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on Risk Management |
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Issue of 2017‒04‒09
28 papers chosen by |
| By: | Osmundsen, Kjartan Kloster (UiS) |
| Abstract: | The Basel Committee’s minimum capital requirement function for banks’ credit risk is based on value at risk. This paper performs a statistical and economic analysis of the consequences of instead basing it on expected shortfall, a switch that has already been set in motion for market risk. The empirical analysis is carried out by means of both theoretical simulations and real data from a Norwegian savings bank group’s corporate portfolio. Expected shortfall has some well known conceptual advantages compared to value at risk, primarily a better ability to capture tail risk. It is also sub-additive in gen- eral, thus always reflecting the positive effect of diversification. These two aspects are examined in detail, in addition to comparing parameter sensitivity, estimation stabil- ity and backtesting methods for the two risk measures. All comparisons are conducted within the Basel Committee’s minimum capital requirement framework. The findings support a switch from value at risk to expected shortfall for credit risk modelling. |
| Keywords: | Expected shortfall; credit risk; bank regulation; Basel III; tail risk |
| JEL: | G10 |
| Date: | 2017–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:stavef:2017_004&r=rmg |
| By: | Stefano Giglio |
| Abstract: | "This paper measures the joint default risk of financial institutions by exploiting information about counterparty risk in credit default swaps (CDS). A CDS contract written by a bank to insure against the default of another bank is exposed to the risk that both banks default. From CDS spreads we can then learn about the joint default risk of pairs of banks. From bond prices we can learn the individual default probabilities. Since knowing individual and pairwise probabilities is not sufficient to fully characterize multiple default risk, I derive the tightest bounds on the probability that many banks fail simultaneously." JEL Classification: G21, E44, G28 |
| Keywords: | credit default swaps, counterparty risk, default risk, simultaneous failures |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201615&r=rmg |
| By: | Rama Cont (Imperial College London) |
| Abstract: | The clearing of over-the-counter transactions through central counterparties (CCPs), one of the pillars of financial reform following the crisis of 2007-2008, has promoted CCPs as key elements of the new global financial architecture. It is important to examine how these reforms have affected risks in the financial system and whether central clearing has attained the initial objective of the reform, which is to enhance financial stability and reduce systemic risk. We show that, rather than eliminating counterparty risk, central clearing transforms it into liquidity risk: margin calls transform accounting losses into realised losses which affect the liquidity buffers of clearing members. Accordingly, initial margin and default fund calculations should account for this liquidity risk in a realistic manner, especially for large positions. While recent discussions have centred on the solvency of CCPs, their capital and 'skin-in-the-game' and capital requirements for CCP exposures of banks, we argue that these issues are secondary and that the main focus of risk management and financial stability analysis should be on the liquidity of clearing members and the liquidity resources of CCPs. Clearing members should assess their exposure to CCPs in terms of liquidity, rather than counterparty risk. Stress tests involving CCPs should focus on liquidity stress testing and adequacy of liquidity resources. |
| Keywords: | CCP, central clearing, central counterparty, systemic risk, liquidity risk, counterparty risk, default fund, OTC derivatives, collateral requirement, regulation, stress testing |
| Date: | 2017–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2017_03&r=rmg |
| By: | Allen, D.E.; McAleer, M.J.; Singh, A.K. |
| Abstract: | This paper features a tri-criteria analysis of Eurekahedge fund data strategy index data. We use nine Eurekahedge equally weighted main strategy indices for the portfolio analysis. The tri-criteria analysis features three objectives: return, risk and dispersion of risk objectives in a Multi-Criteria Optimisation (MCO) portfolio analysis. We vary the MCO return and risk targets and contrast the results with four more standard portfolio optimisation criteria, namely the tangency portfolio (MSR), the most diversifed portfolio (MDP), the global minimum variance portfolio (GMW), and portfolios based on minimising expected shortfall (ERC). Backtests of the chosen portfolios for this hedge fund data set indicate that the use of MCO is accompanied by uncertainty about the a priori choice of optimal parameter settings for the decision criteria. The empirical results do not appear to outperform more standard bi-criteria portfolio analyses in the backtests undertaken on our hedge fund index data. |
