nep-rmg New Economics Papers
on Risk Management
Issue of 2018‒09‒17
sixteen papers chosen by

  1. Modeling Of Dynamic Weather Indexes By Coupling Spatial Phenological And Precipitation Data - A Practical Application In The Context Of Weather Index-based Insurances By Doms, Juliane; Gerstmann, Henning; Möller, Markus
  2. Measuring Geopolitical Risk By Matteo Iacoviello
  3. Quantitative Risk Management in Real Estate – Previous developments, comparative comparision of practices and derivation of an evoluation matrix " By Cay Oertel; Sven Bienert
  4. The Spread of Deposit Insurance and the Global Rise in Bank Asset Risk since the 1970s By Charles W. Calomiris; Sophia Chen
  5. Identification of structural multivariate GARCH models By HAFNER Christian,; HERWARTZ Helmut,; MAXAND Simone,
  6. How Safe are Central Counterparties in Derivatives Markets? By Mark Paddrik; Peyton Young
  7. A Residual Bootstrap for Conditional Value-at-Risk By Eric Beutner; Alexander Heinemann; Stephan Smeekes
  8. Foreign Expansion, Competition and Bank Risk By Faia, Ester; Laffitte, Sebastien; Ottaviano, Gianmarco
  9. Choice of Invoice Currency and Exchange Rate Risk Management: 2017 Questionnaire Survey with Japanese headquarters (Japanese) By ITO Takatoshi; KOIBUCHI Satoshi; SATO Kiyotaka; SHIMIZU Junko
  10. The Term Structure of Growth-at-Risk By Tobias Adrian; Federico Grinberg; Nellie Liang; Sheheryar Malik
  11. Portfolio diversification and model uncertainty: a robust dynamic mean-variance approach By Huyen Pham; Xiaoli Wei; Chao Zhou
  12. How to manage risk for the online one-way trading problems? By LILI DING; Zhao Xin
  13. Marketing Contracts and Risk Management for Cereal Producers By Roussy, Caroline; Rider, Aude; Chaib, Karim; Boyet, Marie
  14. Assessing and Addressing Portfolio Risk By Deufel, Joe
  15. Agricultural commodity market responses to extreme agroclimatic events By Chatzopoulos, T.; Perez Dominguez, I.; Zampieri, M.; Toreti, A.
  16. Economic Transactions Govern Business Cycles By Olkhov, Victor

  1. By: Doms, Juliane; Gerstmann, Henning; Möller, Markus
    Abstract: A key challenge for the design of weather index insurances (WII) is the presence of basis risk, i.e. the actual loss of the insured farm is not fully covered by the insurance payment. Basis risk can occur dependent on the distance between the point of measurement of a specific weather event and the farm’s location (spatial basis risk). The present study aimed to derive spatial data sets and use them for the design of test site- and phenological phasespecific precipitation indexes. We studied for 20 German crop farms the hedging efficiency of WII, i.e. how the variability of farm specific total gross margins would have changed if farmers had purchased the designed WII. The hedging efficiency is different from farm to farm and not always a risk reduction (positive HE) results. Although these might be not the best results, a new methodology to minimize spatial basis risk could be introduced by designing highly dynamic indexes, which are flexible and precise in terms of time and space. The contribution of the present study to the WII research is the analysis of the HE of WII based on these indexes.
    Keywords: Agricultural Finance, Risk and Uncertainty
    Date: 2017–08–29
  2. By: Matteo Iacoviello (Federal Reserve Board)
    Abstract: We present a monthly indicator of geopolitical risk based on a tally of newspaper articles covering geopolitical tensions, and examine its evolution and effects since 1985. The geopolitical risk (GPR) index spikes around the Gulf War, after 9/11, during the 2003 Iraq invasion, during the 2014 Russia-Ukraine crisis, and after the Paris terrorist attacks. High geopolitical risk leads to a decline in real activity, lower stock returns, and movements in capital flows away from emerging economies and towards advanced economies. When we decompose the index into threats and acts components, the adverse effects of geopolitical risk are mostly driven by the threat of adverse geopolitical events. Extending our index back to 1900, geopolitical risk rose dramatically during the World War I and World War II, was elevated in the early 1980s, and has drifted upward since the beginning of the 21st century.
