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on Risk Management |
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Issue of 2014‒02‒21
twenty papers chosen by |
| By: | Matija Pi\v{s}korec; Nino Antulov-Fantulin; Petra Kralj Novak; Igor Mozeti\v{c}; Miha Gr\v{c}ar; Irena Vodenska; Tomislav \v{S}muc |
| Abstract: | Motivated by recent financial crises significant research efforts have been put into studying contagion effects and herding behaviour in financial markets. Much less has been said about influence of financial news on financial markets. We propose a novel measure of collective behaviour in financial news on the Web, News Cohesiveness Index (NCI), and show that it can be used as a systemic risk indicator. We evaluate the NCI on financial documents from large Web news sources on a daily basis from October 2011 to July 2013 and analyse the interplay between financial markets and financially related news. We hypothesized that strong cohesion in financial news reflects movements in the financial markets. Cohesiveness is more general and robust measure of systemic risk expressed in news, than measures based on simple occurrences of specific terms. Our results indicate that cohesiveness in the financial news is highly correlated with and driven by volatility on the financial markets. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1402.3483&r=rmg |
| By: | Brinkmann, Felix; Kempf, Alexander; Korn, Olaf |
| Abstract: | This paper provides implied measures of higher-order dependencies between assets. The measures exploit only forward-looking information from the options market and can be used to construct an implied estimator of the covariance, co-skewness, and co-kurtosis matrices of asset returns. We implement the estimator using a sample of US stocks. We show that the higher-order dependencies vary heavily over time and identify which driving them. Furthermore, we run a portfolio selection exercise and show that investors can benefit from the better out-of-sample performance of our estimator compared to various historical benchmark estimators. The benefit is up to seven percent per year. -- |
| Keywords: | option-implied information,dependence measures,higher moments,portfolio selection |
| JEL: | G11 G13 G17 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1308r&r=rmg |
| By: | Kempf, Alexander; Korn, Olaf; Saßning, Sven |
| Abstract: | We develop a new family of estimators of the covariance matrix that relies solely on forwardlooking information. It uses only current prices of plain-vanilla options. In an out-of-sample study we show that a minimum-variance strategy based on these fully-implied estimators outperforms several benchmark strategies, including various strategies based on historical estimates, index investing, and 1/N investing. The outperformance originates in crisis periods when information ow and information asymmetry are high. Although the historical benchmark strategies improve when more recent data is used, they never outperform fully-implied strategies. Thus, our results suggest that investors are better off relying on forward-looking information. -- |
| Keywords: | portfolio selection,option-implied information |
| JEL: | G11 G13 G17 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1110r&r=rmg |
| By: | Dominique Guegan (Centre d'Economie de la Sorbonne - Paris School of Economics); Bertrand K Hassani (Centre d'Economie de la Sorbonne et Grupo Santander) |
| Abstract: | The particular subject of this paper, is to construct a general framework that can consider and analyse in the same time upside and downside risks. This paper offers a comparative analysis of concept risk measures, we focus on quantile based risk measure (ES and VaR), spectral risk measure and distortion risk measure. After introducing each measure, we investigate their interest and limit. Knowing that quantile based risk measure cannot capture correctly the risk aversion of risk manager and spectral risk measure can be inconsistent to risk aversion, we propose and develop a new distortion risk measure extending the work of Wang (2000) [38] and Sereda et al (2010) [34]. Finally, we provide a comprehensive analysis of the feasibility of this approach using the S&P500 data set from o1/01/1999 to 31/12/2011. |
| Keywords: | Risk, VaR, distortion measures. |
| JEL: | C1 C6 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:14008&r=rmg |
| By: | Micha{\l} Barski |
| Abstract: | The issue of constructing a risk minimizing hedge with additional constraints on the shortfall risk is examined. Several classical risk minimizing problems have been adapted to the new setting and solved. The existence and specific forms of optimal strategies in a general semimartingale market model with the use of conditional statistical tests have been proven. The quantile hedging method applied in \cite{FL1} and \cite{FL2} as well as the classical Neyman-Pearson lemma have been generalized. Optimal hedging strategies with shortfall constraints in the Black-Scholes and exponential Poisson model have been explicitly determined. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1402.3725&r=rmg |
| By: | Dominique Guegan (Centre d'Economie de la Sorbonne - Paris School of Economics); Bertrand K Hassani (Centre d'Economie de la Sorbonne et Grupo Santander) |
| Abstract: | Stress testing is used to determine the stability or the resilience of a given financial institution by deliberately submitting. In this paper, we focus on what may lead a bank to fail and how its resilience can be measured. Two families of triggers are analysed: the first stands in the stands in the impact of external (and / or extreme) events, the second one stands on the impacts of the choice of inadequate models for predictions or risks measurement; more precisely on models becoming inadequate with time because of not being sufficiently flexible to adapt themselves to dynamical changes. |
