nep-rmg New Economics Papers
on Risk Management
Issue of 2020‒02‒17
sixteen papers chosen by
Stan Miles
Thompson Rivers University

  1. New models of commodity risk hedging according to the behavior of economic decision-makers or Rollover Strategies By Zoulkiflou Moumouni; Jules Sadefo Kamdem
  2. Bank Capital and Risk in Europe and Central Asia Ten Years After the Crisis By Anginer,Deniz; Demirguc-Kunt,Asli; Mare,Davide Salvatore
  3. How Safe are European Safe Bonds? An Analysis from the Perspective of Modern Portfolio Credit Risk Models By R\"udiger Frey; Kevin Kurt; Camilla Damian
  4. Dynamic Optimal Hedge Ratio Design when Price and Production are stochastic with Jump By Nyassoke Titi Gaston Clément; Jules Sadefo Kamdem; Louis Aimé Fono
  6. On Shortfall Risk Minimization for Game Options By Yan Dolinsky
  7. Pricing vulnerable options in a hybrid credit risk model driven by Heston-Nandi GARCH processes By Gechun Liang; Xingchun Wang
  8. Risk Loadings in Classification Ratemaking By Liang Yang; Zhengxiao Li; Shengwang Meng
  9. On the first moments and semi-moments of fuzzy variables based on a new measure and application for portfolio selection with fuzzy returns By Justin Dzuche; Christian Deffo Tassak; Jules Sadefo Kamdem; Louis Aimé Fono
  10. Empirical Tail Copulas for Functional Data By Einmahl, John; Segers, Johan
  11. On Two Dominances of Fuzzy Variables based on a Parametric Fuzzy Measure and Application to Portfolio Selection with Fuzzy Return By Justin Dzuche; Christian Deffo Tassak; Jules Sadefo Kamdem; Louis Aimé Fono
  12. The Aggregate Consequences of Default Risk: Evidence from Firm-level Data By Timothy J. Besley; Isabelle A. Roland; John Van Reenen
  13. Finance from the viewpoint of physics By A. Jakovac
  14. Fuzzy lower partial moment and Mean-risk Dominance: An application for poverty Measurement By Christian Deffo Tassak; Louis Aimé Fono; Jules Sadefo Kamdem
  15. Strategic Supply Chain Planning and Risk Management: Experiment of a Decision Support System Gathering Business Departments Around a Common Vision By Raphaël Oger; Matthieu Lauras; Frederick Benaben; Benoit Montreuil
  16. PCA for Implied Volatility Surfaces By Marco Avellaneda; Brian Healy; Andrew Papanicolaou; George Papanicolaou

  1. By: Zoulkiflou Moumouni (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier); Jules Sadefo Kamdem (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier)
    Abstract: In static framework, many hedging strategies can be settled following the various hedge ratios that have been developed in the literature. However, it is difficult to choose among them the best the appropriate strategy according the to preference or economic behavior of the decision-maker such as prudence and temperance. This is so even with the hedging effectiveness measure. After introducing a hedging ratio that take into account the prudence and temperance of the decision maker, we propose a ranking based approach to measure the effectiveness using L-moment to classify hedge portfolios, hence hedge ratios, with regard to their performance. Moreover, we deal with the hedging issue in presence of quantity and rollover risks and derive an optimal strategy that depends upon the basis and insurance contract. Such hedging issue includes the relevant risks encountered in practice and we relate how insurance contract, specially designed for production risk could affect the futures hedge. The application on futures prices data at hands shows that taking into account quantity and rollover risks leads to better hedging strategy based on the L-performance effectiveness measure.
    Keywords: Risk Management,Futures Markets,Commodities,Risk Aversion
    Date: 2019–10–06
  2. By: Anginer,Deniz; Demirguc-Kunt,Asli; Mare,Davide Salvatore
    Abstract: This paper examines changes in bank capital and capital regulations since the global financial crisis, in the Europe and Central Asia region. It shows that banks in Europe and Central Asia are better capitalized, as measured by regulatory capital ratios, than they were prior to the crisis. However, the increase in simple equity ratios for the same banks has been smaller over the past 10 years. The increases in regulatory capital ratios have coincided with a reduction in the stringency of the definition of Tier 1 capital and reduction in risk-weights. Further analyses showthat bank risk in Europe and Central Asia is more sensitive to changes in simple leverage ratios than in regulatory capital ratios, consistent with the notion that equity ratios only include high-quality capital and do not rely on internal risk models to compute risk-weights. Although there has been some effort to increase capital and liquidity requirements for institutions deemed systemically important, the region has been lagging in addressing the resolution of these institutions.
