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on Risk Management |
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Issue of 2016‒06‒09
twelve papers chosen by |
| By: | Ojo, Marianne |
| Abstract: | Developments since the introduction of the 1988 Basel Capital Accord have resulted in growing realisation that new forms of risks have emerged and that previously existing and managed forms require further redress. The revised Capital Accord, Basel II, evolved to a form of meta regulation – a type of regulation which involves the risk management of internal risks within firms. The 1988 Basel Accord was adopted as a means of achieving two primary objectives: Firstly, “…to help strengthen the soundness and stability of the international banking system – this being facilitated where international banking organisations were encouraged to supplement their capital positions; and secondly, to mitigate competitive inequalities.” As well as briefly outlining various efforts and measures which have been undertaken and adopted by several bodies in response to the recent Financial Crisis, this paper considers why efforts aimed at developing a new framework, namely, Basel III, have been undertaken and global developments which have promulgated the need for such a framework. Further, it attempts to evaluate the strengths and flaws inherent in the present and future regulatory frameworks by drawing a comparison between Basel II and the enhanced framework which will eventually be referred to as Basel III. |
| Keywords: | capital; cyclicality; buffers; risk; regulation; internal controls; equity; liquidity; losses; forward looking provisions; silent participations; Basel III |
| JEL: | E0 K2 E32 E58 E44 G01 |
| Date: | 2016–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70887&r=rmg |
| By: | Asian Development Bank (ADB); Asian Development Bank (ADB) (East Asia Department, ADB); Asian Development Bank (ADB) (East Asia Department, ADB); Asian Development Bank (ADB) |
| Abstract: | Disaster risk now presents one of the most serious threats to inclusive and sustainable socioeconomic development. In the People’s Republic of China (PRC), the incidence of natural disasters—particularly water-related disasters—are on the rise, resulting in an increased exposure to and vulnerability of the population to disasters. Coupled with anticipated increases in the frequency and intensity of weather-related events due to climate change, the PRC’s population is at heightened risk. This review focuses on waterrelated disasters, including identification of underlying causes, current management and policies to reduce risk, and opportunities for strengthening integrated disaster risk management in the PRC. |
| Keywords: | natural disasters, climate change risks, extreme weather events, water-related disasters, flooding, risk management, idrm, water resources development, water resources management, risk reduction, drought, extreme storms, environmental degradation, water-related hazards |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:asd:wpaper:rpt157747&r=rmg |
| By: | Katrien Antonio; Els Godecharle; Robin Van Oirbeek |
| Abstract: | Insurance companies hold reserves to be able to fulll future liabilities with respect to the policies they write. Micro-level reserving methods focus on the development of individual claims over time, providing an alternative to the classical techniques that aggregate the development of claims into run-o triangles. This paper presents a discrete-time multi-state framework that reconstructs the claim development process as a series of transitions between a given set of states. The states in our setting represent the events that may happen over the lifetime of a claim, i.e. reporting, intermediate payments and closure. For each intermediate payment we model the payment distribution separately. To this end, we use a body-tail approach where the body of the distribution is modeled separately from the tail. Generalized Additive Models for Location, Scale and Shape introduced by Stasinopoulos and Rigby (2007) allow for exible modeling of the body distribution while incorporating covariate information. We use the toolbox from Extreme Value Theory to determine the threshold separating the body from the tail and to model the tail of the payment distributions. We do not correct payments for in ation beforehand, but include relevant covariate information in the model. Using these building blocks, we outline a simulation procedure to evaluate the RBNS reserve. The method is applied to a real life data set, and we benchmark our results by means of a back test. |
| Keywords: | micro-level reserving, extreme value theory, splicing, multi-state model |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ete:afiper:540323&r=rmg |
| By: | Pandey, Radhika (National Institute of Public Finance and Policy); Pasricha, Gurnain K. (International Economic Analysis Department, Bank of Canada); Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy) |
| Abstract: | We assess the motivations for changing capital controls and their effectiveness in India, a country where there is a comprehensive capital control system covering all crossborder transactions. We focus on foreign borrowing by firms, where systemic risk concerns could potentially play a role. A novel fine-grained data set of capital control actions is constructed. We find that capital control actions are potentially motivated by exchange rate considerations, but not by systemic risk issues. A quasi-experimental design reveals that the actions appear to have no impact either on the exchange rate or on variables connected with systemic risk. |
