nep-rmg New Economics Papers
on Risk Management
Issue of 2017‒06‒11
twelve papers chosen by

  2. Scenario-based capital requirements for the interest rate risk of insurance companies By Schlütter, Sebastian
  3. Risk Assessment of ERP Implementation Using Generalized Stochastic Petri Net By Thangamani Gurunathan
  4. Corporate governance of insurance firms after Sovency II By Siri, Michele
  5. Macroprudential policy and the revolving door of risk: lessons from leveraged lending guidance By Kim, Sooji; Plosser, Matthew; Santos, Joao A. C.
  6. Anti-cyclical versus Risk-sensitive Margin Strategies in Central Clearing By Berlinger, Edina; Dömötör, Barbara; Illés, Ferenc
  7. Elements of an Index-based Margin Insurance. An Application to Wheat Production in Austria By Karin Heinschink; Franz Sinabell; Thomas Url
  8. Modelling a Dutch Pension Fund’s Capital Requirement for Longevity Risk By Polman, Fabian M.; Krijgsman, Cees; Dajani, Karma; Hemminga, Marcus A.
  9. Leverage and Capital Structure Determinants of Chinese Listed Companies By Ferrarini , Benno; Hinojales , Marthe; Scaramozzino , Pasquale
  10. Systemic banks, capital composition and CoCo bonds issuance: The effects on bank risk By Victor Echevarria-Icaza; Simón Sosvilla-Rivero
  11. Deep Learning Bank Distress from News and Numerical Financial Data By Paola Cerchiello; Giancarlo Nicola; Samuel Rönnqvist; Peter Sarlin
  12. Heston Stochastic Vol-of-Vol Model for Joint Calibration of VIX and S&P 500 Options By Jean-Pierre Fouque; Yuri F. Saporito

  1. By: Ashutosh Sarkar (Indian Institute of Management Kozhikode)
    Abstract: In an globalized business environment and highly competitive market, disruptions and glitches of supply chain can affect business survivability of an organization. Recently, supply chain risk management has emerged as an important priority area for supply chain managers and receiving attention in their decision making. Given the important the question of institutionalizing and developing a risk management system across the supply chain becomes relevant. In this paper, we have attempted to develop a conceptual framework for such a risk management system. The framework is being proposed based on the three argument of risk prevention, monitoring, and control of supply chain risks. Such a framework would benefit firms in terms of bringing an insight into the way a supply chain risk management system is to be viewed and institutionalized.
    Keywords: supply chain, risk, risk monitoring, risk assessment.
    Date: 2017–04
  2. By: Schlütter, Sebastian
    Abstract: The Solvency II standard formula measures interest rate risk based on two stress scenarios which are supposed to reflect the 1-in-200 year event over a 12-month time horizon. The calibration of these scenarios appears much too optimistic when comparing them against historical yield curve movements. This article demonstrates that interest rate risk is measured more accurately when using a (vector) autoregressive process together with a GARCH process for the residuals. In line with the concept of a pragmatic standard formula, the calculation of the Value-at-Risk can be boiled down to 4 scenarios, which are elicited with a Principal Component Analysis (PCA), at the cost of a relatively small measurement error.
    Keywords: Interest Rate Risk,Principal Component Analysis,Capital Requirements,Solvency II
    JEL: G17 G22 G32 G38
    Date: 2017
  3. By: Thangamani Gurunathan (Indian Institute of Management Kozhikode)
    Abstract: Risk and complete uncertainty can potentially have damaging consequences on the Enterprise Resource Planning (ERP) implementation projects. Risk management is also one of the ten knowledge areas propagated by the Project Management Institute which shows its importance. Risk management in the ERP system implementation context is a comprehensive and systematic way of identifying, analyzing and responding to risks to achieve the project objectives. This paper presents a risk modelling method using Generalized Stochastic Petri Nets (GSPN) along with simulation for risk estimation in ERP implementation. An overall risk management framework is also developed and the same is used to explore various risks, categorize them as per their sources, assesses those risks and their variability. This approach will help key project participants such as client, contractor or developer, consultant, and supplier – to meet their commitments and minimize negative impacts on ERP project performance in relation to cost, time and quality objectives. The methodology is demonstrated using a case study of ERP implementation project.
