nep-rmg New Economics Papers
on Risk Management
Issue of 2014‒07‒05
eleven papers chosen by
Stan Miles
Thompson Rivers University

  1. Advances in Financial Risk Management and Economic Policy Uncertainty: An Overview By Shawkat Hammoudeh; Michael McAleer
  2. TEDAS - Tail Event Driven ASset Allocation By Wolfgang Karl Härdle; Sergey Nasekin; David Lee Kuo Chuen; Phoon Kok Fai
  3. Optimal Portfolio Problem Using Entropic Value at Risk: When the Underlying Distribution is Non-Elliptical By Hassan Omidi Firouzi; Andrew Luong
  4. A Dynamic AutoRegressive Expectile for Time-Invariant Portfolio Protection Strategies By Benjamin Hamidi; Bertrand Maillet; Jean-Luc Prigent
  5. Active extension portfolio optimization with non-convex risk measures using metaheuristics By Ronald Hochreiter; Christoph Waldhauser
  6. Islamic Banks’ Capital Buffers: Unique Risk Exposures and the Disciplining Effects of Charter Values By Daher, Hassan; Masih, A.Mansur M.; Ibrahim, Mansor H.
  7. A two-stage model for dealing with temporal degradation of credit scoring By Maria Rocha Sousa; Jo\~ao Gama; Manuel J. Silva Gon\c{c}alves
  8. Diversification in Crude Oil and Other Commodities: A Comparative Analysis By Abdullah, Ahmad Monir; Saiti, Buerhan; Masih, Abul Mansur M.
  9. The sensitivity of Fama-French factors to economic uncertainty By Amélie Charles; Olivier Darné; Zakaria Moussa
  10. John Doe's Old-Age Provision: Dollar Cost Averaging and Time Diversification By Dirk Ulbricht
  11. Une approche douglasienne de la prudence comme origine morale de pratiques organisationnelles émergentes By Jemaa, Fatma; Ben Khaled, Wafa

  1. By: Shawkat Hammoudeh; Michael McAleer (University of Canterbury)
    Abstract: Financial risk management is difficult at the best of times, but especially so in the presence of economic policy uncertainty. The purpose of this special issue on “Advances in Financial Risk Management and Economic Policy Uncertainty” is to highlight some areas of research in which novel econometric, financial econometric and empirical finance methods have contributed significantly to the analysis of financial risk management when there is economic policy uncertainty, specifically the power of print: uncertainty shocks, markets, and the economy, determinants of the banking spread in the Brazilian economy, forecasting value-at-risk using block structure multivariate stochastic volatility models, the time-varying causality between spot and futures crude oil prices, a regime-dependent assessment of the information transmission dynamics between oil prices, precious metal prices and exchange rates, a practical approach to constructing price-based funding liquidity factors, realized range volatility forecasting, modelling a latent daily tourism financial conditions index, bank ownership, financial segments and the measurement of systemic risk, model-free volatility indexes in the financial literature, robust hedging performance and volatility risk in option markets, price cointegration between sovereign CDS and currency option markets in the GFC, whether zombie lending should always be prevented, preferences of risk-averse and risk-seeking investors for oil spot and futures before, during and after the GFC, managing financial risk in Chinese stock markets, managing systemic risk in The Netherlands, mean-variance portfolio methods for energy policy risk management, on robust properties of the SIML estimation of volatility under micro-market noise and random sampling, asymmetric large-scale (I)GARCH with hetero-tails, the economic fundamentals and economic policy uncertainty of Mainland China and their impacts on Taiwan and Hong Kong, prediction and simulation using simple models characterized by nonstationarity and seasonality, and volatility forecast of stock indexes by model averaging using high frequency data.
