nep-rmg New Economics Papers
on Risk Management
Issue of 2014‒10‒13
nine papers chosen by
Stan Miles
Thompson Rivers University

  1. Parametric Risk Parity By Lorenzo Mercuri; Edit Rroji
  2. Measuring Systemic Risk in a Post-Crisis World By O. de Bandt; J.-C. Héam; C. Labonne; S. Tavolaro
  3. Risk Premia: Asymmetric Tail Risks and Excess Returns By Y. Lemp\'eri\`ere; C. Deremble; T. T. Nguyen; P. Seager; M. Potters; J. P. Bouchaud
  4. Ex Ante Capital Position, Changes in the Different Components of Regulatory Capital and Bank Risk By B. Camara; L. Lepetit; A. Tarazi
  5. Estimating the risk of joint defaults: an application to central bank collateralized lending operations By Dariusz Gatarek; Juliusz Jabłecki
  6. Banking regulation and supervision in the next 10 years and their unintended consequences By D. Nouy
  8. The Republic of Kazakhstan: Financial System Stability Assessment By International Monetary Fund. Middle East and Central Asia Dept.
  9. A Risk Map of Markups: Why We Observe Mixed Behaviors of Markups By Seong-Hoon Kim; Seongman Moon

  1. By: Lorenzo Mercuri; Edit Rroji
    Abstract: Any optimization algorithm based on the risk parity approach requires the formulation of portfolio total risk in terms of marginal contributions. In this paper we use the independence of the underlying factors in the market to derive the centered moments required in the risk decomposition process when the modified versions of Value at Risk and Expected Shortfall are considered. The choice of the Mixed Tempered Stable distribution seems adequate for fitting skewed and heavy tailed distributions. The ensuing detailed description of the optimization procedure is due to the existence of analytical higher order moments. Better results are achieved in terms of out of sample performance and greater diversification.
    Date: 2014–09
  2. By: O. de Bandt; J.-C. Héam; C. Labonne; S. Tavolaro
    Abstract: In response to the very large number of quantitative indicators that have been put forward to measure the level of systemic risk since the start of the subprime crisis, the paper surveys the different indicators available in the economic and financial literature. It distinguishes between (i) indicators related to institutions, based either on market data or regulatory/accounting data; (ii) indicators addressing risks in financial markets and infrastructures; (iii) indicators measuring interconnections and network effects - where research is currently very active-; and (iv) comprehensive indicators. All these indicators are critically assessed and ways forward for a better understanding of systemic risk are suggested.
    Keywords: systemic risk, market data, balance sheet data, regulatory data, financial network, funding liquidity.
    JEL: G2 G3 E44
    Date: 2013
  3. By: Y. Lemp\'eri\`ere; C. Deremble; T. T. Nguyen; P. Seager; M. Potters; J. P. Bouchaud
    Abstract: We present extensive evidence that "risk premium" is strongly correlated with tail-risk skewness but very little with volatility. We introduce a new, intuitive definition of skewness and elicit a linear relation between the Sharpe ratio of various risk premium strategies (Equity, Fama-French, FX Carry, Short Vol, Bonds, Credit) and their negative skewness. We find a clear exception to this rule: trend following (and perhaps the Fama-French "High minus Low"), that has positive skewness and positive excess returns, suggesting that some strategies are not risk premia but genuine market anomalies. Based on our results, we propose an objective criterion to assess the quality of a risk-premium portfolio.
    Date: 2014–09
  4. By: B. Camara; L. Lepetit; A. Tarazi
    Abstract: We investigate the impact of changes in capital of European banks on their risk-taking behavior from 1992 to 2006, a time period covering the Basel I capital requirements. We specifically focus on the initial level and type of regulatory capital banks hold. First, we assume that risk changes depend on banks' ex ante regulatory capital position. Second, we consider the impact of an increase in each component of regulatory capital on banks? risk changes. We find that, for highly capitalized, adequately capitalized and strongly undercapitalized banks, an increase in equity or in subordinated debt positively affects risk. Moderately undercapitalized banks tend to invest in less risky assets when their equity ratio increases but not when they improve their capital position by extending hybrid capital or subordinated debt. On the whole, our conclusions support the need to implement more explicit thresholds to classify European banks according to their capital ratios but also to clearly distinguish pure equity from hybrid and subordinated instruments.
    Keywords: Bank Risk, Bank Capital, Capital regulation, European banks.
    JEL: G21 G28
    Date: 2013
