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on Risk Management |
| By: | Dietmar Pfeifer; Herv\'e Awoumlac Tsatedem |
| Abstract: | We construct new multivariate copulas on the basis of a generalized infinite partition-of-unity approach. This approach allows - in contrast to finite partition-of-unity copulas - for tail-dependence as well as for asymmetry. A possibility of fitting such copulas to real data from quantitative risk management is also pointed out. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1505.00288&r=rmg |
| By: | Bell, Peter N |
| Abstract: | Tail hedging is a portfolio management strategy meant to reduce the risk of large losses. For an investor who holds a stock market index fund, the strategy entails buying out of the money put options on the index. Research suggests the strategy works well in practice and I explore the returns to tail hedging in a simple theoretical model. I calculate descriptive statistics for the returns to tail hedging when the stock price has either a normal or fat tailed distribution. I find that tail hedging is rewarding when stock prices have fat tails. |
| Keywords: | Portfolio management, tail option, fat tail, simulation. |
| JEL: | B50 C63 G11 G32 |
| Date: | 2015–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:62160&r=rmg |
| 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: | 2015–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-01&r=rmg |
| By: | Ghamami, Samim (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | We consider risk-neutral valuation of a contingent claim under bilateral counterparty risk in a reduced-form setting similar to that of Duffie and Huang [1996] and Duffie and Singleton [1999]. The probabilistic valuation formulas derived under this framework cannot be usually used for practical pricing due to their recursive path-dependencies. Instead, finite-difference methods are used to solve the quasi-linear partial differential equations that equivalently represent the claim value function. By imposing restrictions on the dynamics of the risk-free rate and the stochastic intensities of the counterparties' default times, we develop path-independent probabilistic valuation formulas that have closed-form solution or can lead to computationally efficient pricing schemes. Our framework incorporates the so-called wrong way risk (WWR) as the two counterparty default intensities can depend on the derivatives values. Inspired by the work of Ghamami and Goldberg [2014] on th e impact of WWR on credit value adjustment (CVA), we derive calibration-implied formulas that enable us to mathematically compare the derivatives values in the presence and absence of WWR. We illustrate that derivatives values under unilateral WWR need not be less than the derivatives values in the absence of WWR. A sufficient condition under which this inequality holds is that the price process follows a semimartingale with independent increments. |
| Keywords: | Basel III; Counterparty Risk; Credit Value Adjustment; Reduced-Form Modeling; Wrong Way Risk |
| Date: | 2015–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-26&r=rmg |
| By: | Beatriz Martínez (University of Valencia (Spain)); Hipòlit Torró (University of Valencia (Spain)) |
| Abstract: | This paper is the first to discuss the design of futures hedging strategies in European natural gas markets (NBP, TTF and Zeebrugge). A common feature of energy prices is that conditional mean and volatility are driven by seasonal trends due to weather, demand, and storage level seasonalities. This paper follows and extends the Ederington and Salas (2008) framework and considers seasonalities in mean and volatility when minimum variance hedge ratios are computed. Our results show that hedging effectiveness is much higher when the seasonal pattern in spot price changes is approximated with lagged values of the basis (futures price minus spot price). This fact remain true for short (a week) and long (one, three and six months) hedging periods. Furthermore, volatility of weekly price changes also has a seasonal pattern and is higher in winter than in summer. A simple volatility seasonal model that is based on sinusoidal functions on the basis improves the risk reduction obtained by strategies in which hedging ratios are estimated with linear regressions. Seasonal hedging strategies, linear regression based strategies, or even a naïve position, perform better than more sophisticated statistical methods. |
| Keywords: | Natural Gas Market, Futures, Hedging Ratio, Natural Gas Price Risk |
| JEL: | G11 L95 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2015.10&r=rmg |
| By: | Catalan, Mario; Demekas, Dimitri |
