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on Risk Management |
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Issue of 2014‒09‒08
twelve papers chosen by |
| By: | David E. Giles (Department of Economics, University of Victoria); Qinlu Chen |
| Abstract: | Gold, and other precious metals, are among the oldest and most widely held commodities used as a hedge against the risk of disruptions in financial markets. The prices of such metals fluctuate substantially, introducing a risk of its own. This paper’s goal is to analyze the risk of investment in gold, silver, and platinum by applying Extreme Value Theory to historical daily data for changes in their prices. The risk measures adopted in this paper are Value at Risk and Expected Shortfall. Estimates of these measures are obtained by fitting the Generalized Pareto Distribution, using the Peaks-Over-Threshold method, to the extreme daily price changes. The robustness of the results to changes in the sample period is discussed. Our results show that silver is the most risky metal among the three considered. For negative daily returns, platinum is riskier than gold; while the converse is true for positive returns. |
| Keywords: | Inequality; Precious metals; extreme values; portfolio risk; value-at-risk; generalized Pareto distribution |
| JEL: | C46 C58 G10 G32 |
| Date: | 2014–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:vic:vicewp:1402&r=rmg |
| By: | Shawkat Hammoudeh; Duc Khuong Nguyen; Juan Carlos Reboredo; Xiaoqian Wen |
| Abstract: | In this article, we examine the recent trends in dependence structure between the fast-growing commodity markets and the stock markets in China in order to draw implications for portfolio investment. We address this issue by using copula functions that allow for measuring both average and tail dependence. Our results provide evidence of small and positive correlations between these markets, suggesting that commodity futures are a desirable asset class for portfolio diversification. By comparing the market risks of alternative portfolio strategies, we show that Chinese investors can take advantage of commodity futures to obtain risk diversification and downside risk reduction benefits. |
| Keywords: | China; commodity futures; equity markets; co-movement; copulas; portfolio risk management. |
| JEL: | C52 G11 G15 |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-561&r=rmg |
| By: | Naceur Naguez; Jean-Luc Prigent |
| Abstract: | In this paper, we analyze the Kappa performance measures of portfolio returns having Johnson distributions. Kappa performance measures are based on downside risk measures, which better allows evaluating risk and performance of complex returns such as those of hedge funds. These measures take account of the whole return distribution. We illustrate how they evolve according to the four basic parameters of the Johnson distributions. |
| Keywords: | Portfolio performance; Hedge funds; Downside risk measures; Kappa performance measures; Johnson distributions |
| JEL: | C16 D03 G11 |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-510&r=rmg |
| By: | Guillaume Marceau |
| Abstract: | In this article, we propose an organizational communication oriented approach to Risk Management. The business domain studied here is the pharmaceutical industry, which has a high sensitivity to communication. Through two examples, we show how and in which context risk management can be an essential component in corporate management, by laying partially aside financial aspects, although they are usually put forward in this field. |
| Keywords: | risk management; organizational communication; crisis; vigilance |
| JEL: | I11 M14 O32 |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-536&r=rmg |
| By: | Mehmet Balcılar; Rıza Demirer; Shawkat Hammoudeh; Duc Khuong Nguyen |
| Abstract: | This study examines the risk spillovers between energy futures prices and Europe-based carbon futures contracts. We use a Markov regime-switching dynamic correlation, generalized autoregressive conditional heteroscedasticity (MSDCC- GARCH) model in order to capture the time variations and structural breaks in the spillovers. We further evaluate the optimal weights, hedging effectiveness, and dynamic hedging strategies for the MS-DCC-GARCH model based on both the regime dependent and regime independent optimal hedge ratios. We finally complement our analysis by examining the in- and out-of sample hedging performances for alternative strategies. Our results mainly show significant volatility and time-varying risk transmission from energy markets to carbon market. We also find that spot and futures segments of the emission markets exhibit time-varying correlations and volatile hedging effectiveness. These results have important investment and policy implications. |
| Keywords: | Multivariate regime-switching; time-varying correlations; hedging; CO2 allowance prices. |
| JEL: | C32 G11 G19 Q47 Q54 |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-552&r=rmg |
| By: | Su, EnDer |
| Abstract: | This paper aims to study the structural tail dependences and risk magnitude of contagion risk during high risk state between domestic and foreign banks. Empirically, volatility of stock returns has the properties of persistence, clustering, heteroscedasticity, and regime switchs. Thus, the threshold regression model having piecewise regression capability is used to classify the volatility index of influential foreign banks as “high” and “low” of two volatility states to further estimate Kendall taus i.e. structural tail dependences between banks using three models: Gaussian, t, and Clay copula GARCH. Using fuzzy c-means method, both domestic and foreign banks are categorized into 10 groups. Through the groups, 5 domestic and 7 foreign representative banks are identified as the research objects. Then, the in-sample data of daily banks’ stock prices covering 01/03/2003 ~06/30/2006 are used to estimate the parameters of threshold copula GARCH model and Kendall taus. The out-of-sample data covering 07/01/2006~03/25/2014 are used to estimate the Kendall taus gradually using rolling window technique. Several research findings are described as follows. In high state, the tail dependences are two times much larger than in low state and most of them have up-trend property after sub-prime crisis and reach the peak during Greek debt. It implies that the volatility is high in risk event and the contagion is high after risk event. In high state, HNC has the highest tail dependences with foreign banks but its value at risk is the lowest. It can be considered as an international attribute bank with lower risk. On the contrary, YCB and FCB have the lower tail dependences with foreign banks but their value at risks are quite high. They are viewed as a local attribute bank with higher risk. The Bank of American, Citigroup, and UBS AG have the relatively higher value at risk. Citigroup has been tested to Granger cause ANZ and all domestic banks. It is necessary to beware the contagion risk from Citigroup. Among three models, in low state, Gaussian and t copula models have the better significance of estimation than Clay copula model. However in high state, Clay copula model has the same acceptable estimation and more capability to uncover the instant nonlinear jumps of tail dependences while Gaussian and t copula models reveal the linear changes of tail dependences as a curve. |
