nep-rmg New Economics Papers
on Risk Management
Issue of 2015‒03‒27
fourteen papers chosen by

  1. A Unified Approach to Systemic Risk Measures via Acceptance Sets By Francesca Biagini; Jean-Pierre Fouque; Marco Frittelli; Thilo Meyer-Brandis
  2. Measuring Systemic Risk: Robust Ranking Techniques Approach By Amirhossein Sadoghi
  3. How may risk weights differ across banks? Evidence from the corporate portfolios of French banks. By Dietsch M.; Fraisse H.; Frappa S.
  4. Does Basel III bring anything new? A comparison between capital accords Basel II and Basel III By Max Kubat
  5. How Cyclical Is Bank Capital? By Haubrich, Joseph G.
  6. Exchange Rate Exposure and Risk Management: The case of Japanese Exporting Firms By Takatoshi Ito; Satoshi Koibuchi; Kiyotaka Sato; Junko Shimizu
  7. CEO risk-taking incentives and bank failure during the 2007-2010 financial crisis By Patricia Boyallian; Pablo Ruiz-Verdú
  8. Riesgo operativo en el sector salud en Colombia By Franco-Arbeláez, Luis Ceferino; Franco-Ceballos, Luis Eduardo; Murillo-Gómez, Juan Guillermo; Venegas-Martínez, Francisco
  9. Is Barrier version of Merton model more realistic? Evidence from Europe By Petra Andrlikova
  11. METHODOLOGY OF APPLICATION OF STATISTICAL MODELLING FOR RISK ASSESSMENT By Konstantins Didenko; Vitalijs Jurenoks; Vladimirs Jansons; Viktors Nespors
  12. Company management by using INFA method By Vojtech Stehel; Marek Vochozka
  13. Innovaciones financieras en América Latina: mercados de derivados y determinantes de la administración de riesgo By Ibañez, Francisco; Romero-Meza, Rafael; Coronado-Ramírez, Semei; Venegas-Martínez, Francisco
  14. Risk Assessments for Construction projects in the KSA By Abdulmohsen Alrashed; Ibrahim Alrashed

  1. By: Francesca Biagini; Jean-Pierre Fouque; Marco Frittelli; Thilo Meyer-Brandis
    Abstract: The financial crisis has dramatically demonstrated that the traditional approach to apply univariate monetary risk measures to single institutions does not capture sufficiently the perilous systemic risk that is generated by the interconnectedness of the system entities and the corresponding contagion effects. This has brought awareness of the urgent need for novel approaches that capture systemic riskiness. The purpose of this paper is to specify a general methodological framework that is flexible enough to cover a wide range of possibilities to design systemic risk measures via multi-dimensional acceptance sets and aggregation functions, and to study corresponding examples. Existing systemic risk measures can usually be interpreted as the minimal capital needed to secure the system after aggregating individual risks. In contrast, our approach also includes systemic risk measures that can be interpreted as the minimal capital funds that secure the aggregated system by allocating capital to the single institutions before aggregating the individual risks. This allows for a possible ranking of the institutions in terms of systemic riskiness measured by the optimal allocations. Moreover, we also allow for the possibility of allocating the funds according to the future state of the system (random allocation). We provide conditions which ensure monotonicity, convexity, or quasi-convexity properties of our systemic risk measures.
    Date: 2015–03
  2. By: Amirhossein Sadoghi
    Abstract: The recent economic crisis has raised a wide awareness that the financial system should be considered as a complex network with financial institutions and financial dependencies respectively as nodes and links between these nodes. Systemic risk is defined as the risk of default of a large portion of financial exposures among institution in the network. Indeed, the structure of this network is an important element to measure systemic risk and there is no widely accepted methodology to determine the systemically important nodes in a large financial network. In this research, we introduce a metric for systemic risk measurement with taking into account both common idiosyncratic shocks as well as contagion through counterparty exposures. Our focus is on application of eigenvalue problems, as a robust approach to the ranking techniques, to measure systemic risk. Recently, the efficient algorithm has been developed for robust eigenvector problem to reduce to a nonsmooth convex optimization problem. We applied this technique and studied the performance and convergence behavior of the algorithm with different structure of the financial network.
