nep-rmg New Economics Papers
on Risk Management
Issue of 2018‒04‒23
fourteen papers chosen by
Stan Miles
Thompson Rivers University

  1. Mortality in a heterogeneous population - Lee-Carter's methodology By Kamil Jod\'z
  2. Distributions of Historic Market Data -- Implied and Realized Volatility By M. Dashti Moghaddam; Zhiyuan Liu; R. A. Serota
  3. Growth in Stress By González-Rivera, Gloria; Vicente Maldonado, Javier de; Ruiz Ortega, Esther
  4. A Model-Point Approach to Indifference Pricing of Life Insurance Portfolios with Dependent Lives By Christophette Blanchet-Scalliet; Diana Dorobantu; Yahia Salhi
  5. Diversification Effect of Commodity Futures on Financial Markets By KANAMURA Takashi
  6. Indifference pricing of life insurance contracts via BSDEs under partial information By Claudia Ceci; Katia Colaneri; Alessandra Cretarola
  7. Portafolios del mercado bursátil mexicano que minimizan una medida coherente de riesgo sujeto a restricciones de rendimientos esperados y ventas en corto By Covarrubias-Sánchez, Claudia Ivett; Téllez-León, Isela-Elizabeth; Venegas-Martínez, Francisco
  8. A Primer on Managing Sovereign Debt-Portfolio Risks By Thordur Jonasson; Michael G. Papaioannou
  9. How News and Its Context Drive Risk and Returns Around the World By Charles W. Calomiris; Harry Mamaysky
  10. Determinants of Credit Risk in the Banking system in Sub-Saharan Africa By Trust R. Mpofu; Eftychia Nikolaidou
  11. Toward a Systematic Approach to the Economic Effects of Risk: Characterizing Utility Functions" By Gollier, Christian; Kimball, Miles S.
  12. Credit Risk in African Microfinance Institutions: Correlates and International Comparisons By Eliud Moyi; Eftychia Nikolaidou
  13. Evolution of the Chinese Guarantee Network and Its Implication for Risk Management: Impacts from Financial Crisis and Stimulus Program By Yingli Wang; Qingpeng Zhang; Xiaoguang Yang
  14. Determining Risk Management Dynamics: An Analysis of Risk Perceptions of Real Estate Development Firms in Turkey By Harun Tanrivermis; Yesim Aliefendioglu; Akin Ozturk; Yunus Emre Kapusuz

  1. By: Kamil Jod\'z
    Abstract: The EU Solvency II directive recommends insurance companies to pay more attention to the risk management methods. The sense of risk management is the ability to quantify risk and apply methods that reduce uncertainty. In life insurance, the risk is a consequence of the random variable describing the life expectancy. The article will present a proposal for stochastic mortality modeling based on the Lee and Carter methodology. The maximum likelihood method is often used to estimate parameters in mortality models. This method assumes that the population is homogeneous and the number of deaths has the Poisson distribution. The aim of this article is to change assumptions about the distribution of the number of deaths. The results indicate that the model can get a better match to historical data, when the number of deaths has a negative binomial distribution.
    Date: 2018–03
  2. By: M. Dashti Moghaddam; Zhiyuan Liu; R. A. Serota
    Abstract: We undertake a systematic comparison between implied volatility, as represented by VIX (new methodology) and VXO (old methodology), and realized volatility. We compare visually and statistically distributions of realized and implied variance (volatility squared) and study the distribution of their ratio. We find that the ratio is best fitted by heavy-tailed -- lognormal and fat-tailed (power-law) -- distributions, depending on whether preceding or concurrent month of realized variance is used. We do not find substantial difference in accuracy between VIX and VXO. Additionally, we study the variance of theoretical realized variance for Heston and multiplicative models of stochastic volatility and compare those with realized variance obtained from historic market data.
