
on Risk Management 
By:  Longfeng Zhao; GangJin Wang; Mingang Wang; Weiqi Bao; Wei Li; H. Eugene Stanley 
Abstract:  Financial networks have become extremely useful in characterizing the structure of complex financial systems. Meanwhile, the time evolution property of the stock markets can be described by temporal networks. We utilize the temporal network framework to characterize the timeevolving correlationbased networks of stock markets. The market instability can be detected by the evolution of the topology structure of the financial networks. We employ the temporal centrality as a portfolio selection tool. Those portfolios, which are composed of peripheral stocks with low temporal centrality scores, have consistently better performance under different portfolio optimization schemes, suggesting that the temporal centrality measure can be used as new portfolio optimization and risk management tools. Our results reveal the importance of the temporal attributes of the stock markets, which should be taken serious consideration in real life applications. 
Date:  2017–12 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1712.04863&r=rmg 
By:  Véronique MaumeDeschamps (ICJ  Institut Camille Jordan [Villeurbanne]  ECL  École Centrale de Lyon  UCBL  Université Claude Bernard Lyon 1  INSA Lyon  Institut National des Sciences Appliquées de Lyon  UJM  Université Jean Monnet [SaintÉtienne]  CNRS  Centre National de la Recherche Scientifique); Didier Rullière (ISFA  Institut des Science Financière et d'Assurances  Université de Lyon); Khalil Said (ICJ  Institut Camille Jordan [Villeurbanne]  ECL  École Centrale de Lyon  UCBL  Université Claude Bernard Lyon 1  INSA Lyon  Institut National des Sciences Appliquées de Lyon  UJM  Université Jean Monnet [SaintÉtienne]  CNRS  Centre National de la Recherche Scientifique) 
Abstract:  This paper is devoted to the introduction and study of a new family of multivariate elicitable risk measures. We call the obtained vectorvalued measures multivariate expectiles. We present the different approaches used to construct our measures. We discuss the coherence properties of these multivariate expectiles. Furthermore, we propose a stochastic approximation tool of these risk measures. 
Keywords:  Multivariate risk measures, Elicitability, Multivariate expectiles, Copulas, Stochastic approximation, Coherence properties, Solvency 2, Risk management, Risk theory, Dependence modeling, Capital allocation 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:hal:journl:hal01367277&r=rmg 
By:  Iñaki Aldasoro; Andreas Barth 
Abstract:  This paper analyzes banks' usage of CDS. Combining bankfirm syndicated loan data with a unique EUwide dataset on bilateral CDS positions, we find that stronger banks in terms of capital, funding and profitability tend to hedge more. We find no evidence of banks using the CDS market for capital relief. Banks are more likely to hedge exposures to relatively riskier borrowers and less likely to sell CDS protection on domestic firms. Lead arrangers tend to buy more protection, potentially exacerbating asymmetric information problems. Dealer banks seem insensitive to firm risk, and hedge more than nondealers when they are more profitable. These results allow for a better understanding of banks' credit risk management. 
Keywords:  syndicated loans, CDS, speculation, capital regulation, EMIR, crossborder lending, asymmetric information 
JEL:  G21 G28 
Date:  2017–12 
URL:  http://d.repec.org/n?u=RePEc:bis:biswps:679&r=rmg 
By:  Sergio Masciantonio (European Commission); Andrea Zaghini (Bank of Italy) 
Abstract:  Systemic risk and systemic importance are two different concepts that came out of the crisis and are now widely employed to assess the potential impact on the banking system as a whole of shocks that hit one specific bank. However, those two measures are often improperly used and misunderstandings arise. This paper sheds light about their meaning, measurement and information content. Empirically, the two measures provide different information; it is therefore worthwhile investigating both, so to have a thorough understanding of single name and aggregate systemic risk exposure. In addition, by relying on the standard risk management perspective, we propose how to integrate systemic importance and systemic risk concepts. We provide two new measures of systemic risk exposure and compare them with the standard one (SRISK). 