  5. By: Dariusz Gatarek (HVB Unicredit; Systems Research Institute, Polish Academy of Sciences); Juliusz Jabłecki (Faculty of Economic Sciences Warsaw University; Narodowy Bank Polski / Instytut Ekonomiczny)
    Abstract: Central bank lending to commercial banks is typically collateralized which reduces central bank’s credit risk exposure to “double default events” when the counterparty and the issuer of the underlying collateral asset both default in a short period of time. This paper presents a simple model for correlated defaults which are the key drivers of residual credit risk in central bank’s repo portfolios. In the model default times of counterparties and collateral issuers are determined by idiosyncratic and systematic factors, whereby a name defaults if it is struck by either factor for the first time. The novelty of our approach lies in representing systematic factors as increasing sequences of random variables. Such a setting allows to build a rich dependence structure that is free of the flaws inherent in the Gaussian copula-based approaches currently regarded as state of the art solutions for central banks.
    Keywords: joint defaults, collateralized lending, residual credit risk
    JEL: G12 G13
    Date: 2014
  6. By: D. Nouy
    Abstract: In the paper, we deal with the unexpected effects of new regulations and supervision and provide recommendations to ensure their effectiveness. New regulations essentially aim at strengthening the solvency and the liquidity of financial institutions. However, some technical aspects of these regulations, particularly regarding the effect on deleveraging, the use of a non-risk weighted leverage ratio and regulatory arbitrage require continuous monitoring. In addition, banking supervision is evolving toward more intrusive approach, more stress test exercises and an increasing role of macro prudential supervision. These changes in supervisory approach also require an efficient management of communication in order to avoid market overreaction and banks? ex ante inefficient behaviour. Supervisors have to anticipate and manage these unintended effects. The European Banking Union will help address these challenges by setting a single supervisory mechanism, a single resolution mechanism and a single deposit insurance scheme.
    Keywords: Basel III, CRD IV, regulatory arbitrage, stress test, macro prudential supervision, Banking Union.
    JEL: G21 G23 G28
    Date: 2013
  7. By: Dumitru-Catalin BURSUC (National Defense University “Carol I”); Ion CALIN
    Abstract: Risk management requires for a proper reaction of the organization which has to undertake a set of measures which, in general, needs allocation of supplementary resources. This allocation must be based on very well justified integrated risk analysis.The establishment of the critical level, until the risk is appreciated to be inside the tolerance range, is the responsibility of the decision-maker (policy-maker) at the highest level of the organization which relies its success on his management experience, but also on the lessons-learn during incidents and events produced under the same circumstances. The design of the response measures without taking into account the context of the real situation may decrease their efficiency until zero. The projective nature of these measures requires an integrated analysis of the environment and limitations towards directions of appearance of those events with the highest probability.
    Date: 2013–11
  8. By: International Monetary Fund. Middle East and Central Asia Dept.
    Keywords: Financial system stability assessment;Financial sector;Financial safety nets;Liquidity management;Bank resolution;Bank supervision;Insurance supervision;Securities regulations;Capital markets;Risk management;Economic indicators;Reports on the Observance of Standards and Codes;Kazakhstan;
    Date: 2014–08–29
  9. By: Seong-Hoon Kim (University of St Andrews); Seongman Moon (Universidad Carlos III de Madrid)
    Abstract: This paper proposes an explanation for mixed evidence on the behaviors of markups. The key mechanism consists of two complementary channels of risk internalization that arise when firms face uninsurable business risks. One channel is based on passive risk consideration, through which firms raise prices to abide by riskier business thereby associating higher production with higher prices. The other channel is based on active risk management, through which firms lower prices to handle riskier business thereby associating higher production with lower prices. The relative responsiveness of the two channels to a shock depends on each firm’s fundamental characteristics and leads to a sharp division of markup cyclicality across sectors.
    Keywords: markups, risk internalization, technology, market power, cost channel, hedging channel
    JEL: D21 E32
    Date: 2013–12–01

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