nep-rmg New Economics Papers
on Risk Management
Issue of 2020‒01‒27
fifteen papers chosen by
Stan Miles
Thompson Rivers University

  1. Tone from the Top in Risk Management: A Complementarity Perspective on How Control Systems Influence Risk Awareness By Braumann, Evelyn; Grabner, Isabella; Posch, Arthur
  2. The Effectiveness of Risk Management Committee and Hedge Accounting Practices in Malaysia By Abdullah, Azrul Bin; Ismail, Ku Nor Izah Ku
  3. Hedging Activities Information and Risk Management Committee Effectiveness: Malaysian evidence By Abdullah, Azrul Bin; Ismail, Ku Nor Izah Ku
  4. Least Impulse Response Estimator for Stress Test Exercises By Christian Gouriéroux; Yang Lu
  5. Capturing Macroeconomic Tail Risks with Bayesian Vector Autoregressions By Andrea Carriero; Todd E. Clark; Massimiliano Marcellino
  6. Risk Management Committee and Disclosure of Hedging Activities Information among Malaysian Listed Companies By Abdullah, Azrul Bin; Ismail, Ku Nor Izah Ku; Isa, Norshamshina Mat
  7. TwinDefault Crises By Caterina Mendicino; Kalin Nikolov; Juan Rubio-Ramirez; Javier Suarez
  8. A note on currency-hedging By Rodrigo Alfaro; Natan Goldberger
  9. How connected is too connected? Impact of network topology on systemic risk and collapse of complex economic systems By Aymeric Vi\'e; Alfredo J. Morales
  10. The effect of paper versus realized losses on subsequent risk-taking: Field evidence from casino gambling By Philippe Meier; Raphael Flepp; Maximilian Rüdisser; Egon Franck
  11. Uncertainty as a Predictor of Economic Activity By Martina Hengge
  12. Shock and Volatility Spillovers between Crude Oil Price and Stock Returns: Evidence for Thailand By Theplib, Krit; Sethapramote, Yuthana; Jiranyakul, Komain
  13. Dependence Structure of Insurance Credit Default Swaps By Mudiangombe, Benjamin; Muteba Mwamba, John Weirstrass
  14. Using simulations to explore sampling distributions: an antidote to hasty and extravagant inferences By Rousselet, Guillaume A
  15. Expected Value Under Normative Uncertainty By Franz Dietrich; Brian Jabarian

  1. By: Braumann, Evelyn; Grabner, Isabella; Posch, Arthur
    Abstract: Prompted by the weaknesses of standardized risk management approaches in the aftermath of the 2008 financial crisis, scholars, regulators, and practitioners alike emphasize the importance of creating a risk-aware culture in organizations. Recent insights highlight the special role of tone from the top as crucial driver of risk awareness. In this study, we take a systems-perspective on control system design to investigate the role of tone from the top in creating risk awareness. In particular, we argue that both interactive and diagnostic use of budgets and performance measures interact with tone from the top in managing risk awareness. Our results show that interactive control strengthens the effect of tone from the top on risk awareness, while tone from the top and diagnostic control are, on average, not interrelated with regard to creating risk awareness. To shed light on the boundary conditions of the proposed interdependencies, we further investigate whether the predicted interdependencies are sensitive to the level of perceived environmental uncertainty. We find that the effect of tone from the top and interactive control becomes significantly stronger in a situation of high perceived environmental uncertainty. Most interestingly, tone from the top and diagnostic control are complements with regard to risk awareness in settings of low perceived environmental uncertainty and substitutes at high levels of perceived environmental uncertainty.
    Keywords: Tone from the top; risk awareness; interactive and diagnostic use of budgets and performance measures; perceived environmental uncertainty; SMEs
    Date: 2020–01–08
  2. By: Abdullah, Azrul Bin (Universiti Teknologi MARA, Perlis Branch, Arau Campus); Ismail, Ku Nor Izah Ku
    Abstract: This study examines the effectiveness of Risk Management Committee (RMC) in influencing hedge accounting practices among non-financial companies listed on the Bursa Malaysia. Our regression results reveal that that there is no significant relationship between the application of hedge accounting and the effectiveness of RMCs. However, there are positive and significant relationships between the choice of hedge accounting and each of company size and leverage. The implications of the findings were discussed.
