nep-rmg New Economics Papers
on Risk Management
Issue of 2016‒10‒30
seven papers chosen by

  1. Multiple-days-ahead value-at-risk and expected shortfall forecasting for stock indices, commodities and exchange rates: inter-day versus intra-day data By Degiannakis, Stavros; Potamia, Artemis
  2. Agnostic Risk Parity: Taming Known and Unknown-Unknowns By Raphael Benichou; Yves Lemp\'eri\`ere; Emmanuel S\'eri\'e; Julien Kockelkoren; Philip Seager; Jean-Philippe Bouchaud; Marc Potters
  3. Tail Systemic Risk And Banking Network Contagion: Evidence From the Brazilian Banking System By Miguel Rivera-Castro; Andrea Ugolini; Juan Arismendi Z
  4. Short term prediction of extreme returns based on the recurrence interval analysis By Zhi-Qiang Jiang; Gang-Jin Wang; Askery Canabarro; Boris Podobnik; Chi Xie; H. Eugene Stanley; Wei-Xing Zhou
  5. How Insurers Differ from Banks: A Primer on Systemic Regulation By Christian Thimann
  6. Does Country Risks Predict Stock Returns and Volatility? Evidence from a Nonparametric Approach By Tahir Suleman; Rangan Gupta; Mehmet Balcilar

