nep-rmg New Economics Papers
on Risk Management
Issue of 2013‒11‒22
eighteen papers chosen by
Stan Miles
Thompson Rivers University

  1. Financial network systemic risk contributions By Hautsch, Nikolaus; Schaumburg, Julia; Schienle, Melanie
  2. Essays on risk management and systematic risk. By Silva Buston, C.F.
  3. Modeling systemic risks in financial markets By Abhijnan Rej
  4. An optimal three-way stable and monotonic spectrum of bounds on quantiles: a spectrum of coherent measures of financial risk and economic inequality By Pinelis, Iosif
  5. A new approach for quantitative risk analysis. By Creemers, Stefan; Demeulemeester, Erik; Van De Vonder, Stijn
  6. A Fast Algorithm for Computing High-dimensional Risk Parity Portfolios By Th\'eophile Griveau-Billion; Jean-Charles Richard; Thierry Roncalli
  7. The Retirement Income System and the Risks Faced by Canadian Seniors By Milligan, Kevin; Schirle, Tammy
  8. Do flood insurance schemes in developing countries provide incentives to reduce physical risks? By Swenja Surminski; Delioma Oramas-Dorta
  9. "Firm-driven Management for Longevity Risk: Analysis of Lump-sum Forward Payments in Japanese Nursing Homes" By Shinya Sugawara
  10. Pr\'evision du risque de cr\'edit : Une \'etude comparative entre l'Analyse Discriminante et l'Approche Neuronale By Younes Boujelb\`ene; Sihem Khemakhem
  11. Asset allocation with conditional value-at-risk budgets. By Boudt, Kris; Carl, Peter; Peterson, Brian
  12. Advances in rule-based process mining: applications for enterprise risk management and auditing. By Caron, Filip; Vanthienen, Jan; Baesens, Bart
  13. Spatial correlation in credit risk and its improvement in credit scoring By Fernandes, Guilherme Barreto; Artes , Rinaldo
  14. Foreign Acquisitions and Firm-Level Financial Risk By Georgios Efthyvoulou; Liza Jabbour
  15. The 2011 European short sale ban on financial stocks: A cure or a curse? By Félix, Luiz; Kräussl, Roman; Stork, Philip
  16. Multiscale Stochastic Volatility Model for Derivatives on Futures By Jean-Pierre Fouque; Yuri F. Saporito; Jorge P. Zubelli
  17. Functional It\^o Calculus, Path-dependence and the Computation of Greeks By Samy Jazaerli; Yuri F. Saporito
  18. Optimal versus realized bank credit risk and monetary policy By Manthos D. Delis; Yiannis Karavias

  1. By: Hautsch, Nikolaus; Schaumburg, Julia; Schienle, Melanie
    Abstract: We propose the realized systemic risk beta as a measure for financial companies' contribution to systemic risk given network interdependence between firms' tail risk exposures. Conditional on statistically pre-identified network spillover effects and market as well as balance sheet information, we define the realized systemic risk beta as the total time-varying marginal effect of a firm's Value-at-risk (VaR) on the system's VaR. Statistical inference reveals a multitude of relevant risk spillover channels and determines companies' systemic importance in the U.S. financial system. Our approach can be used to monitor companies' systemic importance allowing for a transparent macroprudential supervision. --
    Keywords: time-varying systemic risk contribution,systemic risk network,network topology estimation,Value at Risk
    JEL: G01 G18 G32 G38 C21 C51 C63
    Date: 2013
  2. By: Silva Buston, C.F. (Tilburg University)
    Abstract: Abstract: Through the creation of the Financial Stability Board (FSB), G20 members have committed to regulate the financial sector across the globe in order to enhance the resilience of the system. Two important points in this agenda are the regulation of OTC derivatives, such as Credit Default Swaps (CDS) and the regulation of Systemically Important Financial Institutions (SIFIs). The first two chapters of this thesis relate to the first point. These papers study the effects of the use of CDS at banks on banks' behavior and stability. The last chapter of the thesis addresses the second point. This chapter discusses the proper assessment of systemic risk, and the characteristics and performance of systemically important banks based on this assessment.
    Date: 2013
  3. By: Abhijnan Rej
    Abstract: We survey systemic risks to financial markets and present a high-level description of an algorithm that measures systemic risk in terms of coupled networks.