    Date: 2015–03
  3. By: Dietsch M.; Fraisse H.; Frappa S.
    Abstract: This article analyses the dispersion of risk weights for large corporate portfolios and identifies the sources of dispersion among banks in terms of the Basel risk parameters. The analysis focuses on loans granted by 5 large French banking groups to large corporates operating in France and rated by several banks under the Advanced Internal Rating Based approach (the so-called AIRB approach). The analysis differs from the existing studies since it is based on a detailed dataset of common counterparties for the five banks. Since the comparison is done on identical counterparties, the differences in RW or in risk parameters are not related to the composition of loan portfolios. This article uses a unique dataset that has been collected by the APCR in 2012 through an ad hoc survey sent to banks regarding a sample of common counterparties among the five banks. The analysis shows that banks have similar RWA rates (Risk-Weighted Assets/Exposures at Default), except one bank which is more conservative than others. Regarding Probabilities of Default (PDs), the banks exhibit broadly similar levels of average PDs. But, for Loss Given Defaults (LGDs), there is a wider dispersion. The analysis also shows that the dispersion on the RWA rates is mainly due to differences in LGDs more than the other parameters. Part of the dispersion in LGDs may be related to differences across banks in their collateral policy as well as the inclusion of collateral in LGD calculation, and in the effectiveness of the recovery process in case of default. In addition, the regulatory provision to add margins of conservatism to cover the expected range of estimation errors, may also be an explanatory factor of this dispersion, as well as the calculation of the downturn LGD. If some differences observed in LGD estimates would appear unwarranted, it could be considered to improve harmonization by focusing supervision of internal models on LGDs and by providing more rules for their computation. Therefore, in the debate around the role of the AIRB approach, this article suggests that, instead of replacing this approach, the current framework for large corporates portfolios could rather be adapted to restore confidence in internal models.
    Keywords: internal ratings, Basel regulation, risk-weighted assets.
    JEL: G01 G21 G28
    Date: 2015
  4. By: Max Kubat (University of Economics, Prague)
    Abstract: Basel Accords represent the most important documents of banking supervision. Basel II came into force almost at the same time as the financial crisis set in. Relatively soon after this, the work on the new capital accord known as Basel III was initiated. The question is whether the new agreement brings something really principally different from Basel II, or whether it is just a tool to reassure the public and markets with some form of stricter requirements. Basel Committee is based on G-20 countries representation. Introduction contains a brief explanation of how the Basel capital accords are reflected in European law. The first part of the article explains core principles of Basel II with several possible explanations of its failure. The second part clarifies the main principles of Basel III and compares them with Basel II. The criterion for comparison is search for fundamental distinctions between the introduced tools. From five monitored areas (definition of capital, capital requirements, risk coverage, leverage ratio, liquidity management) three of them meet this criterion. The redefinition of capital means only better clarification and unification of definitions. The risk coverage part focuses on technical issues, but no new risks are perceived. There is a significant change about new capital requirements. Two new buffers are requested. While previous capital requirement were based on direct connection with risks, the connection between capital conservation buffer and countercyclical buffer is only indirect to measured risks. Also the leverage ratio and liquidity management bring new tools and thus principle change. There is a significant change in leverage ratio that brings a new tool which is not based on risk. It makes the calculation easier and should avoid cheating in capital manipulation. Liquidity management is a completely new part of banking regulation measures, therefore there is nothing to compare with Basel II.
    Keywords: Basel capital accords; Basel II; Basel III; capital requirements; capital adequacy
    JEL: L51 F02 G28
    Date: 2014–05
  5. By: Haubrich, Joseph G. (Federal Reserve Bank of Cleveland)
    Abstract: The alleged pro-cyclicality of bank capital (high in good times, low in bad) has received some blame for the recent financial crisis. Others blame the countercyclicality of capital regulations: too low in high times and too high in bad. To address this problem, Basel III has introduced countercyclical capital buffers for large banks. But just how cyclical is bank capital? We look at the question from several vantage points, using both detailed recent data on risk-weighted assets and several sources of annual data going back to 1834. To help understand the historical data, we provide a short summary of capital concepts and regulation from early America to the present.
    JEL: E32 G21 G28 N20
    Date: 2015–03–19
  6. By: Takatoshi Ito; Satoshi Koibuchi; Kiyotaka Sato; Junko Shimizu
    Abstract: This paper investigates the relationship between the Japanese firms’ exposure to the exchange rate risk and risk management, such as choice of invoicing currency, and financial and operational hedge. The firm’s exposure to the exchange rate risk is estimated by co-movements of the stock prices and exchange rates, following Dominguez (1998) and others. Data on risk management measures—financial and operational hedging, the choice of invoice currency and the price revision strategy (pass-through)—were collected from a questionnaire survey covering all Tokyo Stock Exchange listed firms in 2009. Results show the followings: First, firms with greater dependency on sales in foreign markets have greater foreign exchange exposure. Second, the higher the US dollar invoicing share, the greater is the foreign exchange exposure. But, risk is reduced by both financial and operational hedging. Third, yen invoicing reduces foreign exchange exposure. These findings indicate that Japanese firms use the combination of risk management tools to mitigate the degree of the exchange rate risk.