| Abstract: | Assessing and monitoring systemic risk is a challenge for policy makers and supervisors in all countries. It is particularly challenging in low-income countries (LICs), owing to a number of characteristics shared to a greater or lesser extent by most of them. This paper discusses these common characteristics and how they shape the nature of systemic risk in LICs, and concludes with some practical lessons for policy makers and financial supervisors that can help improve the effectiveness of systemic risk assessment and mitigation in these countries. |
| Keywords: | financial stability, stress testing, systemic risk, low-income countries, macroprudential policy, IMF |
| JEL: | G01 G28 G32 O16 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64125&r=rmg |
| By: | Helena Chuliá (Department of Econometrics, Riskcenter-IREA, Universitat de Barcelona); Montserrat Guillén (Department of Econometrics, Riskcenter-IREA, Universitat de Barcelona); Jorge M. Uribe (Facultad de Ciencias Sociales y Economicas, Universidad del Valle) |
| Abstract: | We present a methodology to forecast mortality rates and estimate longevity and mortality risks. The methodology uses Generalized Dynamic Factor Models fitted over the differences of the log-mortality rates. We compare prediction performance with models previously proposed in the literature, such as the traditional Static Factor Model fitted over the level of log-mortality rates. We also construct risk measures by the means of vinecopulae simulations, taking into account the dependence between the idiosyncratic components of the mortality rates. The methodology is implemented to project the mortality rates of the United Kingdom, for which we consider a portfolio and study longevity and mortality risks. |
| Keywords: | Longevity, mortality forecasting, factor models, vine-copulae, Value at Risk. |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:bak:wpaper:201503&r=rmg |
| By: | Gregory Phelan (Williams College) |
| Abstract: | Financial intermediation naturally arises when borrowers' payoffs are correlated. I show this using a costly enforcement model in which lenders need ex post incentives to enforce payments from defaulted loans. When projects have correlated outcomes, learning the state of one project (via enforcement) provides information about the states of other projects. A large, correlated portfolio provides ex post incentives for enforcement and as a result borrowers default less frequently. Because borrowers behave differently with large lenders, intermediation dominates direct lending. Intermediaries are financed with risk-free deposits, earn positive profits, and hold systemic default risk. |
| Keywords: | Financial intermediation, systemic risk, default |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:wil:wileco:2015-01&r=rmg |
| By: | Dijkman,Miquel |
| Abstract: | In the aftermath of the global financial crisis, interest in systemic risk has surged among academics and policy makers. The mitigation of systemic risk is now widely accepted as the fundamental underlying concept for the design of the post-crisis regulatory agenda. Effective mitigation requires the presence of a well-developed analytical methodology for monitoring systemic risk, so that policy makers can make informed policy choices. This remains a challenging area, particularly in developing and emerging economies characterized by rapid structural changes and gaps in data availability. This working paper aims to provide policy makers in developing and emerging economies with practical tools for the analysis of systemic risk, focusing on the identification of domestic, systemically important banks; analyzing interconnectedness within the financial In the aftermath of the global financial crisis, interest in systemic risk has surged among academics and policy makers. The mitigation of systemic risk is now widely accepted as the fundamental underlying concept for the design of the post-crisis regulatory agenda. Effective mitigation requires the presence of a well-developed analytical methodology for monitoring systemic risk, so that policy makers can make informed policy choices. This remains a challenging area, particularly in developing and emerging economies characterized by rapid structural changes and gaps in data availability. This working paper aims to provide policy makers in developing and emerging economies with practical tools for the analysis of systemic risk, focusing on the identification of domestic, systemically important banks; analyzing interconnectedness within the financial system; and analyzing the cyclical component of systemic risk. system; and analyzing the cyclical component of systemic risk. |
| Keywords: | Access to Finance,Debt Markets,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Emerging Markets |
| Date: | 2015–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:7248&r=rmg |
| By: | Peter Reinhard Hansen (European University Institute and CREATES); Guillaume Horel (Serenitas Credit L.p.); Asger Lunde (Aarhus University and CREATES); Ilya Archakov (European University Institute) |