    Date: 2018–04
  3. By: González-Rivera, Gloria; Vicente Maldonado, Javier de; Ruiz Ortega, Esther
    Abstract: We propose a new global risk index, Growth-in-Stress (GiS), that measures the expected decrease in a country GDP growth as the global factors, which drive world growth, are subject to stressful conditions. Stress is measured as the 95% contours of the joint probability distribution of the factors. With GDP growth rates of a sample of 87 countries in the World Bank and International Monetary Fund databases and for the period 1985 to 2015, we extract three global factors: a first world growth factor driven mainly by all industrial and emerging countries; a second factor driven by “other developing” countries in Africa and America; and a third factor that is mostly related to East Asian economies. We find that the average GiS across industrialized, emerging and other developing countries has been going down from 1987. Post 2008 financial crisis, mainly from 2011 on, the world overall has fallen in a state-of-complacency with the average GiS falling quite dramatically to reach the lowest levels of risk (0-1% potential drop in growth) in 2015. However, the dispersion within groups is quite wide. It is the smallest among industrialized countries and the largest among emerging and other developing countries. We also measure the factor stress on different quantiles of the DGP growth distribution of each country. We calculate an Armageddon-type event as we seek to find the 5% GiS quantile under 95% extreme factor events and find that it can be as large as an annual 20% drop in growth.
    Keywords: Value in Stress; Stress Index; Quantile regressions; Principal Components; Predictive regressions; Factor uncertainty; Dynamic Factor Model; Business Cycle
    Date: 2018–03–23
  4. By: Christophette Blanchet-Scalliet (ICJ - Institut Camille Jordan [Villeurbanne] - ECL - École Centrale de Lyon - Université de Lyon - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - INSA Lyon - Institut National des Sciences Appliquées de Lyon - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - CNRS - Centre National de la Recherche Scientifique); Diana Dorobantu (ICJ - Institut Camille Jordan [Villeurbanne] - ECL - École Centrale de Lyon - Université de Lyon - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - INSA Lyon - Institut National des Sciences Appliquées de Lyon - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - CNRS - Centre National de la Recherche Scientifique); Yahia Salhi (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)
    Abstract: In this paper, we study the pricing of life insurance portfolios in the presence of dependent lives. We assume that an insurer with an initial exposure to n mortality-contingent contracts wanted to acquire a second portfolio constituted of m individuals. The policyhold-ers' lifetimes in these portfolios are correlated with a Farlie-Gumbel-Morgenstern (FGM) copula, which induces a dependency between the two portfolios. In this setting, we compute the indifference price charged by the insurer endowed with an exponential utility. The optimal price is characterized as a solution to a backward differential equation (BSDE). The latter can be decomposed into (n − 1)n! auxiliary BSDEs. In this general case, the derivation of the indifference price is computationally infeasible. Therefore, while focusing on the example of death benefit contracts, we develop a model point based approach in order to ease the computation of the price. It consists on replacing each portfolio with a single policyholder that replicates some risk metrics of interest. Also, the two representative agents should adequately reproduce the observed dependency between the initial portfolios.
    Keywords: representative contract,indifference pricing, utility maximization, life insurance
    Date: 2017
  5. By: KANAMURA Takashi
    Abstract: This paper examines the portfolio diversification effect of commodity futures on financial market products introducing a comprehensive evaluation standard of risk standardization, robustly small correlations, and risk-return tradeoffs. Regarding risk standardization, we propose a definition of portfolio diversification as how much the distribution of portfolio returns is close to a normal distribution. It is shown by using α-stable distribution that if the commodity price return distribution has the opposite sign of skewness parameter β to financial portfolio's β, commodity diversification effect exists. The empirical studies using S&P500, U.S. 10-year bond and DJ-AIG commodity index are conducted to investigate the portfolio diversification effects. The parameter estimation results of portfolio return distributions, the conditional correlations using the dynamic conditional correlation model with financial exogenous variables, and the efficient frontier from the mean-CVaR portfolio optimization all suggest that commodity futures have a diversification effect on financial markets.
    Date: 2018–03
  6. By: Claudia Ceci; Katia Colaneri; Alessandra Cretarola
    Abstract: In this paper we investigate the pricing problem of a pure endowment contract when the insurer has a limited information on the mortality intensity of the policyholder. The payoff of this kind of policies depends on the residual life time of the insured as well as the trend of a portfolio traded in the financial market, where investments in a riskless asset, a risky asset and a longevity bond are allowed. We propose a modeling framework that takes into account mutual dependence between the financial and the insurance markets via an observable stochastic process, which affects the risky asset and the mortality index dynamics. Since the market is incomplete due to the presence of basis risk, in alternative to arbitrage pricing we use expected utility maximization under exponential preferences as evaluation approach, which leads to the so-called indifference price. Under partial information this methodology requires filtering techniques that can reduce the original control problem to an equivalent problem in complete information. Using stochastic dynamics techniques, we characterize the value function as well as the indifference price in terms of the solution to a quadratic-exponential backward stochastic differential equation.
