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on Risk Management |
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Issue of 2019‒11‒25
fourteen papers chosen by |
| By: | Korn, Olaf; Möller, Philipp M.; Schwehm, Christian |
| Abstract: | Over the years, a diverse range of drawdown measures has evolved to guide asset management. We show that almost all of these measures fit into a unified framework. This new framework simplifies the implementation of drawdown measures and improves understanding their similarities and differences. Conceptual differences between drawdown measures translate into different rankings of portfolios, which we document in a simulation study. Our research also shows that all drawdown measures can (to some degree) discriminate between skillful and unskillful portfolio managers, but differ in terms of accuracy. However, the ability to detect skill does not easily improve performance ratios where drawdown measures serve as the denominator. In conclusion, our study shows that the choice of an adequate drawdown measure is vital to the assessment of investments because different measures emphasize different aspects of risk. |
| Keywords: | Asset Management,Drawdown,Risk Measures,Performance Measurement |
| JEL: | G11 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1904&r=all |
| By: | Giuseppe Brandi; Ruggero Gramatica; Tiziana Di Matteo |
| Abstract: | Portfolio allocation and risk management make use of correlation matrices and heavily rely on the choice of a proper correlation matrix to be used. In this regard, one important question is related to the choice of the proper sample period to be used to estimate a stable correlation matrix. This paper addresses this question and proposes a new methodology to estimate the correlation matrix which doesn't depend on the chosen sample period. This new methodology is based on tensor factorization techniques. In particular, combining and normalizing factor components, we build a correlation matrix which shows emerging structural dependency properties not affected by the sample period. To retrieve the factor components, we propose a new tensor decomposition (which we name Slice-Diagonal Tensor (SDT) factorization) and compare it to the two most used tensor decompositions, the Tucker and the PARAFAC. We have that the new factorization is more parsimonious than the Tucker decomposition and more flexible than the PARAFAC. Moreover, this methodology applied to both simulated and empirical data shows results which are robust to two non-parametric tests, namely Kruskal-Wallis and Kolmogorov-Smirnov tests. Since the resulting correlation matrix features stability and emerging structural dependency properties, it can be used as alternative to other correlation matrices type of measures, including the Person correlation. |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1911.06126&r=all |
| By: | Xiao, Tim |
| Abstract: | The incremental risk charge (IRC) is a new regulatory requirement from the Basel Committee in response to the recent financial crisis. Notably few models for IRC have been developed in the literature. This paper proposes a methodology consisting of two Monte Carlo simulations. The first Monte Carlo simulation simulates default, migration, and concentration in an integrated way. Combining with full re-valuation, the loss distribution at the first liquidity horizon for a subportfolio can be generated. The second Monte Carlo simulation is the random draws based on the constant level of risk assumption. It convolutes the copies of the single loss distribution to produce one year loss distribution. The aggregation of different subportfolios with different liquidity horizons is addressed. Moreover, the methodology for equity is also included, even though it is optional in IRC. |
| Date: | 2018–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:osf:arabix:qmcdz&r=all |
| By: | Daniel Ritter |
| Abstract: | As impressively shown by the financial crisis in 2007/08, contagion effects in financial networks harbor a great threat for the stability of the entire system. Without sufficient capital requirements for banks and other financial institutions, shocks that are locally confined at first can spread through the entire system and be significantly amplified by various contagion channels. The aim of this thesis is thus to investigate in detail two selected contagion channels of this so-called systemic risk, provide mathematical models and derive consequences for the systemic risk management of financial institutions. The first contagion channel we consider is default contagion. The underlying effect is here that insolvent institutions cannot service their debt or other financial obligations anymore - at least partially. Debtors and other directly impacted parties in the system are thus forced to write off their losses and can possibly be driven into insolvency themselves due to their incurred financial losses. This on the other hand starts a new round in the default contagion process. In our model we simplistically describe each institution by all the financial positions it is exposed to as well as its initial capital. In doing so, our starting point is the work of Detering et al. (2017) - a model for contagion in unweighted networks - which particularly considers the exact network configuration to be random and derives asymptotic results for large networks. We extend this model such that weighted networks can be considered and an application to financial networks becomes possible. More precisely, for any given initial shock we deduce an explicit asymptotic expression for the total damage caused in the system by contagion and provide a necessary and sufficient criterion for an unshocked financial system to be stable against small shocks. Moreover, ... |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1911.07313&r=all |
