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on Risk Management |
| By: | Aslanidis, Nektarios; Fernández Bariviera, Aurelio; Savva, Christos S. |
| Abstract: | This paper adopts a versatile multivariate conditional correlation model to estimate daily seasonality in the returns, the volatility, and the correlations between stocks, bonds, gold and Bitcoin. Besides the well known seasonality in stocks and bonds, the day-of-the-week effect is also present in Bitcoin. Mondays are associated with higher Bitcoin returns, while Wednesdays with higher Bitcoin volatility. As opposed to previous literature, our results indicate strong evidence of Bitcoin’s leverage effect. Moreover, we show that daily correlations between Bitcoin and traditional assets are higher at the beginning of the week, while the volatility of these correlations decreases over the week. Our results offer interesting insights in terms of investment and portfolio diversification, that can be applied to the analysis of systematic risk asset allocation and hedging. Keywords: Day-of-the-week effect; dynamic conditional correlation; Bitcoin; volatility seasonality. JEL codes: G01; G10; G12; G22 |
| Keywords: | Bitcoin, Mercats financers, 336 - Finances. Banca. Moneda. Borsa, |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:urv:wpaper:2072/417680&r=all |
| By: | Bermin, Hans-Peter (Knut Wicksell Centre for Financial Studies, Lund University); Holm, Magnus (Hilbert Capital) |
| Abstract: | In this paper we show that risk associated with leverage is fundamentally relative to an arbitrary choice of reference asset or portfolio. We characterize leverage risk as a drawdown risk measure relative to the chosen reference asset. We further prove that the growth optimal Kelly portfolio is the only portfolio for which the relative drawdown risk is not dependent on the choice of the reference asset. Additionally, we show how to translate an investor’s viewpoint from one choice of reference asset to another and establish conditions for when two investors can be said to face identical leverage risk. We also prove that, for a given reference asset, the correlation between two arbitrary portfolios with identical leverage risk equals the ratio of their Sharpe ratios if and only if the leverage risk is consistently traded. More surprisingly, we observe that leverage applied to the growth optimal Kelly strategy affects the drawdown risk in much the same way as the speed of light affects velocities in Einstein’s theory of special relativity. Finally, we provide details on how to trade in order to beat an arbitrary index for a given leverage risk target. |
| Keywords: | Leverage; Drawdown risk; Generalized Kelly strategy; Numéraire invariance; Risk relativity |
| JEL: | E20 |
| Date: | 2021–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:luwick:2021_001&r=all |
| By: | Mikael Juselius; Nikola Tarashev |
| Abstract: | Extending a standard credit-risk model illustrates that a single factor can drive both expected losses and the extent to which they may be exceeded in extreme scenarios, ie "unexpected losses". This leads us to develop a framework for forecasting these losses jointly. In an application to quarterly US data on loan charge-offs from 1985 to 2019, we find that financial-cycle indicators – notably, the debt service ratio and credit-to-GDP gap – deliver reliable real-time forecasts, signalling turning points up to three years in advance. Provisions and capital that reflect such forecasts would help reduce the procyclicality of banks' loss-absorbing resources. |
| Keywords: | loss rate forecasts, cyclical turning points, expected loss provisioning, bank capital |
| JEL: | G17 G21 G28 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:913&r=all |
| By: | Mohamed Belkhir; Sami Ben Naceur; Ralph Chami; Anis Semet |
| Abstract: | Using a sample of publicly listed banks from 62 countries over the 1991-2017 period, we investigate the impact of capital on banks’ cost of equity. Consistent with the theoretical prediction that more equity in the capital mix leads to a fall in firms’ costs of equity, we find that better capitalized banks enjoy lower equity costs. Our baseline estimations indicate that a 1 percentage point increase in a bank’s equity-to-assets ratio lowers its cost of equity by about 18 basis points. Our results also suggest that the form of capital that investors value the most is sheer equity capital; other forms of capital, such as Tier 2 regulatory capital, are less (or not at all) valued by investors. Additionally, our main finding that capital has a negative effect on banks’ cost of equity holds in both developed and developing countries. The results of this paper provide the missing evidence in the debate on the effects of higher capital requirements on banks’ funding costs. |
