nep-rmg New Economics Papers
on Risk Management
Issue of 2016‒06‒18
eight papers chosen by

  1. Systemic risk: Time-lags and persistence By Kubitza, Christian; Gründl, Helmut
  2. Risk-based capital requirements and optimal liquidation in a stress scenario By Yann Braouezec; Lakshithe Wagalath
  3. How Low Can House Prices Go? Estimating a Conservative Lower Bound By Alexander N. Bogin; Stephen D. Bruestle; William M. Doerner
  4. Structure and Dynamics of the Global Financial Network By Thiago Christiano Silva; Sergio Rubens Stancato de Souza; Benjamin Miranda Tabak
  5. Basel III and recourse to Eurosystem monetary policy operations By Bucalossi, Annalisa; Fonseca Coutinho, Cristina; Junius, Kerstin; Luskin, Alaoishe; Momtsia, Angeliki; Rahmouni-Rousseau, Imene; Sahel, Benjamin; Scalia, Antonio; Schmitz, Stefan; Prior Soares, Rita Isabel; Schobert, Franziska; Wedow, Michael
  6. Shariah stocks as an inflation hedge in Malaysia By Haniff, Norazza Mohd; Masih, Mansur
  7. A Quantitative Model of "Too Big to Fail,"' House Prices, and the Financial Crisis By Acikgoz, Omer; Kahn, James
  8. The impact of risk management practices on wheat productivity in France and Hungary By Vigani, Mauro; Kathage, Jonas

