nep-rmg New Economics Papers
on Risk Management
Issue of 2018‒11‒26
fifteen papers chosen by

  1. Conditional VaR using GARCH-EVT approach with optimal tail selection By Krzysztof Echaust
  2. Systemic risk assessment through high order clustering coefficient By Roy Cerqueti; Gian Paolo Clemente; Rosanna Grassi
  3. Optimizing the Hungarian Government Debt Portfolio By András Bebes; Dávid Tran; László Bebesi
  4. “Scaling Down Downside Risk with Inter-Quantile Semivariances” By Jorge M. Uribe
  6. The Bias of Realized Volatility By Becker, Janis; Leschinski, Christian
  7. The Morning After--The Impact on Collateral Supply After a Major Default By Dermot Turing; Manmohan Singh
  8. Robust risk aggregation with neural networks By Stephan Eckstein; Michael Kupper; Mathias Pohl
  9. Measuring the effectiveness of volatility auctions By Diego A. Agudelo; Sergio Preciado; Carlos Castro
  10. Making Parametric Portfolio Policies Work By Gehrig, Thomas; Sögner, Leopold; Westerkamp, Arne
  11. How to manage prudential standards ? Results of an intervention-research carried out in a mutual integrating Solvency II By Laurent Cappelletti; Nicolas Dufourg
  12. Altruism and Risk Sharing in Networks By Bourles, Renaud; Bramoulle, Yann; Perez-Richet, Eduardo
  14. 銀行の資本構成と自己資本比率規制 By Okahara, Naoto
  15. Early Warning Indicator of financial crises for V4 Countries By Michal Mares; Martin Slany

  1. By: Krzysztof Echaust (Pozna? University of Economics and Business)
    Abstract: Accurate risk prediction plays a key role in effective risk management process. A conditional GARCH-EVT approach combines Extreme Value Theory and GARCH methodology and it allows us to estimate Value at Risk with high accuracy. The approach requires to pre-specify a threshold indicating distribution tails. In this paper we use an optimal tail selection algorithm of Caeiro and Gomes (2016) to estimate out-of-sample VaR forecasts. Unlike other studies we update the optimal fraction of the tail for each rolling window of the data set. Results are presented for a long and a short position applying ten U.S. blue chips. The GARCH-EVT model enables us to estimate risk precisely. However, it is not possible to notice the improvement of VaR accuracy relative to conservative approach taking the 95th or 90th quantile of returns as a threshold.
    Keywords: Value-at-Risk, optimal tail selection, Extreme Value Theory, GARCH-EVT
    JEL: C22 C53
    Date: 2018–10
  2. By: Roy Cerqueti; Gian Paolo Clemente; Rosanna Grassi
    Abstract: In this article we propose a novel measure of systemic risk in the context of financial networks. To this aim, we provide a definition of systemic risk which is based on the structure, developed at different levels, of clustered neighbours around the nodes of the network. The proposed measure incorporates the generalized concept of clustering coefficient of order $l$ of a node $i$ introduced in Cerqueti et al. (2018). Its properties are also explored in terms of systemic risk assessment. Empirical experiments on the time-varying global banking network show the effectiveness of the presented systemic risk measure and provide insights on how systemic risk has changed over the last years, also in the light of the recent financial crisis and the subsequent more stringent regulation for globally systemically important banks.
    Date: 2018–10
  3. By: András Bebes (Government Debt Management Agency Pte. Ltd.); Dávid Tran (Government Debt Management Agency Pte. Ltd.); László Bebesi (UniCredit Hungary)
    Abstract: We construct an optimal debt portfolio model with the purpose of optimizing the Hungarian government debt portfolio. To analyze the characteristics of the costs and corresponding risk factors of the Hungarian debt portfolio we simulate issuances of chosen instruments on a specified time horizon. We apply a multiobjective optimization scheme to construct compositions of financing that minimize the costs and risks of the debt portfolio. Our purpose is to find the set of Pareto-optimal solutions that minimize expected costs, volatility of costs and refinancing risks while maximizing average time to re-fixing. The results of the multiobjective optimization can be used to help in constructing a medium term debt management strategy.
