
on Risk Management 
Issue of 2013‒11‒09
eleven papers chosen by 
By:  Areski Cousin (SAF  Laboratoire de Sciences Actuarielle et Financière  Université Claude Bernard  Lyon I : EA2429); Elena Di Bernardinoy (IMATH  Département Ingénierie Mathématique  Conservatoire National des Arts et Métiers (CNAM)) 
Abstract:  In this paper, we introduce two alternative extensions of the classical univariate ConditionalTailExpectation (CTE) in a multivariate setting. Contrary to allocation measures or systemic risk measures, these measures are also suitable for multivariate risk problems where risks are heterogenous in nature and cannot be aggregated together. 
Keywords:  Multivariate risk measures, Level sets of distribution functions, Multivariate probability integral transformation, Stochastic orders, Copulas and dependence. 
Date:  2013–10–28 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:hal00877386&r=rmg 
By:  Sarah Dahlgren 
Abstract:  Remarks at the Institute of International Bankers' Seminar on Risk Management and Regulatory/Examinations Compliance Issues. 
Keywords:  Financial crises ; Bank capital ; Bank liquidity ; Banks and banking  Regulations ; Financial market regulatory reform ; Clearing of securities ; Systemic risk ; Federal Reserve Bank of New York 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:fip:fednsp:120&r=rmg 
By:  Christophe Hurlin (LEO  Laboratoire d'économie d'Orleans  CNRS : UMR6221  Université d'Orléans); Sebastien Laurent (IAE AixenProvence  Institut d'Administration des Entreprises  AixenProvence  Université Paul Cézanne  AixMarseille III, GREQAM  Groupement de Recherche en Économie Quantitative d'AixMarseille  Université de la Méditerranée  AixMarseille II  Université Paul Cézanne  AixMarseille III  École des Hautes Études en Sciences Sociales [EHESS]  CNRS : UMR7316); Rogier Quaedvlieg (Maastricht University  univ. Maastricht); Stephan Smeekes (Maastricht University  univ. Maastricht) 
Abstract:  We propose a widely applicable bootstrap based test of the null hypothesis of equality of two firms' Risk Measures (RMs) at a single point in time. The test can be applied to any marketbased measure. In an iterative procedure, we can identify a complete grouped ranking of the RMs, with particular application to finding buckets of fi rms of equal systemic risk. An extensive Monte Carlo Simulation shows desirable properties. We provide an application on a sample of 94 U.S. financial institutions using the ΔCoVaR, MES and %SRISK, and conclude only the %SRISK can be estimated with enough precision to allow for a meaningful ranking. 
Keywords:  Bootstrap; Grouped Ranking; Risk Measures; Uncertainty 
Date:  2013–10–28 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:halshs00877279&r=rmg 
By:  El Ghourabi, Mohamed; Francq, Christian; Telmoudi, Fedya 
Abstract:  A twostep approach for conditional Value at Risk (VaR) estimation is considered. In the first step, a generalizedquasimaximum likelihood estimator (gQMLE) is employed to estimate the volatility parameter, and in the second step the empirical quantile of the residuals serves to estimate the theoretical quantile of the innovations. When the instrumental density $h$ of the gQMLE is not the Gaussian density utilized in the standard QMLE, or is not the true distribution of the innovations, both the estimations of the volatility and of the quantile are asymptotically biased. The two errors however counterbalance each other, and we finally obtain a consistent estimator of the conditional VaR. For a wide class of GARCH models, we derive the asymptotic distribution of the VaR estimation based on gQMLE. We show that the optimal instrumental density $h$ depends neither on the GARCH parameter nor on the risk level, but only on the distribution of the innovations. A simple adaptive method based on empirical moments of the residuals makes it possible to infer an optimal element within a class of potential instrumental densities. Important asymptotic efficiency gains are achieved by using gQMLE instead of the usual Gaussian QML when the innovations are heavytailed. We extended our approach to Distortion Risk Measure parameter estimation, where consistency of the gQMLEbased method is also proved. Numerical illustrations are provided, through simulation experiments and an application to financial stock indexes. 