| Keywords: | Keywords: MCO, Portfolio Analysis, Hedge Fund Strategies, Multi-Criteria Optimisation, Genetic Algorithms. |
| JEL: | G15 G17 G32 C58 D53 |
| Date: | 2016–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:ems:eureir:98658&r=rmg |
| By: | Jalal Etesami; Ali Habibnia; Negar Kiyavash |
| Abstract: | Financial instability and its destructive effects on the economy can lead to financial crises due to its contagion or spillover effects to other parts of the economy. Having an accurate measure of systemic risk gives central banks and policy makers the ability to take proper policies in order to stabilize financial markets. Much work is currently being undertaken on the feasibility of identifying and measuring systemic risk. In principle, there are two main schemes to measure interlinkages between financial institutions. One might wish to construct a mathematical model of financial market participant relations as a network/graph by using a combination of information extracted from financial statements like the market value of liabilities of counterparties, or an econometric model to estimate those relations based on financial series. In this paper, we develop a data-driven econometric framework that promotes an understanding of the relationship between financial institutions using a nonlinearly modified Granger-causality network. Unlike existing literature, it is not focused on a linear pairwise estimation. The method allows for nonlinearity and has predictive power over future economic activity through a time-varying network of relationships. Moreover, it can quantify the interlinkages between financial institutions. We also show how the model improve the measurement of systemic risk and explain the link between Granger-causality network and generalized variance decompositions network. We apply the method to the monthly returns of U.S. financial Institutions including banks, broker and insurance companies to identify the level of systemic risk in the financial sector and the contribution of each financial institution. |
| Keywords: | Systemic risk; Risk Measurement; Financial Linkages and Contagion; Nonlinear Granger Causality; Directed Information Graphs |
| JEL: | C14 C51 D8 D85 G1 G14 G21 G28 G31 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:70769&r=rmg |
| By: | Adeola Oyenubi |
| Abstract: | This paper provides a plausible explanation for why the optimum number of stocks in a portfolio is elusive, and suggests a way to determine this optimal number. Diversification is dependent on the number of stocks in a portfolio and the correlation structure. Adding stocks to a portfolio increases the level of diversification, and consequently leads to risk reduction. However the risk reduction effect dissipates after a certain number of stocks, beyond which additional stocks do not contribute to risk reduction. To explain this phenomenon, this paper investigates the relationship between portfolio diversification and concentration using a genetic algorithm.To quantify diversification, we use the Portfolio Diversification Index (PDI). In the case of concentration, we introduce a new quantification method. Concentration is quantified as complexity of the correlation matrix. The proposed method quantifies the level of dependency (or redundancy) between stocks in a portfolio. By contrasting the two methods it is shown that the optimal number of stocks that optimizes diversification depends on both number of stocks and average correlation. Our result shows that, for a given universe, there is a set of Pareto optimal portfolios each containing a different number of stocks that simultaneously maximizes diversification and minimizes concentration. The preferred portfolio among the Pareto set will depend on the preference of the investor. Our result also suggests that an ideal condition for the optimal number of stocks is when the variance reduction as a result of adding a stock is off-set by the the variance contribution of complexity. |
| Keywords: | Information Theory, Diversification, Genetic Algorithm, Portfolio optimization, Principal Component Analysis, Simulation methods, Maximum Diversification Index |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:666&r=rmg |
| By: | Charles Boissel; François Derrien; Evren Örs; David Thesmar |