    Date: 2013–11
  4. By: Pinelis, Iosif
    Abstract: A certain spectrum, indexed by a\in[0,\infty], of upper bounds P_a(X;x) on the tail probability P(X\geq x), with P_0(X;x)=P(X\geq x) and P_\infty(X;x) being the best possible exponential upper bound on P(X\geq x), is shown to be stable and monotonic in a, x, and X, where x is a real number and X is a random variable. The bounds P_a(X;x) are optimal values in certain minimization problems. The corresponding spectrum, also indexed by a\in[0,\infty], of upper bounds Q_a(X;p) on the (1-p)-quantile of X is stable and monotonic in a, p, and X, with Q_0(X;p) equal the largest (1-p)-quantile of X. In certain sense, the quantile bounds Q_a(X;p) are usually close enough to the true quantiles Q_0(X;p). Moreover, Q_a(X;p) is subadditive in X if a\geq 1, as well as positive-homogeneous and translation-invariant, and thus is a so-called coherent measure of risk. A number of other useful properties of the bounds P_a(X;x) and Q_a(X;p) are established. In particular, quite similarly to the bounds P_a(X;x) on the tail probabilities, the quantile bounds Q_a(X;p) are the optimal values in certain minimization problems. This allows for a comparatively easy incorporation of the bounds P_a(X;x) and Q_a(X;p) into more specialized optimization problems. It is shown that the minimization problems for which P_a(X;x) and Q_a(X;p) are the optimal values are in a certain sense dual to each other; in the case a=\infty this corresponds to the bilinear Legendre--Fenchel duality. In finance, the (1-p)-quantile Q_0(X;p) is known as the value-at-risk (VaR), whereas the value of Q_1(X;p) is known as the conditional value-at-risk (CVaR) and also as the expected shortfall (ES), average value-at-risk (AVaR), and expected tail loss (ETL). It is shown that the quantile bounds Q_a(X;p) can be used as measures of economic inequality. The spectrum parameter, a, may be considered an index of sensitivity to risk/inequality.
    Keywords: probability inequalities, extremal problems, tail probabilities, quantiles, coherent measures of risk, measures of economic inequality, value-at-risk (VaR), condi- tional value-at-risk (CVaR), expected shortfall (ES), average value-at-risk (AVaR), expected tail loss (ETL), mean-risk (M-R), Gini's mean difference, stochastic dominance, stochastic orders.
    JEL: C10 C54 C58 C61 C65 Z1 Z13
    Date: 2013–10–22
  5. By: Creemers, Stefan; Demeulemeester, Erik; Van De Vonder, Stijn
    Abstract: Project risk management aims to provide insight into the risk profile of a project as to facilitate decision makers to mitigate the impact of risks on project objectives such as budget and time. A popular approach to determine where to focus mitigation efforts, is the use of so-called ranking indices (e.g., the criticality index, the significance index etc.). Ranking indices allow the ranking of project activities (or risks) based on the impact they have on project objectives. A distinction needs to be made between activity-based ranking indices (those that rank activities) and risk-driven ranking indices (those that rank risks). Because different ranking indices result in different rankings of activities and risks, one might wonder which ranking index is best. In this article, we provide an answer to this question. Our contribution is threefold: (1) we set up a large computational experiment to assess the efficiency of ranking indices in the mitigation of risks, (2) we develop two new ranking indices that outperform existing ranking indices and (3) we show that a risk-driven approach is more effective than an activity-based approach.
    Keywords: Project risk management; Risk mitigation; Ranking index;
    Date: 2013
  6. By: Th\'eophile Griveau-Billion; Jean-Charles Richard; Thierry Roncalli
    Abstract: In this paper we propose a cyclical coordinate descent (CCD) algorithm for solving high dimensional risk parity problems. We show that this algorithm converges and is very fast even with large covariance matrices (n > 500). Comparison with existing algorithms also shows that it is one of the most efficient algorithms.
    Date: 2013–11
  7. By: Milligan, Kevin; Schirle, Tammy
    Abstract: In this paper, we use a risk framework to analyze the risks seniors face and discuss the success of Canada’s retirement income system in insuring against these risks. We focus on four types of risk: (i) the risk of low income at the onset of retirement, (ii) longevity risk, (iii) business cycle risk, and (iv) decision-making risk. The research conducted by CLSRN researchers and others leads us to conclude that, overall, Canada’s retirement income system successfully mitigates against most risks facing Canadian seniors. Important gaps remain, however. Some demographic groups remain at higher risk of poverty at the onset of retirement. Risks of longevity and widowhood are not fully insured. Private savings are subject to financial return risk. The complexity of some retirement income programs makes it difficult for seniors to plan their retirement income optimally.