Keywords:  GSIFIs, Systemic risk, toobigtofail, financial crisis 
JEL:  G21 G01 G18 
Date:  2017–12 
URL:  http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1153_17&r=rmg 
By:  Maarten van Oordt 
Abstract:  The present paper shows that, everything else equal, some transactions to transfer portfolio credit risk to thirdparty investors increase the insolvency risk of banks. This is particularly likely if a bank sells the senior tranche and retains a sufficiently large firstloss position. The results do not rely on banks increasing leverage after the risk transfer, nor on banks taking on new risks, although these could aggravate the effect. High leverage and concentrated business models increase the vulnerability to the mechanism. These results are useful for risk managers and banking regulation. The literature on credit risk transfers and information asymmetries generally tends to advocate the retention of ‘informationsensitive’ firstloss positions. The present study shows that, under certain conditions, such an approach may harm financial stability, and thus calls for further reflection on the structure of securitization transactions and portfolio insurance. 
Keywords:  Credit risk management, Financial Institutions, Financial stability 
JEL:  G21 G28 G32 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:bca:bocawp:1759&r=rmg 
By:  Sami Ben Naceur; Caroline Roulet 
Abstract:  Using data on commercial banks in the United States and Europe, this paper analyses the impact of the new Basel III capital and liquidity regulation on banklending following the 2008 financial crisis. We find that U.S. banks reinforce their risk absorption capacities when expanding their credit activities. Capital ratios have significant, negative impacts on bankretailandotherlendinggrowth for large European banks in the context of deleveraging and the “credit crunch” in Europe over the post2008 financial crisis period. Additionally, liquidity indicators have positive but perverse effects on banklendinggrowth, which supports the need to consider heterogeneous banks’ characteristics and behaviors when implementing new regulatory policies. 
Date:  2017–11–15 
URL:  http://d.repec.org/n?u=RePEc:imf:imfwpa:17/245&r=rmg 
By:  Siemsen, Thomas; Vilsmeier, Johannes 
Abstract:  This paper exploits a recent and granular data set for 1,500 German LSIs to conduct a residential mortgage stress testing exercise. To account for model uncertainty when modeling PD dynamics we use a benchmarkconstrained Bayesian model averaging approach that combines standard BMA with a benchmark derived from a quantile mapping between the historical PD distribution and the historical distribution of macro variables. To link LGD to current LTV we derive a reducedform metadependency. In the baseline model, we quantify expected as well as unexpected losses. We show that German LSIs, though being mostly sufficiently capitalized, are susceptible to a corrective movement in house prices with a median CET1 ratio reduction of 1.5pp in the severely adverse scenario. We quantify the impact of RWA modeling on stress test results and show that the Standardized Approach leads to an up to 33% lower stress impact relative to the more risksensitive "pseudoIRB" approach. 
Keywords:  stress test,Bayesian model averaging,quantile mapping,survey data,German residential mortgage market,model uncertainty 
JEL:  C11 C52 G21 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:zbw:bubdps:372017&r=rmg 
By:  Peter Kritzer; Gunther Leobacher; Michaela Sz\"olgyenyi; Stefan Thonhauser 
Abstract:  In this paper, we analyse piecewise deterministic Markov processes, as introduced in Davis (1984). Many models in insurance mathematics can be formulated in terms of the general concept of piecewise deterministic Markov processes. In this context, one is interested in computing certain quantities of interest such as the probability of ruin of an insurance company, or the insurance company's value, defined as the expected discounted future dividend payments until the time of ruin. Instead of explicitly solving the integro(partial) differential equation related to the quantity of interest considered (an approach which can only be used in few special cases), we adapt the problem in a manner that allows us to apply deterministic numerical integration algorithms such as quasiMonte Carlo rules; this is in contrast to applying random integration algorithms such as Monte Carlo. To this end, we reformulate a general cost functional as a fixed point of a particular integral operator, which allows for iterative approximation of the functional. Furthermore, we introduce a smoothing technique which is applied to the integrands involved, in order to use error bounds for deterministic cubature rules. On the analytical side, we prove a convergence result for our PDMP approximation, which is of independent interest as it justifies phasetype approximations on the process level. We illustrate the smoothing technique for a risktheoretic example, and provide a comparative study of deterministic and Monte Carlo integration. 