    Keywords: Financial risk management, Economic policy uncertainty, Financial econometrics, Empirical finance
    JEL: C58 D81 E60 G32
    Date: 2014–06–23
  2. By: Wolfgang Karl Härdle; Sergey Nasekin; David Lee Kuo Chuen; Phoon Kok Fai
    Abstract: Portfolio selection and risk management are very actively studied topics in quantitative finance and applied statistics. They are closely related to the dependency structure of portfolio assets or risk factors. The correlation structure across assets and opposite tail movements are essential to the asset allocation problem, since they determine the level of risk in a position. Correlation alone is not informative on the distributional details of the assets. By introducing TEDAS -Tail Event Driven ASset allocation, one studies the dependence between assets at different quantiles. In a hedging exercise, TEDAS uses adaptive Lasso based quantile regression in order to determine an active set of negative non-zero coefficients. Based on these active risk factors, an adjustment for intertemporal correlation is made. Finally, the asset allocation weights are determined via a Cornish-Fisher Value-at-Risk optimization. TEDAS is studied in simulation and a practical utility-based example using hedge fund indices.
    Keywords: portfolio optimization, asset allocation, adaptive lasso, quantile regression, value-at-risk
    JEL: C00 C14 C50 C58
    Date: 2014–06
  3. By: Hassan Omidi Firouzi; Andrew Luong
    Abstract: This paper is devoted to study the optimal portfolio problem. Harry Markowitz's Ph.D. thesis prepared the ground for the mathematical theory of finance. In modern portfolio theory, we typically find asset returns that are modeled by a random variable with an elliptical distribution and the notion of portfolio risk is described by an appropriate risk measure. In this paper, we propose new stochastic models for the asset returns that are based on Jumps- Diffusion (J-D) distributions. This family of distributions are more compatible with stylized features of asset returns. On the other hand, in the past decades, we find attempts in the literature to use well-known risk measures, such as Value at Risk and Expected Shortfall, in this context. Unfortunately, one drawback with these previous approaches is that no explicit formulas are available and numerical approximations are used to solve the optimization problem. In this paper, we propose to use a new coherent risk measure, so-called, Entropic Value at Risk(EVaR), in the optimization problem. For certain models, including a jump-diffusion distribution, this risk measure yields an explicit formula for the objective function so that the optimization problem can be solved without resorting to numerical approximations.
    Date: 2014–06
  4. By: Benjamin Hamidi (Neuflize OBC Investissements - Neuflize OBC Investissements); Bertrand Maillet (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans); Jean-Luc Prigent (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise)
    Abstract: "Constant proportion portfolio insurance" (CPPI) is nowadays one of the most popular techniques for portfolio insurance strategies. It simply consists of reallocating the risky part of a portfolio with respect to market conditions, via a leverage parameter - called the multiple - guaranteeing a predetermined floor. We propose to introduce a conditional time-varying multiple as an alternative to the standard unconditional CPPI method, directly linked to actual risk management problematics. This "ex ante" approach for the conditional multiple aims to diversify the risk model associated, for example, with the expected shortfall (ES) or extreme risk measure estimations. First, we recall the portfolio insurance principles, and main properties of the CPPI strategy, including the time-invariant portfolio protection (TIPP) strategy, as introduced by Estep and Kritzman (1988). We emphasize the existence of an upper bound on the multiple, for example to hedge against sudden drops in the market. Then, we provide the main properties of the conditional multiples for well-known financial models including the discrete-time portfolio rebalancing case and Lévy processes to describe the risky asset dynamics. For this purpose, we precisely define and evaluate different gap risks, in both conditional and unconditional frameworks. As a by-product, the introduction of discrete or random time portfolio rebalancing allows us to determine and/or estimate the density of durations between rebalancements. Finally, from a more practical and statistical point of view due to trading restrictions, we present the class of Dynamic AutoRegressive Expectile (DARE) models for estimating the conditional multiple. This latter approach provides useful complementary information about the risk and performance associated with probabilistic approaches to the conditional multiple.
