nep-rmg New Economics Papers
on Risk Management
Issue of 2015‒01‒26
fourteen papers chosen by

  1. Centrality-based Capital Allocations By Adrian Alter; Ben Craig; Peter Raupach
  2. Multiperiod optimal hedging ratios: Methodological aspects and application to wheat markets By Gianluca, Stefani; Tiberti, Marco
  3. Systemic risk and banking regulation: some facts on the new regulatory framework By Michele Bonollo; Irene Crimaldi; Andrea Flori; Fabio Pammolli; Massimo Riccaboni
  4. Loan Sales and Bank Liquidity Risk Management: Evidence from a U.S. Credit Register By Irani, Rustom M.; Meisenzahl, Ralf R.
  5. Nonparametric Estimates for Conditional Quantiles of Time Series By Jürgen Franke; Peter Mwita; Weining Wang;
  6. Extreme weather events in Belgium: calamity fund and on-farm strategies hand in hand? By Verspecht, Ann; Van Huylenbroeck, Guido; Buysse, Jeroen
  7. Robust Inference of Risks of Large Portfolios By Jianqing Fan; Fang Han; Han Liu; Byron Vickers
  8. Revisions to the simpler approaches to operational risk: the need for enhanced disclosures and risk sensitive measures By Ojo, Marianne
  9. Timing the Purchase of Livestock Risk Protection Insurance for Feeder Cattle By Griffith, Andrew P.; Lewis, Karen E.; Boyer, Christopher N.
  10. The impact of Basel III on trade finance: The potential unintended consequences of the leverage ratio By Auboin, Marc; Blengini, Isabella
  11. What predicts financial (in)stability? A Bayesian approach By Eidenberger, Judith; Neudorfer, Benjamin; Sigmund, Michael; Stein, Ingrid
  12. Transitions in the Stock Markets of the US, UK, and Germany By Matthias Raddant; Friedrich Wagner
  13. Liquidity Risk and the Credit Crunch of 2007-2008: Evidence from Micro-Level Data on Mortgage Loan Applications By Adonis Antoniades
  14. An insurance model to cover losses due to highly contagious animal disease in the Finnish pig sector By Niemi, Jarkko K.; Heikkilä, Jaakko; Myyrä, Sami

  1. By: Adrian Alter; Ben Craig; Peter Raupach
    Abstract: We look at the effect of capital rules on a banking system that is connected through correlated credit exposures and interbank lending. The rules, which combine individual bank characteristics and interconnectivity measures of interbank lending, are to minimize a measure of system-wide losses. Using the detailed German Credit Register for estimation, we find capital rules based on eigenvectors to dominate any other centrality measure, followed by closeness. Compared to the baseline case, capital reallocation based on the Adjacency Eigenvector saves about 15% in system losses as measured by expected bankruptcy costs.
    Keywords: Banking systems;Interconnectedness;Capital requirements;Credit risk;Systemic risk;Financial contagion;Econometric models;interconnectedness; systemic risk; SIFIs; network analysis
    Date: 2014–12–24
  2. By: Gianluca, Stefani; Tiberti, Marco
    Abstract: This work deals with methodological and empirical issues related to multiperiod optimal hedging OLS estimators. We propose an analytical formula for the multiperiod minimum variance hedging ratio starting from the triangular representation of a cointegrated system DGP. Since estimating the hedge ratio matching the frequency of data with the hedging horizon leads to a sample size reduction problem, we carry out a Monte Carlo study to investigate the pattern and hedging efficiency of OLS hedging ratio based on overlapping vs non-overlapping observations exploring a range of hedging horizons and sample sizes. Finally, we applied our approach to real data for a cross hedging related to soft wheat.
    Keywords: Risk and Uncertainty,
    Date: 2014–08
  3. By: Michele Bonollo (Credito trevigiano; IMT Lucca Institute for Advanced Studies); Irene Crimaldi (IMT Lucca Institute for Advanced Studies); Andrea Flori (IMT Lucca Institute for Advanced Studies); Fabio Pammolli (IMT Lucca Institute for Advanced Studies); Massimo Riccaboni (IMT Lucca Institute for Advanced Studies)
    Abstract: The recent financial crisis highlighted the relevant role of the systemic effects of banks’ defaults on the stability of the whole financial system. In this work we draw an organic picture of the current regulations, moving from the definitions of systemic risk to the issues concerning data availability. We show how a more detailed flow of data on traded deals might shed light on some systemic risk features taken into account only partially in the past. In particular, we analyse how the new regulatory framework allows regulators to describe OTC derivatives markets according to more detailed partitions, thus depicting a more realistic picture of the system. Finally, we suggest to study sub-markets illiquidity conditions to consider possible spill over effects which might lead to a worsening for the entire system.