    Date: 2020–01–30
  3. By: R\"udiger Frey; Kevin Kurt; Camilla Damian
    Abstract: Several proposals for the reform of the euro area advocate the creation of a market in synthetic securities backed by portfolios of sovereign bonds. Most debated are the so-called European Safe Bonds or ESBies proposed by (Brunnermeier et al. 2017). This paper provides a comprehensive quantitative analysis of such products. A key component of our contribution is a novel dynamic credit risk model which captures salient features of euro area sovereign CDS spreads and enables tractable modelling of default dependence amongst euro members. After successful calibration of our model to CDS spreads, we perform a thorough analysis of ESBies. We provide model-independent price bounds; we consider the expected loss as a function of model parameters and attachment points; we study the volatility of the credit spread of ESBies; and we discuss several approaches to assess the market risk of ESBies. Our analysis provides a fairly comprehensive picture of the risks associated with ESBies.
    Date: 2020–01
  4. By: Nyassoke Titi Gaston Clément (Université de Douala); Jules Sadefo Kamdem (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier, UG - Université de Guyane); Louis Aimé Fono (Université de Douala)
    Abstract: In this paper, we focus on the farmer's risk income, by using commodity futures, when price and output processes are correlated random represented by jump-diffusion models. We evaluate the expected utility of the farmer's wealth and we determine, at each instant of time, the optimal consumption rate and hedge position at given the time to harvest and state variables. We find a closed form optimal position of consumption and position rate in case of CARA utility investor. This result (see table 1.5) is a generalization of Ho (1984) result who consider the particular case where price and output are diffusion models.
    Keywords: Jump-diffusion process,futures,stochastic dynamic programming,Lévy measure,risk management
    Date: 2019–01
  5. By: Imène Berguiga (University of Sousse); Philippe Adair (University Paris Est Créteil); Nadia Zrelli (University of Sousse); Ali Abdallah (University of Sousse)
    Abstract: Islamic banks face specific risks related to Sharia-compliant contracts. We provide an exhaustive literature review addressing the methodological issues of the measurement of performance and document the main stylised facts regarding the performance of Islamic banks (IBs) in the MENA region. We investigate 53IBs in 11 MENA countries over 2007-2014, first using cross-sectional analysis as of year 2013. A panel data model with instrumental variables estimates the impact of risks upon the returns on assets and equity of Islamic banks. Four salient results emerge: Sharia compliance exerts an ambiguous effect upon performance; Islamic specificity is a minor attribute according to the insignificant share of profit and loss sharing (PLS) contracts in total assets; there is no relationship between Sharia compliance and specific risk; loan loss provisions do not restrict to specific risks (PLS), hedging all risks.
    Date: 2019–12–20
  6. By: Yan Dolinsky
    Abstract: In this paper we study the existence of an optimal hedging strategy for the shortfall risk measure in the game options setup. We consider the continuous time Black--Scholes (BS) model. Our first result says that in the case where the game contingent claim (GCC) can be exercised only on a finite set of times, there exists an optimal strategy. Our second and main result is an example which demonstrates that for the case where the GCC can be stopped on the all time interval, optimal portfolio strategies need not always exist.
    Date: 2020–02
  7. By: Gechun Liang; Xingchun Wang
    Abstract: This paper proposes a hybrid credit risk model, in closed form, to price vulnerable options with stochastic volatility. The distinctive features of the model are threefold. First, both the underlying and the option issuer's assets follow the Heston-Nandi GARCH model with their conditional variance being readily estimated and implemented solely on the basis of the observable prices in the market. Second, the model incorporates both idiosyncratic and systematic risks into the asset dynamics of the underlying and the option issuer, as well as the intensity process. Finally, the explicit pricing formula of vulnerable options enables us to undertake the comparative statistics analysis.
    Date: 2020–01
  8. By: Liang Yang; Zhengxiao Li; Shengwang Meng
    Abstract: The risk premium of a policy is the sum of the pure premium and the risk loading. In the classification ratemaking process, generalized linear models are usually used to calculate pure premiums, and various premium principles are applied to derive the risk loadings. No matter which premium principle is used, some risk loading parameters should be given in advance subjectively. To overcome this subjective problem and calculate the risk premium more reasonably and objectively, we propose a top-down method to calculate these risk loading parameters. First, we implement the bootstrap method to calculate the total risk premium of the portfolio. Then, under the constraint that the portfolio's total risk premium should equal the sum of the risk premiums of each policy, the risk loading parameters are determined. During this process, besides using generalized linear models, three kinds of quantile regression models are also applied, namely, traditional quantile regression model, fully parametric quantile regression model, and quantile regression model with coefficient functions. The empirical result shows that the risk premiums calculated by the method proposed in this study can reasonably differentiate the heterogeneity of different risk classes.
