nep-rmg New Economics Papers
on Risk Management
Issue of 2014‒11‒28
sixteen papers chosen by

  1. Semiparametric Conditional Quantile Models for Financial Returns and Realized Volatility By Žikeš, Filip; Baruník, Jozef
  2. Price Volatility and Risk Management: The Case of Rice By Banterle, Alessandro; Vandone, Daniela
  3. Supply Chain Risk Management in der Industrie - am Beispiel der Metall- und Elektroindustrie By Bayer, Frank; Bioly, Sascha
  4. Liquidity risk and contagion in interbank markets: a presentation of Allen and Gale Model By FERROUHI, El Mehdi; LEHADIRI, Abderrassoul
  5. W.U.I. on Fire: Risk, Salience & Housing Demand By Shawn J. McCoy; Randall P. Walsh
  6. Effectiveness marketing strategies and risk measurement in the sugarcane industry By Capitani, Daniel H. D.; Mattos, Fabio; Xavier, Carlos E. O.
  7. A large neighbourhood metaheuristic for the risk-constrained cash-in-transit vehicle routing problem By TALARICO, Luca; SÖRENSEN, Kenneth; SPRINGAEL, Johan
  8. Is Barrier version of Merton model more realistic? Evidence from Europe By Petra Andrlíková
  9. A general approach to recovering market expectations from futures prices with an application to crude oil By Baumeister, Christiane; Kilian, Lutz
  10. Realized wavelet-based estimation of integrated variance and jumps in the presence of noise By Baruník, Jozef; Vácha, Lukáš
  11. The Impact of Oil Price Shocks on the Stock Market Return and Volatility Relationship By Wensheng Kang; Ronald A. Ratti; Kyung Hwan Yoon
  12. Real and Financial Vulnerabilities from Crossborder Banking Linkages By Kyunghun Kim; Srobona Mitra
  13. Insurance Markets for the Elderly By Hanming Fang
  14. Evaluating the Effectiveness of Flood Mitigation Policies in the U.S. By Fan, Qin; Davlasheridze, Meri
  15. Optimal Maturity Structure of Sovereign Debt in Situation of Near Default By Gabriel Desgranges; Céline Rochon
  16. Price Volatility Transmission: Linking the U.S. Crude Oil, Corn and Plastics Markets By Jiang, Jingze; Marsh, Thomas L.; Tozer, Peter R.

  1. By: Žikeš, Filip; Baruník, Jozef
    Abstract: This paper investigates how the conditional quantiles of future returns and volatility of financial assets vary with various measures of ex-post variation in asset prices as well as option-implied volatility. We work in the exible quantile regression framework and rely on recently developed model-free measures of integrated variance, upside and downside semivariance, and jump variation. Our results for the S&P 500 and WTI Crude Oil futures contracts show that simple linear quantile regressions for returns and heterogenous quantile autoregressions for realized volatility perform very well in capturing the dynamics of the respective conditional distributions, both in absolute terms as well as relative to a couple of well-established benchmark models. The models can therefore serve as useful risk management tools for investors trading the futures contracts themselves or various derivative contracts written on realized volatility.
    Keywords: conditional quantiles,Value-at-Risk,quantile regression,realized measures
    JEL: C14 C21 G17 G32
    Date: 2014
  2. By: Banterle, Alessandro; Vandone, Daniela
    Abstract: The paper aims at analysing rice-price volatility over the last five years, and at identifying strengths and weaknesses of financial-risk management tools other than derivatives. In particular, it focuses on innovative insurance products and on their potential use in the EU Mediterranean area, specifically in Italy that is the main rice producer in this area.
