nep-rmg New Economics Papers
on Risk Management
Issue of 2015‒10‒04
seven papers chosen by

  1. Risk management in light of corporate Governance By Ahmad khateeb
  2. Multivariate dynamic intensity peaks-over-threshold models By Hautsch, Nikolaus; Herrera, Rodrigo
  3. Firms’ risk endogenous to strategic management choices By Delis, Mantos D.; Hasan, Iftekhar; Tsionas, Efthymios G
  4. A macroeconomic reverse stress test By Grundke, Peter; Pliszka, Kamil
  5. Dynamics of multivariate default system in random environment By Nicole El Karoui; Monique Jeanblanc; Ying Jiao
  6. The relationship between distance-to-default and CDS spreads as measures of default risk for European banks By Kim Ristolainen
  7. Portfolio Selection with Transaction Costs and Default Risk By Giovanni W. Puopolo

  1. By: Ahmad khateeb (al-hussein bin talal university)
    Abstract: Corporate Governance operations are carried out by representatives of stakeholders to provide supervision of risk management and control risks of the organization and the emphasis on the adequacy of controls to avoid these risks, which leads to the direct contribution in the achievement of goals and increase the value of the organization, and perhaps is the question "of these actors that contribute to risk management based on rules of corporate Governance? "The answer to this question was the subject of this research to shed light on the concept of risk management and its relationship to the corporate Governance and identification of which can contribute to identifying, measuring and testing and evaluation of risk management. And to identify the extent of the commitment of both boards of directors and the internal auditor and external auditor and audit committees the requirements of corporate governance in risk management in the insurance company and diagnosis the negative and positive aspects of practical applications for risk management and submission of proposals that would increase the effectiveness of risk management in insurance companies The results showed that there is a recognition great importance to these agencies for their role in risk management but differentiated one from the other and to promote this awareness is necessary to Adhere to the principles and standards of the International Auditing and amending legislation related to the duties of these entities and the holding of training courses, continuing all management levels to familiarize them with the elements of corporate governance and effective role in risk management.
    Keywords: corporate Governance , Risk management , insurance company , internal auditor , stakeholders
    JEL: G30 G22 G32
  2. By: Hautsch, Nikolaus; Herrera, Rodrigo
    Abstract: We propose a multivariate dynamic intensity peaks-over-threshold model to capture extreme events in a multivariate time series of returns. The random occurrence of extreme events exceeding a threshold is modeled by means of a multivariate dynamic intensity model allowing for feedback effects between the individual processes. We propose alternative specifications of the multivariate intensity process using autoregressive conditional intensity and Hawkes-type specifications. Likewise, temporal clustering of the size of exceedances is captured by an autoregressive multiplicative error model based on a generalized Pareto distribution. We allow for spillovers between both the intensity processes and the process of marks. The model is applied to jointly model extreme returns in the daily returns of three major stock indexes. We find strong empirical support for a temporal clustering of both the occurrence of extremes and the size of exceedances. Moreover, significant feedback effects between both types of processes are observed. Backtesting Value-at-Risk (VaR) and Expected Shortfall (ES) forecasts show that the proposed model does not only produce a good in-sample fit but also reliable out-of-sample predictions. We show that the inclusion of temporal clustering of the size of exceedances and feedback with the intensity thereof results in better forecasts of VaR and ES.
    Keywords: Extreme value theory,Value-at-Risk,Expected shortfall,Self-exciting point process,Conditional intensity
    Date: 2015
  3. By: Delis, Mantos D. (University of Surrey); Hasan, Iftekhar (Fordham University and Bank of Finland); Tsionas, Efthymios G (Athens University of Economics and Business, and Lancaster University Management School, Lancaster University)
    Abstract: Use of variability of profits and other accounting-based ratios in order to estimate a firm's risk of insolvency is a well-established concept in management and economics. This paper argues that these measures fail to approximate the true level of risk accurately because managers consider other strategic choices and goals when making risky decisions. Instead, we propose an econometric model that incorporates current and past strategic choices to estimate risk from the profit function. Specifically, we extend the well-established multiplicative error model to allow for the endogeneity of the uncertainty component. We demonstrate the power of the model using a large sample of U.S. banks, and show that our estimates predict the accelerated bank risk that led to the subprime crisis in 2007. Our measure of risk also predicts the probability of bank default both in the period of the default, but also well in advance of this default and before conventional measures of bank risk.
    Keywords: risk; strategic management; endogenous; profit function
    JEL: C13 C33 E47 G21 G32
    Date: 2015–08–20
  4. By: Grundke, Peter; Pliszka, Kamil
    Abstract: Reverse stress tests are a relatively new stress test instrument that aims at finding exactly those scenarios that cause a bank to cross the frontier between survival and default. Afterward, the scenario which is most probable has to be identified. This paper sketches a framework for a quantitative reverse stress test for maturity-transforming banks that are exposed to credit and interest rate risk and demonstrates how the model can be calibrated empirically. The main features of the proposed framework are: 1) The necessary steps of a reverse stress test (solving an inversion problem and computing the scenario probabilities) can be performed within one model, 2) Scenarios are characterized by realizations of macroeconomic risk factors, 3) Principal component analysis helps to reduce the dimensionality of the space of systematic risk factors, 4) Due to data limitations, the results of reverse stress tests are exposed to considerable model and estimation risk, which makes numerous robustness checks necessary.
    Keywords: copula functions,extreme value theory,principal component analysis,reverse stress testing
    JEL: C22 C51 C53 G21 G32
    Date: 2015
  5. By: Nicole El Karoui (LPMA); Monique Jeanblanc (SAF); Ying Jiao (SAF)
    Abstract: We consider a multivariate default system where random environmental information is available. We study the dynamics of the system in a general setting and adopt the point of view of change of probability measures. We also make a link with the density approach in the credit risk modelling. In the particular case where no environmental information is concerned, we pay a special attention to the phenomenon of system weakened by failures as in the classical reliability system.
    Date: 2015–09
  6. By: Kim Ristolainen (Department of Economics, University of Turku)
    Abstract: CDS spreads are often used as market’s view of credit risk. There is no popular alternative to it; perhaps only the distance-to-default measure based on Merton (1974) comes close to it. In this paper we investigate the relationship between these two measures for large European banks in post subprime crises era. The analysis makes use of conventional Granger causality test statistics for individual banks and for the whole panel data. As for the results, we find that the lead-lag relationship between these variables varies over time and over different banks and economic regimes. The lead of distance-to-default is stronger for banks in problem countries (PIGS), during European debt crises, for relatively small banks and when there are large changes in CDS spread. These results suggest that we may have predictive power by not only using the CDS spread, but also other measures such as the distance-to-default.
    Keywords: financial stability, European banks, distance-to-default, credit default swap, lead-lag relationship
    JEL: G01 G14 G21 G32 G33
    Date: 2015–09
  7. By: Giovanni W. Puopolo (Università Bocconi and CSEF)
    Abstract: I propose a simple consumption/investment problem with transaction costs and default risk. When default occurs, I assume the value of the risky asset drops to zero and the investor receives the terminal wealth only in the form of the other (riskless) security. I show that default risk can generate a first-order effect on the investor’s asset allocation. On the contrary, the liquidity premium is one order of magnitude smaller than the transaction costs, implying that the additional source of risk determined by the possibility of default is not able to generate a first-order effect on asset pricing.
    JEL: C61 D11 D91 G11
    Date: 2015–09–20

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.