    Date: 2020–02
  9. By: Justin Dzuche (Université de Douala); Christian Deffo Tassak (Université de Douala); Jules Sadefo Kamdem (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier, UG - Université de Guyane); Louis Aimé Fono (Université de Douala)
    Abstract: Possibility, Necessity and Credibility measures are used in the literature in order to deal with imprecision. Recently, Yang and Iwamura [11] introduced a new measure as convex linear combination of possibility and necessity measures and they determined some of its axioms. In this paper, we introduce characteristics (parameters) of a fuzzy vari-able based on that measure, namely, Expected value, Variance, Semi-Variance, Skewness, Kurtosis and Semi-Kurtosis. We determine some properties of these characteristics and we compute them for trapezoidal and triangular fuzzy variables. We display their application for the determination of optimal portfolios when assets returns are described by triangular or trapezoidal fuzzy variables.
    Date: 2019
  10. By: Einmahl, John (Tilburg University, Center For Economic Research); Segers, Johan
    Abstract: For multivariate distributions in the domain of attraction of a max-stable distribution, the tail copula and the stable tail dependence function are equivalent ways to capture the dependence in the upper tail. The empirical versions of these functions are rank-based estimators whose inflated estimation errors are known to converge weakly to a Gaussian process that is similar in structure to the weak limit of the empirical copula process. We extend this multivariate result to continuous functional data by establishing the asymptotic normality of the estimators of the tail copula, uniformly over all finite subsets of at most D points (D fixed). As a special case we obtain the uniform asymptotic normality of all estimated upper tail dependence coefficients. The main tool for deriving the result is the uniform asymptotic normality of all the D-variate tail empirical processes. The proof of the main result is non-standard.
    Keywords: extreme value statistics; functional data; tail empirical process; tal dependence; tial copula estimation; uniform asymptotic normality
    JEL: C13 C14
    Date: 2020
  11. By: Justin Dzuche (Université de Douala); Christian Deffo Tassak (Université de Yaoundé I [Yaoundé]); Jules Sadefo Kamdem (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier, LAMETA - Laboratoire Montpelliérain d'Économie Théorique et Appliquée - UM1 - Université Montpellier 1 - UM3 - Université Paul-Valéry - Montpellier 3 - INRA - Institut National de la Recherche Agronomique - Montpellier SupAgro - Centre international d'études supérieures en sciences agronomiques - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier, UG - Université de Guyane); Louis Aimé Fono (Université de Douala)
    Abstract: Iwamura [18] introduced a new parametric fuzzy measure as a convex linear combination of possibility and necessity measures. This measure generalizes the credibility measure and the parameter of the possibility measure is considered as the decision making (investors) optimism's level. In this paper, we introduce by means of that mea-sure two new dominances (binary relations) on fuzzy variables. The first one generalizes the first order dominance introduced recently by Tassak et al. [17] and the second one, based on optimism's level and called optimisnism dominance, is stronger than the first one. We study properties of these dominances on trapezoidal fuzzy numbers and we characterize them. We implement the optiminism dominance in a nu-merical example to display that its set of efficient portfolios enlarges the set of efficient portfolios obtained by Tassak et al. [17] through their first order dominance.
    Keywords: Fuzzy variable,Parametric fuzzy measure,Generalized Firstorder dominance,Optiminism Dominance,Set of best portfolios
    Date: 2019
  12. By: Timothy J. Besley; Isabelle A. Roland; John Van Reenen
    Abstract: This paper studies the implications of perceived default risk for aggregate output and productivity. Using a model of credit contracts with moral hazard, we show that a firm’s probability of default is a sufficient statistic for capital allocation. The theoretical framework suggests an aggregate measure of the impact of credit market frictions based on firm-level probabilities of default which can be applied using data on firm-level employment and default risk. We obtain direct estimates of firm-level default probabilities using Standard and Poor’s PD Model to capture the expectations that lenders were forming based on their historical information sets. We implement the method on the UK, an economy that was strongly exposed to the global financial crisis and where we can match default probabilities to administrative data on the population of 1.5 million firms per year. As expected, we find a strong correlation between default risk and a firm’s future performance. We estimate that credit frictions (i) cause an output loss of around 28% per year on average; (ii) are much larger for firms with under 250 employees and (iii) that losses are overwhelmingly due to a lower overall capital stock rather than a misallocation of credit across firms with heterogeneous productivity. Further, we find that these losses accounted for over half of the productivity fall between 2008 and 2009, and persisted for smaller (although not larger) firms
    JEL: D24 E32 L11 O47
    Date: 2020–01
  13. By: A. Jakovac
    Abstract: In this note we review the basic mathematical ideas used in finance in the language of modern physics. In the framework of discrete time formalism we discuss the effect time rescaling, and derive path integral formulas for pricing. We also discuss various risk mitigation methods.