    Keywords: CPPI ; VaR ; Expected Shorfall ; Expectile ; Quantile Regression ; Dynamic Quantile Model ; Extreme Value
    Date: 2014–06–26
  5. By: Ronald Hochreiter; Christoph Waldhauser
    Abstract: We consider the optimization of active extension portfolios. For this purpose, the optimization problem is rewritten as a stochastic programming model and solved using a clever multi-start local search heuristic, which turns out to provide stable solutions. The heuristic solutions are compared to optimization results of convex optimization solvers where applicable. Furthermore, the approach is applied to solve problems with non-convex risk measures, most notably to minimize Value-at-Risk. Numerical results using data from both the Dow Jones Industrial Average as well as the DAX 30 are shown.
    Date: 2014–06
  6. By: Daher, Hassan; Masih, A.Mansur M.; Ibrahim, Mansor H.
    Abstract: In the aftermath of the recent financial crisis, the inherent linkages between banks’ capital buffers and risk took center stage as policy makers promoted a more resilient global banking system. The growing recognition of Islamic banking as a viable alternative-banking model warrants the need to investigate the overall susceptibilities of Islamic banks’ capital buffers to unique risks emanating from their operating environments. We examine this issue over the period 2005-2012 in the 18 countries where Islamic and conventional commercial banks coexist. We employ a panel model using dynamic Generalized Methods of Moments (GMM) on a data set comprising 128 commercial banks of which 44 are Islamic commercial banks. The search for alternative forms of prudential regulation over and above risk based capital guidelines has also shifted the attention of policy makers towards investigating the disciplining effects of banks’ charter values on capital buffers. We test this issue for Islamic banks, and whether the relationship varies as a function of the size of the charter as implied by theory. We employ the cross-section threshold approach suggested by Hansen (2000) for 101 publicly listed commercial banks in the same countries. To the best of our knowledge, this study is the first attempt to examine empirically the aforementioned issues for Islamic banks. This study is expected to expose shortcomings in capital adequacy guidelines and raises distinct policy implications with regards to the regulation and supervision of Islamic banks in countries where both bank types co-exist.
    Keywords: Islamic banks, capital buffers, risk management, charter values, nonlinear, policy implications
    JEL: G21 G28
    Date: 2014–06–28
  7. By: Maria Rocha Sousa; Jo\~ao Gama; Manuel J. Silva Gon\c{c}alves
    Abstract: This work is attached to the BRICS 2013 competition. We propose a two-stage model for dealing with the temporal degradation of credit scoring models. This methodology produced motivating results in a 1-year horizon. We anticipate that it can be extended to other applications of risk assessment with great success. Future extensions should cover predictions in larger time frames and consider lagged periods. This methodology can be further improved if more information about the economic cycles is integrated in the forecasting of default.
    Date: 2014–06
  8. By: Abdullah, Ahmad Monir; Saiti, Buerhan; Masih, Abul Mansur M.
    Abstract: An understanding of how volatilities of and correlations between commodity returns change over time including their directions (positive or negative) and size (stronger or weaker) is of crucial importance for both the domestic and international investors with a view to diversifying their portfolios for hedging against unforeseen risks. This paper is a humble attempt to add value to the existing literature by empirically testing the ‘time-varying’ and ‘scale dependent’ volatilities of and correlations of the sample commodities. Particularly, by incorporating scale dependence, it is able to identify unique portfolio diversification opportunities for different set of investors bearing different investment horizons or holding periods. In order to address the research objectives, we have applied the vector error-correction test and several recently introduced econometric techniques such as the Maximum Overlap Discrete Wavelet Transform (MODWT), Continuous Wavelet Transform (CWT) and Multivariate GARCH – Dynamic Conditional Correlation. The data used in this paper is the daily data of seven commodities (crude oil, gas, gold, silver, copper, soybean and corn) prices from 1 January 2007 until 31 December 2013. Our findings tend to suggest that there is a theoretical relationship between the sample commodities (as evidenced in the cointegration tests) and that the oil, gold and corn variables are leading the other commodities (as evidenced in the Vector Error-Correction models). Consistent with these results, our analysis based on the application of the recent wavelet technique MODWT tends to indicate that the gold price return is leading the other commodities. From the point of view of portfolio diversification benefits based on the extent of dynamic correlations between variables, our results tend to suggest that an investor should be aware that the gas price return is less correlated with the crude oil in the short run (as evidenced in the continuous wavelet transform analysis), but due to its high volatility, it offsets its benefit of diversification in the long run and that an investor holding the crude oil can gain by including corn in his/her portfolio (as evidenced in the Dynamic conditional correlations analysis). Our analysis based on the recent applications of the wavelet decompositions and the dynamic conditional correlations helps us unveil the portfolio diversification opportunities for the investors with heterogeneous investment horizons or holding stocks over different periods.