    Date: 2017–05
  4. By: Siri, Michele
    Abstract: Under Solvency II, corporate governance requirements are a complementary, but nonetheless essential, element to build a sound regulatory framework for insurance undertakings, also to address risks not specifically mitigated by the sole solvency capital requirements. After recalling the provisions of the second pillar concerning the system of governance, the paper is devoted to highlight the emerging regulatory trends in the corporate governance of insurance firms. Among others, it signals the exceptional extension of the duties and responsibilities assigned to the Board of directors, far beyond the traditional role of both monitoring the chief executive officer, and assessing the overall direction and strategy of the business. However, a better risk governance is not necessarily built on narrow rule-based approaches to corporate governance.
    Keywords: Insurance,Corporate Governance,Board of Directors,Culture,Risk Management,Internal Controls,Principle of Proportionality,Regulation,EIOPA,Solvency,Guidelines
    Date: 2017
  5. By: Kim, Sooji (Federal Reserve Bank of New York); Plosser, Matthew (Federal Reserve Bank of New York); Santos, Joao A. C. (Federal Reserve Bank of New York, Nova School of Business and Economics)
    Abstract: We investigate the U.S. experience with macroprudential policies by studying the interagency guidance on leveraged lending. We find that the guidance primarily impacted large, closely supervised banks, but only after supervisors issued important clarifications. It also triggered a migration of leveraged lending to nonbanks. While we do not find that nonbanks had more lax lending policies than banks, we unveil important evidence that nonbanks increased bank borrowing following the issuance of guidance, possibly to finance their growing leveraged lending. The guidance was effective at reducing banks’ leveraged lending activity, but it is less clear whether it accomplished its broader goal of reducing the risk that these loans pose for the stability of the financial system. Our findings highlight the importance of supervisory monitoring for macroprudential policy goals, and the challenge that the revolving door of risk poses to the effectiveness of macroprudential regulations.
    Keywords: macroprudential regulation; leveraged loans; banks; enforcement; supervision; shadow banking
    JEL: G18 G21 G23
    Date: 2017–05–01
  6. By: Berlinger, Edina; Dömötör, Barbara; Illés, Ferenc
    Abstract: We analyzed the effects of different margin strategies on the loss distribution of a clearinghouse during different crises. First, we developed a general one-period analytical model and proved the existence of a unique optimal margin which is not necessarily risk-sensitive even in a weaker sense. Then, we simulated the operation of a hypothetical clearinghouse active on the US stock futures market in the period 2008-2015. We found that anti-cyclical margin strategies might be optimal also for clearinghouses focusing on their micro-level financial stability, not only for regulators aiming to reduce systemic risk. Anti-cyclical margin strategies performed especially well in minor crises like Flash Crash.
    Keywords: financial stability, clearinghouse, central counterparty, EMIR, agent-based simulation, stochastic dominance
    JEL: G20 G28
    Date: 2017–05–24
  7. By: Karin Heinschink; Franz Sinabell (WIFO); Thomas Url (WIFO)
    Abstract: Farmers may use financial market instruments to hedge price risks. Moreover, various types of insurance products are on the market to protect against production losses. An insurance that covers losses of both input and output prices was recently introduced in the USA. We develop this concept further by proposing a prototype of an index-based margin insurance which accounts for both production risks and price risks (input and output prices). The prototype is based on standardised gross margin time series for specific activities. It accounts for revenues, variable costs by cost item, various insurance coverage levels, and gross margin. Indemnities are paid if the gross margin falls short of a determined level. We identify steps necessary to accomplish a market-ready insurance product (e.g., data validation, defining the details of the sub-indexes and the premium calculation, evaluating acceptance on the market prior to its launch). Using Austrian data, the innovative approach is exemplified with respect to different farm management practices, more specifically for the case of conventional and organic wheat production. Farmers could benefit from such a margin insurance since production and price risks would be covered in one scheme, thus reducing opportunity costs.
