nep-rmg New Economics Papers
on Risk Management
Issue of 2016‒04‒23
twelve papers chosen by
Stan Miles
Thompson Rivers University

  2. Modeling and Forecasting (Un)Reliable Realized Covariances for More Reliable Financial Decisions By Tim Bollerslev; Andrew J. Patton; Rogier Quaedvlieg
  3. On the properties of the Lambda value at risk: robustness, elicitability and consistency By Matteo Burzoni; Ilaria Peri; Chiara Maria Ruffo
  4. Exchange Risk Management and the Choice of Invoice Currency: 2013 questionnaire survey of Japanese exporting firms (Japanese) By ITO Takatoshi; KOIBUCHI Satoshi; SATO Kiyotaka; SHIMIZU Junko
  5. Parisian ruin for a refracted L\'evy process By Mohamed Amine Lkabous; Irmina Czarna; Jean-Fran\c{c}ois Renaud
  6. Higher losses and slower development in the absence of disaster risk management investments By Hallegatte,Stephane; Bangalore,Mook; Jouanjean,Marie Agnes
  7. Asset Encumbrance, Bank Funding and Financial Fragility By Toni Ahnert; Kartik Anand; Prasanna Gai; James Chapman
  8. Multivariate Stochastic Dominance for Risk Averters and Risk Seekers By Guo, Xu; Wong, Wing-Keung
  9. Disaster risk management and fiscal policy : narratives, tools, and evidence associated with assessing fiscal risk and building resilience By Mechler,Reinhard; Mochizuki,Junko; Hochrainer-Stigler,Stefan
  10. Profit distribution and loss coverage rules for central banks By Bunea, Daniela; Karakitsos, Polychronis; Merriman, Niall; Studener, Werner
  11. Margin Trading: Hedonic Returns and Real Losses By Daniel Ladley; Guanqing Liu; James Rockey
  12. Co-benefits of disaster risk management By Vorhies,Francis; Wilkinson,Emily

  1. By: Hamdamov Omonulla Ne’matillaevich
    Abstract: In this article you will learn what methods of financial risk management exist in the practice of management, how to build a system of risk management and carry out a phased analysis of effectiveness of introduction of the control system. The article includes the following main parts:financial risk management system, objectives of risk management at the enterprise, classification of risk in risk management system, methods of financial risk management, models of assessment of financial risk of company, stages of creation of the own risk management system, example of mechanisms of accounting and control in the risk management system, influence of risk management system to investment attractiveness. Key words: financial risk, management, methods, models, economic value added
    Date: 2016–03
  2. By: Tim Bollerslev (Duke University, NBER and CREATES); Andrew J. Patton (Duke University); Rogier Quaedvlieg (Maastricht University)
    Abstract: We propose a new framework for modeling and forecasting common financial risks based on (un)reliable realized covariance measures constructed from high-frequency intraday data. Our new approach explicitly incorporates the effect of measurement errors and time-varying attenuation biases into the covariance forecasts, by allowing the ex-ante predictions to respond more (less) aggressively to changes in the ex-post realized covariance measures when they are more (less) reliable. Applying the new procedures in the construction of minimum variance and minimum tracking error portfolios results in reduced turnover and statistically superior positions compared to existing procedures. Translating these statistical improvements into economic gains, we find that under empirically realistic assumptions a risk-averse investor would be willing to pay up to 170 basis points per year to shift to using the new class of forecasting models.
    Keywords: Common risks; realized covariances; forecasting; asset allocation; portfolio construction
    JEL: C32 C58 G11 G32
    Date: 2016–04–05
  3. By: Matteo Burzoni; Ilaria Peri; Chiara Maria Ruffo
    Abstract: Recently, financial industry and regulators have enhanced the debate on the good properties of a risk measure. A fundamental issue is the evaluation of the quality of a risk estimation. On one hand a backtesting procedure is desirable for assessing the accuracy of such an estimation and this can be naturally achieved by elicitable risk measures. For the same objective an alternative approach has been introduced by Davis (2013) through the so-called consistency property. On the other hand a risk estimation should be less sensitive with respect to small changes in the available data set and exhibit qualitative robustness. A new risk measure, the Lambda value at risk (Lambda VaR), has been recently proposed by Frittelli et al. (2014), as a generalization of VaR, with the ability of discriminating the risk among P&L distributions with different tail behaviour. In this article, we show that Lambda VaR also satisfies the properties of robustness, elicitability and consistency under some conditions.