    Keywords: Commodity, MODWT, CWT, DCC-MGARCH, Diversification, Causality
    JEL: C22 C58 Q43
    Date: 2014–06–29
  9. By: Amélie Charles (Audencia Recherche - Audencia); Olivier Darné (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Zakaria Moussa (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: This paper analyzes the sensitivity of the three Fama-French factors in relation to the US economic uncertainty, by using three proxies of uncertainty measures in macroeconomics, financial markets or economic policy from January 1985 to December 2011. We examine the extent, speed and duration of response of the three (market, size and value) risk premia to movements in the US uncertainties under low and high volatility regimes through the Markov-regime switching VAR model. We find clearly two (high and low) volatility regimes, where each regime is highly persistent. The high volatility regime is the prevailing regime between periods of 2000 to 2003, and 2008 to the end of 2012. We show a negative effect of changes in financial and economic policy uncertainties on value risk premia during the high volatility regime. This finding imply that investors move to growth stocks from value stocks in high volatility regime when volatility is expected to increase. The latter suggests that value firms can be more risky than growth firms during high volatility periods. We also propose an aggregate measure of economic uncertainty by using Principal Component Analysis based on the three uncertainty proxies. The results on value risk premia are confirmed. We find a negative relationship between the market risk premium and the change in the economic uncertainty index in high volatility regime. Finally, by adding a liquidity risk factor we find a positive effect of financial uncertainty on liquidity factor during the high volatility regime, suggesting that investors preferring liquidity stocks when market uncertainty increases.
    Keywords: Fama-French factors; Economic uncertainty; Markov-switching model.
    Date: 2014–06–26
  10. By: Dirk Ulbricht
    Abstract: Do timing and time diversification improve the average investor's stock market return? Contrary to literature's scenario of wealthy investors, average investors invest each month over life. Many purchases prevent investors from buying at peak, but horizons decrease, giving latter investments less time to offset losses. This paper accommodates timing using internal rates of return, facilitating the comparison of wealthy and average investors. One to 480 months investments in S&P and downward trending Nikkei, are compared. In conclusion, average investor's risk and return ratios improve with horizon and, compared to wealthy investors, in bullish and deteriorate in bearish markets.
    Keywords: Dollar-weighted return, retirement accounts, risk, cost averaging, DCA, time diversification
    JEL: G11 G17 D14
    Date: 2014
  11. By: Jemaa, Fatma; Ben Khaled, Wafa
    Abstract: En 2011, 48% des risk managers prennent leurs fonctions dans le cadre d’une création de poste. La proportion de directeurs du développement durable ayant pris leurs fonctions dans le cadre d’une création de poste l’année suivante est voisine. Ces chiffres sont la quantification d’un constat : les structures de « risk management » et de « développement durable » se généralisent au sein des entreprises tout comme les pratiques managériales qui leur sont associées. Ce travail de recherche propose des facteurs explicatifs de niveau macro à cette constatation méso grâce à la mobilisation de la sociologie culturelle de Mary Douglas combinée à la notion de prudence.
    Keywords: Risk management; Développement durable; Prudence; Culture; Douglas;
    JEL: A14 M14 Q56
    Date: 2014–05

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