    Keywords: natural hazards, price risk, margin insurance
    Date: 2017–05–29
  8. By: Polman, Fabian M.; Krijgsman, Cees; Dajani, Karma; Hemminga, Marcus A.
    Abstract: Longevity risk is the risk arising from uncertainty in the prediction of future mortality. This risk must be faced by pension funds. The legislation for Dutch pension funds prescribes that the pension funds need to keep in reserve a certain level of capital for this risk. De Nederlandsche Bank (DNB), the regulator of the legislation, suggests a method for calculating this capital requirement. In this paper an alternative method is developed, that provides a better insight in the current risk. Moreover, it turns out that the resulting capital requirement from our method is less than half of the capital requirement calculated using the method suggested by DNB.
    Keywords: Longevity risk, capital requirement for longevity risk, Dutch pension fund, stochastic mortality, Monte Carlo simulations
    JEL: C15 C51 C53 G23 H55 J11
    Date: 2017–05–04
  9. By: Ferrarini , Benno (Asian Development Bank); Hinojales , Marthe (Asian Development Bank); Scaramozzino , Pasquale (SOAS, University of London)
    Abstract: Total debt in the People’s Republic of China has increased significantly in recent years, mostly on account of nonfinancial corporate debt. Earning and the financial performance of corporate firms have weakened, and so has the asset quality of the financial sector. This paper assesses the financial fragility of the Chinese economy by looking at risk factors in the nonfinancial sector. We apply quantile regressions to a rich dataset of Chinese listed companies contained in Standard & Poor’s IQ Capital database. We find higher sensitivity over time of corporate leverage to some of its key determinants, particularly for firms at the upper margin of the distribution. In particular, profitability increasingly acts as a curb on corporate leverage. At a time of falling profitability across the Chinese nonfinancial corporate sector, this eases the brake on leverage and may contribute to its continuing increase.
    Keywords: corporate debt; debt sustainability; panel quantile regression; People’s Republic of China
    JEL: G01 G21 H30 H60
    Date: 2017–01–26
  10. By: Victor Echevarria-Icaza (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.); Simón Sosvilla-Rivero (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.)
    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.
    Date: 2017
  11. By: Paola Cerchiello (Department of Economics and Management, University of Pavia); Giancarlo Nicola (Department of Economics and Management, University of Pavia); Samuel Rönnqvist (Turku Centre for Computer Science - TUCS, Åbo Akademi University); Peter Sarlin (Hanken School of Economics, RiskLab Finland)
    Abstract: In this paper we focus our attention on the exploitation of the information contained in financial news to enhance the performance of a classifier of bank distress. Such information should be analyzed and inserted into the predictive model in the most efficient way and this task deals with all the issues related to text analysis and specifically analysis of news media. Among the different models proposed for such purpose, we investigate one of the possible deep learning approaches, based on a doc2vec representation of the textual data, a kind of neural network able to map the sequential and symbolic text input onto a reduced latent semantic space. Afterwards, a second supervised neural network is trained combining news data with standard financial figures to classify banks whether in distressed or tranquil states, based on a small set of known distress events. Then the final aim is not only the improvement of the predictive performance of the classifier but also to assess the importance of news data in the classification process. Does news data really bring more useful information not contained in standard financial variables? Our results seem to confirm such hypothesis.
    Keywords: behavioural finance, financial news, deep learning, bank distress, Word2vec.
    JEL: C83 C12 E58 E61 G02 G14
    Date: 2017–05
  12. By: Jean-Pierre Fouque; Yuri F. Saporito
    Abstract: A parsimonious generalization of the Heston model is proposed where the volatility-of-volatility is assumed to be stochastic. We follow the perturbation technique of Fouque et al (2011, CUP) to derive a first order approximation of the price of options on a stock and its volatility index. This approximation is given by Heston's quasi-closed formula and some of its Greeks. It can be very efficiently calculated since it requires to compute only Fourier integrals and the solution of simple ODE systems. We exemplify the calibration of the model with S&P 500 and VIX data.
    Date: 2017–06

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