Date:  2017–12 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1712.09201&r=rmg 
By:  Memmel, Christoph 
Abstract:  This paper investigates determinants of banks' structural exposure to interest rate risk in their banking book. Using banklevel data for German banks, we find evidence that a bank's exposure to interest rate risk depends on its presumed optimization horizon. The longer the presumed optimization horizon is, the more the bank is exposed to interest rate risk in its banking book. Moreover, there is evidence that banks hedge their earnings risk resulting from falling interest levels with exposure to interest rate risk. The more a bank is exposed to the risk of a decline in the interest rate level, the higher its exposure to interest rate risk. 
Keywords:  interest rate risk,banks' business model,hedging 
JEL:  G21 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:zbw:bubdps:352017&r=rmg 
By:  Beirlant, J.; Kijko, Andrzej; Reykens, Tom; Einmahl, John (Tilburg University, Center For Economic Research) 
Abstract:  The areacharacteristic, maximum possible earthquake magnitude TM is required by the earthquake engineering community, disaster management agencies and the insurance industry. The GutenbergRichter law predicts that earthquake magnitudes M follow a truncated exponential distribution. In the geophysical literature several estimation procedures were proposed, see for instance Kijko and Singh (Acta Geophys., 2011) and the references therein. Estimation of TM is of course an extreme value problem to which the classical methods for endpoint estimation could be applied. We argue that recent methods on truncated tails at high levels (Beirlant et al., Extremes, 2016; Electron. J. Stat., 2017) constitute a more appropriate setting for this estimation problem. We present upper confidence bounds to quantify uncertainty of the point estimates. We also compare methods from the extreme value and geophysical literature through simulations. Finally, the different methods are applied to the magnitude data for the earthquakes induced by gas extraction in the Groningen province of the Netherlands. 
Keywords:  Anthropogenic seismicity; endpoint estimation; Extreme value theory; truncation 
JEL:  C13 C14 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:tiu:tiucen:65e5595c7ec14723bf0e8e12ed266ee5&r=rmg 
By:  Bruno Feunou; Ricardo Lopez Aliouchkin; Roméo Tedongap; Lai Xi 
Abstract:  We decompose total variance into its bad and good components and measure the premia associated with their fluctuations using stock and option data from a large crosssection of firms. The total variance risk premium (VRP) represents the premium paid to insure against fluctuations in bad variance (called bad VRP), net of the premium received to compensate for fluctuations in good variance (called good VRP). Bad VRP provides a direct assessment of the degree to which asset downside risk may become extreme, while good VRP proxies for the degree to which asset upside potential may shrink. We find that bad VRP is important economically; in the crosssection, a onestandarddeviation increase is associated with an increase of up to 13% in annualized expected excess returns. Simultaneously going long on stocks with high bad VRP and short on stocks with low bad VRP yields an annualized riskadjusted expected excess return of 18%. This result remains significant in doublesort strategies and crosssectional regressions controlling for a host of firm characteristics and exposures to regular and downside risk factors. 
Keywords:  Asset Pricing, Financial markets 
JEL:  G12 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:bca:bocawp:1758&r=rmg 
By:  Pierluigi Bologna (Banca d'Italia) 
Abstract:  The aim of this paper is twofold: first, to study the determinants of banks’ net interest margin with a particular focus on the role of maturity transformation, using a new measure of maturity mismatch; second, to analyse the implications for banks of the relaxation of a binding prudential limit on maturity mismatch, in place in Italy until the mid2000s. The results show that maturity transformation is an important driver of the net interest margin, as higher maturity transformation is typically associated with higher net interest margin. However, there is a limit to this positive relationship as ‘excessive’ maturity transformation — even without leading to systemic vulnerabilities — has some undesirable implications in terms of higher exposure to interest rate risk and lower net interest margin. 
Keywords:  banks, profitability, maturity transformation, interest rates, macroprudential, microprudential 
JEL:  E43 G21 G28 
Date:  2017–12 
URL:  http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1159_17&r=rmg 
By:  Lijun Bo; Huafu Liao; Xiang Yu 
Abstract:  We study a risk sensitive portfolio optimization problem in a regimeswitching credit market with default contagion. The state space of the Markovian regimeswitching process is assumed to be a countably infinite set. To characterize the value function of the risk sensitive stochastic control problem, we investigate the corresponding recursive infinitedimensional nonlinear dynamical programming equations (DPEs) based on default states. We propose to work in the following procedure: Applying the theory of the monotone dynamical system, we first establish the existence and uniqueness of classical solutions to the recursive DPEs by a truncation argument in the finite state space. Moreover, the associated optimal feedback strategy is characterized by developing a rigorous verification theorem. Building upon results in the first stage, we construct a sequence of approximating risk sensitive control problems with finite state space and prove that the resulting smooth value functions will converge to the classical solution of the original system of DPEs. The construction and approximation of the optimal feedback strategy for the original problem are also thoroughly discussed using verification arguments. 