    Keywords: Seniors, Retirement, Public Policy, Pensions, Risk
    JEL: J14 J18 J26
    Date: 2013–04–29
  8. By: Swenja Surminski; Delioma Oramas-Dorta
    Abstract: Risk transfer, including insurance, is widely recognized as a tool for increasing financial resilience to severe weather events such as floods. The application of this mechanism varies widely across countries, with a range of different types and schemes in operation. While most of the analytical focus has so far been on those markets that have a long tradition of insurance, there is still a clear gap in our understanding of how this mechanism works in a developing country context. This paper assesses 27 insurance schemes that transfer the risk of economic losses arising from floods in low and middle income countries, focusing on the linkages between financial risk transfer and risk reduction. This aspect is important to avoid the effect or moral hazard and has gained particular relevance in the context of the climate change adaptation discourse, where some scholars and practitioners view insurance as a potential tool not just for current risks, but also to address projected future impacts of a changing climate by incentivizing risk reduction. We therefore look beyond the pure financial risk transfer element of those 27 insurance schemes and investigate any prevention and risk reduction initiatives. Our analysis suggests that the potential for utilizing risk transfer for risk reduction is far from exhausted, with only very few schemes showing an operational link between risk transfer and risk reduction, while the effectiveness and implementation on the ground remains unclear. The dearth of linkages between risk reduction and insurance is a missed opportunity in the efforts to address rising risk levels, particularly in the context of climate change. Rising risk levels pose a threat to the insurability of floods, and insurance without risk reduction elements could lead to moral hazard. Therefore a closer linkage between risk transfer and risk reduction could make this a more sustainable and robust tool.
    Date: 2013–07
  9. By: Shinya Sugawara (Faculty of Economics, The University of Tokyo)
    Abstract:    This paper analyzes a system of insuring longevity risk in Japan using a lump-sum forward payment of rent. The system is unique to the Japanese private nursing home market and forces homes to cover most of the longevity risk of residents. To consider the impact of this system, this study conducts a prediction analysis of a counterfactual situation in which the system is eliminated, based on a structural model for the industrial organization of the private nursing home market. For the prediction analysis, a flexible technique is proposed using a nonparametric Bayesian approach. The results indicate there is an excess consumer payment under the current system, for which the consumer can only be compensated if he or she lives for an unrealistically long time in a nursing home. This result provides rich implications for the amount of longevity risk nursing homes assume, as well as possible consumer welfare to be gained from a government intervention to change the situation.
    Date: 2013–11
  10. By: Younes Boujelb\`ene; Sihem Khemakhem
    Abstract: Banks are interested in evaluating the risk of the financial distress before giving out a loan. Many researchers proposed the use of models based on the Neural Networks in order to help the banker better make a decision. The objective of this paper is to explore a new practical way based on the Neural Networks that would help improve the capacity of the banker to predict the risk class of the companies asking for a loan. This work is motivated by the insufficiency of traditional prevision models. The sample consists of 86 Tunisian firms and 15 financial ratios are calculated, over the period from 2005 to 2007. The results are compared with those of discriminant analysis. They show that the neural networks technique is the best in term of predictability.
    Date: 2013–11
  11. By: Boudt, Kris; Carl, Peter; Peterson, Brian
    Date: 2013
  12. By: Caron, Filip; Vanthienen, Jan; Baesens, Bart
    Abstract: Process mining research has mainly focused on the development of process mining techniques, with process discovery algorithms in the center of attention. However, far less research attention has been paid to the actual applicability of these process mining techniques in common business settings. Consequently, there only exists a partial fit between the existing process mining techniques and the compliance checking & risk management applications. This research report contributes to the process mining and compliance checking research by proposing an effective and efficient rule-based approach for analyzing organizational information and processes. Additionally, a general content-based business rule taxonomy has been developed as a source of business rules for the compliance checking approach. Furthermore, we also provide formal grounding for and an evaluation of the rule-based approach.
