nep-rmg New Economics Papers
on Risk Management
Issue of 2014‒05‒24
eight papers chosen by
Stan Miles
Thompson Rivers University

  1. Risk Management with Thinly Traded Securities: Methodology and Implementation By Gonzalo Cortazar; Diether Beuermann; Alejandro Bernales
  2. Risk Measurement and risk modelling using applications of Vine Copulas By David E. Allen; Michael McAleer; Abhay K. Singh
  3. Semi-parametric Expected Shortfall Forecasting By Chen, Cathy W.S.; Gerlach, Richard
  4. Default Predictors in Credit Scoring - Evidence from France’s Retail Banking Institution By Ha-Thu Nguyen
  5. Foreign Exchange Risk: Relevance, Analysis and Management in German-Russian Business By Bleuel, Hans-H.
  6. Is Disaster Risk Reduction Spending Driven by the Occurrence of Natural Disasters? Evidence from Peru By Mauricio A. Vela; Sebastián J. Miller
  7. Constant Proportion Portfolio Insurance under Tolerance and Transaction Costs By Farid MKAOUAR; Jean-luc PRIGENT
  8. Climate change mitigation as catastrophic risk management By Dietz, Simon

  1. By: Gonzalo Cortazar; Diether Beuermann; Alejandro Bernales
    Abstract: Thinly traded securities exist in both emerging and well developed markets. However, plausible estimations of market risk measures for portfolios with infrequently traded securities have not been explored in the literature. We propose a methodology to calculate market risk measures based on the Kalman filter which can be used on incomplete datasets. We implement our approach in a fixed- income portfolio within a thin trading environment. However, a similar approach may be also applied to other markets with thinly traded securities. Our methodology provides reliable market risk measures in portfolios with infrequent trading.
    Keywords: Financial Markets, Financial Risk, Incomplete panels, Kalman Filter, market risk, risk management, thin trading, value-at-risk
    Date: 2013–10
  2. By: David E. Allen (School of Accounting, Finance and Economics Edith Cowan University, Australia.); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute, The Netherlands, Department of Quantitative Economics, Complutense University of Madrid, and Institute of Economic Research, Kyoto University.); Abhay K. Singh (School of Accounting, Finance and Economics, Edith Cowan University)
    Abstract: This paper features an application of Regular Vine copulas which are a novel and recently developed statistical and mathematical tool which can be applied in the assessment of composite �nancial risk. Copula-based dependence modelling is a popular tool in �nancial applications, but is usually applied to pairs of securities. By contrast, Vine copulas provide greater �exibility and permit the modelling of complex dependency patterns using the rich variety of bivariate copulas which may be arranged and analysed in a tree structure to explore multiple dependencies. The paper features the use of Regular Vine copulas in an analysis of the co-dependencies of 10 major European Stock Markets, as represented by individual market indices and the composite STOXX 50 index. The sample runs from 2005 to the end of 2011 to permit an exploration of how correlations change indi�erent economic circumstances using three diferent sample periods: pre-GFC pre-GFC (Jan 2005- July 2007), GFC (July 2007-Sep 2009), and post-GFC periods (Sep 2009 - Dec 2011). The empirical results suggest that the dependencies change in a complex manner, and are subject to change in di�erent economic circumstances. One of the attractions of this approach to risk modelling is the �exibility in the choice of distributions used to model co-dependencies. The practical application of Regular Vine metrics is demonstrated via an example of the calculation of the VaR of a portfolio made up of the indices.
    Keywords: Regular Vine Copulas; Tree structures; Co-dependence modelling; European stock markets.
    JEL: G11 C02
    Date: 2014–05–06
  3. By: Chen, Cathy W.S.; Gerlach, Richard
    Abstract: Intra-day sources of data have proven effective for dynamic volatility and tail risk estimation. Expected shortfall is a tail risk measure, that is now recommended by the Basel Committee, involving a conditional expectation that can be semi-parametrically estimated via an asymmetric sum of squares function. The conditional autoregressive expectile class of model, used to indirectly model expected shortfall, is generalised to incorporate information on the intra-day range. An asymmetric Gaussian density model error formulation allows a likelihood to be developed that leads to semiparametric estimation and forecasts of expectiles, and subsequently of expected shortfall. Adaptive Markov chain Monte Carlo sampling schemes are employed for estimation, while their performance is assessed via a simulation study. The proposed models compare favourably with a large range of competitors in an empirical study forecasting seven financial return series over a ten year perio d.
