nep-rmg New Economics Papers
on Risk Management
Issue of 2018‒02‒12
twelve papers chosen by
Stan Miles
Thompson Rivers University

  1. Modelo de maturidade em gerenciamento de riscos em projetos (Project Risk Management Model Maturity) By Ricardo Antunes; Daniel Birchal; Jo\~ao M\'arcio Abijaodi; Paulo Abreu; Rog\'erio Peixoto
  2. Risk-Sharing Financing of Islamic Banks: Better Shielded Against Interest Rate Risk? By Seho, Mirzet; Alaaabed, Alaa; Masih, Mansur
  3. Tail Risk in a Retail Payment System: An Extreme-Value Approach By Hector Perez-Saiz; Blair Williams; Gabriel Xerri
  4. An Empirical Analysis of Mortgage Loan Delinquency Using Personal Panel Data in Korea (in Korean) By Hosung Jung
  5. On a capital allocation principle coherent with the Solvency 2 standard formula By Fabio Baione; Paolo De Angelis; Ivan Granito
  6. Measuring individual risk-attitudes: an experimental comparison between Holt & Laury measure and an insurance-choices-based procedure By Anne Corcos; François Pannequin; Claude Montmarquette,
  7. Gaussian Approximation of a Risk Model with Stationary Hawkes Arrivals of Claims By Zailei Cheng; Youngsoo Seol
  8. Capital allocation under Fundamental Review of Trading Book By Luting Li; Hao Xing
  9. Rational Models for Inflation-Linked Derivatives By Henrik Dam; Andrea Macrina; David Skovmand; David Sloth
  10. Risk Attitudes in Axiomatic Decision Theory: a Conceptual Perspective By Jean Baccelli
  11. Systematic risk, bank moral hazard, and bailouts By Lucchetta, Marcella; Moretto, Michele; Parigi, Bruno M.
  12. On the Economics of Risk and Uncertainty: A Historical Perspective By Yasuhiro Sakai

  1. By: Ricardo Antunes; Daniel Birchal; Jo\~ao M\'arcio Abijaodi; Paulo Abreu; Rog\'erio Peixoto
    Abstract: The globalization feeded by the technology explosion that begans in the end of the last century, started the world to change faster every day. The only today's certain is the tomorrow's uncertain. Risk is defined as uncertain where one or many causes composed of ocurrence probality can generate an impact or consequence (threat if negative and oportunity if positive, to a determinated goal). The Risk Management is composed of culture, procedure and process of an organization or individual care of uncertain, aiming to minimize threats e maximizing the oportunities, to reach a desired goal. The "Risk maturity model in projects" proposed on this document, wants to measure the organizations capacity and skills to manage the riks involved in projects when adopting a generic risk management methodology.
    Date: 2018–01
  2. By: Seho, Mirzet; Alaaabed, Alaa; Masih, Mansur
    Abstract: In theory, risk sharing based Financing (RSF) is considered a corner stone of Islamic finance. It is argued to render Islamic banks more resilient to shocks. In practice, however thus feature of Islamic financial products is almost negligible. Instead, debt-based instrument, with conventional like features, have overwhelmed the nascent industry. In addition, the framework of present-day economic, regulatory and financial reality inevitable exposes Islamic banks in dual banking systems to problems of conventional banks. This includes, but is not limited to, interest risk rate. Empirical evidence has, thus far, confirmed such exposures, despite Islamic bank’s interest-free operations. This study applies system GMM in modeling the determinants of RSF, and finds that RSF is insensitive to changes in interest rates. Hence, our result provide support to the “stability” view of risk-sharing-based financing. This suggest RSF as the way forward for risk management at Islamic banks, in the absence of widely acceptable Shariah compliant hedging instruments. Further support to the stability view is given by evidence of counter-cyclicality. Unlike debt-based lending that inflates artificial asset bubbles through credit expansion during the upswing of business cycles, RSF is negatively related to GDP growth. Our result also imply a significantly strong relationship between risk- sharing deposits and RSF. However, the pass- through of these deposits to RSF is economically low. About 40 percent of risk-sharing deposits are channeled to risk-sharing financing. This raises questions on the validity of the industry’s claim that depositors accustomed to conventional banking shun away from risk sharing and signals potential for better balance sheet management at Islamic banks. Overall, our findings suggest that, on the one hand, Islamic banks can gain ‘independence’ from conventional banks and interest rates through risk- sharing products, the potential for which is enormous. On the other hand, RSF could enable policy makers to improve systemic stability and restrain excessive credit expansion through its counter cyclical features.
    Keywords: Islamic banks, risk-sharing, financing, interest rate, dynamic system GMM.
