nep-rmg New Economics Papers
on Risk Management
Issue of 2018‒09‒24
sixteen papers chosen by
Stan Miles
Thompson Rivers University

  1. The Impact of LIBOR Linked Borrowing to Cover Venture Bank Investment Loans Creates a New Systemic Risk By Brian P. Hanley
  2. Bank Holdings and Systemic Risk By Celso Brunetti; Jeffrey H. Harris; Shawn Mankad
  3. Portfolio similarity and asset liquidation in the insurance industry By Girardi, Giulio; Hanley, Kathleen Weiss; Nikolova, Stanislava; Pelizzon, Loriana; Getmansky, Mila
  4. Tail expectile process and risk assessment By Daouia, Abdelaati; Girard, Stéphane; Stupfler, Gilles
  5. Market Timing with Moving Averages By Ilomäki, J.; Laurila, H.; McAleer, M.J.
  6. Why millers prefer to hedge at the KCBoT and grain elevator operators at the CBoT By Prehn, Sören; Feil, Jan-Henning
  7. Random Fixed Points, Limits and Systemic risk By Veeraruna Kavitha; Indrajit Saha; Sandeep Juneja
  8. Citrus Producers' Choice of Price Risk Management Tools By Carrer, Marcelo José; Silveira, Rodrigo Lanna F.; Meirelles De Souza Filho, Hildo
  9. Asset Insulators By Gabriel Chodorow-Reich; Andra Ghent; Valentin Haddad
  10. The macroeconomic effects of bank capital requirement tightenings: Evidence from a narrative approach By Sandra Eickmeier; Benedikt Kolb; Esteban Prieto
  11. Believing Yourself: Perceived Risk Taking Behavior and Risk Management Decision of Texas Cotton Farmers By Luitel, Kishor P.; Adhikari, Shyam; Wright, Andrew P.; Hudson, Michael D.; Knight, Thomas O.
  12. Loan-to-value ratio limits: an exploration for Greece By Hiona Balfoussia; Harris Dellas; Dimitris Papageorgiou
  13. Preferences and Prevention: Risk Management in Seed Potato Production By Fuller, Kate B.; McIntosh, Christopher S.; Zidack, Nina
  14. The Effects of Private Stocks versus Public Stocks on Food Price Volatility By Chavas, J.-P.; Li, J.
  15. An investigation into the dependence structure of major cryptocurrencies By Saha, Kunal
  16. Does Global Economic Uncertainty Matter for the Volatility and Hedging Effectiveness of Bitcoin? By Libing Fang; Elie Bouri; Rangan Gupta; David Roubaud

  1. By: Brian P. Hanley
    Abstract: A scenario in which regulators take the drastic step of requiring coverage of all venture bank investment loans using interbank borrowed funds is considered. In this scenario, a minimal amount of default insurance is used, such that Tier 1 and 2 capital requirements are still met. To do this, the default insurance percentage on all investment loans is cut to 3.88%, although the minimum is 2.88%. Results: For a portfolio of 1.31X (ten year total conventional return) or better, at interest rates of 2% or better, the venture bank survives and can have excellent returns. For a portfolio of 1.5X (ten year total conventional return) the bank can have extraordinary returns below 1.5% interest and survive up to 3%. interest. However, if returns fall, or interest rates rise, then venture banks go underwater quite rapidly. Conclusion: Using LIBOR funds limits profitability, and damages stability of the bank, with no visible benefit to any party, thus creating a new systemic risk to the banking system.
    Date: 2018–08
  2. By: Celso Brunetti; Jeffrey H. Harris; Shawn Mankad
    Abstract: The recent financial crisis has focused attention on identifying and measuring systemic risk. In this paper, we propose a novel approach to estimate the portfolio composition of banks as function of daily interbank trades and stock returns. While banks’ assets are reported to regulators and/or the public at relatively low frequencies (e.g. quarterly or annually), our approach estimates bank asset holdings at higher frequencies which allows us to derive precise estimates of (i) portfolio concentration within each bank—a measure of diversification—and (ii) common holdings across banks—a measure of market susceptibility to propagating shocks. We find evidence that systemic risk measures derived from our approach lead, in a forecasting sense, several commonly used systemic risk indicators.
    Keywords: Systemic risk ; Concentration index ; Bank holdings ; Similarity index
    JEL: G21 C11 G11
    Date: 2018–09–04
  3. By: Girardi, Giulio; Hanley, Kathleen Weiss; Nikolova, Stanislava; Pelizzon, Loriana; Getmansky, Mila
    Abstract: An important assumption underlying the designation of some insurers as systemically important is that their overlapping portfolio holdings can result in common selling. We measure the overlap in holdings using cosine similarity, and show that insurers with more similar portfolios have larger subsequent common sales. This relationship can be magnified for some insurers when they are regulatory capital constrained or markets are under stress. When faced with an exogenous liquidity shock, insurers with greater portfolio similarity have even larger common sales that impact prices. Our measure can be used by regulators to predict which institutions may contribute most to financial instability through the asset liquidation channel of risk transmission.