| Keywords: | Stress test, Risk, VaR. |
| JEL: | C1 C6 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:14006&r=rmg |
| By: | Jianjun Gao; Ke Zhou; Duan Li; Xiren Cao |
| Abstract: | Instead of controlling "symmetric" risks measured by central moments of investment return or terminal wealth, more and more portfolio models have shifted their focus to manage "asymmetric" downside risks that the investment return is below certain threshold. Among the existing downside risk measures, the lower-partial moments (LPM) and conditional value-at-risk (CVaR) are probably most promising. In this paper we investigate the dynamic mean-LPM and mean-CVaR portfolio optimization problems in continuous-time, while the current literature has only witnessed their static versions. Our contributions are two-fold, in both building up tractable formulations and deriving corresponding analytical solutions. By imposing a limit funding level on the terminal wealth, we conquer the ill-posedness exhibited in the class of mean-downside risk portfolio models. The limit funding level not only enables us to solve both dynamic mean-LPM and mean-CVaR portfolio optimization problems, but also offers a flexibility to tame the aggressiveness of the portfolio policies generated from such mean - downside risk models. More specifically, for a general market setting, we prove the existence and uniqueness of the Lagrangian multiplies, which is a key step in applying the martingale approach, and establish a theoretical foundation for developing efficient numerical solution approaches. Moreover, for situations where the opportunity set of the market setting is deterministic, we derive analytical portfolio policies for both dynamic mean-LPM and mean-CVaR formulations. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1402.3464&r=rmg |
| By: | Annika Birch; Tomaso Aste |
| Abstract: | We report a study of a stylized banking cascade model investigating systemic risk caused by counter party failure using liabilities and assets to define banks' balance sheet. In our stylized system, banks can be in two states: normally operating or distressed and the state of a bank changes from normally operating to distressed whenever its liabilities are larger than the banks' assets. The banks are connected through an interbank lending network and, whenever a bank is distressed, its creditor cannot expect the loan from the distressed bank to be repaid, potentially becoming distressed themselves. We solve the problem analytically for a homogeneous system and test the robustness and generality of the results with simulations of more complex systems. We investigate the parameter space and the corresponding distribution of operating banks mapping the conditions under which the whole system is stable or unstable. This allows us to determine how financial stability of a banking system is influenced by regulatory decisions, such as leverage; we discuss the effect of central bank actions, such as quantitative easing and we determine the cost of rescuing a distressed banking system using re-capitalisation. Finally, we estimate the stability of the UK and US banking systems in the years 2007 and 2012 showing that both banking systems were more unstable in 2007 and connectedness on the interbank market partly caused the banking crisis. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1402.3688&r=rmg |
| By: | Anissa Chaibi; Maria Ulici |
| Abstract: | We develop a VAR-GRACH approach to invesigate shock and volatility transmissions between bank stock returns in Romania during the 2007-2009 international financial crisis.Our findings provide eveidence of significant shock and volatility transmissions between Romanian bank returns.We also show how our empirical results can be used to build effective diversification and hedging strategies. |
| Keywords: | Shock and volatility transmission, financial crisis, Romanian banks. |
| JEL: | G1 G2 P2 |
| Date: | 2014–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-095&r=rmg |
| By: | Bin Zou; Abel Cadenillas |
| Abstract: | Motivated by the AIG bailout case in the financial crisis of 2007-2008, we consider an insurer who wants to maximize the expected utility of the terminal wealth by selecting optimal investment and risk control strategies. The insurer's risk process is modelled by a jump-diffusion process and is negatively correlated with the capital gains in the financial market. We obtain explicit solution to optimal strategies for various utility functions. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1402.3560&r=rmg |
| By: | Frédéric Teulon; Khaled Guesmi; Salma Fattoum |
| Abstract: | This article studies the dynamic return and market price of risk for Chinese stocks (A-B shares). A Multivariate DCC-GARCH model is used to capture the feature of time-varying volatility in stock returns. We show evidence of different pricing mechanisms explained by the difference in the expected return and market price of risk between A and B shares. However, the significance of the difference between market prices of risk becomes disappearing if GARCH models are used. |
| Keywords: | Asymmetric DCC-GARCH models, B-share discount, Chinese stock market, Market segmentation |
| JEL: | G12 G14 G15 |
| Date: | 2014–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-089&r=rmg |
| By: | Heni Boubaker; Nadia Sghaier |