  1. By: Kubitza, Christian; Gründl, Helmut
    Abstract: Common systemic risk measures focus on the instantaneous occurrence of triggering and systemic events. However, systemic events may also occur with a time-lag to the triggering event. To study this contagion period and the resulting persistence of institutions' systemic risk we develop and employ the Conditional Shortfall Probability (CoSP), which is the likelihood that a systemic market event occurs with a specific time-lag to the triggering event. Based on CoSP we propose two aggregate systemic risk measures, namely the Aggregate Excess CoSP and the CoSP-weighted time-lag, that reflect the systemic risk aggregated over time and average time-lag of an institution's triggering event, respectively. Our empirical results show that 15% of the financial companies in our sample are significantly systemically important with respect to the financial sector, while 27% of the financial companies are significantly systemically important with respect to the American non-financial sector. Still, the aggregate systemic risk of systemically important institutions is larger with respect to the financial market than with respect to non-financial markets. Moreover, the aggregate systemic risk of insurance companies is similar to the systemic risk of banks, while insurers are also exposed to the largest aggregate systemic risk among the financial sector.
    Keywords: Contagion Period,Spillover Effects,Systemic Risk,Financial Crisis,Financial Markets
    JEL: G01 G14 G15 G20
    Date: 2016
  2. By: Yann Braouezec (IESEG School of Management (LEM 9221-CNRS)); Lakshithe Wagalath (IESEG School of Management (LEM 9221-CNRS))
    Abstract: We develop a simple yet realistic framework to analyze the impact of an exogenous shock on a bank's balance-sheet and its optimal response when it is constrained to maintain its risk-based capital ratio above a regulatory threshold. We show that in a stress scenario, capital requirements may force the bank to shrink the size of its assets and we exhibit the bank's optimal strategy as a function of regulatory risk-weights, asset market liquidity and shock size. When financial markets are perfectly competitive, we show that the bank is always able to restore its capital ratio above the required one. However, for banks constrained to sell their loans at a discount and/or with a positive price impact when selling their marketable assets (large banks) we exhibit situations in which the deleveraging process generates a death spiral. We then show how to calibrate our model using annual reports of banks and study in detail the case of the French bank BNP Paribas. Finally, we suggest how our simple framework can be used to design a systemic capital surcharge
    Keywords: Risk-weighted assets (RWA), stress-tests, fire sales, market impact, optimal liquidation, systemic capital surcharge
    Date: 2016–05
  3. By: Alexander N. Bogin (Federal Housing Finance Agency); Stephen D. Bruestle (Penn State Erie); William M. Doerner (Federal Housing Finance Agency)
    Abstract: We develop a theoretically-based statistical technique to identify a conservative lower bound for house prices. Leveraging a model based upon consumer and investor incentives, we are able to explain the depth of housing market downturns at both the national and state level over a variety of market environments. This approach performs well in several historical back tests and has strong out-of-sample predictive ability. When back-tested, our estimation approach does not understate house price declines in any state over the 1987 to 2001 housing cycle and only understates declines in three states during the most recent financial crisis. This latter result is particularly noteworthy given that the post-2001 estimates are performed out-of-sample. Our measure of a conservative lower bound is attractive because it (1) provides a leading indicator of the severity of future downturns and (2) allows trough estimates to dynamically adjust as markets conditions change. This estimation technique could prove particularly helpful in measuring the credit risk associated with portfolios of mortgage assets as part of evaluating static stress tests or designing dynamic stress tests.
    Keywords: house prices, trough, lower bound, trend, financial stress testing
    JEL: G21 C58 R31
    Date: 2015–05
  4. By: Thiago Christiano Silva; Sergio Rubens Stancato de Souza; Benjamin Miranda Tabak
    Abstract: In this paper, we study the evolution of the network topology for the global financial market. We evaluate the level of diversification and participation of developed and emerging economies in cross-border exposures and find that the gross exposure network is dense, the vulnerability matrix is sparse, and the network's fragility changes over time. Prior to the financial crisis in 2008, the network was relatively fragile, whereas it became more resilient afterwards, showing a reduction in financial institutions risk appetite. Our results suggest that financial regulators should track down the network evolution in their systemic risk assessment
    Date: 2016–06
  5. By: Bucalossi, Annalisa; Fonseca Coutinho, Cristina; Junius, Kerstin; Luskin, Alaoishe; Momtsia, Angeliki; Rahmouni-Rousseau, Imene; Sahel, Benjamin; Scalia, Antonio; Schmitz, Stefan; Prior Soares, Rita Isabel; Schobert, Franziska; Wedow, Michael
    Abstract: Following the emergence of the financial crisis in August 2007, the Basel Committee on Banking Supervision established in 2010 a new global regulatory framework. In addition to raising capital requirements, it introduced three ratios, two of which set out minimum standards for liquidity and funding risk, i.e. the liquidity coverage ratio and the net stable funding ratio, and one which aims to limit leverage in the banking system, i.e. the leverage ratio. All three ratios can have a number of implications for monetary policy implementation, in particular the liquidity coverage ratio and the net stable funding ratio owing to the special role of central banks in providing liquidity. This paper investigates the extent to which the regulatory initiatives might have already had an impact on banks’ behaviour in Eurosystem monetary policy operations. It also provides an overview of the regulatory state of play and major recent advancements in banks’ compliance with the three Basel III ratios. Based on aggregate data, the empirical evidence generally supports some of the theoretically predicted effects of the three ratios. However, no firm conclusions can be drawn as to whether the introduction of the three ratios could cause a significant change in banks’ recourse to Eurosystem monetary policy operations. This is partly due to the fact that, in aggregate, major developments, such as substantial fluctuations in the recourse to Eurosystem refinancing operations in the years between 2012 and 2015, have been driven by the financial crisis and the gradual recovery from it, as well as by the accommodative stance of monetary policy. JEL Classification: G28, E58
    Keywords: Basel III, liquidity regulation, monetary policy implementation
    Date: 2016–04
  6. By: Haniff, Norazza Mohd; Masih, Mansur
    Abstract: The purpose of this paper is to study the hedging effectiveness of Shariah (Islamic) stock returns against inflation over the post financial crisis period in Malaysia using wavelet analysis. By using wavelet tools such as wavelet coherence and the wavelet phase angle, the resulting analyses were able to measure cross-correlations and causality between the time series as a function of time-scales. Results tend to indicate that for investment horizons not exceeding 3 years, the FTSE Bursa Malaysia Emas Shariah Index constituent returns can provide hedging against inflation as real returns are largely uncorrelated with inflation.
    Keywords: Shariah (Islamic) stocks, inflation hedge, Malaysia, wavelets
    JEL: C58 G11
    Date: 2016–05–31
  7. By: Acikgoz, Omer; Kahn, James
    Abstract: This paper develops a quantitative model that can rationally explain a sizeable part of the dramatic rise and fall of house prices in the 2000-2009 period. The model is driven by the assumption that the government cannot resist bailing out large financial institutions, but can mitigate the consequences by limiting financial institutions' risk-taking. An episode of regulatory forbearance, modeled as a relaxation of loan-to-value limits for conforming mortgages, is welfare-reducing, results in opportunistic behavior and, for plausible parameters inflates house prices and price/rent ratios by roughly twenty percent. This "boom" is followed by a collapse with high default rates.
    Keywords: Too-Big-to-Fail, Financial Crisis, House Prices
    JEL: E02 E21 E3 G21 R31
    Date: 2016–06–06
  8. By: Vigani, Mauro; Kathage, Jonas
    Abstract: Wheat is a key staple crop for global food security, but its production is strongly concentrated in a few regions, among which the EU is the first producer. EU farmers are struggling to keep high productivity levels due to global market and climate challenges. Risk management practices (RMP) are often advocated as viable tools to cope against these uncertainties, but their adoption can also subtract resources to the production activity, resulting in a controversial impact on the overall farm productivity. This paper analysis whether and how much four RMP contribute to wheat farming efficiency in France and Hungary using i) a stochastic frontier model to obtain a measure of farms efficiency; ii) an endogenous switching regression model to quantify the RMP impact. Results show that RMP can benefit farm efficiency, but not all the RMP have the same effect. While insurance, diversification and contract farming can positively affect farm efficiency, cultivating different varieties can reduce farm efficiency of about 10% depending on the production conditions.
    Keywords: risk management, wheat, productivity, stochastic frontier, endogenous switching regression, Agricultural and Food Policy, Crop Production/Industries, Risk and Uncertainty, J43, G22, G32, Q12, Q18,
    Date: 2016–04

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