    Keywords: Agricultural commodity price volatility, rice price volatility, risk management, revenue insurance, Agribusiness, Food Consumption/Nutrition/Food Safety, Food Security and Poverty, Research Methods/ Statistical Methods, Risk and Uncertainty, Q10, Q13, Q14, Q18, G10, G22,
    Date: 2013–09
  3. By: Bayer, Frank; Bioly, Sascha
    Abstract: Today industrial enterprises are confronted with an increasing trend to focus on their core capabilities. By outsourcing certain activities to logistics providers or suppliers a company has the possibility to create a lean organization and decrease fixed costs. As a result supply chains gain complexity and the dependency on third parties rises which bears new risks for the functionality of the value network. While in the past only risks connected to internal processes were analyzed a contemporary approach is pursuing the theory that risks can move along supply chains and influence the operations of multiple supply chain partners. Because of that Supply Chain Risk Management was introduced as a new academic discipline that deals with the identification, evaluation and mitigation of such risk factors. The present working paper explains the theoretical background of Supply Chain Risk Management and transfers the findings to a company belonging.
    Date: 2014
  4. By: FERROUHI, El Mehdi; LEHADIRI, Abderrassoul
    Abstract: The paper analyzes liquidity risk and contagion in interbank markets. The aim of the research is to define the different structures of interbank markets and structures that allow the better allocation of liquidity and thus avoid the spread of crisis in the whole system. For this purpose, this paper examines Allen and Gale model. This model is the pioneer model in the management of liquidity risk in the interbank market. We will then analyze the mechanisms that explain the spread of liquidity risk in the banking system both at national and international level.
    Keywords: liquidity, risk, interbank market, structure, Morocco, financial crisis
    JEL: G21 G32
    Date: 2013–02–21
  5. By: Shawn J. McCoy; Randall P. Walsh
    Abstract: We investigate the effects of wildfires on risk perceptions by quantifying the impact of severe wildfires on housing price and transaction dynamics. Our empirical results are interpreted through the lens of a parsimonious model of sorting between locations that vary in their perceived level of fire risk. The model allows us to infer the evolution of risk perceptions among potential sellers and buyers of properties located in the proximity of large wildfire events. Our empirical analysis is based on a multi-dimensional characterization of the potential linkages between fire events and risk perceptions which incorporates measures of both proximity and burn scar views as well as a properties latent wildfire risk. Our analysis provides a connection between changes in underlying risk perceptions and the observed differences in housing price and quantity dynamics across properties that differ in both their spatial relationship to wild fire events (views vs. proximity) and their latent risk for wildfire.
    JEL: H23 Q5 R31
    Date: 2014–10
  6. By: Capitani, Daniel H. D.; Mattos, Fabio; Xavier, Carlos E. O.
    Keywords: Agricultural Finance, Risk and Uncertainty,
    Date: 2014–05
  7. By: TALARICO, Luca; SÖRENSEN, Kenneth; SPRINGAEL, Johan
    Abstract: In this paper, we propose a new metaheuristic to solve the Risk constrained Cash-in-Transit Vehicle Routing Problem (rctvrp). The rctvrp is a variant of the well-known capacitated vehicle routing problem and models the problem of routing vehicles in the cash-in-transit sector. In the rctvrp, the risk associated with a robbery represents a critical aspect that is treated as a limiting factor instead of the vehicle capacity which is typical of capacitated vehicle routing problems. The risk of being robbed is assumed to be proportional both to the amount of cash being transported and the time/distance covered by the vehicle carrying the cash. The maximum vehicle exposure to risk limited by a certain risk threshold. A new metaheuristic, called aLNS (Ant colony heuristic with Large Neighbourhood Search), is described. The aLNS metaheuristic combines the ant colony heuristic for the travelling salesman problem and a large neighbourhood search heuristic within an iterated local search heuristic framework. A new library of rctvrp instances with known optimal solutions is proposed, and split in two sets named set O and set S respectively. The aLNS algorithm is extensively tested on small, medium and large benchmark instances and compared with all existing solution approaches for the rctvrp problem.