    Keywords: Multiobjectiove Optimization, Portfolio Optimization, Government Debt Management
    JEL: C61 G17 H63
    Date: 2018–10
  4. By: Jorge M. Uribe (Universitat Ramon LLull, ESADE Business School.)
    Abstract: We propose a risk-management strategy for portfolio allocation based on volatility scaling. The strategy involves decomposing realized volatility according to the magnitude and sign of a given return and, then, using part of the realized variance to design volatility-scaled versions of traditional portfolios. By applying our method to four risk-portfolios (namely, market, small minus big, high minus low, and winners minus losers), we show that scaling according to an appropriate criterion (i.e. the realized volatility of the largest negative returns) increases the profitability of the original strategies, while it simultaneously reduces other risks related to market crashes. The better economic performance of our method – the inter-quantile semivariance model – lies in its better adjustment to the market liquidity of our statistics, and more accurate modeling of the risk-return relationship and of the asymmetric impacts on consumption, production and asset prices, generated by a different fragment of the market realized variance.
    Keywords: asset pricing, risk decomposition, realized volatility, semivariances, volatility scaling, volatility forecasting, liquidity shocks. JEL classification:G11, G12, C21, C58.
    Date: 2018–10
  5. By: Muhammad Hoque (University of KwaZulu-Natal); Sthembile Millicent Ntsele (University of KwaZulu-Natal)
    Abstract: Risk Management is one of the most challenges facing the banking industry, after 2008 financial crisis the banking industry has become one of the heavily regulated industries. This study is intending to determine the association between transformational leadership and risk management. This was a cross-sectional study conducted among 42 employees who were working at the retail bank. Census sampling method was used to select the samples. Data were collected using self-administered questionnaire. The present study found that most of participants perceive themselves as transformational leaders, however strongly believe in transactional leadership style. Results revealed that there was a significant relationship between transformational leadership and risk management. It is recommended that managers adopt the transformational leadership style to improve followers? performance. The study can assist bank managerial employees to apply the relevant style when dealing with their followers to mitigate risk in the bank. Efficient risk management depends on the effectiveness of the leader.
    Keywords: Transformational leadership, risk management, retail bank, South Africa
    JEL: M19 G21 M10
    Date: 2018–11
  6. By: Becker, Janis; Leschinski, Christian
    Abstract: Realized volatility underestimates the variance of daily stock index returns by an average of 14 percent. This is documented for a wide range of international stock indices, using the fact that the average of realized volatility and that of squared returns should be the same over longer time horizons. It is shown that the magnitude of this bias cannot be explained by market microstructure noise. Instead, it can be attributed to correlation between the continuous components of intraday returns and correlation between jumps and previous/subsequent continuous price movements.
    Keywords: Return Volatility; Realized Volatility; Squared Returns
    JEL: G11 G12 G17
    Date: 2018–11
  7. By: Dermot Turing; Manmohan Singh
    Abstract: Changes to the regulatory system introduced after the financial crisis include not only mandatory clearing of OTC derivatives at central counterparties and margining of uncleared derivatives, but also prudential measures, including notably a “Liquidity Coverage Ratio” which obliges firms to set aside high-quality liquid assets (HQLA) as a stopgap against anticipated cash outflows. We examine factors which may affect the demand for HQLA in a severely stressed market following a hypothetical default of a major clearing member. Immediately following a major default, the amount of HQLA demanded by the whole market would spike. We estimate the size of the spike and draw conclusions as to whether the depth of the market is adequate to absorb it.
    Date: 2018–10–31
  8. By: Stephan Eckstein; Michael Kupper; Mathias Pohl
    Abstract: We consider settings in which the distribution of a multivariate random variable is partly ambiguous. We assume the ambiguity lies on the level of dependence structure, and that the marginal distributions are known. Furthermore, a current best guess for the distribution, called reference measure, is available. We work with the set of distributions that are both close to the given reference measure in a transportation distance (e.g. the Wasserstein distance), and additionally have the correct marginal structure. The goal is to find upper and lower bounds for integrals of interest with respect to distributions in this set. The described problem appears naturally in the context of risk aggregation. When aggregating different risks, the marginal distributions of these risks are known and the task is to quantify their joint effect on a given system. This is typically done by applying a meaningful risk measure to the sum of the individual risks. For this purpose, the stochastic interdependencies between the risks need to be specified. In practice the models of this dependence structure are however subject to relatively high model ambiguity. The contribution of this paper is twofold: Firstly, we derive a dual representation of the considered problem and prove that strong duality holds. Secondly, we propose a generally applicable and computationally feasible method, which relies on neural networks, in order to numerically solve the derived dual problem. The latter method is tested on a number of toy examples, before it is finally applied to perform robust risk aggregation in a real world instance.
