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on Risk Management |
| By: | Wentao Hu |
| Abstract: | Quantification of risk positions under model uncertainty is of crucial importance from both viewpoints of external regulation and internal management. The concept of model uncertainty, sometimes also referred to as model ambiguity. Although we know the family of models, we cannot precisely decide which one to use. Given the set $\mathcal{P}$, the value of the risk measure $\rho$ varies in a range over the set of all possible models. The largest value in such a range is referred to as a worst-case value, and the corresponding model is called a worst scenario. Value-at-Risk(VaR) has become a very popular risk-measurement tool since it was first proposed. Naturally, WVaR(worst-case Value-at-Risk) attracts the attention of many researchers. Although many literatures investigated WVaR, the implications for empirical data analysis remain rare. In this paper, we proposed a special model uncertainty market model to simply the $\mathcal{P}$ to a set contain finite number of probability distributions. The model has the structure of the two-layer mixed distribution model. We used change point detection method to divide the returns series and then used EM algorithm to estimate the parameters. Finally, we calculated VaR, WVaR(worst-case Value-at-Risk) and BVaR(best-case Value-at-Risk) for four financial markets and then analyzed their different performance. |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1908.00982&r=all |
| By: | Polanski, Arnold (University of East Anglia); Stoja, Evarist (University of Bristol); Chiu, Ching-Wai (Jeremy) (Bank of England) |
| Abstract: | We present a framework focused on the interdependence of high-dimensional tail events. This framework allows us to analyse and quantify tail interdependence at different levels of extremity, decompose it into systemic and residual part and to measure the contribution of a constituent to the interdependence of a system. In particular, tail interdependence can capture simultaneous distress of the constituents of a (financial or economic) system and measure its systemic risk. We investigate systemic distress in several financial datasets confirming some known stylized facts and discovering some new findings. Further, we devise statistical tests of interdependence in the tails and outline some additional extensions. |
| Keywords: | Co-exceedance; systemic distress; risk contribution; extreme risk interdependence |
| JEL: | C32 G01 |
| Date: | 2019–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0815&r=all |
| By: | Xinyi Li; Yinchuan Li; Xiao-Yang Liu; Christina Dan Wang |
| Abstract: | Midterm stock price prediction is crucial for value investments in the stock market. However, most deep learning models are essentially short-term and applying them to midterm predictions encounters large cumulative errors because they cannot avoid anomalies. In this paper, we propose a novel deep neural network Mid-LSTM for midterm stock prediction, which incorporates the market trend as hidden states. First, based on the autoregressive moving average model (ARMA), a midterm ARMA is formulated by taking into consideration both hidden states and the capital asset pricing model. Then, a midterm LSTM-based deep neural network is designed, which consists of three components: LSTM, hidden Markov model and linear regression networks. The proposed Mid-LSTM can avoid anomalies to reduce large prediction errors, and has good explanatory effects on the factors affecting stock prices. Extensive experiments on S&P 500 stocks show that (i) the proposed Mid-LSTM achieves 2-4% improvement in prediction accuracy, and (ii) in portfolio allocation investment, we achieve up to 120.16% annual return and 2.99 average Sharpe ratio. |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1908.01112&r=all |
| By: | Mateusz Buczyński (Faculty of Economic Sciences, University of Warsaw); Marcin Chlebus (Faculty of Economic Sciences, University of Warsaw) |
| Abstract: | Numerous advances in the modelling techniques of Value-at-Risk (VaR) have provided the financial institutions with a wide scope of market risk approaches. Yet it remains unknown which of the models should be used depending on the state of volatility. In this article we present the backtesting results for 1% and 2.5% VaR of six indexes from emerging and developed countries using several most known VaR models, among many: GARCH, EVT, CAViaR and FHS with multiple sets of parameters. The backtesting procedure has been based on the excess ratio, Kupiec and Christoffersen tests for multiple thresholds and cost functions. The added value of this article is that we have compared the models in four different scenarios, with different states of volatility in training and testing samples. The results indicate that the best of the models that is the least affected by changes in the volatility is GARCH(1,1) with standardized student's t-distribution. Non-parmetric techniques (e.g. CAViaR with GARCH setup (see Engle and Manganelli, 2001) or FHS with skewed normal distribution) have very prominent results in testing periods with low volatility, but are relatively worse in the turbulent periods. We have also discussed an automatic method to setting a threshold of extreme distribution for EVT models, as well as several ensembling methods for VaR, among which minimum of best models has been proven to have very good results - in particular a minimum of GARCH(1,1) with standardized student's t-distribution and either EVT or CAViaR models. |
| Keywords: | Value-at-Risk, GARCH, Extreme Value Theory, Filtered Historical Simulation, CAViaR, market risk, forecast comparison |
| JEL: | G32 C52 C53 C58 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2019-12&r=all |
| By: | Ando, Tomohiro (Melbourne University); Bai, Jushan (Columbia University); Nishimura, Mitohide (Nikko Asset Management Co. Ltd); Yu, Jun (School of Economics, Singapore Management University) |
