nep-rmg New Economics Papers
on Risk Management
Issue of 2019‒05‒20
thirteen papers chosen by

  1. What is the Minimal Systemic Risk in Financial Exposure Networks? By Christian Diem; Anton Pichler; Stefan Thurner
  2. Risk management on the capital market and use of multi-factorial models for estimating the stocks return By Adelina-Monica Moraru
  3. Implications of modifying internal managerial control regulations for a uniform risk management methodology regarding non-reimbursable financing By Ciprian Nicolae
  4. Risk assessment of a stock portfolio using value-at-risk By Adrian Nicolae Capatana
  5. Optimizing the allocation of private pension funds in Romania (2nd Pillar) By Leonardo Badea; Ion Stancu; Adina-Alexandra Darman-Guzun
  6. Credit Risk Analysis using Machine and Deep Learning models By Peter Addo; Dominique Guegan; Bertrand Hassani
  7. Do information contagion and business model similarities explain bank credit risk commonalities? By Wang, Dieter; van Lelyveld, Iman; Schaumburg, Julia
  8. Risk-return puzzle in internationally diversified equity portfolios – the Romanian perspective By Ioana-Alexandra Radu; Cristian-George Vlaicu
  9. The Governance of Risk Management: The Importance of Directors’ Independence and Financial Knowledge By Dionne, Georges; Maalaoui Chun, Olfa; Triki, Thouraya
  10. The Qatar-Gulf Crisis and Risk Management in Oil and Gas Markets By Jamal Bouoiyour; Refk Selmi
  11. La gestion des risques dans une chaîne d’approvisionnement By Anasse Amarouche; Philippe Chapellier; Alain George
  12. Asymptotics of Cholesky GARCH models and time-varying conditional betas By Serge Darolles; Christian Francq; Sébastien Laurent
  13. On Technological Change and Yield Resiliency in Canadian Crop Yields By Ng, Horlick; Ker, Alan P.

  1. By: Christian Diem; Anton Pichler; Stefan Thurner
    Abstract: Management of systemic risk in financial markets is traditionally associated with setting (higher) capital requirements for market participants. There are indications that while equity ratios have been increased massively since the financial crisis, systemic risk levels might not have lowered, but even increased. It has been shown that systemic risk is to a large extent related to the underlying network topology of financial exposures. A natural question arising is how much systemic risk can be eliminated by optimally rearranging these networks and without increasing capital requirements. Overlapping portfolios with minimized systemic risk which provide the same market functionality as empirical ones have been studied by [pichler2018]. Here we propose a similar method for direct exposure networks, and apply it to cross-sectional interbank loan networks, consisting of 10 quarterly observations of the Austrian interbank market. We show that the suggested framework rearranges the network topology, such that systemic risk is reduced by a factor of approximately 3.5, and leaves the relevant economic features of the optimized network and its agents unchanged. The presented optimization procedure is not intended to actually re-configure interbank markets, but to demonstrate the huge potential for systemic risk management through rearranging exposure networks, in contrast to increasing capital requirements that were shown to have only marginal effects on systemic risk [poledna2017]. Ways to actually incentivize a self-organized formation toward optimal network configurations were introduced in [thurner2013] and [poledna2016]. For regulatory policies concerning financial market stability the knowledge of minimal systemic risk for a given economic environment can serve as a benchmark for monitoring actual systemic risk in markets.
    Date: 2019–05
  2. By: Adelina-Monica Moraru (Academy of Economic Studies)
    Abstract: In the last period, the study of the risk and the return of stocks continues to be a very important area of research due to the increasing attention that the investors give to the trend of the capital market. The scope of this paper is to identify the significant determinants of the return of stocks, but also the modelling of the capital market risk. Taking into consideration the previous researches, we identified some microeconomic and macroeconomic factors which can change the return of stocks. As respects the macroeconomic determinants, we took into consideration the interest rate, the inflation rate, the contagion effect and the exchange rate. In addition to this, we used as microeconomic factors the return on equity rate, the return on assets rate, and some other indicators as price earnings ratio, price to book value, the financial leverage, the illiquidity, the market capitalisation and the trading volume. Also, this paper presents a method of risk modelling for the romanian capital market, in order to identify the impact of the historical volatility on the present volatility and the speed of the volatility absorption.