    Keywords: Systemic Risk, OTC Derivatives Market, Basel Regulations, European Market Infrastructure Regulation, Trade Repositories
    JEL: G01 G18 G21
    Date: 2015–01
  4. By: Irani, Rustom M. (University of Illinois at Urbana-Champaign); Meisenzahl, Ralf R. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We examine the impact of banks' liquidity risk management on secondary loan sales. We track the dynamics of bank loan share ownership in the secondary market using data from the Shared National Credit Program, a credit register of syndicated bank loans administered by U.S. regulators. We analyze the 2007-2009 financial crisis as a market-wide liquidity shock and control for loan demand using a loan-year fixed effects approach. We find that banks with greater reliance on wholesale funding at the onset of the crisis were more likely to exit loan syndicates during the crisis. Our analysis identifies the importance of bank liquidity risk management as a motivation for loan sales, in addition to the credit risk transfer motive emphasized in prior literature.
    Keywords: Bank risk management; financial crisis; loan sales; wholesale funding
    JEL: G01 G21 G23
    Date: 2014–10–28
  5. By: Jürgen Franke; Peter Mwita; Weining Wang;
    Abstract: We consider the problem of estimating the conditional quantile of a time series fYtg at time t given covariates Xt, where Xt can ei- ther exogenous variables or lagged variables of Yt . The conditional quantile is estimated by inverting a kernel estimate of the conditional distribution function, and we prove its asymptotic normality and uni- form strong consistency. The performance of the estimate for light and heavy-tailed distributions of the innovations are evaluated by a simulation study. Finally, the technique is applied to estimate VaR of stocks in DAX, and its performance is compared with the existing standard methods using backtesting.
    Keywords: conditional quantile, kernel estimate, quantile autoregression, time series, uniform consistency, value-at-risk
    JEL: C00 C14 C50 C58
    Date: 2014–01
  6. By: Verspecht, Ann; Van Huylenbroeck, Guido; Buysse, Jeroen
    Abstract: Risk management in agriculture has been implemented probably as long as agriculture exists. One of the factors why researchers and policymakers recently are more interested in farm risk management is the vulnerability farmers face towards extreme events (EWE) linked to climate change. This article is based on a survey with Belgian farmers to analyze how they perceive EWE and what actions they undertake to mitigate these risks. Overall it seems that on the one hand policy based recovery measures like disaster funds do not obstruct farmers to take risk prevention measures. On the other hand, 25-30% of the farmers have no strategies implemented towards EWE.
    Keywords: risk management, extreme weather events, risk perception, Belgium, disaster relief fund, Environmental Economics and Policy,
    Date: 2014–08
  7. By: Jianqing Fan; Fang Han; Han Liu; Byron Vickers
    Abstract: We propose a bootstrap-based robust high-confidence level upper bound (Robust H-CLUB) for assessing the risks of large portfolios. The proposed approach exploits rank-based and quantile-based estimators, and can be viewed as a robust extension of the H-CLUB method (Fan et al., 2015). Such an extension allows us to handle possibly misspecified models and heavy-tailed data. Under mixing conditions, we analyze the proposed approach and demonstrate its advantage over the H-CLUB. We further provide thorough numerical results to back up the developed theory. We also apply the proposed method to analyze a stock market dataset.
    Date: 2015–01
  8. By: Ojo, Marianne
    Abstract: The Business Indicator approach has been identified by the Basel Committee as the most suitable replacement for the Gross Income approach, since it addresses most of the Gross Income’s weaknesses, as well as possesses certain attributes which were highlighted to have been at the heart of the recent Financial Crisis. It had been highlighted by the Committee that weaknesses of the simpler approaches to operational risk, were attributed and generated principally from the use of Gross Income (GI) as a proxy indicator for operational risk exposure. This paper highlights rationales for revisions to the present framework of approaches to operational risk and why adjustments to the simpler approaches have become necessary. Further, as well as accentuating on why issues relating to calibration and adequate focus on Pillar III of Basel II, namely, market discipline, continue to dominate and feature as areas in need of greater attention, the paper also seeks to demonstrate why Pillar III may be that area which requires greater focus - where matters relating to goals of consistency, comparability and simplicity are involved. As well as consolidating on why gaps still persist in relation to disclosure requirements relating to operational risks, the paper will, more importantly, propose means of mitigating such gaps.