    Date: 2018–03–08
  3. By: Abdullah, Azrul Bin (Universiti Teknologi MARA, Perlis Branch, Arau Campus); Ismail, Ku Nor Izah Ku
    Abstract: This study examines the extent of information about hedging activities disclosures within the annual reports of Main Market companies listed on Bursa Malaysia. The extent of hedging activities disclosures is captured through a 32-item-template, which consists of a mandatory and voluntary disclosure scores. The results of this study indicate that the extent of information on hedging activities disclosure is still insufficient among the sampled companies even though the disclosure scored is quite high. This study also examines the relationship between the existence of risk management committee (RMC), its characteristics and the extent of information on hedging activities disclosure in two separate statistical models. The regression results imply that the existence of RMC is positive but does not significantly influence the extent of information on hedging activities disclosure. However its characteristics (i.e. RMC independence and RMC meeting) have a significant influence. The findings may provide some meaningful insights to regulators, policymakers and researchers, towards the establishment of RMC as a part of the internal corporate governance mechanisms. In addition to its existence, the effectiveness of RMC also needs to be emphasised.
    Date: 2018–03–08
  4. By: Christian Gouriéroux (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales); Yang Lu (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We introduce new semi-parametric models for the analysis of rates and proportions, such as proportions of default, (expected) loss-given-default and credit conversion factor encountered in credit risk analysis. These models are especially convenient for the stress test exercises demanded in the current prudential regulation. We show that the Least Impulse Response Estimator, which minimizes the estimated effect of a stress, leads to consistent parameter estimates. The new models with their associated estimation method are compared with the other approaches currently proposed in the literature such as the beta and logistic regressions. The approach is illustrated by both simulation experiments and the case study of a retail P2P lending portfolio.
    Date: 2019
  5. By: Andrea Carriero; Todd E. Clark; Massimiliano Marcellino (European University Institute; Universität Commerciale Luigi Bocconi; National Bureau of Economic Research; Centre for Economic Policy Research (CEPR); Universität degli Studi di Firenze; Bocconi University)
    Abstract: A rapidly growing body of research has examined tail risks in macroeconomic outcomes. Most of this work has focused on the risks of significant declines in GDP, and has relied on quantile regression methods to estimate tail risks. In this paper we examine the ability of Bayesian VARs with stochastic volatility to capture tail risks in macroeconomic forecast distributions and outcomes. We consider both a conventional stochastic volatility specification and a specification featuring a common volatility factor that is a function of past financial conditions. Even though the conditional predictive distributions from the VAR models are symmetric, our estimated models featuring time-varying volatility yield more time variation in downside risk as compared to upside risk—a feature highlighted in other work that has advocated for quantile regression methods or focused on asymmetric conditional distributions. Overall, the BVAR models perform comparably to quantile regression for estimating tail risks, with, in addition, some gains in standard point and density forecasts.
    Keywords: forecasting; downside risk; asymmetries
    JEL: C53 E17 E37 F47
    Date: 2020–01–16
  6. By: Abdullah, Azrul Bin (Universiti Teknologi MARA, Perlis Branch, Arau Campus); Ismail, Ku Nor Izah Ku; Isa, Norshamshina Mat
    Abstract: This paper examines the relationship between Risk Management Committee (RMC) characteristics and the extent of hedging activities disclosure within the annual reports of the Malaysian listed companies. In particular, relationships are tested on RMC size, independence, RMC meeting, RMC gender diversity and RMC training. Our regression analysis shows that RMC independence significantly and negatively influences the extent of hedging activities information disclosure, while RMC meeting positively influences the disclosure. The implications of these findings are discussed.
    Date: 2018–03–08
  7. By: Caterina Mendicino; Kalin Nikolov; Juan Rubio-Ramirez; Javier Suarez
    Abstract: Twin Default Crises are rare and severe episodes of borrower and bank defaults. We build a quantitativemodel that links borrower and bank solvency. This is crucial to reproduce key features of thedata both in normal times and in Twin Default Crises. Specialization exposes banks to non-diversifiableborrowers’ default risk. Fluctuations in the non-diversifiable component of credit risk and bank leverageare important determinants of Twin Default Crises. Capturing the frequency and severity of Twin DefaultCrises is key for the correct calibration of bank capital requirements. Our framework implies highercapital requirements than alternative frameworks that do not model the link between borrower and bankdefault.