    Keywords: rentability, risk, volatility, macroeconomic factors, microeconomic factors
    JEL: G10 G11 G15
    Date: 2017–11
  3. By: Ciprian Nicolae (Acamedy of Economics Studies, Bucharest)
    Abstract: For the public authorities and institutions in Romania, risk management is an obligation established by the regulations on internal managerial control. Therefore, any changes to these regulations have an impact on the consistency and sustainability of the risk management measures implemented, including in the case of non-reimbursable financing programs.This paper analysesthe provisions of the internal managerial control regulations in view of the impact they may have on the implementation of a unitary risk management methodology for all non-reimbursable funds in Romania.The proposed methodology would apply to all non-reimbursable grants in Romania, both nationally and from international donors (the European Union, the Governments of Norway, Iceland and Liechtenstein, etc.), as the logic of non-reimbursable funding is the same for all funding programs.The proposed methodology also aims at computerizing the risk management process based on a unique risk register and rigorous organization of information collection and use of the risks, causes and effects.
    Keywords: risk, risk management, non-reimbursable financing, projects, managerial internal control
    JEL: G32 H83
    Date: 2018–11
  4. By: Adrian Nicolae Capatana (Academy of Economic Studies)
    Abstract: This paper aims to evaluate the risk for of a stock portfolio using Value-at-Risk, being of interest to both financial institutions and potential individual investors. Using the portfolio's daily returns over a two-year period, the volatility will be estimated with various specifications of GARCH (GARCH, IGARCH, EGARCH, TGARCH), and normal, tstudent and GED errors distributions. Then we will identify the optimal volatility estimation model required in the VaR calculation using the backtesting method.
    Keywords: Value at Risk, volatility, GARCH, Backtesting, portfolio, stock market
    JEL: G11 C52 C53
    Date: 2017–11
  5. By: Leonardo Badea (Financial Supervisory Authority); Ion Stancu (Institute of Financial Studies Bucharest); Adina-Alexandra Darman-Guzun (West University Timisoara)
    Abstract: Recent phenomena on the aging of the population due to the improvement of the quality of life, the decrease of the population, the decrease in the fertility rate and the development of the capital markets have led to the encouragement of private pension funds. The private pension system is essential to any modern and prosperous economy; the competitive allocation of capital under this scheme ensures the maintenance / increase of the purchasing power of future earnings from pensions, as well as the most appropriate way to finance national economic development.Basedon extensive literature on the optimization of financial investment portfolios and efficient management of private pension funds, our main objective is to optimize portfolios of private pension funds in relation to the degree of risk assumed by the managers of these funds. In concrete terms, we report optimal weights for the allocation of pension funds in five asset categories (shares, corporate bonds, participation funds, government securities and bank deposits) by using three optimal portfolios models: equipping, minimizing standard deviation and risk minimization.The database includes the monthly profitability of the five asset fund categories of pension funds, as well as the VUAN evolution of pension funds and the profitability of pension fund managersfor the period from August 2013 to July 2018 (5 years). The results obtained will constitute recommendations for private pension fund managers both in choosing the portfolio optimization model and as choices for choosing the optimal combination of assets at a discounted profitability of the portfolio in relation to the assumed degree of risk by each administrator.
    Keywords: private pension system; optimal financial investment portfolios, the Markowitz model (average variance, MV), the average MCVaR model, the unit value of the net asset (VUAN), the profitability of private pension fund managers
    JEL: G11 G23 J32
    Date: 2018–11
  6. By: Peter Addo (Lead Data Scientist - SNCF Mobilité); Dominique Guegan (UP1 - Université Panthéon-Sorbonne, Labex ReFi - UP1 - Université Panthéon-Sorbonne, University of Ca’ Foscari [Venice, Italy], CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, IPAG Business School); Bertrand Hassani (Labex ReFi - UP1 - Université Panthéon-Sorbonne, Capgemini Consulting [Paris])
    Abstract: Due to the hyper technology associated to Big Data, data availability and computing power, most banks or lending financial institutions are renewing their business models. Credit risk predictions, monitoring, model reliability and effective loan processing are key to decision making and transparency. In this work, we build binary classifiers based on machine and deep learning models on real data in predicting loan default probability. The top 10 important features from these models are selected and then used in the modelling process to test the stability of binary classifiers by comparing performance on separate data. We observe that tree-based models are more stable than models based on multilayer artificial neural networks. This opens several questions relative to the intensive used of deep learning systems in the enterprises.