    Date: 2018–11
  9. By: Diego A. Agudelo; Sergio Preciado; Carlos Castro
    Abstract: We propose a method for event studies based on synthetic portfolios that provides a robust data-driven approach to build a credible counterfactual. The method is used to evaluate the effectiveness of volatility auctions using intraday data from the Colombian Stock Exchange. The results indicate that the synthetic portfolio method provides an accurate way to build a credible counterfactual that approximates the behavior of the asset if the auction had not taken place. The main results indicate that the volatility auction mitigates the volatility of the asset, but its effect on liquidity and trading activity is ambiguous at best.
    Keywords: Circuit breakers, synthetic control, event studies, volatility auction, tracking portfolios
    JEL: C21 C58 G11 G14
    Date: 2018–07–10
  10. By: Gehrig, Thomas; Sögner, Leopold; Westerkamp, Arne
    Abstract: The implementation of parametric portfolio policies as introduced by Brandt, Santa Clara and Valkanov (RFS 2009) may run into empirical problems. For example, expected utility based on monthly returns of S&P-500 data from 1995-2013 turns non-monotonic for moderate levels of (constant) risk aversion. We establish that in the leading case of constant relative risk aversion (CRRA) strong assumptions on the properties of the returns, the variables used to implement the parametric portfolio policy and the parameter space are necessary to obtain a well defined optimization problem. Without such refinements an interior maximum of the expected utility functional may not exist. We provide economic conditions on the domain and/or the utility functions that overcome such empirical problems and that guarantee the effectiveness of the approach. We illustrate the implications of our improvements by applying parametric portfolio policies to a large universe of stocks.
    Keywords: expected utility; portfolio policy; prospect theory; risk aversion
    JEL: C11 G11 G12
    Date: 2018–09
  11. By: Laurent Cappelletti (ISEOR - Institut de Socio-économie des Entreprises et des ORganisations - Institut de socio-économie des entreprises et des organisations); Nicolas Dufourg
    Abstract: The article introduces the Solvency II Directive, setting out the new prudential framework for insurers, to study the management of the integration of this new normative framework so that it can effectively control risks. The underlying assumption of the research is that the integration of a new normative framework must be managed in an adapted way or else it will not achieve its objectives. Such an hypothesis challenges in a way the neo-institutionalist theory for which the question of the managerial mecanisms allowing the integration of norms is somewhat let down. The study is based on an intervention-research within a French mutual. The results indicate that the Directive, subject to a management approach facilitating principles of orchestration, arbitration, negotiation and ethics, strengthens the risk management system of mutual insurance bodies. Although a bigger complexity of the management system of the company is observed.
    Abstract: L'article porte sur la directive Solvabilité II, fixant le nouveau cadre prudentiel des assureurs, pour étudier la façon de manager ce nouveau cadre normatif de maîtrise des risques. L'hypothèse sous-jacente de la recherche est que l'intégration d'un nouveau cadre normatif se gère de façon adaptée sous peine de ne pas atteindre ses objectifs. Elle questionne ainsi la théorie néo-institutionnaliste qui élude, d'une certaine façon, les mécanismes managériaux d'intégration des normes. L'étude est fondée sur une recherche-intervention menée au sein d'une mutuelle française. Les résultats indiquent que la directive sous réserve d'un management adapté de son intégration fondé sur des principes d'orchestration, d'arbitrage, de négociation et d'éthique renforce la maîtrise des risques des organismes d'assurance mutuelle, tout en impliquant néanmoins une complexification des modes de gestion.
