nep-rmg New Economics Papers
on Risk Management
Issue of 2017‒06‒25
nine papers chosen by
Stan Miles
Thompson Rivers University

  1. Heterogeneity of Bank Risk Weights in the EU; Evidence by Asset Class and Country of Counterparty Exposure By Rima Turk-Ariss
  2. Bottom-Up Default Analysis of Corporate Solvency Risk; An Application to Latin America By Jorge A. Chan-Lau; Cheng Hoon Lim; Jose Daniel Rodríguez-Delgado; Bennett W Sutton; Melesse Tashu
  3. Forecasting multidimensional tail risk at short and long horizons By Polanski, Arnold; Stoja, Evarist
  4. A class of dynamical contagion credit risk models and their applications By Dianfa Chen; Jun Deng; Jianfen Feng
  5. News-sentiment networks as a risk indicator By Thomas Forss; Peter Sarlin
  6. Lehman Sisters: Female Bank Executives and Risk-Taking By Yan Wendy Wu, Cindy Truong, Chen Liu
  7. Theory and Application of an Economic Performance Measure of Risk By Cuizhen Niu; Xu Guo; Wing-Keung Wong; Michael McAleer
  8. Macroeconomic and bank-specific determinants of different categories of non-performing financing in Islamic banks: Evidence from Malaysia By Isaev, Mirolim; Masih, Mansur
  9. Personal Bankruptcy, Bank Portfolio Choice and the Macroeconomy By Eglë Jakuèionytë