| By: | Robert J. Barro; Gordon Y. Liao |
| Abstract: | We derive an option-pricing formula from recursive preference and estimate rare disaster probability. The new options-pricing formula applies to far-out-of-the money put options on the stock market when disaster risk dominates, the size distribution of disasters follows a power law, and the economy has a representative agent with Epstein-Zin utility. The formula conforms with options data on the S&P 500 index from 1983-2018 and for analogous indices for other countries. The disaster probability, inferred from monthly fixed effects, is highly correlated across countries, peaks during the 2008-2009 financial crisis, and forecasts equity index returns and growth vulnerabilities in the economy. |
| Keywords: | Disaster Probability ; Option Prices ; Rare Disaster ; Tail Risk ; Uncertainty ; Volatility |
| JEL: | E44 G13 G12 |
| Date: | 2019–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-73&r=all |
| By: | Sullivan HUE; Yannick LUCOTTE; Sessi TOKPAVI |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:leo:wpaper:2708&r=all |
| By: | Chavleishvili, Sulkhan; Manganelli, Simone |
| Abstract: | We introduce a structural quantile vector autoregressive (VAR) model. Unlike standard VAR which models only the average interaction of the endogenous variables, quantile VAR models their interaction at any quantile. We show how to estimate and forecast multivariate quantiles within a recursive structural system. The model is estimated using real and financial variables. The dynamic properties of the system change across quantiles. This is relevant for stress testing exercises, whose goal is to forecast the tail behavior of the economy when hit by large financial and real shocks. JEL Classification: C32, C53, E17, E32, E44 |
| Keywords: | growth at risk, regression quantiles, structural VAR |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192330&r=all |
| By: | J. Hahn; J. Hirsch |
| Abstract: | While properties face diverse risks from extreme weather events, flood depicts one of the most destructive natural forces, causing damages in the billion-dollar range every year. Property owners therefore may face the challenge of potential value losses or other down sides at the time of sale. Even tenants may be affected in terms of property damage if an extreme weather event occurs. The question arises whether these expected financial losses are actually reflected in market behavior. Therefore, this contribution discusses appropriate methodology and deploys Generalized Additive Models (GAMs) for estimating the impact of existing flood risk on property prices. Both rental as well as sales markets are investigated empirically, on the basis of approximately 16,000 observations from a local housing market in Germany. The study finds substantial evidence that market participants actually do incorporate potential damage from flood risk into their pricing consideration and behavioral patterns. The paper concludes with recommendations as how to transfer the methodology to African real estate markets and summarizes related data requirements, as utilized in the presented study and in preparation of a potential study on African commercial property or housing markets. |
| JEL: | R3 |
| Date: | 2018–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:afr:wpaper:afres2018_126&r=all |
| By: | Bert Loudis; Benjamin Ranish |
| Abstract: | We find that that the Current Expected Credit Loss (CECL) standard would slightly dampen fluctuations in bank lending over the economic cycle. In particular, if the CECL standard had always been in place, we estimate that lending would have grown more slowly leading up to the financial crisis and more rapidly afterwards. We arrive at this conclusion by estimating historical allowances under CECL and modeling how the impact on accounting variables would have affected banks' lending and capital distributions. We consider a variety of approaches to address uncertainty regarding the management of bank capital and predictability of credit losses. |
| Keywords: | Current expected credit loss ; Allowance for Loan and Lease Losses ; Accounting policy |
| JEL: | E1 E3 G21 G28 M41 M48 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-61&r=all |
| By: | Yang-Ho Park |
| Abstract: | This paper introduces a new model-free approach to measuring the expectation of market variance using VIX derivatives. This approach shows that VIX derivatives carry different information about future variance than S&P 500 (SPX) options, especially during the 2008 financial crisis. I find that the segmentation is associated with frictions such as funding illiquidity, market illiquidity, and asymmetric information. When they are segmented, VIX derivatives contribute more to the variance discovery process than SPX options. These findings imply that VIX derivatives would offer a better estimate of expected variance than SPX options, and that a measure of segmentation may be useful for policymakers as it signals the severity of frictions. |