    Keywords: Solvency II,insurance,mutual insurance,risk management,management of standards and norms,prudential standards,tetranormalization,Mots clés : Solvabilité II,assurance,mutuelles,maîtrise des risques,management des normes,normes prudentielles,tétranormalisation
    Date: 2018–05–16
  12. By: Bourles, Renaud; Bramoulle, Yann; Perez-Richet, Eduardo
    Abstract: We provide the first analysis of the risk-sharing implications of altruism networks. Agents are embedded in a fixed network and care about each other. We study whether altruistic transfers help smooth consumption and how this depends on the shape of the network. We identify two benchmarks where altruism networks generate efficient insurance: for any shock when the network of perfect altruism is strongly connected and for any small shock when the network of transfers is weakly connected. We show that the extent of informal insurance depends on the average path length of the altruism network and that small shocks are partially insured by endogenous risk-sharing communities. We uncover complex structural effects. Under iid incomes, central agents tend to be better insured, the consumption correlation between two agents is positive and tends to decrease with network distance, and a new link can decrease or increase the consumption variance of indirect neighbors. Overall, we show that altruism in networks has a first-order impact on risk and generates specific patterns of consumption smoothing.
    Keywords: altruism; Informal Insurance; networks; Risk Sharing
    Date: 2018–09
  13. By: Esida Gila-Gourgoura (Department of Economics, Faculty of Commerce, University of Cape Town); Eftychia Nikolaidou (Department of Economics, Faculty of Commerce, University of Cape Town)
    Abstract: This study uses the ARDL approach to cointegration to identify the factors affecting credit risk in the Italian banking system over the period 1997Q4?2017Q1. The ratio of new bad loans to the outstanding amount of performing loans in the previous period is the selected proxy of credit risk whereas a wide range of explanatory variables are included in the study. Compared to the previous studies, a wider timeframe is investigated, which captures the booming period, the global financial crisis and the ongoing Eurozone sovereign debt crisis. The findings suggest that macroeconomic cyclical, bank-specific, and financial market variables affect the flow of new bad loans in the Italian banking system. The high significance of the sovereign debt crisis risk proxy signals the important link between banking and sovereign debt crisis.
    Keywords: Credit risk, macroeconomic determinants, bank-specific variables, sovereign debt crisis, Italian banking systemcredit risk, Italian banking system, sovereign debt crisis
    JEL: C32 G17 G21
    Date: 2018–10
  14. By: Okahara, Naoto
    Abstract: This study proposes a model that describes banks' decisions about their capital structures and analyzes the regulation of the capital adequacy ratio (CAR), that is, the ratio of equity finance to risky assets. The aim of this study is to investigate two questions. First, which level of CAR is optimal for a bank when both deposit finance and equity finance have advantages and disadvantages. Second, whether or not a bank reduces the amount of lending when it is required to rise its CAR. In this study, we analyze tow types of the model: one without a constraint on the maximum amount of funding a bank can obtain from households, and one with the constraint. In either case, the optimal CAR could be determined as an interior solution. In addition, a regulation of the CAR decreases a bank's profit if its CAR is not large enough to satisfy the regulation in either case. Even though an unsound bank always chooses to use more equity finance to satisfy regulation in the former case, it would choose to reduce the amount of lending in the latter case because its capital structure is affected by households portfolio optimizations. The model shows that the more risk-averse households are, the more likely a bank is to reduce lending. These results show that there is a positive probability that regulating banks' capital structures have a negative effect in economy, and to investigate such effect we consider the interaction between banks and households more carefully.
    Keywords: Bank capital, Capital regulation
    JEL: E10 G18 G21
    Date: 2018–08–27
  15. By: Michal Mares (University of Economics, Prague); Martin Slany (University of Economics, Prague)
    Abstract: This paper represents an early warning indicator of financial crises applied to the data of the Czech Republic, Poland, Hungary and Slovakia (V4 counties) between 2005 and 2018. Based on the previous research, 16 indicators were selected to build up the composite indicator of cyclical components ? so. Composite Index of Financial Instability (CIFI), and discussed its development. The relevance of the presented indicator, especially in the context of the Euro-American financial crisis of 2008-2009, is demonstrated in both graphical and econometric analysis using panel logistic regression. The conclusion implies that all V4 countries had experienced a high instability in connection with the global financial crisis 2008/2009 and implies different developments in financial conditions in recent years. The output of econometric model confirms positive relation between the value of CIFI and probability of financial crises occurrence. An increase in the CIFI per unit indicates an increase in probability of occurrence crisis approximately by 7 %. In spite of all its limitations, the usefulness of the composite index in the context of economic policymaking is proven by the analysis.
    Keywords: financial crises, early warning indicator, composite index, Visegrad countries,panel regression
    JEL: C53 E47 G01
    Date: 2018–10

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