    Date: 2018
  3. By: Cay Oertel; Sven Bienert
    Abstract: The importance of real estate risk management has recently been highlighted by various developments: The GFC in 2007 as fundamental crisis, recently increasing disruptive events and fat tail risk, as well as a general shift up the risk curve due to yield compression in the asset class real estate. Thus, professionals show an increased interest for adequate methods to manage the risk of their position. These professionals include the Deka Immobilien GmbH, who financially as well as intellectually support the present paper. On the other hand, academic literature shows a vital discussion in the risk management of real estate and the feasibility of corresponding methods. Accordingly, the need for an evaluation pattern in order to judge the adequancy of each existing method in the context of fundamental characteristics of the asset class and its dynamics appears to be the logic step. To date, no such real estate-specific assessment pattern exists. Consequently, the central idea of the present paper is to develop a model to evaluate practices from an academic point of view with regard to their adequancy of asset characteristics as well as recent dynamic developments of the market environment. In order to set up this evaluation pattern, economic as well as legal requirements are described and hierachially ordered by ubiquitary versus firm-specific ones to discriminate development levels and set up the evaluation matrix. Subsequently, risk management methods are presented. Lastly, observed methods are evaluated with the newly developed evaluation matrix to assess their feasibility to fulfil above mentioned economic and legal requirements.
    Keywords: Criteria for decision-making under risk and uncertainty; Quantitative Risk Management; Real Estate cycle; Risk Factors
    JEL: R3
    Date: 2018–01–01
  4. By: Charles W. Calomiris; Sophia Chen
    Abstract: We construct a new measure of the changing generosity of deposit insurance for many countries, empirically model the international influences on the adoption and generosity of deposit insurance, and show that the expansion of deposit insurance generosity increased asset risk in banking systems. We consider three asset risk measures: higher loans-to-assets, a higher proportion of lending to households, and a higher proportion of mortgage lending. None of the observed increases in these indicators is offset by declines in banking system leverage. We show that increased asset risk explains at least part of the positive association between deposit insurance and the likelihood and severity of systemic banking crises.
    JEL: E32 F55 G01 G18 G21 G28
    Date: 2018–08
  5. By: HAFNER Christian, (CORE and ISBA, UCLouvain); HERWARTZ Helmut, (University of Goettingen); MAXAND Simone, (University of Helsinki)
    Abstract: Multivariate GARCH models are widely used to model volatility and correlation dynamics of nancial time series. These models are typically silent about the transmission of implied orthogonalized shocks to vector returns. We propose a loss statistic to discriminate in a data-driven way between alternative structural assumptions about the transmission scheme. In its structural form, a four dimensional system comprising US and Latin American stock market returns points to a substantial volatility transmission from the US to the Latin American markets. The identified structural model improves the estimation of classical measures of portfolio risk, as well as corresponding variations.
    Keywords: structural innovations; identifying assumptions; MGARCH; portfolio risk; volatility transmission
    JEL: C32 G15
    Date: 2018–07–25
  6. By: Mark Paddrik (Office of Financial Research, U.S. Treasury); Peyton Young (University of Oxford, Nuffield College)
    Abstract: We propose a general framework for estimating the likelihood of default by central counterparties (CCP) in derivatives markets. Unlike conventional stress testing approaches, which estimate the ability of a CCP to withstand nonpayment by its two largest counterparties, we study the direct and indirect effects of nonpayment by members and/or their clients through the full network of exposures. We illustrate the approach for the U.S. credit default swaps (CDS) market under shocks that are similar in magnitude to the Federal Reserve's stress tests. The analysis indicates that conventional stress testing approaches may underestimate the potential vulnerability of the main CCP for this market.
    Date: 2018
  7. By: Eric Beutner; Alexander Heinemann; Stephan Smeekes
    Abstract: This paper proposes a fixed-design residual bootstrap method for the two-step estimator of Francq and Zako\"ian (2015) associated with the conditional Value-at-Risk. The bootstrap's consistency is proven under mild assumptions for a general class of volatility models and bootstrap intervals are constructed for the conditional Value-at-Risk to quantify the uncertainty induced by estimation. A large-scale simulation study is conducted revealing that the equal-tailed percentile interval based on the fixed-design residual bootstrap tends to fall short of its nominal value. In contrast, the reversed-tails interval based on the fixed-design residual bootstrap yields accurate coverage. In the simulation study we also consider the recursive-design bootstrap. It turns out that the recursive-design and the fixed-design bootstrap perform equally well in terms of average coverage. Yet in smaller samples the fixed-design scheme leads on average to shorter intervals. An empirical application illustrates the interval estimation using the fixed-design residual bootstrap.