  1. By: Degiannakis, Stavros; Potamia, Artemis
    Abstract: In order to provide reliable Value-at-Risk (VaR) and Expected Shortfall (ES) forecasts, this paper attempts to investigate whether an inter-day or an intra-day model provides accurate predictions. We investigate the performance of inter-day and intra-day volatility models by estimating the AR(1)-GARCH(1,1)-skT and the AR(1)-HAR-RV-skT frameworks, respectively. This paper is based on the recommendations of the Basel Committee on Banking Supervision. Regarding the forecasting performances, the exploitation of intra-day information does not appear to improve the accuracy of the VaR and ES forecasts for the 10-steps-ahead and 20-steps-ahead for the 95%, 97.5% and 99% significance levels. On the contrary, the GARCH specification, based on the inter-day information set, is the superior model for forecasting the multiple-days-ahead VaR and ES measurements. The intra-day volatility model is not as appropriate as it was expected to be for each of the different asset classes; stock indices, commodities and exchange rates. The inter-day specification predicts VaR and ES measures adequately at a 95% confidence level. Regarding the 97.5% confidence level that has been recently proposed in the revised 2013 version of Basel III, the GARCH-skT specification provides accurate forecasts of the risk measures for stock indices and exchange rates but not for commodities (i.e. Silver and Gold). In the case of the 99% confidence level, we do not achieve sufficiently accurate VaR and ES forecasts for all the assets.
    Keywords: Basel II, Basel III, Value-at-Risk, Expected Shortfall, volatility forecasting, intra-day data, multi-period-ahead, forecasting accuracy, risk modelling.
    JEL: C15 C32 C53 G15 G17
    Date: 2016–01–01
  2. By: Raphael Benichou; Yves Lemp\'eri\`ere; Emmanuel S\'eri\'e; Julien Kockelkoren; Philip Seager; Jean-Philippe Bouchaud; Marc Potters
    Abstract: Markowitz' celebrated optimal portfolio theory generally fails to deliver out-of-sample diversification. In this note, we propose a new portfolio construction strategy based on symmetry arguments only, leading to "Eigenrisk Parity" portfolios that achieve equal realized risk on all the principal components of the covariance matrix. This holds true for any other definition of uncorrelated factors. We then specialize our general formula to the most agnostic case where the indicators of future returns are assumed to be uncorrelated and of equal variance. This "Agnostic Risk Parity" (AGP) portfolio minimizes unknown-unknown risks generated by over-optimistic hedging of the different bets. AGP is shown to fare quite well when applied to standard technical strategies such as trend following.
    Date: 2016–10
  3. By: Miguel Rivera-Castro (ICMA Centre, Henley Business School, University of Reading); Andrea Ugolini (Dipartimento di Statistica, Informatica, Applicazioni ‘G. Parenti’, Universita di Firenze); Juan Arismendi Z (ICMA Centre, Henley Business School, University of Reading)
    Abstract: In this study the tail systemic risk of the Brazilian banking system is examined, using the conditional quantile as the risk measure. Multivariate conditional dependence between Brazilian banks is modelled with a vine copula hierarchical structure. The results demonstrate that Brazilian nancial systemic risk increased drastically during the global nancial crisis period. Our empirical ndings show that Bradesco and Itau are the origin of the larger systemic shocks from the banking system to the nancial system network. The results have implications for the capital regulation of nancial institutions and for risk managers' decisions.
    Keywords: Systemic Risk, Brazilian Banking System, Banking Network, Financial Contagion, Financial Crisis
    JEL: G01 G21 G32 G38
    Date: 2016–09
  4. By: Zhi-Qiang Jiang (ECUST, BU); Gang-Jin Wang (HNU, BU); Askery Canabarro (BU, UFA); Boris Podobnik (ZSEM); Chi Xie (HNU); H. Eugene Stanley (BU); Wei-Xing Zhou (ECUST)
    Abstract: Being able to predict the occurrence of extreme returns is important in financial risk management. Using the distribution of recurrence intervals---the waiting time between consecutive extremes---we show that these extreme returns are predictable on the short term. Examining a range of different types of returns and thresholds we find that recurrence intervals follow a $q$-exponential distribution, which we then use to theoretically derive the hazard probability $W(\Delta t |t)$. Maximizing the usefulness of extreme forecasts to define an optimized hazard threshold, we indicates a financial extreme occurring within the next day when the hazard probability is greater than the optimized threshold. Both in-sample tests and out-of-sample predictions indicate that these forecasts are more accurate than a benchmark that ignores the predictive signals. This recurrence interval finding deepens our understanding of reoccurring extreme returns and can be applied to forecast extremes in risk management.
    Date: 2016–10
  5. By: Christian Thimann (PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), Axa - AXA, PSE - Paris School of Economics)
    Abstract: This paper aims at providing a conceptual distinction between banking and insurance with regard to systemic regulation. It discusses key differences and similarities as to how both sectors interact with the financial system. Insurers interact as financial intermediaries and through financial market investments, but do not share the features of banking that give rise to particular systemic risk in that sector, such as the institutional interconnectedness through the interbank market, the maturity transformation combined with leverage, the prevalence of liquidity risk and the operation of the payment system. The paper also draws attention to three salient features in insurance that need to be taken account in systemic regulation: the quasiabsence of leverage, the fundamentally different role of capital and the ‘built-in bail-in’ of a significant part of insurance liabilities through policy-holder participation. Based on these considerations, the paper argues that if certain activities were to give rise to concerns about systemic risk in the case of insurers, regulatory responses other than capital surcharges may be more appropriate.
    Keywords: Systemic risk,Insurance,Financial regulation
    Date: 2014–10–16
  6. By: Tahir Suleman (School of Economics and Finance, Victoria University of Wellington, New Zealand and School of Business, Wellington Institute of Technology, New Zealand); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa; IPAG Business School, Paris, France); Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, via Mersin 10, Northern Cyprus,Turkey and Department of Economics, University of Pretoria, Pretoria, 0002, South Africa; IPAG Business School, Paris, France)
    Abstract: We use the k-th order nonparametric causality test at monthly frequency over the period of 1984:1 to 2015:12 to analyze whether aggregate country risk, and its components (economic, financial and political) can predict movements in stock returns and volatility of eighty-three developed and developing economies. The nonparametric approach controls for the existing misspecification of a linear framework of causality, and hence, the weak evidence of causality obtained under the standard Granger tests cannot be relied upon. When we apply the nonparametric test, we find that, while there is no evidence of predictability of squared stock returns barring one case, at times, there are nearly 50 percent of the countries where the aggregate risks and its components tend to predict stock returns and realized volatility.
    Keywords: Country risks, returns, volatility, nonparametric higher-order causality
    JEL: C22 G10
    Date: 2016–10
  7. By: Hering, Imke; Mußhoff, Oliver
    Abstract: Based on a rich dataset of an Azerbaijani microfinance institution, we analyze what a lender can pre-determine from own collected repayment records on clients and how lending conditions are adjusted for the knowledge gains. At the same time, the repayment performances and lending policies between agricultural and non-agricultural clients are differentiated. Our results confirm a positive relationship between previous delays and recidivism, which is even enhanced by the severity of the previous overdue payment. With respect to consequences of previous delay, we find that the borrower faces an increase in loan volume rationing in the subsequent loan. All in all, we state that banks’ internal repayment records can contribute to the customer risk assessment.
    Keywords: Microfinance, Risk management, Credit reports, Azerbaijan, Agricultural Finance, Community/Rural/Urban Development, International Development,
    Date: 2016

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