| Abstract: | How do crises affect Central clearing Counterparties (CCPs)? We focus on CCPs that clear and guarantee a large and safe segment of the repo market during the Eurozone sovereign debt crisis. We start by developing a simple framework to infer CCP stress, which can be measured through the sensitivity of repo rates to sovereign CDS spreads. Such sensitivity jointly captures three effects: (1) the effectiveness of the haircut policy, (2) CCP member default risk (conditional on sovereign default) and (3) CCP default risk (conditional on both sovereign and CCP member default). The data show that, during the sovereign debt crisis of 2011, repo rates strongly respond to movements in sovereign risk, in particular for GIIPS countries, indicating significant CCP stress. Our model suggests that repo investors behaved as if the conditional probability of CCP default was very large. JEL Classification: E58, E43, G01, G21 |
| Keywords: | repurchase agreement, sovereign debt crisis, LTRO, secured money market lending, clearing houses |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201610&r=rmg |
| By: | Arnold Polanski; Evarist Stoja |
| Abstract: | We define tail interdependence as a situation where extreme outcomes for some variables are informative about such outcomes for other variables. We extend the concept of multiinformation to quantify tail interdependence, decompose it into systemic and residual interdependence and measure the contribution of a constituent to the interdependence of a system. Further, we devise statistical procedures to test: a) tail independence, b) whether an empirical interdependence structure is generated by a theoretical model and c) symmetry of the interdependence structure in the tails. We outline some additional extensions and illustrate this framework by applying it to several datasets. JEL Classification: C12, C14, C52 |
| Keywords: | co-exceedance, Kullback-Leibler divergence, multi-information, relative entropy, risk contribution, risk interdependence |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201612&r=rmg |
| By: | Abdullah, Azrul; Ku Ismail, Ku Nor Izah |
| Abstract: | This study examines the effectiveness of Risk Management Committee (RMC) in influencing hedge accounting practices among non-financial companies listed on the Bursa Malaysia. Our regression results reveal that that there is no significant relationship between the application of hedge accounting and the effectiveness of RMCs. However, there are positive and significant relationships between the choice of hedge accounting and each of company size and leverage. The implications of the findings were discussed. |
| Keywords: | Hedge Accounting, Hedging Activities, Risk Management Committee, Corporate Governance, Financial Reporting |
| JEL: | M40 M41 M48 M49 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:77960&r=rmg |
| By: | Syed Abul, Basher; Lawrence M., Kessler; Murat K., Munkin |
| Abstract: | Minimum capital requirements are often implemented under the notion that increased capital improves bank safety and stability. However, an unintended consequence of higher capital requirements could arise if increasing capital induces banks to invest in riskier assets. Several researchers have examined this relationship between bank capital and risk among conventional banks, and interest around this topic has intensifi�ed since the 2007-2008 fi�nancial crisis. However, the fi�ndings are rather mixed. Moreover, very few studies have focused on Islamic banks, which differ greatly from their conventional counterpart's due to their need to be Shariah-compliant. In this paper a sample of 22 Islamic banks is analyzed over a seven year period from 2007-2013. The empirical approach is fully parametric and Bayesian utilizing techniques developed by Kessler and Munkin (2015) and building on previous banking research by Shrives and Dahl (1992) and Jacques and Nigro (1997). Some evidence is found suggesting that increases in total capital positively affect the levels of asset risks among Islamic banks. |
| Keywords: | Islamic Banks; Asset Risks and Total Capital; Panel Data with Endogenous Treatment; MCMC. |
| JEL: | C11 C32 G21 G28 |
| Date: | 2017–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:77932&r=rmg |
| By: | Jamal Bouoiyour (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour); Refk Selmi (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour) |
| Abstract: | During times of extreme market turmoil, it is acknowledged that there is a tendency towards "flight to safety". A strong (weak) safe haven is defined as an asset that has a significant positive (negative) return in periods where another asset is in distress, while hedge has to be negatively correlated (uncorrelated) on average. The Bitcoin's surge alongside the aftermath of Trump's win in the 2016 U.S. presidential elections has strengthened its status as the modern safe haven. This paper uses a truly noise-assisted data analysis method, termed as Ensemble Empirical Mode Decomposition-based approach, to examine whether Bitcoin can act as a hedge and safe haven for U.S. stock price index. The results document that the Bitcoin's safe-haven property is time-varying and that it has primarily been a weak safe haven in the short term and the long-term. We also demonstrate that precious metals lost their safe haven properties over time as the correlation between gold/silver and U.S. stock price declines from short-to long-run horizons. |