| Keywords: | Capital controls ; Capital flows ; Exchange rate ; Foreign borrowing |
| JEL: | F38 G15 G18 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:npf:wpaper:16/168&r=rmg |
| By: | Nicol\'o Musmeci; Tomaso Aste; Tiziana Di Matteo |
| Abstract: | We discovered that past changes in the market correlation structure are significantly related with future changes in the market volatility. By using correlation-based information filtering networks we device a new tool for forecasting the market volatility changes. In particular, we introduce a new measure, the "correlation structure persistence", that quantifies the rate of change of the market dependence structure. This measure shows a deep interplay with changes in volatility and we demonstrate it can anticipate market risk variations. Notably, our method overcomes the curse of dimensionality that limits the applicability of traditional econometric tools to portfolios made of a large number of assets. We report on forecasting performances and statistical significance of this tool for two different equity datasets. We also identify an optimal region of parameters in terms of True Positive and False Positive trade-off, through a ROC curve analysis. We find that our forecasting method is robust and it outperforms predictors based on past volatility only. Moreover the temporal analysis indicates that our method is able to adapt to abrupt changes in the market, such as financial crises, more rapidly than methods based on past volatility. |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1605.08908&r=rmg |
| By: | Outlaw, Joe; Waller, Mark; Richardson, James; Richburg, Nicholas; Russell, Levi; Welch, Mark; Falconer, Larry; Guidry, Kurt; Smith, Nathan |
| Keywords: | aflatoxin, atoxigenics, risk management, Farm Management, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:236001&r=rmg |
| By: | Luo, Rui; Fortenbery, T. Randall |
| Abstract: | In this paper we provide a dynamic minimum-variance hedging strategy for firms in incomplete markets. Firms are looking for improved methods to more efficiently hedge input and output price risk exposure, but it is often the case that all price risk cannot be eliminated through exchange traded futures contracts. Since futures contracts exist for a limited number of assets some sources of price risk cannot be directly hedged and thus hedging markets are incomplete for many firms. If related futures contracts do not exist for both input and output price risk the traditional approach is to employ a one-sided hedge, that is, to hedge only for the risk source with related futures contracts and remain unhedged in the other. By identifying the price transmission (PT) mechanism between input and output prices in a classical complete-market model, we present a two-sided hedge that enables firms to minimize both input and output price fluctuations through a single tradable futures contract even in incomplete markets. Specifically, since in different industries PT is expected to vary in direction and magnitude, we consider four subcases in the model according to the direction of PT and the availability of futures contracts: (CO) cost-driving PT in which supply forces lead to equilibrium between input and output prices with output futures contracts; (CI) cost-driving PT with input futures contracts; (DO) demand-driving PT with output futures contracts; and (DI) demand-driving PT with input futures contracts. In all cases the firm can only directly hedge cash positions with futures contracts (a one-sided hedge), or jointly hedge input and output price risk with a single futures contract (a two-sided hedge) but accounting for PT. A two-factor diffusion model with a stochastic, mean-reverting convenience yield is assumed for the underlying asset. The optimal dynamic hedges are the weighted averages of the classic minimizing direct hedge and cross hedging ratios. We apply our results to the problem of a hypothetical firm that uses light sweet crude oil to produce jet fuel. The firm intends to reduce price exposure with a futures contract on light sweet crude oil. We compare hedging policies and hedging effectiveness between the one-sided and two-sided hedges. Weekly data of futures prices for light sweet crude oil for delivery to Cushing, OK, and spot prices for New York Harbor jet fuel, and spot prices for light sweet crude oil from April 4, 1990 to August, 16, 2015 are used to perform the analysis. We find that the two-sided model results in a more effective hedge. These findings suggest that jet fuel producers will most efficiently reduce profit fluctuations using a hedging model that directly accounts for vertical price links between the input and output prices. The contribution of this paper consists of devising a dynamic two-sided hedge ratio for firms to jointly hedge input and output payoffs in incomplete markets by incorporating the PT mechanism into the traditional complete-market minimizing hedging model. As PT is an important characteristic describing the overall operation of the market, this strategy may be practical for firms in multiple industries. |
