nep-rmg New Economics Papers
on Risk Management
Issue of 2017‒04‒30
sixteen papers chosen by

  1. The case of 'Less is more': Modelling risk-preference with Expected Downside Risk By Mihaly Ormos; Dusan Timotity
  2. Regulatory Competition In Capital Standards with Selection Effects among Banks By Maier, Ulf
  3. Volatility Risk Premia and Future Commodity Returns By José Renato Haas Ornelas; Roberto Baltieri Mauad
  5. Performance and Risk: Empirical Evidence from Petroliam Nasional Berhad (PETRONAS) By Nayan, Norma
  6. Commodity price risk management and fiscal policy in a sovereign default model By Bernabe Lopez-Martin; Julio Leal; Andre Martinez Fritscher
  7. Risk Management with Supply Contracts By Heitor Almeida; Kristine Watson Hankins; Ryan Williams
  8. Necessity of Corporate Governance and Development of Risk Management: APB Resources Berhad By Ghani, Luqman
  9. Introducing global term structure in a risk parity framework By Lauren Stagnol
  10. Firm Risk and Performance: The Role of Corporate Governance in Hwa Tai Sdn Bhd By Khalil, Nur Syafiqah
  11. Hazard risks and their impact on critical infrastructures (Case analysis – natural gas networks of Italy and Romania) By Ionut Purica
  12. Putting a value on injuries to natural assets: The BP Oil Spill By Richard Bishop; Kevin Boyle; Richard Carson; David Chapman; Matthew DeBell; Colleen Donovan; W. Michael Hanemann; Barbara Kanninen; Matthew Konopka; Raymond Kopp; Jon Krosnick; John List; Norman Meade; Robert Paterson; Stanley Presser; Nora Scherer; V. Kerry Smith; Roger Tourangeau; Michael Welsh; Jeffrey Wooldridge
  13. Investor attention and Portuguese stock market volatility: We’ll google it for you! By Ana Brochado
  14. Risky Choices: Simulating Public Pension Funding Stress with Realistic Shocks By Farrell, James; Shoag, Daniel
  15. Life Insurance and Life Settlement Markets with Overconfident Policyholders By Hanming Fang; Zenan Wu
  16. The identification of attitudes towards ambiguity and risk from asset demand By Polemarchakis, Herakles; Selden, Larry; Song, Xinxi

  1. By: Mihaly Ormos; Dusan Timotity
    Abstract: This paper discusses an alternative explanation for the empirical findings contradicting the positive relationship between risk (variance) and reward (expected return). We show that these contradicting results might be due to the false definition of risk-perception, which we correct by introducing Expected Downside Risk (EDR). The EDR parameter, similar to the Expected Shortfall or Conditional Value-at-Risk, measures the tail risk, however, fits and better explains the utility perception of investors. Our results indicate that when using the EDR as risk measure, both the positive and negative relationship between expected return and risk can be derived under standard conditions (e.g. expected utility theory and positive risk-aversion). Therefore, no alternative psychological explanation or additional boundary condition on utility theory is required to explain the phenomenon. Furthermore, we show empirically that it is a more precise linear predictor of expected return than volatility, both for individual assets and portfolios.
    Date: 2017–04
  2. By: Maier, Ulf (LMU Munich)
    Abstract: Several countries have recently introduced national capital standards exceeding the internationally coordinated Basel III rules, which is inconsistent with the \'race to the bottom\' in capital standards found in the literature. We study regulatory competition when banks are heterogeneous and give loans to firms that produce output in an integrated market. In this setting capital requirements change the pool quality of banks in each country and inflict negative externalities on neighboring jurisdictions by shifting risks to foreign taxpayers and by reducing total credit supply and output. Non-cooperatively set capital standards are higher than coordinated ones and a \'race to the top\' occurs when governments care equally about bank profits, taxpayers, and consumers.