    Keywords: Deep learning,Data Science,Credit risk,Financial regulation,Bigdata
    Date: 2018–02
  7. By: Wang, Dieter; van Lelyveld, Iman; Schaumburg, Julia
    Abstract: This paper revisits the credit spread puzzle for banks from the perspective of information contagion. The puzzle consists of two stylized facts: Structural determinants of credit risk not only have low explanatory power but also fail to capture common factors in the residuals. We reproduce the puzzle for European bank credit spreads and hypothesize that the puzzle exists because structural models ignore contagion effects. We therefore extend the structural approach to include information contagion through bank business model similarities. To capture this channel, we propose an intuitive measure for portfolio overlap and apply it to the complete asset holdings of the largest banks in the Eurozone. Incorporating this unique network information into the structural model increases explanatory power and removes a systemic common factor from the residuals. Furthermore, neglecting the network likely overstates the importance of structural determinants. JEL Classification: G01, G21, C32, C33, C38
    Keywords: bank business model similarities, credit spread puzzle, dynamic network effects model., information contagion, portfolio overlap measure
    Date: 2019–05
  8. By: Ioana-Alexandra Radu (Financial Supervisory Authority); Cristian-George Vlaicu (Financial Supervisory Authority)
    Abstract: Our paper highlights the benefits derived from holding internationally diversified portfolios,from the perspective of Romanian investors, by assessing the riskand return levels forthree portfolio structures, constructed with equities from: (1) Romania and emerging countries; (2) Romania and developed countries; (3) Romania and all countriesanalysedin this study.Moreover, we undertake a comparative analysis betweenthe results obtained for the period January2015-February 2018andthe results obtained during the global financial crisis, when increased correlations among global financial markets threatenedtheir diversification potential. Ourfindings indicate that forboth periods considered, portfolios diversified among all equity markets outperform the other two portfolio structures analysed. The performance of portfolios diversified among emerging countriesequities is significantly higher than the performance of portfoliosdiversified with equities from Romania and the developed countries considered,during both the crisisand January -February 2018period, butthe result is reversed when analysing the results forthe last sixmonths.
    Keywords: portfolio choice, international financial markets, financial crisis, foreign exchange risk
    JEL: G11 G15 G01 F31
    Date: 2018–05
  9. By: Dionne, Georges (HEC Montreal, Canada Research Chair in Risk Management); Maalaoui Chun, Olfa (HEC Montreal, Canada Research Chair in Risk Management); Triki, Thouraya (HEC Montreal, Canada Research Chair in Risk Management)
    Abstract: This paper tests the effects of the independence and financial knowledge of directors on risk management and firm value in the gold mining industry. Our original hand-collected database on directors’ financial education, accounting background, and financial experience allows us to test the effect of each dimension of financial knowledge on risk management activities. We show that directors’ financial knowledge increases firm value through the risk management channel. This effect is strengthened by the independence of the directors on the board and on the audit committee. Extending the dimension of education, we show that, following unexpected shocks to gold prices, educated hedgers are more effective than average hedgers in the industry. As a policy implication, our results suggest adding the experience and education dimensions to the 2002 Sarbanes–Oxley Act and New York Stock Exchange requirements for financial literacy.
    Keywords: Risk management governance; financial knowledge; financial and accounting education of director; financial experience of director; independence of director; policy implications.
    JEL: D83 G18 G30 G32 G34 G38
    Date: 2018–01–04
  10. By: Jamal Bouoiyour (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour, IRMAPE - Institut de Recherche en Management et Pays Emergents - ESC Pau); Refk Selmi (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour, IRMAPE - Institut de Recherche en Management et Pays Emergents - ESC Pau)
    Abstract: Oil prices have tumbled after Saudi Arabia and its allies cut ties with Qatar, sparking anxiety that OPEC's fragile deal to curtail oil production could come undone. Also and although its daily oil output of around 600,000 barrels represents less than one percent of world crude production, Qatar is a major player in liquefied natural gas. This means that the current deterioration in relations among the Middle East neighbours would have significant implications for oil and gas markets.This paper is novel in its methodological approach, which is used to decompose the variance of oil stock price indices into contributions from country-specific uncertainty and uncertainty common to all countries. The analysis reveals that the contributing factors have varied over time. Prior to the blockade on Qatar, the region-specific uncertainty plays an important role in driving the volatility of oil and gas shares for all cases. In considering the post-boycott, an increasing importance of the country-specific uncertainty factor is shown. This suggests that GCC states that have long resisted making a collective effort to accomplish energy security, are now moving into a new era during which securing their own supply routes will be an indispensable part of their mode of operation. To strengthen energy cooperation, it is first necessary to rebuild trust.
