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on Risk Management |
| By: | Maciej J. Capi\'nski |
| Abstract: | We present a method of hedging Conditional Value at Risk of a position in stock using put options. The result leads to a linear programming problem that can be solved to optimise risk hedging. |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1408.6673&r=rmg |
| By: | Galen Sher; Giuseppe Loiacono |
| Abstract: | Rationale and objective: The objective of this paper is to define the term "Maturity Transformation" and to measure the amount of interest rate risk arising from maturity transformation to which large European banks are exposed. Modeling approach and methodology: We collect balance sheet asset and liability data by maturity for the largest European banks, in more detail than is available from the major data providers. To these asset and liability exposures, we apply several methods for measuring interest rate repricing risk based on asset pricing models, including the latest Basel Committee guidelines. Preliminary/expected results: We are able to rank the banks in our sample based on measures of the interest rate risk of their loan portfolios using publicly available information. These risk measures are crucial for understanding the overall interest rate risk of banks, and for allowing supervisors, investors and customers to hold these institutions to account. |
| Keywords: | European Union, Finance, Microsimulation models |
| Date: | 2013–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:004912:5442&r=rmg |
| By: | Massimiliano Caporin (University of Padova); Eduardo Rossi (University of Pavia); Paolo Santucci de Magistris (Aarhus University and CREATES) |
| Abstract: | The volatility of financial returns is characterized by rapid and large increments. We propose an extension of the Heterogeneous Autoregressive model to incorporate jumps into the dynamics of the ex-post volatility measures. Using the realized-range measures of 36 NYSE stocks, we show that there is a positive probability of jumps in volatility. A common factor in the volatility jumps is shown to be related to a set of financial covariates (such as variance risk premium, S&P500 volume, credit-default swap, and federal fund rates). The credit-default swap on US banks and variance risk premium have predictive power on expected jump moves, thus confirming the common interpretation that sudden and large increases in equity volatility can be anticipated by credit deterioration of the US bank sector as well as changes in the market expectations of future risks. Finally, the model is extended to incorporate the credit-default swap and the variance risk premium in the dynamics of the jump size and intensity. |
| Keywords: | Volatility jumps, Realized range, HAR-V-J, CDS |
| JEL: | C22 C58 G01 |
| Date: | 2014–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2014-27&r=rmg |
| By: | Cédric Okou; Éric Jacquier |
| Abstract: | The horizon effect in the long-run predictive relationship between market excess return and historical market variance is investigated. To this end, the asymptotic multivariate distribution of the term structure of risk-return trade-offs is derived, accounting for short- and long-memory in the market variance dynamics. A rescaled Wald statistic is used to test whether the term structure of risk-return trade-offs is at, that is, the risk-return slope coeffcients are equal across horizons. When the regression model includes an intercept, the premise of a at term structure of risk-return relationships is rejected. In contrast, there is no significant statistical evidence against the equality of slope coeffcients from constrained risk-return regressions estimated at different horizons. A smoothed cross-horizon estimate is then proposed for the trade-off intensity at the market level. The findings underscore the importance of economically motivated restrictions to improve the estimation of intertemporal asset pricing models. |
| Keywords: | Horizon effect, Stock return predictability, Realized variance, Short-memory, Long-memory, |
| Date: | 2014–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2014s-36&r=rmg |
| By: | Anindya Goswami; Jeeten Patel; Poorva Sevgaonkar |
| Abstract: | This paper includes an original self contained proof of well-posedness of an initial-boundary value problem involving a non-local parabolic PDE which naturally arises in the study of derivative pricing in a generalized market model. We call this market model a semi-Markov modulated market. Although a wellposedness result of that problem is available in the literature, but this recent paper has a different proof. Here the existence of solution is established without invoking mild solution technique. We study the well-posedness of the initial-boundary value problem via a Volterra integral equation of second kind. The method of conditioning on stopping times was used only for showing uniqueness. Furthermore, in the present study we find an integral representation of the PDE problem which enables us to find a robust numerical scheme to compute derivative of the solution. This study paves for addressing many other interesting problems involving this new set of PDEs. Some derivations of external cash flow corresponding to an optimal strategy are presented. These quantities are extremely important when dealing with an incomplete market. Apart from these, the risk measures for discrete trading are formulated which may be of interest to the practitioners. |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1408.5266&r=rmg |
| By: | Huyen Pham (LPMA, CREST) |
| Abstract: | This survey reviews portfolio selection problem for long-term horizon. We consider two objectives: (i) maximize the probability for outperforming a target growth rate of wealth process (ii) minimize the probability of falling below a target growth rate. We study the asymptotic behavior of these criteria formulated as large deviations control pro\-blems, that we solve by duality method leading to ergodic risk-sensitive portfolio optimization problems. Special emphasis is placed on linear factor models where explicit solutions are obtained. |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1408.6455&r=rmg |