    JEL: F31 G15 G32
    Date: 2015–03
  7. By: Patricia Boyallian; Pablo Ruiz-Verdú
    Abstract: We propose a simple measure of the risk-taking incentives of the CEOs of highly levered financial institutions, levered delta, which captures the incentives to take on risk generated by CEOs' stock holdings. Using this measure, we find that stronger CEO risk-taking incentives prior to the 2007-2010 financial crisis are associated with a higher probability of bank failure during the crisis. We find no evidence that risk-taking incentives or bank failure are related to corporate governance failures. However, CEOs' risk-taking incentives appear to be aligned with shareholders' incentivesto shift risk to other claim holders.
    Keywords: Executive compensation, Risk-taking incentives, Leverage, Risk shifting, Bank governance, Financial crisis
    Date: 2015–03
  8. By: Franco-Arbeláez, Luis Ceferino; Franco-Ceballos, Luis Eduardo; Murillo-Gómez, Juan Guillermo; Venegas-Martínez, Francisco
    Abstract: In this research, based on the guidelines of the Basel agreements and its relationships with the health sector according to the respective resolutions of the Ministry of Social Protection of Colombia, the operational risk in the social security in Colombia is quantified in the context of so-called advanced measurement approaches (AMA), particularly the Loss Distribution Approach (LDA). To do this, the Monte Carlo simulation method and the Panjer’s (1981) recursion algorithm are used.
    Keywords: Basel, Operational risk, Health Sector, Loss Distribution Method.
    JEL: G32
    Date: 2015–03–21
  9. By: Petra Andrlikova (Charles University in Prague, Faculty of Social Sciences, (IČ 00216208))
    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. provides 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
    Date: 2014–10
  10. By: Danijela MiloÅ¡ SprÄić (Faculty of Economics and Business, University of Zagreb); Marina MeÅ¡in (Faculty of Economics and Business, University of Zagreb); Mojca Marc (Faculty of Economics, University of Ljubljana)
    Abstract: The global financial crisis has focused attention to the proper identification, analysis and management of key business risks because inadequate risk assessment has been identified as one of the main factors of a failure or financial difficulties of a large number of organizations worldwide. Hence, inadequate risk management has become a problem of a broader social interest, resulting in recommendations of the OECD and the European Commission on the necessary changes in the existing risk management systems. As a result, an increasing number of companies are moving on from traditional silo-based risk management (TRM), where different corporate risks were managed on the individual basis without taking into account their correlations, toward ERM, where a holistic view of corporate risks is conducted and overall risk exposure is assessed. There is a belief among increasing number of scholars that ERM offers companies a more comprehensive approach toward risk management in comparison to TRM. By adopting a systematic and consistent approach to managing all of the risks confronting an organization, ERM is presumed to lower a firm’s overall risk of a failure and thus increase the performance and, in turn, the value of the organization. However, a comprehensive research to prove a positive statistically significant relationship between the use of ERM and performance indicators of non-financial companies has not been conducted so far. The purpose of this comprehensive study is to examine the effect of ERM implementation, and to explore whether firms adopting ERM actually achieve better financial results consistent with the claimed benefits of ERM, especially in the time of severe market conditions. To our best knowledge, little research exists on the effect of ERM to the company’s performance and value, and in particular on the effect of ERM to the performance and value of non-financial companies. This is the first comprehensive research conducted on the large sample of U.S. non-financial companies that are in the market index S&P 500. Previous ERM studies explored if ERM affects company’s value only. In our research we analyse if ERM affects company’s profitability, business risk, growth potential, liquidity and value. Our study differs from others as we explore if companies that implemented ERM before the Global financial crisis performed better in the period of crisis in comparison to companies that did not implemented ERM. This research objective is accomplished by performing MANOVA (multivariate analysis of variance) between ERM and no-ERM companies.