    Keywords: Regulatory competition; capital requirements; bank heterogeneity;
    JEL: G28 F36 H73
    Date: 2017–03–25
  3. By: José Renato Haas Ornelas; Roberto Baltieri Mauad
    Abstract: This paper extends the empirical literature on volatility risk premium (VRP) and future returns by analyzing the predictive ability of commodity currency VRP and commodity VRP. The empirical evidence throughout this paper provides support for a positive relationship of commodity currency VRP and future commodity returns, but only for the period after the 2008 global financial crisis. This predictability survives the inclusion of control variables such as equity VRP and past currency returns. Furthermore, we find a negative relationship between gold VRP and future commodity and currency returns. This result corroborates the view of gold as a safe haven asset
    Date: 2017–04
  4. By: Baker, Colleen (Independent Consultant); Cumming, Christine M. (Federal Reserve bank of New York (retired)); Jagtiani, Julapa (Federal Reserve Bank of Philadelphia)
    Abstract: This paper discusses the new financial regulations in the post–financial crisis period, focusing on capital and liquidity regulations. Basel III and the capital stress tests introduced new requirements and new definitions while retaining the structure of the pre-2010 requirements. The total number of requirements increased, making it difficult to determine which constraints are binding. We find that the new common equity tier 1 (CET1) and Level 1 high-quality liquid assets (HQLAs) are the binding constraints at large U.S. banks, especially for banks that are active in capital markets activities. Banks have been holding more CET1 and a larger share of Level 1 HQLAs since the financial crisis of 2007 to 2009. We also find that the market pricing of bank debt appears to have responded to changes in liquidity measures, especially at large capital markets banks. The Basel III regulatory capital ratios appear to have little direct influence on spreads.
    Keywords: bank capital regulations; bank liquidity; CET1; high-quality liquid assets (HQLAs); Basel III; Dodd–Frank Act; financial stability
    JEL: G12 G18 G21 G28
    Date: 2017–04–24
  5. By: Nayan, Norma
    Abstract: The paper aims to recognize the relationship between risk and profit in the company Petroliam Nasional Berhad (PETRONAS). This company is one of the leading companies in oil and gas industry, therefore, knowing the risk taken by the company and their management and the impact on the profit to the shareholder. The main focus in this paper is to recognized risk especially in operational risk, liquidity risk and credit risk while the profit is indicate by using ROA, ROE, Profit Margin Ratio, Debt to Equity Ratio, Debt to Asset Ratio and Interest Coverage Ratio. In addition, the size of the company is considered to have relationship with the risk factor. It involved the total assets and the Malaysian economic outlook looking at the GDP growth, inflation, exchange rate and the unemployment. In addition, Pearson correlation coefficient and significant (1-tailed) are used to find the relationship between the ROA and the 13 items that be as independent variables. The ROE and Profit Margin Ratio are significant in this business due to the direct and indirect relationship to the profitability in the company. In conclusion, this paper takes further examines if the company has taken the appropriate decision in retaining the risk as mention that will reflected to the profitability and the growth of the company.
    Keywords: Keywords: company performance, operational risk, liquidity risk and credit risk, return on asset, return on equity, profit margin ratio, debt to equity ratio, current ratio, quick ratio, cash ratio, interest coverage ratio, GDP, inflation, exchange rate, unemployment.
    JEL: D8 G3 G32
    Date: 2017–04–16
  6. By: Bernabe Lopez-Martin; Julio Leal; Andre Martinez Fritscher
    Abstract: Commodity prices are an important driver of fiscal policy and the business cycle in many developing and emerging market economies. We analyze a dynamic stochastic small-open-economy model of sovereign default, featuring endogenous fiscal policy and stochastic commodity revenues. The model accounts for a positive correlation of commodity revenues with government expenditures and a negative correlation with tax rates. We quantitatively document the extent to which the utilization of different financial hedging instruments by the government contributes to lowering the volatility of different macroeconomic variables and their correlation with commodity revenues. An event analysis illustrates how financial hedging instruments moderate fiscal adjustment in response to significant falls in the price of commodities. We evaluate the conditional and unconditional welfare gains for the representative household, generated by financial derivatives and commodity-indexed bonds.