    Keywords: operational risk; standardised approaches; market discipline; calibration; off-balance sheet exposures; comparability; consistency
    JEL: E3 E32 E60 G2 K2
    Date: 2015–01–06
  9. By: Griffith, Andrew P.; Lewis, Karen E.; Boyer, Christopher N.
    Abstract: Livestock Risk Protection Insurance (LRP) is a risk management tool available to cattle producers protecting against price declines. It can be used to establish a price floor much like a put option. The primary difference between put options and LRP is LRP can be purchased for as few as one animal while put options are based on 50,000 pound contracts. Thus, LRP can be utilized by cattle producers of any size. LRP is generally offered five times a week with insurance termination dates ranging from 13 to 52 weeks and coverage levels from 70 to 100 percent. The objective of this research is to determine how far in advance feeder cattle producers should purchase LRP to maximize their expected price received given an expected cattle marketing month. Daily LRP offerings were obtained for 600 to 900 pound feeder cattle in Tennessee from 2007 through 2014. Expected price received is defined as the CME Feeder Cattle Index price plus the indemnity payment less the LRP premium. Data were subjected to a mixed model to determine differences in the expected price received for different coverage periods given an expected cattle marketing month.
    Keywords: Insurance, Risk management, cattle, Production Economics, Risk and Uncertainty, Q12, Q13,
    Date: 2015
  10. By: Auboin, Marc; Blengini, Isabella
    Abstract: Trade finance, particularly in the form of short-term, self-liquidating letters of credit and the like, has received relatively favourable treatment regarding capital adequacy and liquidity under Basel III, the new international prudential framework. However, concerns have been expressed over the potential "unintended consequences" of applying the newly created leverage ratio to these instruments, notably for developing countries' trade. This paper offers a relatively simple model approach showing the conditions under which the initially proposed 100% leverage tax on non-leveraged activities such as letters of credit would reduce their natural attractiveness relative to higher-risk, less collateralized assets, which may stand in the balance sheet of banks. Under these conditions, the model shows that leverage ratio may nullify in part the effect of the low capital ratio that is commensurate to the low risk of such instruments. The decision by the Basel committee on 12 January 2014 to reduce the leverage ratio seems to be justified by the analytical framework developed in this paper.
    Keywords: trade financing,cooperation with international financial institutions,prudential supervision and trade
    JEL: E44 F13 F34 F36 O19 G21 G32
    Date: 2014
  11. By: Eidenberger, Judith; Neudorfer, Benjamin; Sigmund, Michael; Stein, Ingrid
    Abstract: This paper contributes to the literature on early warning indicators by applying a Bayesian model averaging approach. Our analysis, based on Austrian data, is carried out in two steps: First, we construct a quarterly financial stress index (AFSI) quantifying the level of stress in the Austrian financial system. Second, we examine the predictive power of various indicators, as measured by their ability to forecast the AFSI. Our approach allows us to investigate a large number of indicators. The results show that excessive credit growth and high returns of banks' stocks are the best early warning indicators. Unstable funding (as measured by the loan to deposit ratio) also has a high predictive power.
    Keywords: financial crisis,early warning indicators,government policy and regulation,financial stress index
    JEL: G01 G28
    Date: 2014
  12. By: Matthias Raddant; Friedrich Wagner
    Abstract: In this paper we analyze transitions in the stock markets of the US, the UK, and Germany. For all this markets we find that while the markets were focused on stocks from the IT and technology sector around the year 2000, this focus has vanished and the markets have mostly moved towards a focus on stocks from the financial sector. This development is paralleled by changes in the returns distributions and the tail exponent. We show that we can extend the concept of beta values to systematically describe a risk measure for stocks from different sectors of the economy. This slowly varying sector specific risk measure describes ordered states in the market and identifies sectors which show concentration of market risk
    Keywords: stock price correlations - financial risk - CAPM
    JEL: G11 G12
    Date: 2014–12
  13. By: Adonis Antoniades
    Abstract: Recent empirical studies have shown that during the financial crisis of 2007-2008 banks that were more heavily exposed to liquidity risk contracted their supply of credit more sharply. I contribute to the identification of this effect by relying on the use of micro-level data on US mortgage loan applications, which allows me to identify liquidity risk as an important determinant of the contraction of credit in the mortgage market, but as separate from the precipitous fall in credit demand, disruptions in the securitization and subprime markets, shifts in asset risk, and changing risk-aversion among loan officers.
    Keywords: liquidity risk, bank lending channel, credit lines, core deposits, mortgage credit
    Date: 2014–12
  14. By: Niemi, Jarkko K.; Heikkilä, Jaakko; Myyrä, Sami
    Abstract: This study analyses numerically an animal disease insurance scheme and how it could be operationalized. We focus on animal producer’s incentives to choose an insurance policy and on the feasibility of the insurance system as a whole. We develop a simple simulation model where the producer chooses whether to take an insurance policy at a given price, and the insurance provider simultaneously decides the price of the scheme. We find that producer interest towards such insurance products is limited. Uptake of insurance could be increased through collective actions such as group insurance or through support for the cost of insurance.
    Keywords: animal disease, risk management, insurance, Health Economics and Policy,
    Date: 2014–08

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