    Keywords: Semi-parametric; Markov chain Monte Carlo method; Expected; Asymmetric Gaussian distribution; Nonlinear; CARE model
    Date: 2014–04
  4. By: Ha-Thu Nguyen
    Abstract: The aim of this paper is to present the set-up of a behavioral credit-scoring model and to estimate such a model using the auto loan data set of one of the largest multinational financial institutions based in France. We rely on a logistic regression approach, which is commonly used in credit scoring, to construct a behavioral scorecard. A detailed description of the model building process is provided, as are discussions about specific modeling issues. The paper then uses a number of quantitative criteria to identify the model best suited to modeling. Finally, it is demonstrated that such model possesses the desirable characteristics of a scorecard.
    Keywords: Auto Loans, Credit Risk, Credit Scoring, Logistic Regression.
    JEL: G3 C51 C52
    Date: 2014
  5. By: Bleuel, Hans-H. (Department of Economics of the Duesseldorf University of Applied Sciences)
    Abstract: This paper starts with a brief summary on corporate foreign exchange risk management. The second chapter overviews the development of the Rouble-Euro exchange rate in the last decade. The fluctuations of this parity impact significantly the international competitiveness of German and Russian enterprises with resulting effects on the bilateral trade and business. The corporate internationalisation strategies and risk management procedures need to take account of this business environment.
    Abstract: Dieser Beitrag fasst einige Grundlagen zum Management betrieblicher Währungsrisiken kurz zusammen. Darauf werden die Bewegungen der deutsch-russischen (bzw. europäisch-russischen) Währungsparitäten aufgezeigt. Es ergeben sich signifikante Auswirkungen auf die Wettbewerbsfähigkeit deutscher sowie russischer Unternehmen, die den deutsch-russischen Handel und Geschäftsverkehr beeinflussen. Relevant ist dies insbesondere für die Internationalisierungsstrategie und das Risikomanagement der Unternehmen.
    Keywords: Rubel, Euro, Wechselkursrisiko, Risikomanagement, Russland, Wirtschaftsbeziehung, Exposure, Risk Management, Russia, Economic Relation
    JEL: G32 F31 O24
    Date: 2014–05
  6. By: Mauricio A. Vela; Sebastián J. Miller
    Abstract: This paper studies the allocation of total disaster risk reduction public spending among regions in Peru. The main objective of this work is to identify the main determinants of the distribution of these resources, and for this purpose an index of historical physical impacts of natural disasters, social vulnerability, and institutional capacity was created. It is found that historical impacts of climatological disasters are positively correlated with the per capita amount received by region in order to prevent future natural disasters. Impacts of geological disaster, on the other hand, affect the amount of executed and budgeted resources used to cope with the effects of past disasters. The prevention expenditure is mainly driven by climatological effects on the agriculture sector. Additionally, results confirm that higher social vulnerability is a main determinant of the distribution of prevention spending but conditioned on being affected by climatological disasters. Institutional capacity seems to define only the amount of recovery expenditure, positively for regions more seriously affected by geological disasters and negatively for regions devastated by climatological disasters.
    Keywords: Public expenditure, Disasters, Climate Change, Pollution, Potable water supply, Environmental management, Risk management, Prevention expenditure, Natural disasters, Recovery expenditure, Climatological disasters, Social vulnerability, Recovery expenditures, Institutional capacity, IDB-WP-500
    Date: 2014–04
  7. By: Farid MKAOUAR; Jean-luc PRIGENT
    Abstract: Portfolio insurance allows investors to recover at maturity a given percentage of their initial investment, whatever financial market evolu- tions. This portfolio insurance strategy limits downside risk in falling markets, while it allows potential benefits in rising markets. We analyze this method in the presence of jumps in asset price dynamics, in partic- ular for Lévy processes. First we examine the continuous-time rebalancing case, second we introduce a stochastic-time rebalancing according to investor's tolerance. This latter case is more in accordance with usual practice and allows to take account of transaction costs. The target mul- tiple may be either deterministic or stochastic.We study in particular the impact of tolerance and transaction costs. We provide general results that we illustrate when the risky asset price follows a double exponential Lévy process.
    Keywords: Portfolio Insurance, CPPI, Lévy processes, risk tolerance, transaction costs.
    Date: 2014–05–23
  8. By: Dietz, Simon
    Keywords: Environmental Economics and Policy, Food Security and Poverty,
    Date: 2014

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