    Date: 2018–03
  7. By: Covarrubias-Sánchez, Claudia Ivett; Téllez-León, Isela-Elizabeth; Venegas-Martínez, Francisco
    Abstract: Resumen: Este trabajo obtiene portafolios óptimos formados con activos de mercado mexicano de capitales que minimizan una medida coherente de riesgo sujetos a restricciones sobre rendimientos esperados y ventas en corto. Particularmente, se utiliza como función objetivo el Valor en Riesgo Condicional (CVaR) de acuerdo con la metodología propuesta por Rockafellar y Uryasev (2000). Esto permite calcular los pesos óptimos (proporciones óptimas) de cualquier signo para el CVaR a diferentes niveles de confianza mediante un problema de programación lineal. Por último se muestra evidencia empírica de que, en el caso mexicano, el CVaR óptimo con pesos no negativos proporciona mejores resultados que el VaR durante el periodo 2014-2016. / Abstract: This paper is aimed at obtaining optimal portfolios formed with assets from the Mexican stock market that minimize a coherent measure of risk subject to contraints on expected returns and short sales. In particular, the Conditional Value at Risk (CVaR) is used as the objective function according to the methodology proposed by Rockafellar and Uryasev (2000). This allows to calculate the optimal weights (optimal proportions) of any sign for the CVaR at different levels of confidence through a linear programming problem. Finally, empirical evidence shows that, in the Mexican case, the optimal CVaR with nonnegative weights provides better results than those from VaR during the period 2014-2016.
    Keywords: Portafolios óptimos de acciones, riesgo de mercado, medidas de riesgo, medida coherente de riesgo. / Stock optimal portfolios, market risk, risk measures, coherent measure of risk
    JEL: G11
    Date: 2018–03–23
  8. By: Thordur Jonasson; Michael G. Papaioannou
    Abstract: This paper provides an overview of sovereign debt portfolio risks and discusses various liability management operations (LMOs) and instruments used by public debt managers to mitigate these risks. Debt management strategies analyzed in the context of helping reach debt portfolio targets and attain desired portfolio structures. Also, the paper outlines how LMOs could be integrated into a debt management strategy and serve as policy tools to reduce potential debt portfolio vulnerabilities. Further, the paper presents operational issues faced by debt managers, including the need to develop a risk management framework, interactions of debt management with fiscal policy, monetary policy, and financial stability, as well as efficient government bond markets.
    Date: 2018–04–06
  9. By: Charles W. Calomiris; Harry Mamaysky
    Abstract: We develop a classification methodology for the context and content of news articles to predict risk and return in stock markets in 51 developed and emerging economies. A parsimonious summary of news, including topic-specific sentiment, frequency, and unusualness (entropy) of word flow, predicts future country-level returns, volatilities, and drawdowns. Economic and statistical significance are high and larger for year-ahead than monthly predictions. The effect of news measures on market outcomes differs by country type and over time. News stories about emerging markets contain more incremental information. Out-of-sample testing confirms the economic value of our approach for forecasting country-level market outcomes.
    JEL: G12 G14 G15
    Date: 2018–03
  10. By: Trust R. Mpofu (School of Economics, University of Cape Town); Eftychia Nikolaidou (School of Economics, University of Cape Town)
    Abstract: This paper investigates the macroeconomic determinants of credit risk in the banking system of 22 Sub-Saharan African economies. We measure credit risk as the ratio of non-performing loans to total gross loans (NPLs) and employ a dynamic panel data approach over the period 2000-2016. Using a variety of specifications, the results show that an increase in real GDP growth rate has a statistically and economically significant reducing effect on the ratio of non-performing loans to total gross loans. Furthermore, inflation rate, domestic credit to private sector by banks as a percent of GDP, trade openness, VIX as a proxy of global volatility, and the 2008/2009 global financial crisis, all have positive and significant impact on NPLs.