| Abstract: | It is well-known that the standard estimators of the risk premium in asset pricing models are biased when some price factors are omitted. To address this problem, we propose a novel quantile-based asset pricing model and a new estimation method. Our new asset pricing model allows for the risk premium to be quantile-dependent and our estimation method is applicable to models with unobserved factors. It avoids biased estimation results and always ensures a positive risk premium. The method is applied to the U.S., Japan, and U.K. stock markets. The empirical analysis demonstrates the clear benefits of our approach. |
| Keywords: | Five-factor model; Quantile-based asset pricing model; Risk premium |
| JEL: | G12 G15 |
| Date: | 2019–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:ris:smuesw:2019_015&r=all |
| By: | Khanal, Aditya R.; Mishra, Ashok K.; Kumar, Anjani |
| Keywords: | Risk and Uncertainty |
| Date: | 2019–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea19:291285&r=all |
| By: | Amara, Tijani; Mabrouki, Mohamed |
| Abstract: | The global financial crisis has induced a series of failures of most conventional banks. This study investigates the main sources of banking fragility. We use a sample of 49 banks operating in the Tunisian over the period 2006-2015 to analyze the relationship between credit risk and liquidity risk and its impact on bank stability. Our results show that credit risk and liquidity risk do not have an economically meaningful reciprocal contemporaneous or time-lagged relationship. However, both risks separately affect bank stability and their interaction contributes to bank instability. These findings provide bank managers with more understanding of bank risk and serve as an underpinning for recent regulatory efforts aimed at strengthening the joint risk management of liquidity and credit risks. |
| Keywords: | Credit risk ; Liquidity risk ; Bank stability ; Z-Score |
| JEL: | C01 G00 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95453&r=all |
| By: | H. Evren Damar; Reint Gropp; Adi Mordel |
| Abstract: | Deposit insurance protects depositors from failing banks, thus making insured deposits risk-free. When a deposit insurance limit is increased, some deposits that previously were uninsured become insured, thereby increasing the share of risk-free assets in households’ portfolios. This increase cannot simply be undone by households, because to invest in uninsured deposits, a household must first invest in insured deposits up to the limit. This basic insight is the starting point of the analysis in this paper. We show that in a standard portfolio allocation model, faced with a deposit insurance limit increase, households move some of their assets out of deposits into risky alternatives, such as mutual funds. Our empirical analysis, taking advantage of a deposit insurance increase in Canada in 2005 and detailed household portfolio data, confirms the insights from the model and stands up to multiple alternative explanations. Hence, we show that an increase in the deposit insurance limit results in a sizable deposit outflow. Our work has important policy lessons. First, although there is considerable evidence on the financial stability consequences of deposit insurance (as it reduces the impact of runs in a crisis), we document a novel implication where enhanced protection may also trigger deposit outflows during non-crisis times. Second, the paper highlights the link between deposit insurance and the composition of household portfolios. It emphasizes the role that uninsured deposits play in the household investment decision and the importance of studying them separately from insured deposits when analyzing portfolio allocation choice. |
| Keywords: | Financial Institutions; Financial system regulation and policies |
| JEL: | D14 G21 G28 L51 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-29&r=all |
| By: | Lee, Jiwon; Schulz, Lee; Tonsor, Glynn T. |
| Keywords: | Agricultural and Food Policy |
| Date: | 2019–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea19:290908&r=all |
| By: | Stark, Oded (University of Bonn); Szczygielski, Krzysztof (University of Warsaw) |
| Abstract: | We link causally the riskiness of men's management of their finances with the probability of their experiencing a divorce. Our point of departure is that when comparing single men to married men, the former manage their finances in a more aggressive (that is, riskier) manner. Assuming that single men believe that low relative wealth has a negative effect on their standing in the marriage market and that they care about their standing in that market more than married men do, we find that a stronger distaste for low relative wealth translates into reduced relative risk aversion and, consequently, into riskier financial behavior. With this relationship in place we show how this difference varies depending on the "background" likelihood of divorce and, hence, on the likelihood of re-entry into the marriage market: married men in environments that are more prone to divorce exhibit risk-taking behavior that is more similar to that of single men than married men in environments that are little prone to divorce. We offer a theoretical contribution that helps inform and interpret empirical observations and regularities and can serve as a guide for follow-up empirical work, having established and identified the direction of causality. |
| Keywords: | men's preferences towards risk, risk-taking behavior, concern at having low relative wealth, relative and absolute risk aversion, marital-based difference in attitudes towards risk, likelihood of divorce |
| JEL: | D21 D81 G32 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12518&r=all |
| By: | Rhee, Keeyoung; Hwang, Sunjoo |