  1. By: Rima Turk-Ariss
    Abstract: Concerns about excessive variability in bank risk weights have prompted their review by regulators. This paper provides prima facie evidence on the extent of risk weight heterogeneity across broad asset classes and by country of counterparty for major banks in the European Union using internal models. It also finds that corporate risk weights are sensitive to the riskiness of an average representative firm, but not to a market indicator of a firm’s probablity of default. Under plausible yet severe hypothetical scenarios for harmonized risk weights, counterfactual capital ratios would decline significantly for some banks, but they would not experience a shortfall relative to Basel III’s minimum requirements. This, however, does not preclude falling short of meeting additional national supervisory capital requirements.
    Date: 2017–06–09
  2. By: Jorge A. Chan-Lau; Cheng Hoon Lim; Jose Daniel Rodríguez-Delgado; Bennett W Sutton; Melesse Tashu
    Abstract: This paper suggests a novel approach to assess corporate sector solvency risk. The approach uses a Bottom-Up Default Analysis that projects probabilities of default of individual firms conditional on macroeconomic conditions and financial risk factors. This allows a direct macro-financial link to assessing corporate performance and facilitates what-if scenarios. When extended with credit portfolio techniques, the approach can also assess the aggregate impact of changes in firm solvency risk on creditor banks’ capital buffers under different macroeconomic scenarios. As an illustration, we apply this approach to the corporate sector of the five largest economies in Latin America.
    Date: 2017–06–08
  3. By: Polanski, Arnold (University of East Anglia); Stoja, Evarist (School of Economics, Finance and Management, University of Bristol)
    Abstract: Multidimensional Value at Risk (MVaR) generalises VaR in a natural way as the intersection of univariate VaRs. We reduce the dimensionality of MVaRs which allows for adapting the techniques and applications developed for VaR to MVaR. As an illustration, we employ VaR forecasting and evaluation techniques. One of our forecasting models builds on the progress made in the volatility literature and decomposes multidimensional tail events into long-term trend and short-term cycle components. We compute short and long-term MVaR forecasts for several multidimensional time series and discuss their (un)conditional accuracy.
    Keywords: Multidimensional risk; multidimensional Value at Risk; two-factor decomposition; long-horizon forecasting
    JEL: C52 C53
    Date: 2017–06–12
  4. By: Dianfa Chen; Jun Deng; Jianfen Feng
    Abstract: In this paper, we establish a class of default risk models with possible dynamical contagion between different obligors. Thereby, we derive explicitly the pricing formulae by set-valued Markov chain approach. As an application, we employ the default contagion model to price synthetic CDOs. The calculation time is reduced dramatically comparing with related literatures, especially, when the number of reference obligors is large.
    Date: 2017–06
  5. By: Thomas Forss; Peter Sarlin
    Abstract: To understand the relationship between news sentiment and company stock price movements, and to better understand connectivity among companies, we define an algorithm for measuring sentiment-based network risk. The algorithm ranks companies in networks of co-occurrences, and measures sentiment-based risk, by calculating both individual risks and aggregated network risks. We extract relative sentiment for companies to get a measure of individual company risk, and input it into our risk model together with co-occurrences of companies extracted from news on a quarterly basis. We can show that the highest quarterly risk value outputted by our risk model, is correlated to a higher chance of stock price decline, up to 70 days after a risk measurement. Our results show that the highest difference in the probability of stock price decline, compared to the benchmark containing all risk values for the same period, is during the interval from 21 to 30 days after a quarterly measurement. The highest average probability of company stock price decline, is found at a delay of 28 days, after a company has reached its maximum risk value. The highest probability differences for a daily decline were calculated to be 13 percentage points.
    Date: 2017–06
  6. By: Yan Wendy Wu, Cindy Truong, Chen Liu (Wilfrid Laurier University)
    Abstract: This paper studies the impact of female executives on risk-taking within US banks. An examination of US bank panel data from 2002 to 2010 provides evidence that female executives reduce levels of risk-taking in banks. We also find that a more balanced gender ratio has a greater impact on bank risk-taking than merely with the presence of female executive. The results are robust to alternative specifications of riskiness and instrument variable approach. However, when we only use part of the sample period surrounding the financial crises of 2007-2008, the results do not hold. We interpret the results as suggesting that having female executives and more balanced gender ratios in the executive team reduces bank risk-taking overall. But the risk-reduction becomes less effective during crisis years.
    Keywords: Gender, Female, Bank Executive, Diversity, Risk-taking, Lehman sister
    JEL: G21 G28 J16 J48
    Date: 2017–03–01
  7. By: Cuizhen Niu (School of Statistics, Beijing Normal University, Beijing.); Xu Guo (School of Statistics, Beijing Normal University, Beijing.); Wing-Keung Wong (Department of Finance, Asia University, Taiwan Department of Economics, Lingnan University, Hong Kong.); Michael McAleer (Department of Quantitative Finance National Tsing Hua University, Taiwan and Econometric Institute Erasmus School of Economics Erasmus University Rotterdam, The Netherlands and Department of Quantitative Economics Complutense University of Madrid, Spain And Institute of Advanced Sciences Yokohama National University, Japan.)
    Abstract: Homm and Pigorsch (2012a) use the Aumann and Serrano index to develop a new economic performance measure (EPM), which is well known to have advantages over other measures. In this paper, we extend the theory by constructing a one-sample confidence interval of EPM, and construct confidence intervals for the difference of EPMs for two independent samples. We also derive the asymptotic distribution for EPM and for the difference of two EPMs when the samples are independent. We conduct simulations to show the proposed theory performs well for one and two independent samples. The simulations show that the proposed approach is robust in the dependent case. The theory developed is used to construct both onesample and two-sample confidence intervals of EPMs for Singapore and USA stock indices.
    Keywords: Economic performance measure; Asymptotic confidence interval; Bootstrapbased confidence interval; Method of variance estimates recovery.
    JEL: C12 C15
    Date: 2017–06
  8. By: Isaev, Mirolim; Masih, Mansur
    Abstract: This paper explores the factors propelling Islamic bank’s non-performing financing in Malaysia for the period of 2010Q4 and 2016Q3. Dynamic OLS is employed to examine the effects of macroeconomic and bank specific variables on each financing categories (mortgage, business and consumer financing). The findings tend to indicate that macroeconomic variables, particularly, the unemployment rate, have strong impact on the level of non-performing financing for each financing portfolio. Adoption of effective risk management policy may ensure to mitigate the systematic risks derived from macroeconomic changes and enhance the level of quality of asset.
    Keywords: non-performing financing, Malaysian Islamic banking system, Dynamic OLS, risk management
    JEL: C58 E44 G15 G21
    Date: 2017–06–13
  9. By: Eglë Jakuèionytë (Tinbergen Institute and the University of Amsterdam, the Netherlands)
    Abstract: This paper explores the spillover effects from increasing personal bankruptcy protection. Innovatively, the paper shows that the spillover effects can be influenced by the bank portfolio choice. Since a low level of personal bankruptcy protection keeps an insolvent individual liable until her debt is repaid in full, lender’s returns on mortgages are less uncertain than returns on other assets ceteris paribus. Risk-averse banks would prefer mortgages over other types of assets such as corporate loans. Corporate lending and thus equilibrium output would fall. In contrary to the popular view that creditor protection smooths credit provision and makes the allocation of resources more efficient, I show that in some cases a low level of personal bankruptcy protection can lead to aggregate consumption losses. Also I show that macroprudential policies (LTV ratios) can successfully complement higher personal bankruptcy protection in ensuring even higher welfare.
    Keywords: Personal bankruptcy, household debt, housing, general equilibrium, bank portfolio choice
    JEL: E44 G11 G21 K35 R21
    Date: 2017–04–24

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