| Keywords: | US stock market,Trump's win,2016 US presidential elections,Bitcoin price,safe haven |
| Date: | 2017–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01480031&r=rmg |
| By: | Louis Raymond Eeckhoudt (Department of Economics (University of Verona)); Elisa Pagani (Department of Economics (University of Verona)); Emanuela Rosazza Gianin (Department of Statistics and Quantitative Methods, University of Milano-Bicocca, Via Bicocca degli A) |
| Abstract: | The notion of prudence was very useful in economics to analyze saving or self protection decisions. We show in this note that, following Ben-Tal and Teboulle (2007), it is also relevant to develop risk measures. |
| Keywords: | Utility Theory, Certainty Equivalent, Prudence Premium, Risk Measure. |
| JEL: | D31 D81 G11 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:ver:wpaper:07/2016&r=rmg |
| By: | Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid); Victor Echevarria Icaza (Universidad Complutense de Madrid Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa)) |
| Abstract: | This paper shows that systemic banks are prone to increase their regulatory capital ratio through a decline in risk-weighted assets density and an intense use of lower level capital. The market access of systemic banks, and the fact that they were singled out for higher capital requirements seem to have biased them towards lower level capital, consistent with the theory that asymmetric information drives capital decisions. These effects are particularly strong for institutions that had a rather low level of capitalization at the start of the period and for those that exhibited a strong use of Additional Tier I capital before the regulatory changes. Strict capital composition requirements for firms with lower buffers would be an improvement. |
| Keywords: | Contingent capital, banking regulation, risk-taking incentives, asset substitution, systemic risk |
| JEL: | G12 G21 G28 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:aee:wpaper:1703&r=rmg |
| By: | Dionne, Georges (HEC Montreal, Canada Research Chair in Risk Management); Desjardins, Denise (HEC Montreal, Canada Research Chair in Risk Management) |
| Abstract: | This paper analyzes the relation between insurers’ liquidity creation and reinsurance demand. The empirical measure of liquidity creation was developed for banks by Berger and Bouwman (2009), who distinguished two important bank activities: liquidity creation and risk transformation. Insurers also actively transform risk, but the extent of their engagement in liquidity creation is less clear. Because liquidity creation is a risky activity, it may affect the demand for reinsurance. The goal of this study is to analyze how liquidity creation affects demand for reinsurance. |
| Keywords: | Liquidity creation; reinsurance; risk transformation; insurance |
| JEL: | G21 G22 G32 |
| Date: | 2017–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:ris:crcrmw:2017_003&r=rmg |
| By: | Filippo Ippolito; José-Luis Peydró; Andrea Polo; Enrico Sette |
| Abstract: | By providing liquidity to depositors and credit line borrowers, banks are exposed to doubleruns on assets and liabilities. For identification, we exploit the 2007 freeze of the European interbank market and the Italian Credit Register. After the shock, there are sizeable, aggregate double-runs. In the cross-section, pre-shock interbank exposure is (unconditionally) unrelated to post-shock credit line drawdowns. However, conditioning on firm observable and unobservable characteristics, higher pre-shock interbank exposure implies more post-shock drawdowns. We show that is the result of active pre-shock liquidity risk management by more exposed banks granting credit lines to firms that run less in a crisis. JEL Classification: G01, G21, G28 |
| Keywords: | Credit lines, Liquidity risk, Financial crisis, Runs, Risk management |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201608&r=rmg |
| By: | Cyril Grunspan (ESILV Léonard de Vinci); Ricardo Pérez-Marco (CNRS - Centre National de la Recherche Scientifique, IMJ-PRG - Institut de Mathématiques de Jussieu - Paris Rive Gauche - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | We present Bitcoin Security Tables computing the probability of success p(z, q, t) of a double spend attack by an attacker controlling a share q of the hashrate after z confirmations in time t. |
| Keywords: | Regularized Incomplete Beta Function, double spend, blockchain,Bitcoin, mining, proof-of-work |
| Date: | 2017–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01465634&r=rmg |
| By: | Anastasiou, Dimitrios |