Keywords:  APARCH, Conditional VaR, Distortion Risk Measures, GARCH, Generalized Quasi Maximum Likelihood Estimation, Instrumental density. 
JEL:  C22 C58 
Date:  2013–10 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:51150&r=rmg 
By:  Fernando Duarte; Thomas Eisenbach 
Abstract:  We construct a new systemic risk measure that quantifies vulnerability to firesale spillovers using detailed regulatory balancesheet data for U.S. commercial banks and repo market data for brokerdealers. Even for moderate shocks in normal times, firesale externalities can be substantial. For commercial banks, a 1 percent exogenous shock to assets in the first quarter of 2013 produces firesale externalities equal to 10 percent of system equity. For brokerdealers, a 0.1 percent shock to assets in August 2013 generates spillover losses equivalent to almost 6 percent of system equity. Externalities during the last financial crisis are between two and three times larger. Our systemic risk measure reaches a peak in the fall of 2008 but shows a notable increase starting in 2005, ahead of many other systemic risk indicators. Although the largest banks and brokerdealers produce—and are victims of—most of the externalities, leverage and "connectedness" of financial institutions also play important roles. 
Keywords:  Systemic risk ; Bank holding companies ; Repurchase agreements ; Financial leverage ; Financial institutions 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:fip:fednsr:645&r=rmg 
By:  Assa Hirbod; Morales Manuel; Omidi Firouzi Hassan 
Abstract:  In this paper we introduce a new coherent cumulative risk measure on $\mathcal{R}_L^p$, the space of c\`adl\`ag processes having Laplace transform. This new coherent risk measure turns out to be tractable enough within a class of models where the aggregate claims is driven by a spectrally positive L\'evy process. Moreover, we study the problem of capital allocation in an insurance context and we show that the capital allocation problem for this risk measure has a unique solution determined by the Euler allocation method. Some examples are provided. 
Date:  2013–11 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1311.0354&r=rmg 
By:  Ledenyov, Dimitri O.; Ledenyov, Viktor O. 
Abstract:  The hedge fund represents a unique investment opportunity for the institutional and private investors in the diffusiontype financial systems. The main objective of this condensed article is to research the hedge fund’s optimal investment portfolio strategies selection in the global capital markets with the nonlinearities. We provide a definition for the hedge fund, describe the hedge fund’s organization structures and characteristics, discuss the hedge fund’s optimal investment portfolio strategies and review the appropriate hedge fund’s risk assessment models for investing in the global capital markets in time of high volatilities. We analyze the advanced techniques for the hedge fund’s optimal investment portfolio strategies replication, based on both the Stratonovich – Kalman  Bucy filtering algorithm and the particle filtering algorithm. We developed the software program with the embedded Stratonovich – Kalman  Bucy filtering algorithm and the particle filtering algorithm, aiming to track and replicate the hedge funds optimal investment portfolio strategies in the practical cases of the nonGaussian nonlinear chaotic distributions. 
Keywords:  hedge fund, investment portfolio, investment strategy, global tactical asset allocation investment strategy, investment decision making, return on investments, value at risk, arbitrage pricing theory, Sharpe ratio, separation theorem, Sortino ratio, Sterling ratio, Calmar ratio, Gini coefficient, value at risk (VaR), Ledenyov investment portfolio theorem, stability of investment portfolio, Kolmogorov chaos theory, Sharkovsky chaos theory, Lyapunov stability criteria, bifurcation diagram, nonlinearities, stochastic volatility, stochastic probability, Markov chain, Bayesian estimation, Bayesian filters, Wiener filtering theory, Stratonovich optimal nonlinear filtering theory, Stratonovich – Kalman – Bucy filtering algorithm, HodrickPrescott filter, Hirose  Kamada filter, particle filtering methods, particle filters, multivariate filters, Gaussian linear distribution, nonGaussian nonlinear distribution, MonteCarlo simulation, Brownian motion, diffusion process, econophysics, econometrics, global capital markets. 