    Keywords: commodity revenues, hedging, indexed bonds, fiscal policy, sovereign default
    Date: 2017–03
  7. By: Heitor Almeida; Kristine Watson Hankins; Ryan Williams
    Abstract: Purchase obligations are forward contracts with suppliers and are used more broadly than traded commodity derivatives. This paper is the first to document that these contracts are a risk management tool and have a material impact on corporate hedging activity. Firms that expand their risk management options following the introduction of steel futures contracts substitute financial hedging for purchase obligations. Contracting frictions – such as bargaining power and settlement risk – as well as potential hold-up issues associated with relationship-specific investment affects the use of purchase obligations in the cross-section as well as how firms respond to the introduction of steel futures.
    JEL: G32
    Date: 2017–04
  8. By: Ghani, Luqman
    Abstract: The purpose of this study is to examine the overall performance of the company APB Resources Berhad with the specific risk and their profitability factor on performance. The data that are use is annual report of APB Resources Berhad starting from 2012-2016. The measurement of return on asset, leverage, current ratio and inventory turnover ratio to see overall the performance of this company. The additional measurement is the method of SPSS that give a specific results on the risk and profitability on performance during five years. The relationship return on asset, current ratio, leverage, gross domestic product, inflation remuneration board are the factors of the performance. The regression analysis and correlation shows only the impact and effect on the performance during five years.
    Keywords: Credit Risk, Profitability, Risk Management, Corporate Governance
    JEL: G21 G32
    Date: 2017–04–16
  9. By: Lauren Stagnol
    Abstract: In this paper, we aim at constructing a global risk model using the term structure from major bond-issuing countries. The goal is twofold: first this allows quantifying global interest rate risk (level, slope and curvature effects), providing insights on global risks at play. Secondly, such information could be used in order to design sovereign bond indexes in a risk parity framework where each country's sensitivity to global interestrisk is accounted for. More specifically, we propose two innovative indexing schemes, a first one where we equalize contribution to global level risk exposures across countries, and a second one where we turn to level, slope and curvature risk exposures within a country. Indeed at the country level, only parallel (level) risk matters, while when turning to maturity buckets within a country, non parallel risks (slope and curvature) have to be accounted for. Finally, we demonstrate that the conjunctive use of these two approaches allows to efficiently tackle exposure to global interest rate risk while providing appealing improvements in the risk-return profile.
    Keywords: Equal Risk Contribution, Yield Curve, Risk Parity, Smart Beta, Risk Measure, Risk-Based Indexing, Sovereign Bonds, Term Structure.
    JEL: G10 G11 G15
    Date: 2017
  10. By: Khalil, Nur Syafiqah
    Abstract: The main purpose of this study is to examine the relation between the overall performance of Hwa Tai Sdn Bhd with firm specific risk and some macroeconomics factor involved. The data collected are from Hwa Tai Sdn Bhd’s annual report starting from 2011 until 2015. The calculation of liquidity ratio, profitability ratio and operating ratio are used to see the overall performance of Hwa Tai Sdn Bhd. A correlation model comprise of dependent variable which is ROA and numerous independent variable was used to analyse the performance of Hwa Tai Sdn Bhd. This study empirical results showed that ROI is the most significant meaning in the performance of Hwa Tai Sdn Bhd.
    Keywords: firm specific risk; macroeconomics factor; liquidity ratio; profitability ratio; operating ratio; ROA; ROI
    JEL: G0 G01 G02 G2 G21 G23 G28
    Date: 2017–04–17
  11. By: Ionut Purica
    Abstract: Hazard risks have important impact on critical infrastructures such as gas network based on large climate and seismic data the risk distribution is determined and the risk maps for the Italian and Romanian gas networks are calculated Mitigation and adaptation measures and insurance policy for critical infrastructures
    Keywords: italy and Romania, Energy and environmental policy, Modeling: new developments
    Date: 2016–07–04
  12. By: Richard Bishop; Kevin Boyle; Richard Carson; David Chapman; Matthew DeBell; Colleen Donovan; W. Michael Hanemann; Barbara Kanninen; Matthew Konopka; Raymond Kopp; Jon Krosnick; John List; Norman Meade; Robert Paterson; Stanley Presser; Nora Scherer; V. Kerry Smith; Roger Tourangeau; Michael Welsh; Jeffrey Wooldridge
    Date: 2017
  13. By: Ana Brochado
    Abstract: The aim of this work is to analyze the influence of investor attention on the Portuguese stock market activity and volatility. As a proxy of investor attention, we use investors’ online search behavior, both at the individual stock and the overall market level, provided by Google Trends. The econometric analysis is performed both for each stock and for the index portfolio. The model include both market states and the crisis effects. As introduced by previous studies, Google search volume revealed to be a reliable proxy of investor attention and to be a significant determinant of the contemporaneous stock market historical volatility. The results are robust even after controlling for variations in market returns and market volume. Moreover, the model estimates revealed that the impact of investor attention seems to be more sensitive to the high-return market state and becomes stronger during periods of crisis.