| Abstract: | In the financial crisis of 2007, many banks with high level of Non-performing loans (NPLs) found their sources of capital dried up, which occurred because of bad management. Huge amounts of NPLs imply both a lack of management methods and lack of capital. Also, high NPL levels have resulted to negative effects to banks’ lending activity, making bank officers-managers more concern for the future of the whole banking system. The purpose of this study is twofold. First, to present some NPL management methods that already exist in the literature and second, to make a clear distinction between the ex-post and ex-ante management of NPLs. I tried to collect in one paper what other researchers suggested for the proper management and fight against NPLs for different kinds of banking systems around the world. Hopefully, by examining these methods, banks will be able to cope with the problem of NPLs. |
| Keywords: | Non-performing loans; NPL management; bank restructuring; economic policy reform; financial stability; macroprudential policy; poor credit risk management |
| JEL: | G21 G28 G38 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:77581&r=rmg |
| By: | Sarena Goodman; Alice M. Henriques; Alvaro A. Mezza |
| Abstract: | Using a novel dataset that links an individual’s background, education, and federal financial aid participation to her future credit records, we document that, even though it is not, and cannot be, used by credit agencies in assigning risk, family background is a strong predictor of early-career credit health (that is, an individual’s credit score when she is around 30 years old). This relationship persists even after controlling for achievement, a range of postsecondary schooling variables (e.g., educational attainment, institutional quality, undergraduate borrowing), and key elements of early credit histories (e.g., default on educational loans). Interestingly, undergraduate borrowing, which is not underwritten, correlates with background and appears to explain some of the difference in scores. In light of the many important contexts in which credit scores are relied upon to evaluate consumers (e.g., lending, insurance, employment), our study offers a new dimension in understanding the transmission of socioeconomic status across generations. |
| Keywords: | Credit Health ; Credit Scores ; Intergenerational Mobility ; Socioeconomic Status ; Student Loans |
| JEL: | D12 D14 I22 I32 J10 J62 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2017-32&r=rmg |
| By: | Andolfatto, David (Federal Reserve Bank of St. Louis); Nosal, Ed (Federal Reserve Bank of Chicago) |
| Abstract: | A bank panic is an expectation-driven redemption event that results in a self-fulfilling prophecy of losses on demand deposits. From the standpoint of theory in the tradition of Diamond and Dybvig (1983) and Green and Lin (2003), it is surprisingly di¢ cult to generate bank panic equilibria if one allows for a plausible degree of contractual flexibility. A common assumption employed in the standard banking model is that returns are linear in the scale of investment. Instead, we assume the existence of a fixed investment cost, so that a higher risk-adjusted rate of return is available only if investment exceeds a minimum scale requirement. With this simple and empirically-plausible modification to the standard model, we find that bank panic equilibria emerge easily and naturally, even under highly flexible contractual arrangements. While bank panics can be eliminated through an appropriate policy, it is not always desirable to do so. We use our model to examine a number of issues, including the likely effectiveness of recent financial market regulations. Our model also lends some support for the claim that low-interest rate policy induces a “reach-for-yield” phenomenon resulting in a more panic-prone financial system. |
| JEL: | G01 G21 G28 |
| Date: | 2017–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-009&r=rmg |
| By: | Sophie A. Rocks; Iljana Schubert; Emma Soane; Edgar Black; Rachel Muckle; Judith Petts; George Prpich; Simon J. Pollard |
| Abstract: | Communicating the rationale for allocating resources to manage policy priorities and their risks is challenging. Here, we demonstrate that environmental risks have diverse attributes and locales in their effects that may drive disproportionate responses among citizens. When 2,065 survey participants deployed summary information and their own understanding to assess 12 policy-level environmental risks singularly, their assessment differed from a prior expert assessment. However, participants provided rankings similar to those of experts when these same 12 risks were considered as a group, allowing comparison between the different risks. Following this, when individuals were shown the prior expert assessment of this portfolio, they expressed a moderate level of confidence with the combined expert analysis. These are important findings for the comprehension of policy risks that may be subject to augmentation by climate change, their representation alongside other threats within national risk assessments, and interpretations of agency for public risk management by citizens and others. |