| Keywords: | Stocks;Banking;Capital adequacy requirements;Stock markets;Return on investment;WP,bank capital,capital requirement,financial risk,capital measure |
| Date: | 2019–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/265&r=all |
| By: | Pedro Cadenas (Denison University); Henryk Gzyl (IESA); Hyun Woong Park (Denison University) |
| Abstract: | Against the widely held belief that diversification at banking institutions contributes to the stability of the financial system, Wagner (2010) found that diversification actually makes systemic crisis more likely. While it is true, as Wagner asserts, that the probability of joint default of the diversified portfolios is larger; we contend that, as common practice, the effect of diversification is examined with respect to a risk measure like VaR. We find that when banks use VaR, diversification does reduce individual and systemic risk. This, in turn, generates a different set of incentives for banks and regulators. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2012.12154&r=all |
| By: | Pierre Durand; Gaëtan Le Quang |
| Abstract: | Prudential regulation is supposed to strengthen financial stability and banks' resilience to new economic shocks. We tackle this issue by evaluating the impact of leverage, capital, and liquidity ratios on banks default probability. To this aim, we use logistic regression, random forest classification, and artificial neural networks applied on the United-States and European samples over the 2000-2018 period. Our results are based on 4707 banks in the US and 3529 banks in Europe, among which 454 and 205 defaults respectively. We show that, in the US sample, capital and equity ratios have strong negative impact on default probability. Liquidity ratio has a positive effect which can be justified by the low returns associated with liquid assets. Overall, our investigation suggests that fewer prudential rules and higher leverage ratio should reinforce the banking system's resilience. Because of the lack of official failed banks list in Europe, our findings on this sample are more delicate to interpret. |
| Keywords: | Banking regulation ; Capital requirements ; Basel III ; Logistic ; Statistical learning classification ; Bankruptcy prediction models. |
| JEL: | C44 G21 G28 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2021-2&r=all |
| By: | Bali, Turan G.; Weigert, Florian |
| Abstract: | While it is established that idiosyncratic volatility has a negative impact on the cross-section of future stock returns, the relationship between idiosyncratic volatility and future hedge fund returns is largely unexplored. We document that hedge funds with high idiosyncratic volatility outperform and this pattern is explained by the positive return effect of idiosyncratic volatility in their equity portfolio holdings. Hedge funds select stocks wisely by picking high-volatility stocks when they are undervalued and shying away from high-volatility stocks when they are overvalued or display lottery-like payoffs. They also trade derivatives in a way to profit from the positive volatility effect. |
| Keywords: | Hedge Funds,Idiosyncratic Volatility Puzzle,Equity Portfolio Holdings,Derivatives,Managerial Incentives,Investment Performance |
| JEL: | G11 G23 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:2101&r=all |
| By: | Andrew Papanicolaou |
| Abstract: | This article explores the relationship between the SPX and VIX options markets. High-strike VIX call options are used to hedge tail risk in the SPX, which means that SPX options are a reflection of the extreme-strike asymptotics of VIX options, and vice versa. This relationship can be quantified using moment formulas in a model-free way. Comparisons are made between VIX and SPX implied volatilities along with various examples of stochastic volatility models. |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2101.00299&r=all |
| By: | Harald Scheule (Finance Discipline Group, University of Technology Sydney); Stephan Jortzik (Global Credit Data Methodology Committee) |
| Abstract: | This paper provides a theoretical and empirical analysis of alternative discount rate concepts for computing loss given default (LGD) rates using historical bank workout data. It benchmarks five discount rate concepts for workout recovery cashflows in order to derive observed LGDs in terms of economic robustness and empirical implications: contract rate at origination, loan-weighted average cost of capital, return on equity (ROE), market return on defaulted debt and market equilibrium return. The paper develops guiding principles for LGD discount rates and argues that the weighted average cost of capital and market equilibrium return dominate the popular contract rate method. The empirical analysis of data provided by Global Credit Data (GCD) shows that declining risk-free rates are in part offset by increasing market risk premiums. Common empirical discount rates lie between the risk-free rate and the ROE. The variation in empirical LGDs is moderate for the various discount rate approaches. Further, a simple correction technique for resolution bias is developed and increases observed LGDs for all periods, particularly recent periods. |