| Keywords: | Contagion Risk, Threshold GARCH, Copula, Tail Dependences |
| JEL: | C00 G10 |
| Date: | 2014–08–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58161&r=rmg |
| By: | Walid Chkili; Chaker Aloui; Duc Khuong Nguyen |
| Abstract: | This article uses the DCC-FIAPARCH model to examine the time-varying properties of conditional return and volatility of crude oil and US stock markets as well as their dynamic correlations over the period 1988-2013. Our results indicate that both the long memory and asymmetric behavior characterize the conditional volatility of oil and stock market returns. On the other hand, the dynamic conditional correlations (DCC) between the crude oil and US stock markets are affected by several economic and geopolitical events. When looking at the optimal design of an oil-stock portfolio, we find that investors in the US markets should have more stocks than crude oil asset in order to reduce their portfolio risk. Finally, the use of the DCC-FIAPARCH model that explicitly accounts for long memory and asymmetric volatility effects enables the investors to effectively hedge the risk of their stock portfolios with lower costs, as compared to the standard DCC-GARCH model. |
| Keywords: | asymmetric volatility, long memory, crude oil, stock returns, hedging strategy. |
| JEL: | C58 G1 G15 Q43 |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-549&r=rmg |
| By: | Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); John Pattison (Independent) |
| Abstract: | Financial regulation has shifted from a system managed as an oligopoly dominated by the G2/G5 to expanded club membership like the Basel Committee for Banking Supervision (BCBS). Expansive clubs have to agree to terms that are closer to the preferences of softregulation members. Yet, once a global agreement on minimum standards, such as Basel III, is reached, the implementation is left to national or regional regulators. Deviations from the Basel III standards are bound to occur; the complexity of the agreement will facilitate an asymmetric implementation of national regulation and supervision. On the high side, countries like the US, UK, Australia, some Scandinavian countries and Canada have chosen higher standards. On the low side, we expect deviations to take place in those member countries of the Eurozone that are heterogeneous, have different preferences and tradeoffs between regulatory stringency and economic activity. The requirements of both global clubs and the EU regional club for transparency, monitoring and a level playing field will cause a collision between the interests of the clubs and their members, threatening to undermine global standard setting at the BCBS. |
| Keywords: | Basel III, clubs, financial regulation, Eurozone, asymmetries |
| JEL: | F33 F36 F42 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:iuk:wpaper:2014-10&r=rmg |
| By: | Mehdi Mili; Yosro M'Hamdi; Moez Khalfallah; Frederic Teulon |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-544&r=rmg |
| By: | Mohamed Arouri; Shawkat Hammoudeh; Fredj Jawadi; Duc Khuong Nguyen |
| Abstract: | We investigate the dynamic relationships between the US five-year financial CDS sector index spreads for the banking, financial services and insurance sectors in the short- and long-run over the recent period which is marked by the onset of the global financial crisis. For this purpose, we implement a Smooth Transition Error- Correction Model (STECM) to accommodate the presence of nonlinearities and asymmetry in the adjustment process of the CDS variables towards their long-run equilibrium. Our findings provide evidence of significant long-run equilibrium links for two out of the three CDS indices, which are found to be typically asymmetric and nonlinear. These findings are more potent and more strongly policy oriented when the control variables are introduced into an extended STECM. |
| Keywords: | sector CDS indices, credit risk, long-run equilibrium, nonlinear risk models, forcing variables |
| JEL: | C58 G11 |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-553&r=rmg |
| By: | Itamar Caspi (Research Department; Bank of Israel); Nico Katzke (Department of Economics, Stellenbosch University, South Africa; Department of Economics, University of Pretoria) |
| Abstract: | This paper sets out to date-stamp periods of historic oil price explosivity (or bubbles) using the Generalized sup ADF (GSADF) test procedure suggested by Phillips et al. (2013). The date-stamping strategy used in this paper is effective at identifying periodically collapsing bubbles; a feature found lacking with previous bubble detecting methods. We set out to identify bubbles in the real price and the nominal price-supply ratio of oil for the period 1876 - 2014. The recursive identification algorithms used in this study identifies several periods of significant explosivity, and as such provides future researchers with a reference for studying the macroeconomic impact of historical periods of significant oil price build-ups. |
| Keywords: | Oil-prices, Date-Stamping Strategy, Periodically Collapsing Bubbles, Explosivity, Flexible Window, GSADF Test, Commodity Price Bubbles |
| JEL: | C15 C22 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201445&r=rmg |
| By: | Fuad Aleskerov (National Research University Higher School); Irina Andrievskaya (National Research University Higher School); Elena Permjakova (National Research University Higher School) |
| Abstract: | The issue of systemic importance has received particular attention since the recent financial crisis when it came to the fore that an individual financial institution can disturb the whole financial system. Interconnectedness is considered as one of the key drivers of systemic importance. Several measures have been proposed in the literature in order to estimate the interconnectedness of financial institutions and systems. However, most of them lack an important dimension of this characteristic: intensities of agent interaction. This paper proposes a novel method that solves this issue. A distinctive feature of our approach is that it takes into consideration not just the interconnectedness of agents but also their interaction intensities. The approach is based on the power index and centrality analysis and is employed to find a key borrower in a loan market. To illustrate the feasibility of our methodology we apply it at the European Union level and find key countries-borrowers. |
| Keywords: | Power index, key borrower, systemic importance, interconnectedness, centrality |
| JEL: | C7 G2 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:33/fe/2014&r=rmg |