    Date: 2020–01
  8. By: Rodrigo Alfaro; Natan Goldberger
    Abstract: In this note we analyze if currency hedging reduces the volatility of a portfolio. Based on historical data (2000m1-2018m12), we found that optimal levels of hedging will depend on the degree of risk of the underlying asset, being full-hedging for the case of high-quality sovereign bonds and very small hedging for equity indexes. Finding are consistent across both US and EU assets and different Latam currencies.
    Date: 2020–01
  9. By: Aymeric Vi\'e; Alfredo J. Morales
    Abstract: Economic interdependencies have become increasingly present in globalized production, financial and trade systems. While establishing interdependencies among economic agents is crucial for the production of complex products, they may also increase systemic risks due to failure propagation. It is crucial to identify how network connectivity impacts both the emergent production and risk of collapse of economic systems. In this paper we propose a model to study the effects of network structure on the behavior of economic systems by varying the density and centralization of connections among agents. The complexity of production increases with connectivity given the combinatorial explosion of parts and products. Emergent systemic risks arise when interconnections increase vulnerabilities. Our results suggest a universal description of economic collapse given in the emergence of tipping points and phase transitions in the relationship between network structure and risk of individual failure. This relationship seems to follow a sigmoidal form in the case of increasingly denser or centralized networks. The model sheds new light on the relevance of policies for the growth of economic complexity, and highlights the trade-off between increasing the potential production of the system and its robustness to collapse. We discuss the policy implications of intervening in the organization of interconnections and system features, and stress how different network structures and node characteristics suggest different directions in order to promote complex and robust economic systems.
    Date: 2019–12
  10. By: Philippe Meier (Department of Business Administration, University of Zurich); Raphael Flepp (Department of Business Administration, University of Zurich); Maximilian Rüdisser (Department of Business Administration, University of Zurich); Egon Franck (Department of Business Administration, University of Zurich)
    Abstract: In this paper, we test the realization effect, i.e., that risk-taking increases after a paper loss, whereas risk-taking decreases after a realized loss, using gambling data from a real casino. During a particular casino visit, losses are likely perceived as paper losses because the chance to offset prior losses remains effective until leaving the casino. However, when casino customers leave the casino, the final account balance is realized. Using individual-level slot machine gambling records, we find that risk-taking after paper losses increases during a visit and that this effect is more pronounced for larger losses. Conversely, risk-taking across multiple visits is not altered if the realized losses are comparatively small, whereas risk-taking is reduced if realized losses are comparatively large.
    Keywords: Market decision making, realization effect, risk behavior, loss, field analysis
    JEL: D12 D14 D81
    Date: 2020–01
  11. By: Martina Hengge (International Monetary Fund)
    Abstract: Are empirical measures of uncertainty informative about risks to future economic activity? I use quantile regression analysis and density predictions on United States data to show that the relationship between macroeconomic uncertainty and future GDP growth is nonlinear and asymmtric. The left tail of the distribution of future GDP growth is highly responsive to fluctuations in macroeconomic uncertainty, whereas the right tail is relatively stable. As such, macroeconomic uncertainty predicts downside risks to growth but is less informative about upside risks. When combined with an index of financial conditions - a previously proposed predictor of downside risks to growth - macroeconomic uncertainty carries a larger weight in the optimal predictive density. Finally, I provide evidence that alternative empirical measures of uncertainty, such as economic policy uncertainty and geopolitical risk, do not predict risks to the economic outlook. These results hold for a larger sample of countries and underline the importance of differentiating between measures of uncertainty when predicting risks to growth.
