fund emergency support to countries in Africa during times of need. In this paper, we undertake a cost-benefit analysis of the ARC pool and discuss how lessons can inform the design of the ARC.
    Keywords: Natural disasters, Risk management, drought,
    Date: 2013
  7. By: Antoaneta Sergueiva
    Abstract: Research capacity is critical in understanding systemic risk and informing new regulation. Banking regulation has not kept pace with all the complexities of financial innovation. The academic literature on systemic risk is rapidly expanding. The majority of papers analyse a single source or a consolidated source of risk and its effect. A fraction of publications quantify systemic risk measures or formulate penalties for systemically important financial institutions that are of practical regulatory relevance. The challenges facing systemic risk evaluation and regulation still persist, as the definition of systemic risk is somewhat unsettled and that affects attempts to provide solutions. Our understanding of systemic risk is evolving and the awareness of data relevance is rising gradually; this challenge is reflected in the focus of major international research initiatives. There is a consensus that the direct and indirect costs of a systemic crisis are enormous as opposed to preventing it, and that without regulation the externalities will not be prevented; but there is no consensus yet on the extent and detail of regulation, and research expectations are to facilitate the regulatory process. This report outlines an integrated approach for systemic risk evaluation based on multiple types of interbank exposures through innovative modelling approaches as tensorial multilayer networks, suggests how to relate underlying economic data and how to extend the network to cover financial market information. We reason about data requirements and time scale effects, and outline a multi-model hypernetwork of systemic risk knowledge as a scenario analysis and policy support tool. The argument is that logical steps forward would incorporate the range of risk sources and their interrelated effects as contributions towards an overall systemic risk indicator, would perform an integral analysis of ...
    Date: 2013–10
  8. By: Monica Billio (Department of Economics, University Of Venice Cà Foscari); Gregory Jannin (Variances and University Paris I); Bertrand Maillet (University La Reunion and University of Orléans); Loriana Pelizzon (Department of Economics, University of Venice Ca’ Foscari)
    Abstract: Most of the performance measures proposed in the financial and academic literature are subject to be gamed in an active management framework (Goetzmann et al., 2007). One of the main reasons of this drawback is due to an incomplete characterization by these measures of studied return distributions. We introduce a new flexible Generalized Utility-based N-moment measure of performance (GUN, in short), characterizing the whole return distribution, and thus hardly gamable. More precisely, it takes into account the first four moments of the return distribution and the associated sensitivities of the studied agent, reflecting his preferences and risk profile. The new performance measure is also well adapted for analyzing performance of hedge funds and more peculiarly in presence of derivative instruments associated with non-Gaussian return distributions. Length: 34
    Keywords: C16, G11, G23, G24
    Date: 2013
  9. By: Di Bu; Yin Liao
    Abstract: This paper extends Merton's structural credit risk model to account for the fact that the firm's asset volatility follows a stochastic process. With the presence of stochastic volatility, the transformed-data maximum likelihood estimation (MLE) method of Duan (1994, 2000) can no longer be applied to estimate the model. We devise a particle filtering algorithm to solve this problem. This algorithm is based on the general non-linear and non-Gaussian filtering with sequential parameter learning, and a simulation study is conducted to ascertain its finite sample performance. Meanwhile, we implement this model on the real data of companies in Dow Jones industrial average and find that incorporating stochastic volatility into the structural model can largely improve the model performance.
    Keywords: Credit risk; Merton model; Stochastic volatility; Particle Filtter; Default probability; CDS
    JEL: C22
    Date: 2013–10–28
  10. By: RIADH ALOUI (LAREQUAD & FSEGT, University of Tunis El Manar, B.P 248 El Manar II 2092 Tunis, Tunisia); MOHAMED SAFOUANE BEN AISSA; DUC KHUONG NGUYEN (Dept. of Finance and Information Systems, ISC Paris School of Management, 22, Boulevard du Fort de Vaux, 75017 Paris, France)
    Abstract: We consider the problem of accurate market risk modeling for agricultural commodity products over heterogeneous investment horizons using copulas and wavelet methods. Our results indicate that the degree and structure of the dependence of daily commodity returns on the three market risk fac- tors (federal funds rate, USD/Euro exchange rate, and world stock market ?uctuations) vary according to the time scale. Changes in the USD/EUR exchange rate and the stock market index are the dominant risks for agri- cultural commodity markets. Moreover, the tail dependence on the daily re- turns of the three market risk factors is also scale-dependent, and frequently asymmetric. Finally, there is evidence to suggest that the application of the wavelet-copula model improves the accuracy of VaR estimates, compared to traditional approaches.
    Keywords: Agricultural commodities, Extreme-value copula, Wavelet, VaR, CVaR
    JEL: Q14 C52 C58 G11 G17
    Date: 2013
  11. By: Nicole El Karoui (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie (UPMC) - Paris VI - Université Paris VII - Paris Diderot); Monique Jeanblanc (Laboratoire d'analyse et probabilités - Université d'Evry-Val d'Essonne : EA2172); Ying Jiao (SAF - Laboratoire Science Actuarielle et Financière - Université Claude Bernard - Lyon I)
    Abstract: We apply the default density framework developed in El Karoui et al. \cite{ejj1} to modelling of multiple defaults, which can be adapted to both top-down and bottom-up models. We present general pricing results and establish links with the classical intensity approach. Explicit models are also proposed by using the methods of change of probability measure or dynamic copula.
    Date: 2013–10–24

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