    Date: 2020–01
  14. By: Christian Deffo Tassak (Université de Yaoundé I [Yaoundé]); Louis Aimé Fono (Université de Douala); Jules Sadefo Kamdem (LAMETA - Laboratoire Montpelliérain d'Économie Théorique et Appliquée - UM1 - Université Montpellier 1 - UM3 - Université Paul-Valéry - Montpellier 3 - INRA - Institut National de la Recherche Agronomique - Montpellier SupAgro - Centre international d'études supérieures en sciences agronomiques - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier, UG - Université de Guyane, MRE - Montpellier Recherche en Economie - UM - Université de Montpellier)
    Abstract: A more general concept of risk in economics consists on the chance of getting an income or a return less than a threshold one. Risk has been studied and generalized more earlier by Fishburn [8] through Mean Partial Lower Moment specially when income can be described by a random variable. In this paper, we present a new concept of partial moment, namely Fuzzy Lower Partial Moment (FLPM) based on credibility measure, to quantify risk of getting a return described by a fuzzy variable and we study its properties. Based on FLPM, we introduce mean risk dominance for fuzzy variables, we characterize the dominance for some specific cases and we determine some of its properties. Furthermore, we study the consistency of mean-risk models with respect to first and second order dominances. We display one application of FLPM by introducing a new poverty index for poverty measurement in the context of fuzzy environment and we examine some of its properties.
    Keywords: Credibility measure,Fuzzy variable,Fuzzy lower partial mo-ment,Mean-Risk dominance,Poverty index
    Date: 2019
  15. By: Raphaël Oger (CGI - Centre Génie Industriel - IMT Mines Albi - IMT École nationale supérieure des Mines d'Albi-Carmaux); Matthieu Lauras (CGI - Centre Génie Industriel - IMT Mines Albi - IMT École nationale supérieure des Mines d'Albi-Carmaux); Frederick Benaben (CGI - Centre Génie Industriel - IMT Mines Albi - IMT École nationale supérieure des Mines d'Albi-Carmaux); Benoit Montreuil (Georgia Institute of Technology [Atlanta])
    Abstract: Strategic supply chain planning and supply chain risk management are two fields of supply chain management that are inseparable nowadays. The ability to consider risks is essential to maintain business performance. In addition, integrating the different business departments' visions in a common business vision is necessary to properly plan the future of a company. However, it is still a challenge for companies to design and maintain a decision-making process supporting strategic supply chain decisions that integrates risk management and unify business vision across departments. This paper relates an industrial experiment as an attempt to meet this challenge. This experiment was asked by a pharmaceutical company with the aim of supporting strategic decisions regarding its network of suppliers. It led to a decision-making process including the use of a computerized information system composed of a software for computations and a business intelligence software to easily make decisions. This process was put in practice on a pilot use case with two years old data. It resulted in the identification of several decisions that could have been made if the process was in operation two years ago, which is considered as a first validation of the approach. Finally, limitations have been identified regarding the data collection, opening avenues for future research on an innovative approach combining supply chain hyperconnectivity and event-driven principles.
    Keywords: Strategic Supply Chain Planning,Supply Chain Risk Management,Decision Support Systems,Decision-Making Process,Business Visions Unification
    Date: 2019
  16. By: Marco Avellaneda; Brian Healy; Andrew Papanicolaou; George Papanicolaou
    Abstract: Principal component analysis (PCA) is a useful tool when trying to construct factor models from historical asset returns. For the implied volatilities of U.S. equities there is a PCA-based model with a principal eigenportfolio whose return time series lies close to that of an overarching market factor. The authors show that this market factor is the index resulting from the daily compounding of a weighted average of implied-volatility returns, with weights based on the options' open interest (OI) and Vega. The authors also analyze the singular vectors derived from the tensor structure of the implied volatilities of S&P500 constituents, and find evidence indicating that some type of OI and Vega-weighted index should be one of at least two significant factors in this market.
    Date: 2020–01

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