| Abstract: | We introduce a multivariate estimator of financial volatility that is based on the theory of Markov chains. The Markov chain framework takes advantage of the discreteness of high-frequency returns. We study the finite sample properties of the estimation in a simulation study and apply it to highfrequency commodity prices. |
| Keywords: | Markov chain, Multivariate Volatility, Quadratic Variation, Integrated Variance, Realized Variance, High Frequency Data |
| JEL: | C10 C22 C80 |
| Date: | 2015–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2015-19&r=rmg |
| By: | António Alberto Santos (Faculty of Economics, University of Coimbra and GEMF, Portugal) |
| Abstract: | In this paper, we calculate the realized volatility measures using intraday data not equally spaced in time. The aim is to compare these measures with the ones from the stochastic volatility model. With this model, the data used are obtained in equal time intervals. Known facts are that the volatility is not directly observable and time-varying. If we consider the set of the most flexible models to capture the volatility evolution of returns, the stochastic volatility model belongs to the aforementioned set. High-frequency observations are used, which means daily observations obtained in equal time intervals. Can this be compatible with ultra-high-frequency data and realized volatility measures? Can we obtain compatible measures of volatility with both approaches? This is the object of this paper. |
| Keywords: | Bayesian estimation, Financial returns, Integrated volatility, Intraday data, Markov chain Monte Carlo, Realized volatility, Stochastic volatility. |
| JEL: | C11 C15 C53 G17 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2015-10.&r=rmg |
| By: | Nicholas M. Kiefer (Cornell University, Ithaca, and CREATES); C. Erik Larson (Promontory Financial Group, LLC) |
| Abstract: | Counting processes provide a very flexible framework for modeling discrete events occurring over time. Estimation and interpretation is easy, and links to more familiar approaches are at hand. The key is to think of data as "event histories," a record of times of switching between states in a discrete state space. In a simple case, the states could be default/non-default; in other models relevant for credit modeling the states could be credit scores or payment status (30 dpd, 60 dpd, etc.). Here we focus on the use of stochastic counting processes for mortgage default modeling, using data on high LTV mortgages. Borrowers seeking to finance more than 80% of a house's value with a mortgage usually either purchase mortgage insurance, allowing a first mortgage greater than 80% from many lenders, or use second mortgages. Are there differences in performance between loans financed by these different methods? We address this question in the counting process framework. In fact, MI is associated with lower default rates for both fixed rate and adjustable rate first mortgages. |
| Keywords: | Econometrics, Aalen Estimator, Duration Modeling, Mortgage Insurance, Loan-to-Value |
| JEL: | C51 C52 C58 C33 C35 |
| Date: | 2015–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2015-17&r=rmg |
| By: | Joenväärä, Juha; Kosowski, Robert |
| Abstract: | We economically motivate and then test a range of hypotheses regarding performance and risk differences between UCITS-compliant and other hedge funds. The latter exhibit more suspicious return patterns than do absolute return UCITS (ARUs), but ARUs exhibit higher levels of operational risk. We find evidence of a strong liquidity premium: hedge funds offer investors less liquidity than do ARUs yet exhibit better risk-adjusted performance. Our findings are substantially unchanged under various robustness tests and adjustments for possible selection bias. The liquidity premium for ARUs and their lack of performance persistence have implications for both investors and policy makers. |
| Keywords: | hedge fund performance; managerial skill; mutual fund performance; regulation |
| JEL: | G11 G12 G23 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10577&r=rmg |
| By: | Liu, Qi; Lu, Lei; Sun, Bo (Board of Governors of the Federal Reserve System (U.S.)); Yan, Hongjun |
| Abstract: | We analyze a model of anomaly discovery. Consistent with existing evidence, we show that the discovery of an anomaly reduces its magnitude and increases its correlation with existing anomalies. One new prediction is that the discovery of an anomaly reduces the correlation between deciles 1 and 10 for that anomaly. Using data for 12 well-known anomalies, we find strong evidence consistent with this prediction. Moreover, the correlation between deciles 1 and 10 of an anomaly becomes correlated with the aggregate hedge-fund wealth volatility after the anomaly is discovered. Our model also sheds light on how to distinguish between risk- and mispricing-based anomalies. |
| Keywords: | Anomaly; Arbitrage; Discovery; Arbitrageur-based asset pricing |
| JEL: | G11 G23 |
| Date: | 2015–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1128&r=rmg |