Date:  2017–12 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1712.05676&r=rmg 
By:  Yuri F. Saporito 
Abstract:  In this paper, we extend the firstorder asymptotics analysis of Fouque et al. to general pathdependent financial derivatives using Dupire's functional Ito calculus. The main conclusion is that the market group parameters calibrated to vanilla options can be used to price to the same order exotic, pathdependent derivatives as well. Under general conditions, the firstorder condition is represented by a conditional expectation that could be numerically evaluated. Moreover, if the pathdependence is not too severe, we are able to find pathdependent closedform solutions equivalent to the fistorder approximation of pathindependent options derived in Fouque et al. Additionally, we exemplify the results with Asian options and options on quadratic variation. 
Date:  2017–12 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1712.07320&r=rmg 
By:  Lyócsa, Štefan; Výrost, Tomáš; Baumöhl, Eduard 
Abstract:  We test a sample of 3,586 banks from 33 European countries to determine whether performances above or below a social aspiration level (median performance of peer banks) influence banks’ aggregate risk levels. Our results are consistent with the behavioral theory of the firm and prospect theory in that we find that bank performance below a bank’s social aspiration level is followed by increased aggregate risk, i.e., risktaking behavior in the subsequent year. Although underperforming banks tend to be risktakers, large banks and banks with high aggregate risk levels tend to limit the increase in their aggregate risk levels. 
Keywords:  social aspiration,European banks,performance,risk behavior,prospect theory 
JEL:  D22 G2 L22 L25 
Date:  2018 
URL:  http://d.repec.org/n?u=RePEc:zbw:esprep:172510&r=rmg 
By:  BREITUNG, Jörg (University of Cologne); HAFNER, Christian M. (Université catholique de Louvain, CORE, Belgium) 
Abstract:  Popular volatility models focus on the conditional variance given past observations, whereas the (arguably most important) information in the current observation is ignored. This paper proposes a simple model for nowcasting volatilities based on a specific ARMA representation of the logtransformed squared returns that allows us to estimate current volatility as a function of current and past returns. The model can be viewed as a stochastic volatility model with perfect correlation between the two error terms. It is shown that the volatility nowcasts are invariant to this correlation and therefore the estimated volatilities coincide. An extension of our nowcasting model is proposed that takes into account the socalled leverage effect. The alternative models are applied to estimate daily return volatilities from the S&P 500 stock price index. 
Keywords:  EGARCH, stochastic volatility, ARMA, realized volatility, leverage 
JEL:  C22 C58 
Date:  2016–10–01 
URL:  http://d.repec.org/n?u=RePEc:cor:louvco:2016004&r=rmg 
By:  Einmahl, Jesson; Einmahl, John (Tilburg University, Center For Economic Research); de Haan, L.F.M. (Tilburg University, Center For Economic Research) 
Abstract:  There is no scientific consensus on the fundamental question whether the probability distribution of the human life span has a finite endpoint or not and, if so, whether this upper limit changes over time. Our study uses a unique dataset of the ages at death  in days  of all (about 285,000) Dutch residents, born in the Netherlands, who died in the years 19862015 at a minimum age of 92 years and is based on extreme value theory, the coherent approach to research problems of this type. Unlike some other studies we base our analysis on the conguration of thousands of mortality data of old people, not just the few oldest old. We find compelling statistical evidence that there is indeed an upper limit to the life span of men and to that of women for all the 30 years we consider and, moreover, that there are no indications of trends in these upper limits over the last 30 years, despite the fact that the number of people reaching high age (say 95 years) was almost tripling. We also present estimates for the endpoints, for the force of mortality at very high age, and for the socalled perseverance parameter. 
Keywords:  aging; endpoint; extreme value indez; oldest; statistics of extremes 
JEL:  C12 C13 C14 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:tiu:tiucen:46b8d3f334c3493690ee8dc4e7086ce6&r=rmg 