| Abstract: | This paper examines the dynamic dependence between American and four developed stock markets, namely, Japan, United Kingdom, Germany and France during a recent period including the global Â…nancial crisis 2007-2009. The econometric approach is based on the extreme-value time-varying copula functions. SpeciÂ…cally, the marginal distributions are reproduced by an extreme-value based model while the joint distribution is explored using time-varying Normal and SJC copulas. The empirical results show that the dynamic dependence between American and Japanese stock markets is symmetric while that between American and European stock markets is asymmetric. In particular, this dependence seems to be related to geographic position. |
| Keywords: | dependence, stock markets, extreme value theory, time-varing copulas. |
| Date: | 2014–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-094&r=rmg |
| By: | Alain Chateauneuf (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, IPAG Business School - Business School); Mina Mostoufi (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne); David Vyncke (Universiteit Gent - Vakgroep Toegepaste Wiskunde en Informatica) |
| Abstract: | Considering that a natural way of sharing risks in insurance companies is to require risk by risk Pareto optimality, we offer in case of strong risk aversion, a simple computable method for deriving all Pareto optima. More importantly all Individually Rational Pareto optima can be computed according to our method. |
| Keywords: | Multivariate risk sharing; comonotonicity; individually rational Pareto optima |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00942114&r=rmg |
| By: | Gogas, Periklis (Democritus University of Thrace, Department of Economics); Papadimitriou, Theophilos (Democritus University of Thrace, Department of Economics); Agrapetidou, Anna (Democritus University of Thrace, Department of Economics) |
| Abstract: | Purpose - This study presents an empirical model designed to forecast bank credit ratings using only quantitative and publicly available information from their financial statements. For this reason we use the long term ratings provided by Fitch in 2012. Our sample consists of 92 U.S. banks and publicly available information in annual frequency from their financial statements from 2008 to 2011. Methodology - First, in the effort to select the most informative regressors from a long list of financial variables and ratios we use stepwise least squares and select several alternative sets of variables. Then these sets of variables are used in an ordered probit regression setting to forecast the long term credit ratings. Findings - Under this scheme, the forecasting accuracy of our best model reaches 83.70% when 9 explanatory variables are used. Originality/value - The results indicate that bank credit ratings largely rely on historical data making them respond sluggishly and after any financial problems are already known to the public. |
| Keywords: | Banking; Forecasting; Credit Rating; Logit |
| JEL: | G20 G24 |
| Date: | 2014–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:ris:duthrp:2014_009&r=rmg |
| By: | Amélie Charles (Audencia Recherche - Audencia); Olivier Darné (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272) |
| Abstract: | Financial market participants and policy-makers can benefit from a better understanding of how shocks can affect volatility over time. This study assesses the impact of structural changes and outliers on volatility persistence of three crude oil markets - Brent, West Texas Intermediate (WTI) and Organization of Petroleum Exporting Countries (OPEC) - between January 2, 1985 and June 17, 2011. We identify outliers using a new semi-parametric test based on conditional heteroscedasticity models. These large shocks can be associated with particular event patterns, such as the invasion of Kuwait by Iraq, the Operation Desert Storm, the Operation Desert Fox, and the Global Financial Crisis as well as OPEC announcements on production reduction or US announcements on crude inventories. We show that outliers can bias (i) the estimates of the parameters of the equation governing volatility dynamics; (ii) the regularity and non-negativity conditions of GARCH-type models (GARCH, IGARCH, FIGARCH and HYGARCH); and (iii) the detection of structural breaks in volatility, and thus the estimation of the persistence of the volatility. Therefore, taking into account the outliers on the volatility modelling process may improve the understanding of volatility in crude oil markets. |
| Keywords: | Crude oil ; Volatility persistence ; Structural breaks |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00940312&r=rmg |
| By: | Aymen Belgacem; Anna Creti; Khaled Guesmi; Amine Lahiani |
| Abstract: | The paper employs an event study methodology to investigate the macroeconomic announcements effects on S&P500 and oil prices. Our results provide evidence of a significant impact of the US macroeconomic news on oil prices. This impact is split into two components, namely the direct effect (common response) and indirect effect (volatility transmission). Altogether our results show that the volatility transmission is bidirectional since a significant volatility transmission from the oil market to the US stock market is revealed. Furthermore, a higher volatility transmission is recorded from the oil market to the stock market especially after the release of consumption indicators. |
| Keywords: | Stock Prices, Oil prices, Macroeconomic Announcements, Volatility Spillovers. |
| JEL: | G14 G15 C58 |
| Date: | 2014–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-050&r=rmg |
