nep-rmg New Economics Papers
on Risk Management
Issue of 2017‒07‒30
seven papers chosen by
Stan Miles
Thompson Rivers University

  1. Ether: Bitcoin's competitor or ally? By Jamal Bouoiyour; Refk Selmi
  2. Information Contagion and Systemic Risk By Toni Ahnert; Co-Pierre Georg
  4. Extended Gini-type measures of risk and variability By Mohammed Berkhouch; Ghizlane Lakhnati
  5. Hedging spark spread risk with futures By Beatriz Martínez Martínez; Hipolit Torro Enguix
  6. On the determinants of speculation - a case for extended disclosures in corporate risk management By Hecht, Andreas
  7. Is the US stock market getting riskier? By Suarez, Ronny

  1. By: Jamal Bouoiyour (CATT); Refk Selmi (CATT)
    Abstract: Although Bitcoin has long been dominant in the crypto scene, it is certainly not alone. Ether is another cryptocurrency related project that has attracted an intensive attention because of its additional features. This study seeks to test whether these cryptocurrencies differ in terms of their volatile and speculative behaviors, hedge, safe haven and risk diversification properties. Using different econometric techniques, we show that a) Bitcoin and Ether are volatile and relatively more responsive to bad news, but the volatility of Ether is more persistent than that of Bitcoin; b) for both cryptocurrencies, the exuberance and the collapse of bubbles were identified, but Bitcoin appears more speculative than Ether; c) there is negative and significant correlation between Bitcoin/Ether and other assets (S\&P500 stocks, US bonds, oil), which would indicate that digital currencies can hedge against the price movements of these assets; d) there is negative tail independence between Bitcoin/Ether and other financial assets, implying that these cryptocurrencies exhibit the function of a weak safe haven; and e) The inclusion of Bitcoin/ Ether in a portfolio improve its efficiency in terms of higher reward-to-risk ratios. But investors who hold diversified portfolios made of stocks or bonds and Ether may face losses over bearish regime. In such situation, stock and bond investors may take a short position on Bitcoin.
    Date: 2017–07
  2. By: Toni Ahnert; Co-Pierre Georg
    Abstract: We examine the effect of ex-post information contagion on the ex-ante level of systemic risk defined as the probability of joint bank default. Because of counterparty risk or common exposures, bad news about one bank reveals valuable information about another bank, triggering information contagion. When banks are subject to common exposures, information contagion induces small adjustments to bank portfolios and therefore increases overall systemic risk. When banks are subject to counterparty risk, by contrast, information contagion induces a large shift toward more prudential portfolios, thereby reducing systemic risk.
    Keywords: Financial Institutions, Financial stability
    JEL: G01 G11 G21
    Date: 2017
  3. By: Charles Wild (LRM Analyst); Stuart Weinstein (Coventry University)
    Abstract: High profile corporate scandals have not only taught us that the loss of reputation can have a significant, if not, fatal effect on a company but also ensured that the study and implementation of legal risk management is at the forefront of the UK?s business and legal sectors. The significance of the complex assortment of new and often contradictory laws and regulations with which companies are faced in today?s global business environment should not be underestimated. Many international companies recognise this and invest heavily in implementing internal mechanisms and controls to detect and prevent compliance breaches. However, such systems and controls cannot succeed without the development of a strong compliance culture that gets ?buy-in? from all levels of a business. At the heart of this compliance culture is a company?s legal and compliance manager(s). Effective legal risk management and compliance requires a company?s legal and compliance manager(s) to gain a substantive knowledge of business and societal risks, awareness and insight into regulation and regulatory changes as well as an understanding of the potential impact of regulation on their organisation. Once these risks have been identified, and appropriate regulatory challenges ascertained, a business must develop, implement and communicate internal policies and ensure that effective control systems are also in place.In order to prove both efficient and effective, a business? legal and compliance manager(s) must draw informed links between regulation and the formulation of sound internal policies related to risks and controls at all relevant levels of their organisation. They must also implementation appropriate procedures to support such policies. Consequently, in order to be effective, a company?s legal and compliance manager(s) must not just identify problems but, more importantly, draw upon proven solutions to ensure success. The legal risk management process relies on a business? ability to manage processes, implement change, track issues, screen potential clients, partners and employees and to implement appropriate remediation.The pressure on management to ensure that a business operates in a compliant way is considerable, and growing. Managers must be permanently on their guard against things going wrong and, as such, are reliant on their legal and compliance manager(s) being ever vigilant and seeking to reduce risk to a minimum. The authors argue that in order to gain a well-rounded, informed business-focused preparation for work within the legal sector, every law student should, at some stage, gain a grounding in Legal Risk Management, Governance & Compliance.
