nep-rmg New Economics Papers
on Risk Management
Issue of 2013‒11‒09
eleven papers chosen by
Stan Miles
Thompson Rivers University

  1. On Multivariate Extensions of Conditional-Tail-Expectation By Areski Cousin; Elena Di Bernardinoy
  2. Five years since the crisis: where are we now? By Sarah Dahlgren
  3. Risk Measure Inference By Christophe Hurlin; Sebastien Laurent; Rogier Quaedvlieg; Stephan Smeekes
  4. Consistent estimation of the Value-at-Risk when the error distribution of the volatility model is misspecified By El Ghourabi, Mohamed; Francq, Christian; Telmoudi, Fedya
  5. Fire-sale spillovers and systemic risk By Fernando Duarte; Thomas Eisenbach
  6. On the Capital Allocation Problem for a New Coherent Risk Measure in Collective Risk Theory By Assa Hirbod; Morales Manuel; Omidi Firouzi Hassan
  7. On the tracking and replication of hedge fund optimal investment portfolio strategies in global capital markets in presence of nonlinearities, applying Bayesian filters: 1. Stratanovich – Kalman – Bucy filters for Gaussian linear investment returns distribution and 2. Particle filters for non-Gaussian non-linear investment returns distribution By Ledenyov, Dimitri O.; Ledenyov, Viktor O.
  8. Common Correlated Effects and International Risk Sharing By Peter Fuleky; L Ventura; Qianxue Zhao
  9. Default Clustering in Large Pools: Large Deviations By Konstantinos Spiliopoulos; Richard B. Sowers
  10. Modeling catastrophic deaths using EVT with a microsimulation approach to reinsurance pricing By Matias Leppisaari
  11. The Real Effects of Bank Capital Requirements By Brun , Matthieu; Fraisse , Henri; Thesmar , David

  1. 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 Conditional-Tail-Expectation (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
  2. 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
  3. By: Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Sebastien Laurent (IAE Aix-en-Provence - Institut d'Administration des Entreprises - Aix-en-Provence - Université Paul Cézanne - Aix-Marseille III, GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille 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 market-based 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
  4. By: El Ghourabi, Mohamed; Francq, Christian; Telmoudi, Fedya
    Abstract: A two-step approach for conditional Value at Risk (VaR) estimation is considered. In the first step, a generalized-quasi-maximum 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 heavy-tailed. We extended our approach to Distortion Risk Measure parameter estimation, where consistency of the gQMLE-based 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
  5. By: Fernando Duarte; Thomas Eisenbach
    Abstract: We construct a new systemic risk measure that quantifies vulnerability to fire-sale spillovers using detailed regulatory balance-sheet data for U.S. commercial banks and repo market data for broker-dealers. Even for moderate shocks in normal times, fire-sale externalities can be substantial. For commercial banks, a 1 percent exogenous shock to assets in the first quarter of 2013 produces fire-sale externalities equal to 10 percent of system equity. For broker-dealers, 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 broker-dealers 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
  6. 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
  7. By: Ledenyov, Dimitri O.; Ledenyov, Viktor O.
    Abstract: The hedge fund represents a unique investment opportunity for the institutional and private investors in the diffusion-type 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 non-Gaussian non-linear 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 non-linear filtering theory, Stratonovich – Kalman – Bucy filtering algorithm, Hodrick-Prescott filter, Hirose - Kamada filter, particle filtering methods, particle filters, multivariate filters, Gaussian linear distribution, non-Gaussian nonlinear distribution, Monte-Carlo 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
  8. 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, Cross-sectional dependence, International risk sharing, Consumption insurance
    JEL: C23 C51 E21 F36
    Date: 2013–08
  9. 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
  10. 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
  11. By: Brun , Matthieu; Fraisse , Henri; Thesmar , David
    Abstract: We measure the impact of bank capital requirements on corporate borrowing and expansion. We use French loan-level 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 two-way variation to empirically estimate the sensitivity of bank lending to capital requirement. This rich identification allows us to control for firm-level credit demand shocks and bank-level 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 between-bank 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

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