    Keywords: oil and gas markets,country- specific uncertainty,region-specific uncertainty,Qatar diplomatic crisis
    Date: 2019–04–17
  11. By: Anasse Amarouche; Philippe Chapellier (MRM - Montpellier Research in Management - UM1 - Université Montpellier 1 - UM3 - Université Paul-Valéry - Montpellier 3 - UM2 - Université Montpellier 2 - Sciences et Techniques - UPVD - Université de Perpignan Via Domitia - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School - UM - Université de Montpellier); Alain George (MRM - Montpellier Research in Management - UM1 - Université Montpellier 1 - UM3 - Université Paul-Valéry - Montpellier 3 - UM2 - Université Montpellier 2 - Sciences et Techniques - UPVD - Université de Perpignan Via Domitia - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School - UM - Université de Montpellier, CEFREM - Centre de Formation et de Recherche sur les Environnements Méditérranéens - UPVD - Université de Perpignan Via Domitia - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In the last decades, many changes have occurred in the supply chain. In this way has the supply chain risk management (SCRM) becomes an important part of the supply chain management (SCM) strategies. However, there is not enough works in the French literature that deals with this theme (Lavastre et Spalanzani, (2010) et Fabbe-Costes et Lancini (2009). We intent through our research to reach three goals: identify the risks we can find in a supply chain, identify the factors that cause their occurrence, and analyze the supply chain risks management strategies. This works was realized through an immersion in a fruit and vegetable import-export company. A quantitative analysis allows us to identify the main risks of the supply chain. It was completed by a qualitative analysis which aim was to understand the factors that cause the occurrence of these risks and to analyze the main strategies in the risks management. Our work shows that the main risks concern the products quality and quantity, the invoicing and the delivery delays. It shows also that the occurrence of these risks results from a lack of information sharing through the supply chain. It also underlines how the information flow between the actors of the chain is important to optimize the risks management in the SCs.
    Abstract: La chaîne d'approvisionnement a connu ces dernières décennies des évolutions notables. C'est dans cette dynamique que la gestion des risques est devenue une partie intégrante et importante des stratégies de management des supply chains (SCs). Cette thématique est pourtant peu abordée, notamment dans la littérature francophone (Lavastre et Spalanzani (2010) et Fabbe-Costes et Lancini (2009). Trois objectifs distincts sont attachés à notre travail de recherche : identifier les risques présents dans le cadre d'une chaîne d'approvisionnements, repérer les facteurs qui provoquent leurs apparitions, et analyser les stratégies mises en place en matière de gestion et de prévention de ces risques. Une observation participante a été réalisée au sein d'une société d'import-export de fruits et légumes. Une analyse quantitative a permis d'identifier les principaux risques de la chaine d'approvisionnement. Celle-ci a été́ complétée par une étude qualitative afin de comprendre les facteurs provoquant l'apparition de ces risques et d'analyser les stratégies mises en place pour y faire face. L'étude montre que les principaux risques portent sur la qualité et la quantité des produits, la facturation et les retards de livraisons, et que ceux- ci proviennent souvent d'un défaut de partage d'informations entre les différents acteurs de la chaîne. Cela met ainsi en exergue à quel point la maîtrise des flux d'informations est complexe et importante pour optimiser la gestion des risques dans les chaînes d'approvisionnement.
    Keywords: Risk Management and Prevention,Logistics,Information Flow,Flux d’informations,Supply Chain,Gestion et prévention des risques,Logistique
    Date: 2018–05–22
  12. By: Serge Darolles (DRM-Finance - DRM - Dauphine Recherches en Management - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique); Christian Francq (EQUIPPE - Economie Quantitative, Intégration, Politiques Publiques et Econométrie - Université de Lille, Sciences et Technologies - Université de Lille, Sciences Humaines et Sociales - PRES Université Lille Nord de France - Université de Lille, Droit et Santé); Sébastien Laurent (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper proposes a new model with time-varying slope coefficients. Our model, called CHAR, is a Cholesky-GARCH model, based on the Cholesky decomposition of the conditional variance matrix introduced by Pourahmadi (1999) in the context of longitudinal data. We derive stationarity and invertibility conditions and prove consistency and asymptotic normality of the Full and equation-by-equation QML estimators of this model. We then show that this class of models is useful to estimate conditional betas and compare it to the approach proposed by Engle (2016). Finally, we use real data in a portfolio and risk management exercise. We find that the CHAR model outperforms a model with constant betas as well as the dynamic conditional beta model of Engle (2016).
    Keywords: Multivariate-GARCH,Conditional betas,Covariance
    Date: 2018–06
  13. By: Ng, Horlick; Ker, Alan P.
    Abstract: Feeding nine billion people by 2050, yield resiliency, climate change, and remaining economically competitive have received significant attention within both the literature and populous. Technological change in agriculture will largely dictate our ability to meet these challenges. Although there is significant literature on technological change in U.S. crop yields, very little has been done with Canadian yields. Moreover, the adoption and effect of various technologies and their interaction with climate tend to be crop-region specific. To this end, we model technological change in county-level yields for barley, canola, corn, oats, soybean and wheat in Canada. We use mixtures to allow and test for heterogeneous rates of technological change within the yield data generating process. While we tend to find increasing but heterogeneous rates of technological change, increasing and asymmetric yield volatility, and, increasing absolute but decreasing relative yield resiliency, our results do differ across crops and exhibit spatial bifurcations within a crop. Using a standard attribution model we find changing climate has differing effects across crops. We also consider the public funding implications of technological change for Canadian Business Risk Management programs.
    Keywords: Agricultural and Food Policy
    Date: 2019–05–16

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