    Keywords: Business Rules; Compliance Checking; Risk Management; Process Mining; Process-Aware Information Systems;
    Date: 2013–03
  13. By: Fernandes, Guilherme Barreto; Artes , Rinaldo
    Date: 2013–10
  14. By: Georgios Efthyvoulou; Liza Jabbour
    Abstract: This paper examines the impact of foreign and domestic acquisitions on firm-level financial risk in Italy and Spain over the period 2002-2010. Our results indicate that foreign acquisition leads to a significant and steady reduction in financial risk. In contrast, the domestic acquisition effects are smaller and statistically less robust.
    Keywords: financial risk; acquisitions; foreign investment
    Date: 2013
  15. By: Félix, Luiz; Kräussl, Roman; Stork, Philip
    Abstract: Did the August 2011 European short sale bans on financial stocks accomplish their goals? In order to answer this question, we use stock options' implied volatility skews to proxy for investors' risk aversion. We find that on ban announcement day, risk aversion levels rose for all stocks but more so for the banned financial stocks. The banned stocks' volatility skews remained elevated during the ban but dropped for the other unbanned stocks. We show that it is the imposition of the ban itself that led to the increase in risk aversion rather than other causes such as information flow, options trading volumes, or stock specific factors. Substitution effects were minimal, as banned stocks' put trading volumes and put-call ratios declined during the ban. We argue that although the ban succeeded in curbing further selling pressure on financial stocks by redirecting trading activity towards index options, this result came at the cost of increased risk aversion and some degree of market failure. --
    Keywords: short-selling,ban,financial stocks,implied volatility skew,risk aversion
    JEL: G01 G28
    Date: 2013
  16. By: Jean-Pierre Fouque; Yuri F. Saporito; Jorge P. Zubelli
    Abstract: In this paper we present a new method to compute the first-order approximation of the price of derivatives on futures in the context of multiscale stochastic volatility of Fouque \textit{et al.} (2011, CUP). It provides an alternative method to the singular perturbation technique presented in Hikspoors and Jaimungal (2008). The main features of our method are twofold: firstly, it does not rely on any additional hypothesis on the regularity of the payoff function, and secondly, it allows an effective and straightforward calibration procedure of the model to implied volatilities. These features were not achieved in previous works. Moreover, the central argument of our method could be applied to interest rate derivatives and compound derivatives. The only pre-requisite of our approach is the first-order approximation of the underlying derivative. Furthermore, the model proposed here is well-suited for commodities since it incorporates mean reversion of the spot price and multiscale stochastic volatility. Indeed, the model was validated by calibrating it to options on crude-oil futures, and it displays a very good fit of the implied volatility.
    Date: 2013–11
  17. By: Samy Jazaerli; Yuri F. Saporito
    Abstract: Dupire's functional It\^o calculus provides an alternative approach to the classical Malliavin calculus for the computation of sensitivities, also called Greeks, of path-dependent derivatives prices. In this paper, we introduce a measure of path-dependence of functionals within the functional It\^o calculus framework. Namely, we consider the Lie bracket of the space and time functional derivatives, which we use to classify functionals according to their degree of path-dependence. We then revisit the problem of efficient numerical computation of Greeks for path-dependent derivatives using integration by parts techniques. Special attention is paid to path-dependent functionals with zero Lie bracket, called weakly path-dependent functionals in our classification. We then derive the weighted-expectation formulas for their Greeks, that was first derived using Malliavin calculus. In the more general case of fully path-dependent functionals, we show that, equipped with the functional It\^o calculus, we are able to analyze the effect of the Lie bracket on computation of Greeks. This was not achieved using Malliavin calculus. Numerical examples are also provided.
    Date: 2013–11
  18. By: Manthos D. Delis; Yiannis Karavias
    Abstract: Standard banking theory suggests that there exists an optimal level of credit risk that yields maximum bank profit. We identify the optimal level of risk-weighted assets that maximizes banks’ returns in the full sample of US banks over the period 1996–2011. We find that this optimal level is cyclical, being higher than the realized credit risk in relatively stable periods with high profit opportunities for banks but quickly decreasing below the realized in periods of turmoil. We place this cyclicality into the nexus between bank risk and monetary policy. We show that a contractionary monetary policy in stable periods, where the optimal credit risk is higher than the realized credit risk, increases the gap between them. An increase in this gap also comes as a result of an expansionary monetary policy in bad economic periods, where the realized risk is higher than the optimal risk.
    Keywords: Banks; Optimal credit risk; Profit maximization; Monetary policy

This nep-rmg issue is ©2013 by Stan Miles. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.