    Keywords: Legal EducationLegal Risk Management, Governance & ComplianceMulti-disciplinary
    JEL: K20 I23
    Date: 2017–07
  4. By: Mohammed Berkhouch; Ghizlane Lakhnati
    Abstract: The main of this paper is to introduce a family of risk measures which generalizes the Gini-type measures of risk and variability, by taking into consideration the psychological behavior. Our risk measures family is coherent and catches variability with respect to the decision-maker attitude towards risk.
    Date: 2017–07
  5. By: Beatriz Martínez Martínez (Dpto. Finanzas Empresariales); Hipolit Torro Enguix (Universitat de València)
    Abstract: This is the first paper to discuss the spark spread risk management using electricity and natural gas futures. We focus on three European markets in which the natural gas share in the fuel mix varies considerably: Germany, the United Kingdom, and the Netherlands. We find that spark spread returns are partially predictable, and consequently, the Ederington and Salas (2008) minimum variance hedging approach should be applied. Hedging the spark spread is more difficult than hedging electricity and natural gas price risks with individual futures contracts. Whereas spark spread risk reduction for monthly periods produces values of between 20.05 and 48.90 per cent, electricity and natural gas individual hedges attain reductions ranging from 31.22 to 69.06 per cent. Results should be of interest for agents in those markets in which natural gas is part of the fuel mix in the power generation system. En este documento se aborda por primera vez en la doctrina la gestión del riesgo del spark spread utilizando futuros sobre la electricidad y el gas natural. Se ha focalizado la atención en tres mercados europeos en los que la participación del gas natural en el mix de generación es muy diferente: Alemania, Reino Unido y Holanda. Un primer resultado es que las rentabilidades del spark spread son parcialmente predecibles y, en consecuencia, el enfoque de cobertura mínima varianza propuesto en Ederington y Salas (2008) debe ser aplicado. La cobertura del riesgo del spark spread resulta ser mucho más difícil que la cobertura individualizada del riesgo de precio de la electricidad y el gas natural con sus respectivos contratos de futuros. Mientras que la reducción del riesgo alcanzada para el spark spread para coberturas mensuales obtiene reducciones de riesgo de entre el 21,22% y el 48,90%, las coberturas individualizadas de ambas commodities alcanzan reducciones de entre el 31,22% y el 69,06%. Estos resultados son de interés para aquellos agentes en cuyos mercados en el gas natural forma parte del mix de generación eléctrico.
    Keywords: mercado del gas natural, mercado de la electricidad, contratos de futuro, contratos forward, spark spread, ratio de cobertura, efectos estacionales. natural gas market, electricity market, futures contracts, forward contracts, spark spread, hedging ratio, seasonal effects.
    JEL: G11 G13 L94 L95
    Date: 2017–07
  6. By: Hecht, Andreas
    Abstract: We examine the determinants of corporate speculation and challenge the extant, conflicting evidence. Separating risk management (reducing currency-specific FX exposure) from speculation (increasing or holding currency-specific FX exposure constant), we provide unprecedented evidence that speculators are smaller, have more growth opportunities and possess lower internal resources than risk-managing firms. The refined granularity of our dataset stems from a unique regulatory environment, where a regulating authority recommends additional disclosures for FX risk management in excess of governing accounting standards. Our findings enable investors, henceforth, to identify speculation from public available sources, where our results substantiate the significance of such an extended reporting. Thus, this case of optional disclosures might serve as blueprint for further regulatory refinements in other settings.
    Keywords: Foreign Exchange,Risk Management,Selective Hedging,Speculation,Disclosure,Reporting
    JEL: G32 G38 G39
    Date: 2017
  7. By: Suarez, Ronny
    Abstract: In this paper, we compared the distribution of the S&P 500 Index monthly returns of the period 1957-1986 against the period 1987-2016 to evaluate the presence of extreme events. The last 30 years have recorded a higher (lower) probability to exceed a given negative (positive) monthly return compare with the probability of exceedance of the three previous decades
    Keywords: S&P500; Generalized Pareto Distribution, Return Level
    JEL: C0 G0
    Date: 2017–07–23

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