    Date: 2019–12–20
  12. By: Theplib, Krit; Sethapramote, Yuthana; Jiranyakul, Komain
    Abstract: This paper employs a bivariate BEKK-GARCH(1,1) model to examine shock and volatility spillovers between crude oil and stock markets by taking into account the impact of the 2008 global financial crisis. Daily data from crude oil market and the Thai stock market during February 6, 2004 and September 14, 2015 are used in the analyses. The whole sample is divided into the pre- and post- crisis periods. The results show that there are no spillover effects between oil price and stock returns in the pre-crisis period. In the post-crisis period, there are unilateral spillover effects from oil price to some equity sector returns. In the market level, there are unilateral spillovers of shock and volatility from oil price to stock market return. The findings in this paper are crucial for financial market participations to understand shock and volatility transmissions from oil to stock markets such that portfolio management should take into account the presence of oil price risk.
    Keywords: Stock returns, oil price shock, volatility spillover, bivariate GARCH
    JEL: G1 G12 Q43
    Date: 2020–01
  13. By: Mudiangombe, Benjamin; Muteba Mwamba, John Weirstrass
    Abstract: We examine the dependence structure of insurance credit default swap (CDS) indices in the pairs of markets of the United Kingdom (UK), Eurozone (EU) and United States (US) insurance industries during the period of January 2004 to October 2018. We applied the Archimedean Clayton copula to model the lower tail and the Gumbel copula to model the upper tail of the empirical distributions. The empirical results show a significant dependence structure for both constant and time-varying copulas, implying the co-movement in the pairs of markets during the study period, influencing the contagion risk and showing strong dependence among Markets. The highest tail dependence and positive adjustment parameters seen in crisis and debt-crisis in the lower regime explains the link between these markets. The crucial findings show confirmation of asymmetric tail dependence proposing the propagation of risks of default among UK, EU and US markets. The conditional tail of the time-varying dependence structure explains the behaviour of dependence better than the constant level. This finding is robust when measuring the evolution of the dependence structure over time. The results are consistent for risk managers and investors to select the portfolio investment in different markets during stress period.
    Keywords: Dependence structure, Insurance credit default swaps, Constant and Time-varying Copulas
    JEL: C0 C01 C02 C63 G11 G15
    Date: 2019–09–05
  14. By: Rousselet, Guillaume A
    Abstract: Most statistical inferences in psychology are based on frequentist statistics, which rely on sampling distributions: the long-run outcomes of multiple experiments, given a certain model. Yet, sampling distributions are poorly understood and rarely explicitly considered when making inferences. In this article, I demonstrate how to use simulations to illustrate sampling distributions to answer simple practical questions: for instance, if we could run thousands of experiments, what would the outcome look like? What do these simulations tell us about the results from a single experiment? Such simulations can be run a priori, given expected results, or a posteriori, using existing datasets. Both approaches can help make explicit the data generating process and the sources of variability; they also reveal the large variability in our experimental estimation and lead to the sobering realisation that, in most situations, we should not make a big deal out of results from a single experiment. Simulations can also help demonstrate how the selection of effect sizes conditional on some arbitrary cut-off (p≤0.05) leads to a literature crammed with false positives, a powerful illustration of the damage done in part by researchers’ over-confidence in their statistical tools. The article focuses on graphical descriptions and covers examples using correlation analyses, percent correct data and response latency data.
    Date: 2019–12–05
  15. By: Franz Dietrich (CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Brian Jabarian (UP1 UFR10 - Université Panthéon-Sorbonne - UFR Philosophie - UP1 - Université Panthéon-Sorbonne)
    Abstract: Maximising expected value is the classic doctrine in choice theory under empirical uncertainty, and a prominent proposal in the emerging philosophical literature on normative uncertainty, i.e., uncertainty about the standard of evaluation. But how should Expectationalism be stated in general, when we can face both uncertainties simultaneously , as is common in life? Surprisingly, different possibilities arise, ranging from Ex-Ante to Ex-Post Expectationalism, with several hybrid versions. The difference lies in the perspective from which expectations are taken, or equivalently the amount of uncertainty packed into the prospect evaluated. Expectationalism thus faces the classic dilemma between ex-ante and ex-post approaches, familiar elsewhere in ethics and aggregation theory under uncertainty. We analyse the spectrum of expectational theories, showing that they reach diverging evaluations, use different modes of reasoning, take different attitudes to normative risk as well as empirical risk, but converge under an interesting (necessary and sufficient) condition.
    Date: 2020–01–08

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