| Keywords: | environment; policy prioritization; strategic risk |
| JEL: | G32 |
| Date: | 2017–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:71580&r=rmg |
| By: | Keuschnigg, Christian; Kogler, Michael |
| Abstract: | Capital reallocation from unprofitable to profitable firms is a key source of productivity gain in an innovative economy. We present a model of credit reallocation and focus on the role of banks: Weakly capitalized banks hesitate to write off non-performing loans to avoid a violation of regulatory requirements or even insolvency. Such behavior blocks credit to expanding industries and results in insufficient credit reallocation across sectors and a distorted capital allocation. Reducing the cost of bank equity, tightening capital requirements, and improving insolvency laws relaxes constraints and mitigates distortions. |
| Keywords: | Banking, credit reallocation, regulations, finance and growth |
| JEL: | D92 G21 G28 G33 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2017:04&r=rmg |
| By: | Aiba, Daiju; Odajima, Ken; Khou, Vouthy |
| Abstract: | Foreign currency borrowing, a phenomenon sometimes referred to as financial dollarization, is a growing issue in developing countries. This study investigated the determinants of foreign currency borrowing behavior of households in Cambodia using household survey data; and this allowed use of the currency-wise information in tracking households’ financial activities. We found that Cambodian households engage in risk-hedging behavior against exchange rate risks, and are likely to borrow in a foreign currency if this makes up the major portion of their income stream. We also found that expectation of a depreciation of their local currency leads households to take out local currency loans in line with the predictions of theoretical models. Furthermore, education plays a role in the choice of currency for loans; the better educated households are more likely to engage in risk-hedging behavior, and to seek to match the currency composition between loans and income, than the lesse r educated are. We also found that variables related to the use of financial services are also positively correlated with the intensity of risk-hedging behavior against currency mismatches. These results suggest that financial literacy has the potential to enhance risk-hedging behavior against exchange rate risks for Cambodian households. |
| Keywords: | Foreign currency borrowing,Dollarization,Risk-hedging behaviors,Financial literacy,Household survey |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:jic:wpaper:143&r=rmg |
| By: | Timotej Homar |
| Abstract: | This paper analyzes the effect of bank recapitalizations on lending, funding and asset quality of European banks between 2000 and 2013. Controlling for market implied capital shortfall of banks, we find that banks that receive a sufficiently large recapitalization increase lending, attract more deposits and clean up their balance sheets. In contrast, banks that receive a small recapitalization relative to their capital shortfall reduce lending and shrink assets. These results suggest recapitalizations need to be large enough to lead to new lending. JEL Classification: G21, G28 |
| Keywords: | bank recapitalization, lending, zombie banks, bank restructuring, banking crisis |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201616&r=rmg |
| By: | Valerii Salov |
| Abstract: | Time and Sales of corn futures traded electronically on the CME Group Globex are studied. Theories of continuous prices turn upside down reality of intra-day trading. Prices and their increments are discrete and obey lattice probability distributions. A function for systematic evolution of futures trading volume is proposed. Dependence between sample skewness and kurtosis of waiting times does not support hypothesis of Weibull distribution. Kumaraswamy distribution is more suitable for waiting times. Relationships between trading volume and maximum profit strategies are presented. Frequencies of absolute b-increments are approximated by a Hurwitz Zeta distribution. Relative b-increments are non-Gaussian too. Dependence between b- and a-increments allows to interpret the sample variances of b-increments as a stochastic process. Mean sample variance of b-increments vs. a-increments is presented. The L1 distance and Log-likelihood statistics for independence between a- and b-increments are controversial. Corn price jumps remind of chain branching reactions. Bi-logarithmic plots of the empirical frequencies of extreme b-increments vs. ranks are presented. Corresponding distributions resemble snakes forked tongues. The maximum profit strategy is discussed as a measure of non-equilibrium. |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1704.01179&r=rmg |
| By: | Jan Dhaene; Ben Stassen; Karim Barigou; Daniël Linders; Ze Chen |