    Keywords: Interconnectedness,Asset Liquidation,Similarity,Financial Stability,Insurance Companies,SIFI
    JEL: G11 G18 G2
    Date: 2018
  4. By: Daouia, Abdelaati; Girard, Stéphane; Stupfler, Gilles
    Abstract: Expectiles define a least squares analogue of quantiles. They are determined by tail expectations rather than tail probabilities. For this reason and many other theoretical and practical merits, expectiles have recently received a lot of attention, especially in actuarial and financial risk management. Their estimation, however, typically requires to consider non-explicit asymmetric least squares estimates rather than the traditional order statistics used for quantile estimation. This makes the study of the tail expectile process a lot harder than that of the standard tail quantile process. Under the challenging model of heavy-tailed distributions, we derive joint weighted Gaussian approximations of the tail empirical expectile and quantile processes. We then use this powerful result to introduce and study new estimators of extreme expectiles and the standard quantile-based expected shortfall, as well as a novel expectile-based form of expected shortfall. Our estimators are built on general weighted combinations of both top order statistics and asymmetric least squares estimates. Some numerical simulations and applications to actuarial and financial data are provided.
    Keywords: Asymmetric least squares; Coherent risk measures; Expected shortfall; Expectile; Extrapolation; Extremes; Heavy tails; Tail index
    Date: 2018–08
  5. By: Ilomäki, J.; Laurila, H.; McAleer, M.J.
    Abstract: Consider using the simple moving average (MA) rule of Gartley (1935) to determine when to buy stocks, and when to sell them and switch to the risk-free rate. In comparison, how might the performance be affected if the frequency is changed to the use of MA calculations? The empirical results show that, on average, the lower is the frequency, the higher are average daily returns, even though the volatility is virtually unchanged when the frequency is lower. The volatility from the highest to the lowest frequency is about 30% lower as compared with the buy-and-hold strategy volatility, but the average returns approach the buy-and-hold returns when frequency is lower. The 30% reduction in volatility appears if we invest randomly half the time in stock markets and half in the riskfree rate.
    Keywords: Market timing, Moving averages, Risk-free rate, Returns and volatility
    JEL: G32 C58 C22 C41 D23
    Date: 2018–06–01
  6. By: Prehn, Sören; Feil, Jan-Henning
    Abstract: In this paper, we analyze why grain elevator operators tend to hedge hard red winter wheat at the CBoT and not at the KCBoT. They do so because they trade not only the basis but also the premium risk. Like the basis, also premiums of hard red winter wheat have a tendency to increase after harvest. Only a short hedge in the lower priced CBoT wheat contract makes it possible to participate in a post-harvest premium increase. For this reason, grain elevator operators favor a loose hedge at the CBoT. Our results underscore the importance of premium risk for hedging decisions.
    Date: 2017–08–28
  7. By: Veeraruna Kavitha; Indrajit Saha; Sandeep Juneja
    Abstract: We consider vector fixed point (FP) equations in large dimensional spaces involving random variables, and study their realization-wise solutions. We have an underlying directed random graph, that defines the connections between various components of the FP equations. Existence of an edge be- tween nodes i, j implies the i th FP equation depends on the j th component. We consider a special case where any component of the FP equation depends upon an appropriate aggregate of that of the random neighbor components. We obtain finite dimensional limit FP equations (in a much smaller dimensional space), whose solutions approximate the solution of the random FP equations for almost all re- alizations, in the asymptotic limit (number of components increase). Our techniques are different from the traditional mean-field methods, which deal with stochastic FP equa- tions in the space of distributions to describe the station- ary distributions of the systems. In contrast our focus is on realization-wise FP solutions. We apply the results to study systemic risk in a large financial heterogeneous net- work with many small institutions and one big institution, and demonstrate some interesting phenomenon.
    Date: 2018–09
  8. By: Carrer, Marcelo José; Silveira, Rodrigo Lanna F.; Meirelles De Souza Filho, Hildo
    Keywords: Agricultural Finance, Risk and Uncertainty, Agribusiness
    Date: 2017–07–03
  9. By: Gabriel Chodorow-Reich; Andra Ghent; Valentin Haddad
    Abstract: We propose that financial institutions can act as asset insulators, holding assets for the long run to protect their valuations from consequences of exposure to financial markets. We demonstrate the empirical relevance of this theory for the balance sheet behavior of a large class of intermediaries, life insurance companies. The pass-through from assets to equity is an especially informative metric for distinguishing the asset insulator theory from Modigliani-Miller or other standard models. We estimate the pass-through using security-level data on insurers’ holdings matched to corporate bond returns. Uniquely consistent with the insulator view, outside of the 2008-2009 crisis insurers lose as little as 15 cents in response to a dollar drop in asset values, while during the crisis the pass-through rises to roughly 1. The rise in pass-through highlights the fragility of insulation exactly when it is most valuable.