    Keywords: Enterprise Risk Management, Global financial crisis, financial performance, U.S. market, non-financial companies
    JEL: G30 H12
    Date: 2014–05
  11. By: Konstantins Didenko (Riga Technical University); Vitalijs Jurenoks (Riga Technical University); Vladimirs Jansons (Riga Technical University); Viktors Nespors (Riga Technical University)
    Abstract: Risk assessment is one of the major challenges that must be addressed by each insurance company. To assess risk we need to know the value of losses as well as the probability of losses, since the risk cost is the basic component in evaluating the insurance indemnity. Statistical methods should be used for objective evaluation of insurance processes, but because of complexity in real life processes of insurance, statistical modelling techniques would be preferable. It is particularly important to develop and practically apply these methods in Latvia as in recent years (starting from 1992) the insurance market in Latvia has experienced steady growth. To improve the competitiveness of the insurance companies, especially small companies, it is simply impossible to do without methods allowing us to estimate the parameters of the insurance process. Taking this into consideration it becomes important to study information systems related to the processes of insurance and to use modern information technologies for processing the available empirical information and the dynamic scenario forecasting performance of the insurance process taking into account different assumptions about the factors that could affect the insurance process. The article deals with the various statistical models that assess the risks and losses of the insurance company allowing us to simplify the calculation of insurance premiums, insurance reserves and assess the financial stability of the insurance company with a sufficiently wide range of parameters of the real process of insurance. At the present time transition from local information systems to corporate information systems based on network technologies is being accomplished in the Baltic countries. Therefore, in the future it is important to include such statistical models into the integrated European information system of processing insurance information.
    Keywords: financial stability, risk statistical modelling, nonparametric methods
    JEL: C10 C14 C15
    Date: 2014–05
  12. By: Vojtech Stehel (The Institute of technology and business in ÄŒeské BudÄ›jovice); Marek Vochozka (The Institute of technology and business in ÄŒeské BudÄ›jovice)
    Abstract: A company is a living unit which should act to survive. The survival must not be kept in the influence of random elements. Every single process should be managed systematically to minimalize the risk of bankruptcy. The fruitfulness of the process managing is mostly determined by setting its primary objective. The objective is the source of consequent planning, leading and controlling of partial activities which influence the final strategy. The article considers the determination of the top objective of the company based on the method of the pyramidal system of indices INFA. The INFA indicator cannot be managed as a complex unit and this is the reason the objective of this article is the setting up partial indicators to minimize the risk of bankruptcy. During the process of determination of those supporting indicators their priority will be set up to company is able to solve conflict situations when the partial goals are contradictory. The company evaluates the results of partial objectives and indicators compared with the market and the best companies in the surroundings. The evaluation will be provided by bechmarking of a company applied on partial objectives.
    Keywords: INFA, Bechmarking, company objectives, Strategy, Manegment.
    Date: 2014–10
  13. By: Ibañez, Francisco; Romero-Meza, Rafael; Coronado-Ramírez, Semei; Venegas-Martínez, Francisco
    Abstract: This paper is aimed at examining the theoretical determinants and empirical evidence on the use of derivatives in Latin America for risk management. The contingent claims, the development of their market, and their use, is undoubtedly one of the most powerful financial innovations available to individuals and businesses. It is shown that though Latin American firms use derivatives, there is a lack of research to understand its determinants. The causes and incentives for the development of the Chilean derivatives market are investigated, concluding that its development could not take off in exchanges; however, the OTC market has shown a healthy development. Finally, goals and challenges for Latin American countries are stated and potential research ideas to fill the gap on empirical aspects of risk management in these economies are proposed.
    Keywords: Financial innovations derivatives, risk management, Latin America.
    JEL: G13
    Date: 2015–03–21
  14. By: Abdulmohsen Alrashed (Glasgow Caledonian University); Ibrahim Alrashed (University of Wales Trinity Saint David, Swansea)
    Abstract: The construction market of Kingdom of Saudi Arabia (KSA) is significantly huge in the Middle East, which is currently estimates to be >$122 Billion per year (in recent times) and this is anticipated to reach >$610 Billion in next five years. Construction projects in residential sector is too positive than commercial sector. However, data on the actual percentage of success rate and vital risk factors in aforementioned projects are still limited. Accordingly, this study estimates risk evaluation of recent construction projects in the KSA. Consequently, this paper presents a new risk evaluation method for recent construction projects: this analysis constructed on new liner decisionâ€making model. Whilst, this study also investigates the practical applications of risk management in the trade of construction projects of both national and international companies.
    Keywords: Risk Appraisal, Liner decision- making model, KSA, Construction Projects.
    JEL: D79 A10 A12
    Date: 2014–06

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