    Keywords: Vehicle routing, Risk, Security, Cash-in-transit, Metaheuristic
    Date: 2014–10
  8. By: Petra Andrlíková (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)
    Abstract: A company can go bankrupt if the value of its assets drops below the debt level. This event can happen at any point in time. This is however not taken into account in the plain vanilla option framework of the Merton model. Theoretically, the barrier version of the Merton model shall therefore be more accurate since it allows the company to go bankrupt at time prior to or at maturity. This theoretical prediction is tested on European most liquid companies. The implied default probabilities are compared with observed default rates given the Standard & Poor's rating grades. We provide evidence that the Barrier version of Merton model is more realistic, i.e. provide a significantly better fit to observed default rates, based on the value of the Diebold-Mariano test statistics.
    Keywords: structural credit risk model, barrier option pricing theory, down-and-in option, default probability
    JEL: G12 G15 C58 C51
    Date: 2014–04
  9. By: Baumeister, Christiane; Kilian, Lutz
    Abstract: Futures markets are a potentially valuable source of information about market expectations. Exploiting this information has proved difficult in practice, because the presence of a timevarying risk premium often renders the futures price a poor measure of the market expectation of the price of the underlying asset. Even though the expectation in principle may be recovered by adjusting the futures price by the estimated risk premium, a common problem in applied work is that there are as many measures of market expectations as there are estimates of the risk premium. We propose a general solution to this problem that allows us to uniquely pin down the best possible estimate of the market expectation for any set of risk premium estimates. We illustrate this approach by solving the long-standing problem of how to recover the market expectation of the price of crude oil. We provide a new measure of oil price expectations that is considerably more accurate than the alternatives and more economically plausible. We discuss implications of our analysis for the estimation of economic models of energy-intensive durables, for the debate on speculation in oil markets, and for oil price forecasting.
    Keywords: Futures,risk premium,market expectation,model uncertainty,forecast,oil price
    JEL: C53 D84 G14 Q43
    Date: 2014
  10. By: Baruník, Jozef; Vácha, Lukáš
    Abstract: We introduce wavelet-based methodology for estimation of realized variance allowing its measurement in the time-frequency domain. Using smooth wavelets and Maximum Overlap Discrete Wavelet Transform, we allow for the decomposition of the realized variance into several investment horizons and jumps. Basing our estimator in the two-scale realized variance framework, we are able to utilize all available data and get feasible estimator in the presence of microstructure noise as well. The estimator is tested in a large numerical study of the finite sample performance and is compared to other popular realized variation estimators. We use different simulation settings with changing noise as well as jump level in different price processes including long memory fractional stochastic volatility model. The results reveal that our wavelet-based estimator is able to estimate and forecast the realized measures with the greatest precision. Our timefrequency estimators not only produce feasible estimates, but also decompose the realized variation into arbitrarily chosen investment horizons. We apply it to study the volatility of forex futures during the recent crisis at several investment horizons and obtain the results which provide us with better understanding of the volatility dynamics.
    Keywords: quadratic variation,realized variance,jumps,market microstructure noise,wavelets
    Date: 2014
  11. By: Wensheng Kang; Ronald A. Ratti; Kyung Hwan Yoon
    Abstract: This paper examines the impact of structural oil price shocks on the covariance of U.S. stock market return and stock market volatility. We construct from daily data on return and volatility the covariance of return and volatility at monthly frequency. The measures of daily volatility are realized-volatility at high frequency (normalized squared return), conditional-volatility recovered from a stochastic volatility model, and implied-volatility deduced from options prices. Positive shocks to aggregate demand and to oil-market specific demand are associated with negative effects on the covariance of return and volatility. Oil supply disruptions are associated with positive effects on the covariance of return and volatility. The spillover index between the structural oil price shocks and covariance of stock return and volatility is large and highly statistically significant.
    Keywords: Stock return and volatility, oil price shocks, stock volatility, structural VAR
    JEL: E44 G10 Q41 Q43
    Date: 2014–11
  12. By: Kyunghun Kim; Srobona Mitra
    Abstract: This paper looks at the vulnerabilities stemming from banking sector linkages between countries and their macroeconomic effects. It finds that credit risks (from a banking system’s claims on other countries) and funding risks (from a banking system’s liabilities to another) have declined over the past five years. It also finds that funding vulnerabilities have real effects. During normal times, funding vulnerabilities are associated with significant positive GDP growth surprises. During crisis times, funding vulnerabilities are associated with significant negative GDP growth surprises. The results tell us that policymakers should pay more attention to understanding crossborder funding risks.