JEL:  C11 C13 C16 C3 C32 C35 C38 C4 C46 C5 C51 C53 C58 C61 C63 C8 C87 D8 D84 
Date:  2013–10–29 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:51046&r=rmg 
By:  Peter Fuleky (UHERO and Department of Economics, University of Hawaii at Manoa); L Ventura (Department of Economics and Law, Sapienza, University of Rome); Qianxue Zhao (Department of Economics, University of Hawaii at Manoa) 
Abstract:  Existing studies of risk pooling among groups of countries are predicated upon the highly restrictive assumption that all countries have symmetric responses to aggregate shocks. We show that the conventional risk sharing test fails to isolate idiosyncratic fluctuations within countries and produces spurious results. To avoid these problems, we propose an alternative form of the risk sharing test that is robust to heterogeneous country characteristics. In our empirical example, we provide estimates using the pro posed approach for various groupings of 158 countries. 
Keywords:  Panel data, Crosssectional dependence, International risk sharing, Consumption insurance 
JEL:  C23 C51 E21 F36 
Date:  2013–08 
URL:  http://d.repec.org/n?u=RePEc:hai:wpaper:201315&r=rmg 
By:  Konstantinos Spiliopoulos; Richard B. Sowers 
Abstract:  We study large deviations and rare default clustering events in a dynamic large heterogeneous pool of interconnected components. Defaults come as Poisson events and the default intensities of the different components in the system interact through the empirical default rate and via systematic effects that are common to all components. We establish the large deviations principle for the empirical default rate for such an interacting particle system. The rate function is derived in an explicit form that is amenable to numerical computations and derivation of the most likely path to failure for the system itself. Numerical studies illustrate the theoretical findings. An understanding of the role of the preferred paths to large default rates and the most likely ways in which contagion and systematic risk combine to lead to large default rates would give useful insights into how to optimally safeguard against such events. 
Date:  2013–11 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1311.0498&r=rmg 
By:  Matias Leppisaari 
Abstract:  Recently, a marked Poisson process (MPP) model for life catastrophe risk was proposed in [6]. We provide a justification and further support for the model by considering more general Poisson point processes in the context of extreme value theory (EVT), and basing the choice of model on statistical tests and model comparisons. A case study examining accidental deaths in the Finnish population is provided. We further extend the applicability of the catastrophe risk model by considering small and big accidents separately; the resulting combined MPP model can flexibly capture the whole range of accidental death counts. Using the proposed model, we present a simulation framework for pricing (life) catastrophe reinsurance, based on modeling the underlying policies at individual contract level. The accidents are first simulated at population level, and their effect on a specific insurance company is then determined by explicitly simulating the resulting insured deaths. The proposed microsimulation approach can potentially lead to more accurate results than the traditional methods, and to a better view of risk, as it can make use of all the information available to the re/insurer and can explicitly accommodate even complex re/insurance terms and product features. As an example we price several excess reinsurance contracts. The proposed simulation model is also suitable for solvency assessment. 
Date:  2013–10 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1310.8604&r=rmg 
By:  Brun , Matthieu; Fraisse , Henri; Thesmar , David 
Abstract:  We measure the impact of bank capital requirements on corporate borrowing and expansion. We use French loanlevel data and take advantage of the transition from Basel I to Basel II. While under Basel I the capital charge was the same for all firms, under Basel II, it depends in a predictable way on both the bank's model and the firm's risk. We exploit this twoway variation to empirically estimate the sensitivity of bank lending to capital requirement. This rich identification allows us to control for firmlevel credit demand shocks and banklevel credit supply shocks. We find very large effects of capital requirements on bank lending: A 1 percentage point decrease in capital requirement leads to an increase in loan size by about 5%. At the firm level, borrowing also responds strongly although a bit less, consistent with some limited betweenbank substitutability. Investment and employment also increase strongly. Overall, because the transition to Basel II led to an average reduction by 2 percentage points of capital requirements, we estimate that the new regulation led, in France, to an increase in average loan size by 10%, an increase in aggregate corporate lending by 1.5%, an increase in aggregate investment by 0.5%, and the creation or preservation of 235,000 jobs. 
Keywords:  Bank capital ratios; Bank regulation; Credit supply 
JEL:  E51 G21 G28 
Date:  2013–07–04 
URL:  http://d.repec.org/n?u=RePEc:ebg:heccah:0988&r=rmg 