| By: | Andersson, Henrik (Toulouse School of Economics); Risa Hole, Arne (University of Sheffield); Svensson, Mikael (Dept. of Economics) |
| Abstract: | This study elicits individual preferences for reducing morbidity and mortality risk in the context of an infectious disease (campylobacter) using choice experiments. Respondents are in the survey asked to choose between different policies that, in addition to the two health risks, also vary with respect to source of disease being targeted (food or water), when the policy takes place (in time), and the monetary cost. Our results in our baseline model are in line with expectations; respondents prefer the benefits of the program sooner than later, programs that reduce both the mortality and morbidity risk, and less costly programs. Moreover, our results suggest that respondents prefer water- compared with food-safety programs. However, a main objective of this study is to examine scope sensitivity of mortality risk reductions using a novel approach. Our results from a split-sample design suggest that the value of the mortality risk reduction, defined as the value of a statistical life, is SEK 3 177 (USD 483 million) and SEK 50 million (USD 8 million), respectively, in our two sub-samples. This result cast doubt on the standard scope sensitivity tests in choice experiments, and the results also cast doubt on the validity and reliability of VSL estimates based on stated preference (and revealed preference) studies in general. This is important due to the large empirical literature on non-market evaluation and the elicited values’ central role in policy making, such as benefit-cost analysis. |
| Keywords: | Choice experiments; Morbidity risk; Mortality risk; Scope sensitivity; Willingness to pay |
| JEL: | D61 H41 I18 Q51 |
| Date: | 2014–02–06 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:kaunek:0011&r=rmg |
| By: | Heni Boubaker; Nadia Sghaier |
| Abstract: | This paper proposes a new class of semiparametric generalized long memory model with FIA- PARCH errors (SEMIGARMA-FIAPARCH model) that extends the conventionnel GARMA model to incorporate nonlinear deterministic trend, in the mean equation, and to allow for time varying volatility, in the conditional variance equation. The parameters of this model are estimated in a wavelet domain. We provide an empirical application of this model to examine the dynamic of the stock market returns in six GCC countries. The empirical results show that the model proposed o¤ers an interesting framework to describe the seasonal long range dependence and the nonlinear deterministic trend in the return as well as persistence to shocks in the conditional volatiliy. We also compare its performance predictive to the traditional long memory model with FIAPARCH errors (FARMA-FIAPARCH model). The predictive results indicate that the model proposed out performs the FARMA-FIAPARCH model. |
| Keywords: | semiparametric generalized long memory process, FIAPARCH errors, wavelet do- main, stock market returns. |
| JEL: | C13 C22 C32 G15 |
| Date: | 2014–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-066&r=rmg |
| By: | M. Koz{\l}owska; T. Gubiec; T. R. Werner; M. Denys; A. Sienkiewicz; R. Kutner; Z. Struzik |
| Abstract: | The principal aim of this work is the evidence on empirical way that catastrophic bifurcation breakdowns or transitions, proceeded by flickering phenomenon, are present on notoriously significant and unpredictable financial markets. Overall, in this work we developed various metrics associated with catastrophic bifurcation transitions, in particular, the catastrophic slowing down (analogous to the critical slowing down). All these things were considered on a well-defined example of financial markets of small and middle to large capitalization. The catastrophic bifurcation transition seems to be connected with the question of whether the early-warning signals are present in financial markets. This question continues to fascinate both the research community and the general public. Interestingly, such early-warning signals have recently been identified and explained to be a consequence of a catastrophic bifurcation transition phenomenon observed in multiple physical systems, e.g. in ecosystems, climate dynamics and in medicine (epileptic seizure and asthma attack). In the present work we provide an analogical, positive identification of such phenomenon by examining its several different indicators in the context of a well-defined daily bubble; this bubble was induced by the recent worldwide financial crisis on typical financial markets of small and middle to large capitalization. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1402.4047&r=rmg |
| By: | Khaled Guesmi; Salma Fattoum |
| Abstract: | This paper aims to explore the links between Brent crude oil index and stock markets index in OECD countries. We estimate time-varying conditional correlation relationships among these variables by employing Engle’s (2002) Dynamic Conditional Correlation (DCC). This process detects eventual volatility spillovers, which are typically observed in stock markets and oil prices. Our sample consists of monthly frequencies stock indexes and oil price, covering 10 OECD countries for the period of January1990- September 2012. Oil price shocks in periods of world turmoil and political events have an important impact on the relationship between oil and stock market prices. |
| Keywords: | Multivariate Fractional Cointegration, Oil Prices, stock markets, GARCH-DCC. |
| JEL: | C10 E44 G15 |
| Date: | 2014–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-090&r=rmg |