    Keywords: Banking systems;Cross-border banking;Interconnectedness;Credit risk;External shocks;Cross country analysis;Network Linkages; Banking; Funding Risks; Credit Risks; GDP surprises.
    Date: 2014–07–25
  13. By: Hanming Fang
    Abstract: We describe the risks faced by the ageing population and survey the corresponding insurance markets for these risks. We focus on income risk, health expenditure risk, long-term care expenditure risk and mortality risk. We also discuss the interactions between social insurance and private insurance markets.
    JEL: D14 G22 H51 H55 I13
    Date: 2014–10
  14. By: Fan, Qin; Davlasheridze, Meri
    Abstract: We employ a two-stage random utility model (RUM) to estimate people’ marginal willingness to pay (WTP) for enhancing community-level floodplain management activities reflected in the National flood insurance program (NFIP)’s Community Rating System (CRS) program. CRS is a voluntary program, which provides the participating communities with discounts on flood insurance premium in exchange for strengthened flood protection activities. Results show that people with different demographics react differently to flood risk and generally value flood protection activities. We find that among the CRS program activities, people place the highest value on activities concerning repetitive flood loss reduction, with the second highest being public information disclosure about flood risk. In addition, results suggest that people significantly value structural mitigation projects such as flood- and debris- control dams. Importantly, our results suggest that water body as an amenity measure is perceived positively in people’s location choices, nonetheless flood risk information disclosure diminishes the amenity value.
    Keywords: Flood Insurance, Community Rating System, Tiebout Sorting, Locational Equilibrium, Environmental Economics and Policy, Risk and Uncertainty, Q51, Q54 and Q58,
    Date: 2014
  15. By: Gabriel Desgranges; Céline Rochon
    Abstract: We study the relationship between default and the maturity structure of the debt portfolio of a Sovereign, under uncertainty. The Sovereign faces a trade-off between a future costly default and a high current fiscal effort. This results into a debt crisis in case a large initial issuance of long term debt is followed by a sequence of negative macro shocks. Prior uncertainty about future fundamentals is then a source of default through its effect on long term interest rates and the optimal debt issuance. Intuitively, the Sovereign chooses a portfolio implying a risk of default because this risk generates a correlation between the future value of long term debt and future fundamentals. Long term debt serves as a hedging instrument against the risk on fundamentals. When expected fundamentals are high, the Sovereign issues a large amount of long term debt, the expected default probability increases, and so does the long term interest rate.
    Keywords: Sovereign debt;Debt burden;Default;Financial institutions;Econometric models;Long Term Debt; Maturity Structure; Optimal Default; Rational Expectations; Sovereign Debt Crisis; Uncertainty
    Date: 2014–09–12
  16. By: Jiang, Jingze; Marsh, Thomas L.; Tozer, Peter R.
    Abstract: Policy changes and the evolution of green technology have induced new links among markets. In this research, we study a representative market system, the U.S. crude oil, corn and plastics markets affected by policies promoting corn-based energy and corn-based bioplastics production. The vector error correction model (VECM) proxies the mean equation for the ARCH process is established to study price transmission among markets in United States, especially price volatility spillover effects. We find that plastics prices and corn futures prices are moving together in the long run, but that the crude oil futures prices is weakly exogenous to this system. We also show the existence of volatility spillover from crude oil futures price to corn futures price, but not from crude oil futures price to plastics price. Moreover, after EISA 2007 taken effect, the risk spillover effects from crude oil market to corn market is greater, and the significant bidirectional volatility transmission between corn future and plastics market is established as well, which brings new challenges to stake holders on both markets and requires them to re-evaluate the risk management strategy.
    Keywords: corn future, crude oil future, plastics price, volatility spillover, long-run comovement, Resource /Energy Economics and Policy, Risk and Uncertainty, Q480, Q420,
    Date: 2014–07

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