    JEL: G21
    Date: 2016–12–31
  3. By: Hector Perez-Saiz; Blair Williams; Gabriel Xerri
    Abstract: The increasing importance of risk management in payment systems has led to the development of an array of sophisticated tools designed to mitigate tail risk in these systems. In this paper, we use extreme value theory methods to quantify the level of tail risk in the Canadian retail payment system (ACSS) for the period from 2002 to 2015. Our analysis shows that tail risk has been increasing over the years, but the pace of growth has been reduced towards the end of our data sample, which suggests a slower rate of growth of collateral required to cover that risk.
    Keywords: Econometric and statistical methods; Financial stability; Payment clearing and settlement systems
    JEL: G21 G23 C58
    Date: 2018
  4. By: Hosung Jung (Economic Research Institution, The Bank of Korea)
    Abstract: This paper analyzes changes in home mortgage loan delinquencies related to the interest rate factor and the risk factor, using the personal mortgage lending and delinquency panel data held by the Bank of Korea. It finds that changes in the probability of mortgage loan default have been affected mainly by the interest rate factor since 2012. It finds in addition that the affects of the interest rate and risk factors in determining the default probability differ depending upon borrowers' ages and their income-to-loan ratios. Specifically, while the probabilities of home mortgage loan default due to the interest rate factor have dropped regardless of personal characteristics since 2012, for borrowers in their 20s to 30s and with low income-to-loan ratios the probability of default caused by the risk factor is found to have risen compared to June 2012. This is the first study to estimate the factors causing default based on personal borrower characteristics through use of personal lending and delinquency panel data. It is believed that our study may provide important information about the sources of mortgage loan risk and accordingly help in the putting forward of policy response alternatives.
    Keywords: Home mortgage loan, Default probability, Deliquencies
    JEL: G30 G34
    Date: 2017–02–07
  5. By: Fabio Baione; Paolo De Angelis; Ivan Granito
    Abstract: Solvency II Directive 2009/138/EC requires an insurance and reinsurance undertakings assessment of a Solvency Capital Requirement by means of the so-called "Standard Formula" or by means of partial or full internal models. Focusing on the first approach, the bottom-up aggregation formula proposed by the regulator permits a capital reduction due to diversification effect, according to the typical subadditivity property of risk measures. However, once the overall capital has been assessed no specific allocation formula is provided or required in order to evaluate the contribution of each risk source on the overall SCR. The aim of this paper is to provide a closed formula for capital allocation fully coherent with the Solvency II Capital Requirement assessed by means of Standard Formula. The solution proposed permits a top-down approach to assess the allocated SCR among the risks considered in the multilevel aggregation scheme established by Solvency II. Besides, we demonstrate that the allocation formula here proposed is consistent with the Euler's allocation principle
    Date: 2018–01
  6. By: Anne Corcos (CURAPP-ESS UMR 7319; CNRS; Université de Picardie); François Pannequin (CREST; ENS Paris-Saclay; Université Paris-Saclay); Claude Montmarquette, (CIRANO; Université de Montréal)
    Abstract: This paper compares the Holt and Laury’s risk attitude elicitation with a risk attitude classification associated with insurance behavior. The standard Holt and Laury’s procedure (2002) is implemented in the loss domain, while the second tool is based on contextualized experimental hedging choices for insurance and loss reduction (secondary prevention). Our findings highlight the high consistency between the two procedures for more than two-thirds of the subjects, both measures leading to the same risk-attitude assignment. Interestingly, cases where the two measures do not coincide concern the only subjects whose Holt and Laury’s risk aversion coefficient is borderline. For these participants, using both measures allows for a more accurate assessment. Finally, the HL-irrational behavior of participants uncovers specific risk-averse behavior signature, while contextualized-irrational behavior reveals a risk-loving behavior.
    Keywords: risk-attitude classification, insurance demand, self-insurance demand, loss reduction, secondary prevention, multiple price list method, experimental study
    JEL: C91 D81
    Date: 2017–12–01
  7. By: Zailei Cheng; Youngsoo Seol
    Abstract: We consider a classical risk process with arrival of claims following a stationary Hawkes process. We study the asymptotic regime when the premium rate and the baseline intensity of the claims arrival process are large, and claim size is small. The main goal of this article is to establish a diffusion approximation by verifying a functional central limit theorem of this model and to compute both the finite-time and infinite-time horizon ruin probabilities. Numerical results will also be given.
    Date: 2018–01
  8. By: Luting Li; Hao Xing
    Abstract: The Fundamental Review of Trading Book (FRTB) from the Basel Committee overhauls the regulatory framework for minimum capital requirements for market risk. Facing the tightened regulation, banks need to allocate their capital to each of their risk positions to evaluate the capital efficiency of their strategies. This paper proposes two computational efficient allocation methods under the FRTB framework. Simulation analysis shows that both these two methods provide more liquidity horizon weighted, more stable, and less negative allocations than the standard methods under the current regulatory framework.