| Keywords: | Hedging, Price Transmission, Commodity Futures, Financial Economics, Resource /Energy Economics and Policy, Risk and Uncertainty, G11, G31, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:235444&r=rmg |
| By: | Xiaoqing Liang; Zbigniew Palmowski |
| Abstract: | In this paper, we consider the problem of maximizing the expected discounted utility of dividend payments for an insurance company that controls risk exposure by purchasing proportional reinsurance. We assume the preference of the insurer is of CRRA form. By solving the corresponding Hamilton-Jacobi-Bellman equation, we identify the value function and the corresponding optimal strategy. We also analyze the asymptotics of the value function for large initial reserves. |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1605.06849&r=rmg |
| By: | Man Chung Fung; Gareth W. Peters; Pavel V. Shevchenko |
| Abstract: | This paper explores and develops alternative statistical representations and estimation approaches for dynamic mortality models. The framework we adopt is to reinterpret popular mortality models such as the Lee-Carter class of models in a general state-space modelling methodology, which allows modelling, estimation and forecasting of mortality under a unified framework. Furthermore, we propose an alternative class of model identification constraints which is more suited to statistical inference in filtering and parameter estimation settings based on maximization of the marginalized likelihood or in Bayesian inference. We then develop a novel class of Bayesian state-space models which incorporate apriori beliefs about the mortality model characteristics as well as for more flexible and appropriate assumptions relating to heteroscedasticity that present in observed mortality data. We show that multiple period and cohort effect can be cast under a state-space structure. To study long term mortality dynamics, we introduce stochastic volatility to the period effect. The estimation of the resulting stochastic volatility model of mortality is performed using a recent class of Monte Carlo procedure specifically designed for state and parameter estimation in Bayesian state-space models, known as the class of particle Markov chain Monte Carlo methods. We illustrate the framework we have developed using Danish male mortality data, and show that incorporating heteroscedasticity and stochastic volatility markedly improves model fit despite an increase of model complexity. Forecasting properties of the enhanced models are examined with long term and short term calibration periods on the reconstruction of life tables. |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1605.09484&r=rmg |
| By: | François Le Grand (EMLyon Business School); Xavier Ragot (OFCE) |
| Abstract: | We analyze derivative asset trading in an economy in which agents face both aggregate and uninsurable idiosyncratic risks. Insurance markets are incomplete for idiosyncratic risk and, possibly, for aggregate risk as well. However, agents can exchange insurance against aggregate risk through derivative assets such as options. We present a tractable framework, which allows us to characterize the extent of risk sharing in this environment. We show that incomplete insurance markets can explain some properties of the volume of traded derivative assets, which are difficult to explain in complete market economies. |
| Keywords: | Incomplete markets; Heterogeneous agent models; Imperfect risk sharing; Derivative assets |
| JEL: | G1 G12 E44 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/1p7ctioc2n80gp0icks5dssdsa&r=rmg |
| By: | Alessandro Spelta (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore) |
| Abstract: | Many complex systems display fluctuations between alternative states in correspondence to tipping points. These critical shifts are usually associated with generic empirical phenomena such as strengthening correlations between entities composing the system. In finance, for instance, market crashes are the consequence of herding behaviors that make the units of the system strongly correlated, lowering their distances. Consequently, determining future distances between stocks can be a valuable starting point for predicting market down-turns. This is the scope of the work. It introduces a multi-way procedure for forecasting stock prices by decomposing a distance tensor. This multidimensional method avoids aggregation processes that could lead to the loss of crucial features of the system. The technique is applied to a basket of stocks composing the S&P500 composite index and to the index itself so as to demonstrate its ability to predict the large market shifts that arise in times of turbulence, such as the ongoing financial crisis. |
| Keywords: | Stock prices, Correlations, Tensor Decomposition, Forecast. |
| JEL: | C02 C63 C63 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie1:def041&r=rmg |
| By: | Sebastian Herrmann; Johannes Muhle-Karbe; Frank Thomas Seifried |
| Abstract: | We study the pricing and hedging of derivative securities with uncertainty about the volatility of the underlying asset. Rather than taking all models from a prespecified class equally seriously, we penalise less plausible ones based on their "distance" to a reference local volatility model. In the limit for small uncertainty aversion, this leads to explicit formulas for prices and hedging strategies in terms of the security's cash gamma. |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1605.06429&r=rmg |