    JEL: G01 G1 G14 G22 G32
    Date: 2018–08
  10. By: Sandra Eickmeier; Benedikt Kolb; Esteban Prieto
    Abstract: Bank capital regulations are intended to enhance financial stability in the long run, but may, in the meanwhile, involve costs for the real economy. To examine these costs we propose a narrative index of aggregate tightenings in regulatory US bank capital requirements from 1979 to 2008. Anticipation effects are explicitly taken into account and found to matter. In response to a tightening in capital requirements, banks temporarily reduce business and real estate lending, which temporarily lowers investment, consumption, housing activity and production. A decline in financial and macroeconomic risk helps sustain spending in the medium run. Monetary policy also cushions negative effects of capital requirement tightenings on the economy.
    Keywords: Narrative Approach, Bank Capital Requirements, Local Projections
    JEL: G28 G18 C32 E44
    Date: 2018–09
  11. By: Luitel, Kishor P.; Adhikari, Shyam; Wright, Andrew P.; Hudson, Michael D.; Knight, Thomas O.
    Keywords: Risk and Uncertainty, Agricultural and Food Policy, Production Economics
    Date: 2017–06–30
  12. By: Hiona Balfoussia (Bank of Greece); Harris Dellas (University of Bern, CEPR); Dimitris Papageorgiou (Bank of Greece)
    Abstract: We study the role of the loan-to-value (LTV) ratio instrument in a DSGE model with a rich set of financial frictions (Clerc et al., 2015). We find that a binding LTV ratio limit in the mortgage market leads to lower credit and default rates in that market as well as lower levels of investment and output, while leaving other sectors and agents largely unaffected. Interestingly, when the level of capital requirements is in the neighborhood of its optimal value, implementing an LTV ratio cap has a negative impact on welfare, even if it leads to greater macroeconomic stability. Furthermore, the availability of the LTV ratio instrument does not impact on the optimal level of capital requirements. It seems that once capital requirements have been optimally deployed to tame banks’ appetite for excessive risk, the use of the LTV ratio could prove counterproductive from a welfare point of view.
    Keywords: Macroprudential Policy; General Equilibrium; Greece
    JEL: E3 E44 G01 G21 O52
    Date: 2018–07
  13. By: Fuller, Kate B.; McIntosh, Christopher S.; Zidack, Nina
    Keywords: Agricultural Finance, Risk and Uncertainty, Production Economics
    Date: 2017–07–03
  14. By: Chavas, J.-P.; Li, J.
    Abstract: This paper investigates the role of storage and its effects on price dynamics and volatility with an application to food markets. It investigates the differences between private stock and public stock as they affect the distribution of market price. Based on a reduced-form approach, the analysis relies on quantile autoregression (QAR) as a flexible representation of price dynamics. Applied to US wheat and corn markets, the paper documents how storage affects commodity price dynamics and price volatility. Stocks have statistically significant price effects but these effects vary in different parts of the price distribution (e.g., lower tail versus upper tail of the distribution). We find strong statistical evidence that private stock and public stock have different effects on price dynamics and price volatility (including variance, skewness and kurtosis). For wheat, increasing private stock shifts the price distribution to the left, while increasing public stock shifts the price distribution to the right. Studying the effects of storage on price dynamics, we uncover evidence of local dynamic instability in the upper tail of the price distribution. We evaluate how the private/public stock portfolio affects the odds of facing price crashes and spikes.
    Keywords: Demand and Price Analysis, Food Consumption/Nutrition/Food Safety
    Date: 2018–07
  15. By: Saha, Kunal
    Abstract: This paper attempts to examine the dependence structure of four major cryptocurrencies chosen by current market capitalisation. It is a well known fact that there is huge volatility in the prices of these cryptocurrencies. The Vine Copula model is used to get some insights about the dependence structure in these asset prices. This is done using daily closing price from August 2015 to May 2018. This information can be used to calculate risk based metrics such as expected shortfall of a portfolio of these currencies. This analysis becomes more important as complex financial instruments (e.g. indices) based on these currencies are being introduced.
    Keywords: Vine Copula,Cryptocurrencies,Expected shortfall
    JEL: C51 C52 C58 G11
    Date: 2018
  16. By: Libing Fang (School of Management and Engineering, Nanjing University, Nanjing, Jiangsu, China); Elie Bouri (USEK Business School, Holy Spirit University of Kaslik, Jounieh, Lebanon); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); David Roubaud (Montpellier Business School, Montpellier, France)
    Abstract: We assess whether the long-run volatilities of Bitcoin, global equities, commodities, and bonds are affected by global economic policy uncertainty. Empirical results provide evidence supporting that, except for the case of bonds. We further examine whether the correlation between Bitcoin and global equities, commodities, and bonds are affected by global economic policy uncertainty and the results reveal that global economic policy uncertainty has a negative significant impact on the Bitcoin-bonds correlation, and a positive impact on both Bitcoin-equities and Bitcoin-commodities correlations, suggesting a possibility for Bitcoin to act as a hedge under specific economic uncertainty conditions. Interestingly, the hedging effectiveness of Bitcoin for both global equities and global bonds enhances slightly after considering the level of global economic policy uncertainty. Implications for investors and policy-makers are discussed.
    Keywords: Hedging effectiveness, Bitcoin, equities, commodities, bonds
    JEL: C10 G11
    Date: 2018–09

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