| Abstract: | The revolving door practice, i.e. the recruitment of ex-regulators by regulated firms, has long been subject to criticism in Korea. Despite its importance, however, there are few studies on the economic impact of the revolving door. By applying a unique dataset of financial firms in Korea, it was found that the practice does not improve the financial soundness of the recruiting firms. Additionally, it was observed that firms, shortly after hiring former regulators, are less likely to receive regulatory penalties. This result appears to be associated with Korea's financial supervisory system, wherein the majority of supervisory tasks are concentrated within a single agency. - Despite the public's criticism, there have been few empirical studies on the effects of the 'revolving door' practice. - This study provides analysis of the economic impact of the revolving door for financial regulators in Korea. - The 'expertise hypothesis' argues that former financial officials can contribute to improving the risk management of recruiterfirms due to the officials'expertise. - The 'collusion hypothesis' claims that financial firms recruit former officials to seek unduly gains, such as evading regulatory enforcement. - The empirical analysis found no indications of improvement in financial risk management performance after the appointment of former financial officials. - The probability of receiving regulatory action after hiring ex-FSS regulators as executives decreases 16.4% and it is statistically significant, while the probability does not change significantly after hiring ex-regulators from other institutions. - It is possible that executives who were formly in the FSS can help manage the nonfinancial risks. But, the empirical analysis found no indications of such a contribution when the probability of regulatory action decreased. - In the US, financial companies with former financial officials as executives exhibited noticeable improvements in their financial soundness while no meaningful changes were found in the probability of regulatory action. - Unlike the US' decentralized task structure run by multiple authorities, Korea's financial supervisory tasks are concentrated in a single institution. - According to relevant studies, such a centralized structure could incur more incentives for collusive ties between the pertinent government authority and financial firms. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:kdifoc:94&r=all |
| By: | Coletta, Attilio; Giampietri, Elisa; Santeramo, Fabio Gaetano; Severini, Simone; Trestini, Samuele |
| Abstract: | The exposure of farmers to different (and increasing) risks has been recognized by the EU policy, which supports several risk management tools through the Common Agricultural Policy (CAP). Despite the vulnerability of the agricultural sector, and the attention paid at the EU level, the uptake of such tools is generally low across EU countries. The Italian case is emblematic: the uptake of subsidized crop insurance contracts is low, limited to few products, and concentrated in few areas. Coherently, the interest of policy makers toward explaining these characteristics and in gaining insights on the interventions that may help promoting participation is intense. This contribution investigates behavioral aspects linked to choices under risk and ambiguity, and account for time preferences in order to mimic the scenario faced by the potential adopters of the subsidized crop insurance contracts in Italy. Data are collected through questionnaires submitted to students from agricultural colleges in three administrative regions located in northern, central and southern Italy. Results show that attitude toward risk, ambiguity, and impatience are correlated with the intrinsic characteristics of respondents. In addition, some of those attitudes may help explaining decisions under uncertainty. Despite the empirical analysis is preliminary and focused on students, it allowed to validate a promising methodological approach capable of explaining farmer’s willingness to adopt (or renew) insurance contracts. By accounting for (currently under-investigated) behavioral aspects, it is likely to prove useful to re-design or implementing, more effectively, the current policies. |
| Keywords: | Insurance; subjective probabilities; risk preferences; choice experiment |
| JEL: | D81 D83 Q12 Q18 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95347&r=all |
| By: | ITO Takatoshi; KOIBUCHI Satoshi; SATO Kiyotaka; Shimizu Junko; YOSHIMI Taiyo |
| Abstract: | This study presents summary results from the 2018 RIETI Questionnaire Survey of 21,801 Japanese overseas subsidiaries. Our main findings are as follows: First, almost 60% of Japanese overseas subsidiaries are using their own discretion in choosing invoice currency and managing currency risk. This percentage has not changed from the past two surveys. Second, the usage of local Asian currencies as an invoice currency is increasing. The RMB and local Asian currencies are used for trade both with Japan and other countries, and such usage has increased significantly since the previous two surveys. Third, US dollar denominated transactions are decreasing with the increased use of local Asian currencies. In particular, the decrease in US dollar invoicing is large in trade with countries other than Japan. Fourth, Yen invoicing accounts for the largest share in the intermediate goods imports from Japan, while the share of US dollar invoicing exceeds that of Yen-denominated invoicing in exports to Japan. This trend was also confirmed in the past two surveys, however the share of Yen invoicing in exports to Japan decreased significantly. The above findings suggest that the use of the US dollar and the Yen among overseas subsidiaries in Asia gradually decreased, while the use of local Asian currencies including the RMB has steadily increased. |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:eti:rdpsjp:19042&r=all |