    Date: 2018–08
  8. By: Faia, Ester; Laffitte, Sebastien; Ottaviano, Gianmarco
    Abstract: Using a novel dataset on the 15 European banks classified as G-SIBs from 2005 to 2014, we find that the impact of foreign expansion on risk is always negative and significant for most individual and systemic risk metrics. In the case of individual metrics, we also find that foreign expansion affects risk through a competition channel as the estimated impact of openings differs between host countries that are more or less competitive than the source country. The systemic risk metrics also decline with respect to expansion, though results for the competition channel are more mixed, suggesting that systemic risk is more likely to be affected by country or business models characteristics that go beyond and above the differential intensity of competition between source and host markets. Empirical results can be rationalized through a simple model with oligopolistic/oligopsonistic banks and endogenous assets/liabilities risk.
    Keywords: banks' risk-taking; Competition; Diversification; geographical expansion; Gravity; regulatory arbitrage; systemic risk
    JEL: G21 G32 L13
    Date: 2018–09
  9. By: ITO Takatoshi; KOIBUCHI Satoshi; SATO Kiyotaka; SHIMIZU Junko
    Abstract: This study presents the summary results of the 2017 RIETI Questionnaire Survey where 1,006 Japanese listed firms were surveyed. The foreign exchange risk management and invoice currency choice of Japanese exporting firms are investigated and compared with the results of the 2009 and 2013 RIETI Questionnaire Surveys. Our findings are two-fold. First, the share of yen-invoiced exports has declined and become much smaller than the corresponding share of the U.S. dollar in Japanese exports to the world, while the share of U.S. dollar-invoiced exports accounts for about 60% of Japanese exports if taking into account firms' export amounts. Thus, Japanese exporting firms are more exposed to exchange rate fluctuations. Second, the use of Asian currencies has increased steadily. 44% of the sample firms use the renminbi (RMB) for their transactions, and the larger the company size, the stronger is the tendency to use RMB transactions. The corresponding share of the Thai baht and Korean won also increased. The marked increase in the use of Asian currencies suggests that it has become more important for Japanese firms to manage exchange risk more efficiently against Asian currencies.
    Date: 2018–09
  10. By: Tobias Adrian; Federico Grinberg; Nellie Liang; Sheheryar Malik
    Abstract: Using panel quantile regressions for 11 advanced and 10 emerging market economies, we show that the conditional distribution of GDP growth depends on financial conditions, with growth-at-risk (GaR)—defined as growth at the lower 5th percentile—more responsive than the median or upper percentiles. In addition, the term structure of GaR features an intertemporal tradeoff: GaR is higher in the short run; but lower in the medium run when initial financial conditions are loose relative to typical levels, and the tradeoff is amplified by a credit boom. This shift in the growth distribution generally is not incorporated when solving dynamic stochastic general equilibrium models with macrofinancial linkages, which suggests downside risks to GDP growth are systematically underestimated.
    Keywords: Financial stability;downside risk, macrofinancial linkages, volatility paradox, quantile regression, General, International Business Cycles
    Date: 2018–08–02
  11. By: Huyen Pham (LPSM UMR 8001 - Laboratoire de Probabilités, Statistique et Modélisation - UPD7 - Université Paris Diderot - Paris 7 - Sorbonne Université - CNRS - Centre National de la Recherche Scientifique, ENSAE - Ecole Nationale de la Statistique et de l'Analyse Economique - Ecole Nationale de la Statistique et de l'Analyse Economique); Xiaoli Wei (LPSM UMR 8001 - Laboratoire de Probabilités, Statistique et Modélisation - UPD7 - Université Paris Diderot - Paris 7 - Sorbonne Université - CNRS - Centre National de la Recherche Scientifique); Chao Zhou (NUS - National University of Singapore)
    Abstract: This paper is concerned with a multi-asset mean-variance portfolio selection problem under model uncertainty. We develop a continuous time framework for taking into account ambiguity aversion about both expected return rates and correlation matrix of the assets, and for studying the effects on portfolio diversification. We prove a separation principle for the associated robust control problem, which allows to reduce the determination of the optimal dynamic strategy to the parametric computation of the minimal risk premium function. Our results provide a justification for under-diversification, as documented in empirical studies. We explicitly quantify the degree of under-diversification in terms of correlation and Sharpe ratio ambiguity. In particular, we show that an investor with a poor confidence in the expected return estimation does not hold any risky asset, and on the other hand, trades only one risky asset when the level of ambiguity on correlation matrix is large. This extends to the continuous-time setting the results obtained by Garlappi, Uppal and Wang [13], and Liu and Zeng [24] in a one-period model. JEL Classification: G11, C61 MSC Classification: 91G10, 91G80, 60H30
    Keywords: Continuous-time Markowitz problem,model uncertainty,ambiguous drift and correlation,separation principle,portfolio diversification
    Date: 2018–09–04
  12. By: LILI DING (Ocean University of China); Zhao Xin (Ocean University of China)
    Abstract: This paper studies online one-way trading problem, where an investor is given the task of trading dollars to yen. Each day, a new exchange rate is given and the investor must decide how many dollars to convert to yen without knowing the future exchange rates. Since El-Yaniv originally proposed this online problem and presented an optimal threat-based trading strategy, many researchers have been working on innovation based on this model. From the financial risk view, this paper extended El-Yaniv?s traditional one-way trading model to present a risk management framework by introducing American put option with the first price as the strike price. This framework extends pure competitive analysis and allows investors to benefit from options. Second, since the option can help the investors to hedge risk, we extend analysis of Al-Binali (1999) to design the option-forecast trading strategy with twice forecasts. The results show that the option-forecast trading strategy constrains the risk of sudden dropping to the minimum price through the American put option. Compared with former research, the competitive ratio of the option-forecast trading strategy is improved effectively.