    Keywords: Portugal, Finance, Modeling: new developments
    Date: 2016–07–04
  14. By: Farrell, James (FL Southern College); Shoag, Daniel (Harvard University)
    Abstract: State and local government pension funds in the United States collectively manage a very large and diverse pool of assets to meet the even large sum of accrued liabilities. Recent research has emphasized that widely-used accounting practices, like matching discount rates to expected asset returns, understate the market value of these liabilities. Less work has explored the risks inherent in existing diverse set asset allocations, and the accounting practices used by most state and local pensions do not capture or report this risk at all. To explore the effect of asset market risk, we build and simulate a dynamic model of pension funding using a realistic return generating process. We find that the range of potential outcomes is very large, meaning that state and local governments need to prepare for an extremely wide range of possible funding shocks in the next few decades. Moreover, this wide range of outcomes makes the ultimate impact of policy choices--such as changing the discount rate or failing to sufficiently contribute to the fund--nonlinear and difficult to anticipate. Together, these findings suggest the need for more attention and reporting of these risks and the attendant range of possible outcomes by public plans.
    Date: 2016–09
  15. By: Hanming Fang; Zenan Wu
    Abstract: We analyze how the life settlement market – the secondary market for life insurance – may affect consumer welfare in a dynamic equilibrium model of life insurance with one-sided commitment and overconfident policyholders. As in Daily et al. (2008) and Fang and Kung (2010), policyholders may lapse their life insurance policies when they lose their bequest motives; but in our model the policyholders may underestimate their probability of losing their bequest motive, or be overconfident about their future mortality risks. For the case of overconfidence with respect to bequest motives, we show that in the absence of life settlement overconfident consumers may buy “too much” reclassification risk insurance for later periods in the competitive equilibrium. In contrast, when consumers are overconfident about their future mortality rates in the sense that they put too high a subjective probability on the low-mortality state, the competitive equilibrium contract in the absence of life settlement exploits the consumer bias by offering them very high face amounts only in the low-mortality state. In both cases, life settlement market can impose a discipline on the extent to which overconfident consumers can be exploited by the primary insurers. We show that life settlement may increase the equilibrium consumer welfare of overconfident consumers when they are sufficiently vulnerable in the sense that they have a sufficiently large intertemporal elasticity of substitution of consumption.
    JEL: D03 D86 G22 L11
    Date: 2017–03
  16. By: Polemarchakis, Herakles (Department of Economics, University of Warwick and LabEx MME-DII, University of Paris 2); Selden, Larry (Columbia Business School, Columbia University and University of Pennsylvania); Song, Xinxi (International School of Economics and Management, Capital University of Economics and Business)
    Abstract: Individuals behave differently when they know the objective probability of events and when they do not. The smooth ambiguity model accommodates both ambiguity (uncertainty) and risk. For an incomplete, competitive asset market, we develop a revealed preference test for asset demand to be consistent with the maximization of smooth ambiguity preferences ; and we show that ambiguity preferences constructed from finite observations converge to underlying ambiguity preferences as observations become dense. Subsequently, we give sufficient conditions for the asset demand generated by smooth ambiguity preferences to identify the ambiguity and risk indices as well as the ambiguity probability measure. We do not require ambiguity beliefs to be observable : in a generalized specification, they may not even be defined. An ambiguity free asset plays an important role for identification.
    Keywords: risk ; uncertainty ; identification JEL classification numbers: D11 ; D80 ; D81
    Date: 2017

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