    Date: 2018
  11. By: Gollier, Christian; Kimball, Miles S.
    Abstract: The Diffidence Theorem, together with complementary tools, can aid in illuminating a broad set of questions about how to mathematically characterize the set of utility functions with specified economic properties. This paper establishes the technique and illustrates its application to many questions, old and new. For example, among many other older and other technically more difficult results, it is shown that (1) several implications of globally greater risk aversion depend on distinct mathematical properties when the initial wealth level is known, (2) whether opening up a new asset market increases or decreases saving depends on whether the reciprocal of marginal utility is concave or convex, and (3) whether opening up a new asset market raises or lowers risk aversion towards small independent risks depends on whether absolute risk aversion is convex or concave.
    Date: 2018–04
  12. By: Eliud Moyi (School of Economics, University of Cape Town); Eftychia Nikolaidou (School of Economics, University of Cape Town)
    Abstract: Credit risk in African microfinance institutions seems to be rising, and the financial health of these institutions is becoming an issue of concern. Given this trend, this study seeks to unravel the factors that explain variations in credit risk in sub-Sahara African MFIsand, if such factors exist, to establish whether they have the same effects on credit risk in other developing regions. The study approach accommodates dynamic panel bias by applying system generalised method of moments estimators. Results suggest that the main predictors of credit risk in sub-Saharan Africa are lagged credit risk, loan growth, provision for loan impairment, GDP per capita growth and ease of getting credit. In addition, the study identifies threshold effects in the relationship between credit risk and loan growth. Credit risk falls with loan growth until a trough at 36.8% when this relationship is reversed.Further results from regional comparisons suggest that credit risk is most persistent in East Asia and the Pacific but least persistent in Sub-Saharan Africa.
    Date: 2018
  13. By: Yingli Wang; Qingpeng Zhang; Xiaoguang Yang
    Abstract: In this study, we provide a detailed global topological analysis on the Chinese guarantee network and highlight the effect of financial crisis and monetary policies on the evolution of network topologies. On the one hand, the static and dynamic analyses on network indicators confirm a number of stylized facts that are verified for other real complex systems. Guarantee networks are highly sparse, incomplete, and exhibit a small world property and a power-law degree distribution. On the other hand, we present data-driven insights on the association of the topological structure of guarantee networks with economic shock (the 2008 global financial crisis) and monetary policies (i.e., Chinese economic stimulus program and loose monetary policies and latter adjustment). Specifically, the empirical and exponential random graph model results provided that (a) the guarantee network became small due to the huge number of bankruptcies of small and medium firms during financial crisis, and (b) the loose monetary policy along with the stimulus program increased the mutual guarantee behavior among firms that resulted in a highly reciprocal and interconnected network. The following adjustment of monetary policies reduced the interconnection of the network.
    Date: 2018–04
  14. By: Harun Tanrivermis; Yesim Aliefendioglu; Akin Ozturk; Yunus Emre Kapusuz
    Abstract: Although it is well known that there are many sources of risks in real estate investments, particularly in commercial real estate investments, the works are frequently commenced without consideration of risk resources and uncertainties in the project evaluation and investment decision making processes. The nature and impact on investment value of environmental, economic, real estate sector, and project risks are observed to vary from the beginning of the project development process until the end of it. Dynamic methods are often used in commonplace feasibility studies and integration of risks to calculations and periodically updating feasibility analyses are found to be usually neglected. However, project-specific risks such as the ownership of land, land development rights, and demands of the owners of neighboring parcels and economic risks directly affect the feasibility of the investment and can be major sources of failure.In this study, risk perceptions of upper middle managers of large-scale real estate development companies were evaluated and risk management approaches implemented within the companies were discussed. The scope of the study was limited to companies that are members of the Turkish Contractors Association (TCA), to which only the biggest real estate firms of Turkey can be members, and members of other important associations. In the construction and real estate market, two of the most important sectors in the Turkish economy, members of the TCA realize 70%of construction works within the country and 90%of the works undertaken by Turkish contractors abroad and have the ability to represent the industry. In this study, the impact of risk according to its resources on the preparation and implementation of real estate projects and risk perceptions of managers were examined based on the responses received to the questions electronically sent to the members of the TCA and other important associations. The study results revealed that that developers carry out risk management and decision support system activities, use intuitive risk analysis methods, utilize risks in integrated decision-making processes and the risk items that the developers consider are identified. According to the study results, sales forecasts, and the changes in foreign exchange and interest rates are significant in risk management in line with academic studies.
    Keywords: Decision Support Systems; real estate development projects; risk analysis and risk management; Risk dynamics; Risk perceptions
    JEL: R3
    Date: 2017–07–01

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