    Keywords: one-way online trading problem; online algorithm; competitive ratio; option; risk; reward
    Date: 2018–07
  13. By: Roussy, Caroline; Rider, Aude; Chaib, Karim; Boyet, Marie
    Abstract: This article presents an analysis of risk management by French cereal farmers Producers are subject to market and production risks and to environmental restrictions. The paper analyses cereal farmers’ strategies to manage risks through marketing contracts and production decisions. Three main categories of marketing contracts are adopted bearing different risk levels: forward contracts, average price contracts and spot contracts. A hundred wheat producers are surveyed in SouthWest France. The quantitative analysis of their contractual choices shows that risk perceptions and the farmer’s level of education have an influence on contractual choice while crop diversification is negatively correlated with forward contracts.
    Keywords: Agricultural and Food Policy, Marketing
    Date: 2017–08–28
  14. By: Deufel, Joe
    Keywords: Agricultural Finance
    Date: 2017–02–23
  15. By: Chatzopoulos, T.; Perez Dominguez, I.; Zampieri, M.; Toreti, A.
    Abstract: Economic simulation models typically assume ‘normal’ growing conditions in eliciting agricultural market projections, contain no explicit parameterization of climate extremes on the supply side, and confound multifarious sources of historical yield fluctuation in harvest-failure scenarios. In this paper we augment a partial equilibrium model of global agriculture with a recently developed compound indicator of agroclimatic stress. We perform a multi-scenario analysis where the most extreme temperature and soilmoisture anomalies of the last decades, both negative and positive, recur in the near future. Our results indicate that extreme agroclimatic conditions at the regional level may have significant impacts both on domestic and international wheat and maize markets.
    Keywords: Agricultural and Food Policy, Environmental Economics and Policy, Marketing
    Date: 2018–07
  16. By: Olkhov, Victor
    Abstract: This paper presents the business cycle model based on treatment of economic agents as simple units of macroeconomics. Agents (banks, corporations, households, etc.) have numerous economic and financial variables like Assets, Credits, Debts, Consumption, etc. Agents perform economic and financial transactions with other agents. All agents are at risk but not for all agents risk assessments are performed now. Let’s propose that risk assessment can be made for all agents and let’s use agents risk ratings x as their coordinates. Agents coordinates for n risks define n-dimensional economic space. Economic and financial transactions between agents describe evolution of their economic and financial variables. Aggregations of economic or financial variables of agents in a unit volume at point x determine macro variables as functions of x. Aggregations of transactions between agents in unit volumes at points x and y determine macro transactions as functions of x and y. Macro transactions describe rate of change of macro variables at points x and y. We derive economic equations that describe evolution of macro transactions. We show that business cycle fluctuations are consequence of these equations. We argue that business cycle fluctuations of particular macro variable can be treated as oscillations of “mean risk coordinates” of this economic variable. As example we study the business cycle determined by model interactions between transactions CL(t,x,y) that provide Loans from Creditors at point x to Borrowers at point y and transactions LR(t,x,y) that describe repayments from Borrowers at point y to Creditors at point x. Starting with economic equations we derive the system of ordinary differential equations that describe the business cycle fluctuations of macro Credits C(t) and macro Loan-Repayments LR(t) of the entire economics.
    Keywords: Business cycle; Economic Transactions; Risk Assessment; Economic Space
    JEL: C02 E00 E32 F44 G00
    Date: 2018–06–08

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