    Date: 2018–01
  9. By: Henrik Dam; Andrea Macrina; David Skovmand; David Sloth
    Abstract: We construct models for the pricing and risk management of inflation-linked derivatives. The model is rational in the sense that affine payoffs written on the consumer price index have prices that are rational functions of the state variables. The nominal pricing kernel is constructed in a multiplicative manner that allows for closed-form pricing of vanilla inflation products suchlike zero-coupon swaps, caps and floors, year-on-year swaps, caps and floors, and the exotic limited price index swap. The model retains the attractive features of a nominal multi-curve interest rate model such as closed-form pricing of nominal swaptions. We conclude with examples of how the model can be calibrated to EUR data.
    Date: 2018–01
  10. By: Jean Baccelli (Munich Center for Mathematical Philosophy, LMU - Ludwig Maximilian University [Munich], IHPST - Institut d'Histoire et de Philosophie des Sciences et des Techniques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In this paper, I examine the decision-theoretic status of risk attitudes. I start by providing evidence showing that the risk attitude concepts do not play a major role in the axiomatic analysis of the classic models of decision-making under risk. This can be interpreted as reflecting the neutrality of these models between the possible risk attitudes. My central claim, however, is that such neutrality needs to be qualified and the axiomatic relevance of risk attitudes needs to be re-evaluated accordingly. Specifically, I highlight the importance of the conditional variation and the strengthening of risk attitudes, and I explain why they establish the axiomatic significance of the risk attitude concepts. I also present several questions for future research regarding the strengthening of risk attitudes.
    Keywords: cautious expected utility ,rank-dependent utility,risk aversion,conditional certainty equivalent,Allais paradox,non-expected utility
    Date: 2017
  11. By: Lucchetta, Marcella; Moretto, Michele; Parigi, Bruno M.
    Abstract: We show that the impact of government bailouts (liquidity injections) on a representative bank’s risk taking depends on the level of systematic risk of its loans portfolio. In a model where bank’s output follows a geometric Brownian motion and the government guarantees bank’s liabilities, we show first that more generous bailouts may or may not induce banks to take on more risk depending on the level of systematic risk; if systematic risk is high (low), a more generous bailout decreases (increases) bank’s risk taking. Second, the optimal liquidity policy itself depends on systematic risk. Third, the relationship between bailouts and bank’s risk taking is not monotonic. When systematic risk is low, the optimal liquidity policy is loose and more generous bailouts induce banks to take on more risk. If systematic risk is high and the optimal liquidity policy is tight, less generous bailouts induce banks to take on less risk. However, when high systematic risk makes a very tight liquidity policy optimal, a less generous bailout could increase bank’s risk taking. While in this model there is only one representative bank, in an economy with many banks, a higher level of systematic risk could also be a source of systemic risk if a tighter liquidity policy induces correlated risk taking choices by banks.
    JEL: G00 G20 G21
    Date: 2018–01–23
  12. By: Yasuhiro Sakai (Faculty of Economics, Shiga University)
    Abstract: The economics of risk and uncertainty has a long history over 300 years. This paper aims to systematically summarize and critically reevaluate it, with special reference to John M. Keynes and Frank H. Knight, the two giants in modern times. In our opinion, there are the six stages of development, with each stage vividly reflecting its historical background. The first stage, named the Initial Age, corresponds to a long period before 1700, the one in which statistics was firmly established by B. Pascal as a branch of mathematics but economic theory per se was not well developed. The second stage, called the "B-A" Age, covers the period from 1700 to 1880, is characterized by the two superstars, Daniel Bernoulli and Adam Smith. The third stage from 1880 to 1940 may be named the "K-K" Age because it was dominated by J.M. Keynes and F.H. Knight. The fourth stage, called the "N-M" age, eyewitnesses the birth of game theory, with von Neumann and Morgenstern being its foundering fathers. The fifth stage from 1970 to 2000, named the "A-S" Age, is characterized by several distinguished scholars with their initials "A" or "S". Finally, in 2000 and onward, while many doubts have been raised about existing doctrines, new approaches have not emerged yet, thus being named the Uncertain Age. The relationship between Keynes and Knight is both complex and rather strange. It has a history of separating, approaching, separating again and approaching again. As the saying goes, a new wine should be poured into a new bottle. We would urgently need a Keynes and/or a Knight toward a new horizon of the economics of risk and uncertainty.
    Keywords: Economics of risk and uncertainty, Bernoulli, Keynes, Knight
    Date: 2018–01

This nep-rmg issue is ©2018 by Stan Miles. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.