| Abstract: | In this paper, we investigate a single period framework for the fair valuation of the liabilities related to an insurance policy or portfolio.We de ne a fair valuation as a valuation which is both market-consistent (mark-to-market for hedgeable claims)and actuarial (mark-to-model for unhedgeable claims). We introduce the class of hedge-based valuations, where in a rst step of the valuation process, a best hedge for the liability is set up, based on the traded assets in the market, while in a second step, the remaining part of the claim is valuated via an actuarial valuation. We also introduce the class of two-step valuations, the elements of which are closely related to the two-step valuations which were introduced in Pelsser and Stadje (2014). We show that the 3 classes of fair, hedge-based and two-step valuations are identical. |
| Keywords: | Fair valuation of insurance liabilities, market-consistent valuation, actuarial valuation, Solvency II, mean-variance hedging |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ete:afiper:578281&r=rmg |
| By: | Dionne, Georges (HEC Montreal, Canada Research Chair in Risk Management); Harrington, Scott (University of Pennsylvania) |
| Abstract: | Kenneth Arrow and Karl Borch published several important articles in the early 1960s that can be viewed as the beginning of modern economic analysis of insurance activity. This chapter reviews the main theoretical and empirical contributions in insurance economics since that time. The review begins with the role of utility, risk, and risk aversion in the insurance literature and then summarizes work on the demand for insurance, insurance and resource allocation, moral hazard, and adverse selection. It then turns to financial pricing models of insurance and to analyses of price volatility and underwriting cycles; insurance price regulation; insurance company capital adequacy and capital regulation; the development of insurance securitization and insurance-linked securities; and the efficiency, distribution, organizational form, and governance of insurance organizations. |
| Keywords: | Insurance; insurance market; risk sharing; moral hazard; adverse selection; demand for insurance; financial pricing of insurance; price volatility; insurance regulation; capital regulation; securitization; insurance-linked security; organization form; governance of insurance firms. |
| JEL: | D80 D81 D82 G22 G30 |
| Date: | 2017–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:ris:crcrmw:2017_002&r=rmg |
| By: | Fabian Schupp (Deutsche Bundesbank); Leonid Silbermann (Deutsche Bundesbank) |
| Abstract: | We analyze whether, and if so by how much, stable funding would have contributed to the financial soundness of German banks in the time period between 1995 and 2013, before the Basel III liquidity regulation to address excessive maturity mismatches in the wake of the financial crisis via the Net Stable Funding Ratio can be expected to have been fully implemented. Using a dataset that contains information on critical events of German banks, we find that financing loans using fewer customer deposits would have been associated with a higher probability of financial distress for savings banks and credit cooperatives. A one percent rise in the loanto- deposit ratio from 1995 to 2013 corresponds to an increase in the probability of experiencing a critical event, implying approximately two additional savings banks and two additional credit cooperatives in financial distress. No such effect can be detected for commercial banks (excluding big banks), which are found to be far more heterogeneous with respect to their business models. |
| Keywords: | Banks, financial distress, stable funding, Basel III liquidity regulation, NSFR, financial stability, panel data, random effects logit |
| JEL: | G21 G28 C23 C25 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201717&r=rmg |
| By: | Raslan Alzubi (Department of Economics, University of Sheffield); Mustafa Caglayan (School of Social Sciences, Heriot-Watt University); Kostas Mouratidis (Department of Economics, University of Sheffield) |
| Abstract: | Employing data from thirty large banks in the US, we examine banks' risk-taking behaviour in response to monetary policy shocks. Our investigation provides support for the presence of a risk-taking channel: banks' nonperforming loans increase in medium to long run following an expansionary monetary policy shock. We also find that banks' capital structure plays an important role in explaining bank's risk-taking appetite. Impulse response analysis shows that shocks emanating from larger banks spillover to the rest of the sector but no such effect is observed for smaller banks. The results are confirmed for banks' Z-score. |
| Keywords: | Risk-taking channel; GVAR; monetary policy shocks; spilloverover effects |
| JEL: | E44 E52 G01 G19 G29 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2017009&r=rmg |