    Date: 2016–03
  4. By: ITO Takatoshi; KOIBUCHI Satoshi; SATO Kiyotaka; SHIMIZU Junko
    Abstract: This study presents new findings regarding Japanese exporting firms' foreign exchange risk management and choice of invoice currency, based on the 2013 RIETI questionnaire survey of Japanese exporting firms. Comparing these results to that from the 2009 survey, we confirm the following. First, in exports to the world, U.S. dollar invoicing share increased from 42% to 49% while Japanese yen invoicing share decreased from 48% to 42%, and euro invoicing share also declined slightly. In addition, Asian currencies' invoicing showed a tendency to increase gradually. Second, in exports to Asia, U.S. dollar invoicing share increased while a marked increase in the use of Asian currencies was not observed. Third, the number of foreign currencies being handled increased from an average of 3.1 to 3.4, indicating that Japanese firms face more foreign exchange exposure. In summary, we confirm the invariable characteristics of Japanese firms' invoicing currency whereby they select the importer's currency for exports to advanced countries such as the United States and the eurozone, and select the U.S. dollar for trade in Asia. In other words, Japanese firms maintain their pricing-to-the-market policy in their choice of invoicing currency, and the larger the size of the firm, the stronger there is of such tendency. With the aspects of foreign exchange risk management, the larger the size of the firm, the more it utilizes hedging strategies, and there is little change in the results between 2009 and 2013.
    Date: 2016–03
  5. By: Mohamed Amine Lkabous; Irmina Czarna; Jean-Fran\c{c}ois Renaud
    Abstract: In this paper, we investigate Parisian ruin for a L\'evy surplus process with an adaptive premium rate, namely a refracted L\'evy process. More general Parisian boundary-crossing problems with a deterministic implementation delay are also considered. Our main contribution is a generalization of the result in Loeffen et al. (2013) for the probability of Parisian ruin of a standard L\'evy insurance risk process. Despite the more general setup considered here, our main result is as compact and has a similar structure. Examples are provided.
    Date: 2016–03
  6. By: Hallegatte,Stephane; Bangalore,Mook; Jouanjean,Marie Agnes
    Abstract: Global economic losses from natural disasters continue to increase. Yet, investments in disaster risk management are not universal, as they are traditionally seen as in competition with other development and economic priorities. The multitude of benefits from disaster risk management investments are not traditionally accounted for in cost-benefit analyses. This paper contributes to this discussion by highlighting the multiple benefits from disaster risk management investments, focusing on the avoided losses when a disaster occurs, but also on the impacts on economic development even before a disaster strikes. The paper's main message is that disaster risk management investments can provide two dividends: reduced losses when a disaster strikes, and a shift of investment strategies and perhaps even an increase in investment value that would benefit the economy even before a disaster strikes. Providing evidence to policy makers and investors about the existence of both types of dividends can provide a narrative reconciling short-term and long-term objectives, thereby improving the acceptability and feasibility of disaster risk management investments.
    Keywords: Insurance&Risk Mitigation,Economic Theory&Research,Hazard Risk Management,Labor Policies,Natural Disasters
    Date: 2016–04–12
  7. By: Toni Ahnert; Kartik Anand; Prasanna Gai; James Chapman
    Abstract: How does asset encumbrance affect the fragility of intermediaries subject to rollover risk? We offer a model in which a bank issues covered bonds backed by a pool of assets that is bankruptcy remote and replenished following losses. Encumbering assets allows a bank to raise cheap secured debt and expand profitable investment, but it also concentrates risk on unsecured debt and thus exacerbates fragility and raises unsecured funding costs. Deposit insurance or wholesale funding guarantees induce excessive encumbrance and fragility. To mitigate such risk shifting, we study prudential regulatory tools, including limits on encumbrance, minimum capital requirements and surcharges for encumbrance.
    Keywords: Financial Institutions, Financial stability, Financial system regulation and policies
    JEL: D82 G01 G21 G28
    Date: 2016
  8. By: Guo, Xu; Wong, Wing-Keung
    Abstract: This paper first extends some well-known univariate stochastic dominance results to multivariate stochastic dominances (MSD) for both risk averters and risk seekers, respectively, to n order for any n ≥ 1 when the attributes are assumed to be independent and the utility is assumed to be additively and separable. Under these assumptions, we develop some properties for MSD for both risk averters and risk seekers. For example, we prove that MSD are equivalent to the expected-utility maximization for both risk averters and risk seekers, espectively. We show that the hierarchical relationship exists for MSD. We establish some dual relationships between the MSD for risk averters and risk seekers. We develop some properties for non-negative combinations and convex combinations random variables of MSD and develop the theory of MSD for the preferences of both risk averters and risk seekers on diversification. At last, we discuss some MSD relationships when attributes are dependent and discuss the importance and the use of the results developed in this paper.