| Keywords: | VIX derivative ; Asymmetric information ; Economic uncertainty ; Illiquidity ; Implied variance |
| JEL: | G01 G13 G14 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-59&r=all |
| By: | Taneli M�kinen (Bank of Italy); Lucio Sarno (Cambridge Judge Business School, University of Cambridge; Cass Business School, City, University of London); Gabriele Zinna (Bank of Italy) |
| Abstract: | Applying standard portfolio-sort techniques to bank asset returns for 15 countries from 2004 to 2018, we uncover a risk premium associated with implicit government guarantees. This risk premium is intimately tied to sovereign risk, suggesting that guaranteed banks, defined as those of particular importance to the national economy, inherit the risk of the guarantor. Indeed, this premium does not exist in safe-haven countries. We rationalize these findings with a model in which implicit government guarantees are risky in the sense that they provide protection that depends on the aggregate state of the economy. |
| Keywords: | banks, sovereign risk, risk premium, government guarantee |
| JEL: | G23 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1232_19&r=all |
| By: | Roncoroni, Alan; Battiston, Stefano; D'Errico, Marco; Hałaj, Grzegorz; Kok, Christoffer |
| Abstract: | We study the interplay between two channels of interconnectedness in the banking system. The first one is a direct interconnectedness, via a network of interbank loans, banks' loans to other corporate and retail clients, and securities holdings. The second channel is an indirect interconnectedness, via exposures to common asset classes. To this end, we analyze a unique supervisory data set collected by the European Central Bank that covers 26 large banks in the euro area. To assess the impact of contagion, we apply a structural valuation model NEVA (Barucca et al., 2016a), in which common shocks to banks' external assets are reflected in a consistent way in the market value of banks' mutual liabilities through the network of obligations. We identify a strongly non-linear relationship between diversification of exposures, shock size, and losses due to interbank contagion. Moreover, the most systemically important sectors tend to be the households and the financial sectors of larger countries because of their size and position in the financial network. Finally, we provide policy insights into the potential impact of more diversified versus more domestic portfolio allocation strategies on the propagation of contagion, which are relevant to the policy discussion on the European Capital Market Union. JEL Classification: C45, C63, D85, G21 |
| Keywords: | bank stress test, cross-border contagion channels, financial contagion, financial networks, financial stability, systemic risk |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192331&r=all |
| By: | Saman Adhami (VGSF - Vienna Graduate School of Finance); Dominique Guegan (UP1 - Université Panthéon-Sorbonne, CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne, University of Ca’ Foscari [Venice, Italy], UEH - University of Economics Ho Chi Minh City) |
| Abstract: | This paper reexamines the discussion on blockchain technology, crypto assets and ICOs, providing also evidence that in crypto markets there are currently two classes of assets, namely standalone cryptocurrencies (or 'coins') and tokens, which result from an ICO and are intrinsically linked to the performance of the issuing company or venture. While the former have been arguments of various empirical studies regarding their price dynamics and their effect on the variance of a well-diversified portfolio, no such study has been done to analyze listed tokens, which in our sample are over 700 and with a backing of about $17.3Bn from their respective ICOs. Therefore, investors interested in optimizing their portfolios should first assess the diversifier, hedge or safe haven role of tokens vis-à-vis traditional assets, on top of 'coins', in order to sensibly use this new asset class. After constructing various indices to represent both the token asset class as a whole and its sub-classes, we model dynamic conditional correlations among all the assets in our sample to obtain time-varying correlations for each token-asset pair. We find that tokens are effective diversifiers but not a hedge or a safe haven asset. We evidence that tokens retain important systematic differences with the two other asset classes to which they are most generally compared to, namely 'coins' and equities. |
| Keywords: | Cryptocurrency,Initial Coin Offering,DCC-MGARCH,Safe Haven,Hedge |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-02353656&r=all |
| By: | Marcus C. Christiansen; Boualem Djehiche |
| Abstract: | Insurance cash flows become reserve dependent whenever contract conditions are modified during the contract term while maintaining actuarial equivalence. As a result, insurance cash flows and prospective reserves depend on each other in a circular way, and it is a non-trivial problem to solve that circularity and make cash flows and reserves well-defined. The literature offers answers to that question in case of one or two contract modifications under Markovian assumptions. This paper studies multiple contract modifications in a general non-Markovian framework. |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1911.06159&r=all |