    Keywords: Multivariate Stochastic Dominance, Risk Averters, Risk Seekers, Ascending stochastic dominance, descending stochastic dominance, utility function
    JEL: D81 G11
    Date: 2016–04–11
  9. By: Mechler,Reinhard; Mochizuki,Junko; Hochrainer-Stigler,Stefan
    Abstract: This paper addresses the question whether and how co-benefits, through disaster resilience building, can be further promoted. Co-benefits are defined as positive externalities that arise deliberately as a result of a joint strategy that pursues several objectives synergistically at the same time, such as disaster risk management and development goals, or disaster risk management and climate change adaptation. Of particular interest is the question of how the economic and broader benefits of disaster risk management can be recognized and realized by those in charge of fiscal policy decisions. The paper considers the interplay between public disaster risk management investment and fiscal policy, and provides an overview of the current debate as well as assessment methods, tools, and policy options. In fiscal budgeting, it has been standard practice to focus on direct liabilities and recurrent spending. Costs of disasters are often dealt with after the fact only, rather than being considered as contingent liabilities. As a consequence, the full costs of disasters have often not been budgeted for, and, with a price signal missing, there is lack of clear incentives for investing in disaster risk management. Overall, the paper identifies four steps and three dividends to be harnessed: (i) understanding fiscal risk; (ii) protecting public finance through risk financing instruments, the first dividend; (iii) managing disaster risk comprehensively, the second dividend; and (iv) pursuing a synergistic, co-benefits strategy of concurrently managing disaster risks and promoting development, the third dividend.
    Keywords: Insurance&Risk Mitigation,Banks&Banking Reform,Hazard Risk Management,Labor Policies,Natural Disasters
    Date: 2016–04–12
  10. By: Bunea, Daniela; Karakitsos, Polychronis; Merriman, Niall; Studener, Werner
    Abstract: The issue of central bank profit distribution is both complex and often politically controversial. Based on the replies of 57 central banks worldwide to an ECB questionnaire, this paper analyses how profit distribution rules can affect the amounts distributed and the financial strength of central banks. The paper also investigates the link between profit distribution, accounting rules and financial strength. Research shows that central banks apply divergent rules as regards profit distribution and loss coverage. While they are not a measure of central bank performance, in the long run profits strengthen the credibility of central banks and contribute to their financial independence, whereas profit distribution rules that do not allow central banks to set up adequate reserves might have the opposite effect. The interaction of profit distribution rules and accounting rules also plays an important role in central banks achieving financial strength. Accounting frameworks can materially influence central banks’ net results via their treatment of unrealised results and the creation of general risk provisions. Distribution policies can offset the volatility of distributed profits by recording changes in value in a separate account before calculating the amount of distributable profit. This paper also shows that central banks with less volatile distributable profits display higher ratios of equity to total assets over time. Finally, the paper examines the role of stakeholders in influencing the profit distribution regimes of central banks, and develops a non-exhaustive set of general principles that could be considered in relation to profit distribution frameworks, with the aim of strengthening the financial, and therefore institutional, independence of central banks. JEL Classification: E37, E58, M48
    Keywords: accounting framework, financial independence, financial strength, loss coverage, profit distribution
    Date: 2016–04
  11. By: Daniel Ladley; Guanqing Liu; James Rockey
    Abstract: Margin trading is popular with retail investors around the world. This is a puzzle, since, as we show, it has a negative expected return. Our explanation is that whilst lowering mean returns, the collateral requirement imposed by margin calls induces positive skew in the distribution of returns. Investments in assets with symmetric returns now offer limited losses and a small chance of a large gain, like lottery tickets and other gambles. Results from a unique dataset of retail futures traders show that actual losses are substantial. Traders’ behaviour is demonstrated to be best understood as motivated by hedonic returns.
    Keywords: Margin Trading, Hedonic Trading, Gambling, Recreational Investors
    JEL: G02 G11 G13
    Date: 2016–04
  12. By: Vorhies,Francis; Wilkinson,Emily
    Abstract: Many ex ante measures taken to reduce disaster risk can deliver co-benefits that are not dependent on disasters occurring. In fact, building resilience to climate extremes and disasters can achieve multiple objectives. These are secondary to the main objective of disaster risk management of avoiding disaster losses, but identifying and measuring additional co-benefits can enhance the attractiveness of disaster risk management investments. Co-benefits are often economic, such as investment in dams or irrigation to reduce drought risk generating greater productivity; but they can also include significant environmental and social benefits. This paper identifies some of the potential categories of co-benefits associated with disaster risk management investments, expanding on typologies created by agencies seeking to promote social and environmental safeguarding in their work. The paper looks at previous studies on disaster risk management where co-benefits are mentioned but not explored in any detail. The paper examines two new case studies where environmental and socioeconomic co-benefits were uncovered in an irrigation project to reduce drought risk, and an urban flood risk management project, in Jamaica and Mexico, respectively. This review points to several challenges in traditional cost-benefit analysis techniques and puts forward alternative approaches to identify environmental and socioeconomic co-benefits when planning disaster risk management investments. The authors argue that a comprehensive disaster risk management co-benefits framework is needed that includes and categorizes all potential positive environmental and socioeconomic impacts. Co-benefits research focused on revisiting existing cases and developing new case studies could play an important role in this regard.
    Keywords: Climate Change Economics,Hazard Risk Management,Economic Theory&Research,Climate Change Mitigation and Green House Gases,Environmental Economics&Policies
    Date: 2016–04–12

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