| Keywords: | default; discount rates; global credit data; loss given default (LGD); recovery; resolution; systematic risk |
| Date: | 2020–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:ppaper:2020-5&r=all |
| By: | Anantharaman, Divya; Kamath, Saipriya; Li, Shengnan |
| Abstract: | Corporate defined-benefit (DB) pension sponsors in the US are increasingly on a path of “derisking” – by moving pension assets away from equities and towards fixed-income securities that better match the obligations, or by transferring obligations off their balance sheets entirely, via settlements with insurance companies or lump-sum payouts to beneficiaries. In this study, we examine whether the Tax Cut and Jobs Act of 2017 (“TCJA”) served as a driver of pension derisking. Examining behavior in the window between the TCJA’s announcement and its lower tax rate going into effect, we document that sponsors with stronger incentives to derisk their pensions tend to contribute more into their plans in that window, while deductions can still be taken at the higher tax rate – specifically, sponsors expecting large and uncertain contribution requirements for pensions in the future, facing high regulatory costs to maintaining plans, and with competing demands on cash flows. Examining behavior after the TCJA goes into effect, we document that the firms with the largest TCJA-triggered contributions also engage in more derisking subsequently, both by shifting asset allocations and by transferring obligations to other parties. In sum, our findings point to the TCJA having acted as a trigger for what could be a fundamental reorganization of the DB pension landscape in the US. |
| Keywords: | TCJA; defined-benefit plans; voluntary contributions; derisking; pension asset allocation; pension settlements or buyouts |
| JEL: | J32 K34 H32 H26 G23 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:108535&r=all |
| By: | Rama Cont; Artur Kotlicki; Laura Valderrama |
| Abstract: | The traditional approach to the stress testing of financial institutions focuses on capital adequacy and solvency. Liquidity stress tests have been applied in parallel to and independently from solvency stress tests, based on scenarios which may not be consistent with those used in solvency stress tests. We propose a structural framework for the joint stress testing of solvency and liquidity: our approach exploits the mechanisms underlying the solvency-liquidity nexus to derive relations between solvency shocks and liquidity shocks. These relations are then used to model liquidity and solvency risk in a coherent framework, involving external shocks to solvency and endogenous liquidity shocks arising from these solvency shocks. We define the concept of ‘Liquidity at Risk’, which quantifies the liquidity resources required for a financial institution facing a stress scenario. Finally, we show that the interaction of liquidity and solvency may lead to the amplification of equity losses due to funding costs which arise from liquidity needs. The approach described in this study provides in particular a clear methodology for quantifying the impact of economic shocks resulting from the ongoing COVID-19 crisis on the solvency and liquidity of financial institutions and may serve as a useful tool for calibrating policy responses. |
| Keywords: | Financial statements;Liquidity risk;Liquidity;Stress testing;Solvency;WP,balance sheet,variation margin,amount |
| Date: | 2020–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/082&r=all |
| By: | Boeckelmann Lukas; Stalla-Bourdillon Arthur |
| Abstract: | We propose a novel approach to quantify spillovers on financial markets based on a structural version of the Diebold-Yilmaz framework. Key to our approach is a SVAR-GARCH model that is statistically identified by heteroskedasticity, economically identified by maximum shock contribution and that allows for time-varying forecast error variance decompositions. We analyze credit risk spillovers between EZ sovereign and bank CDS. Methodologically, we find the model to better match economic narratives compared with common spillover approaches and to be more reactive than models relying on rolling window estimations. We find, on average, spillovers to explain 37% of the variation in our sample, amid a strong variation of the latter over time. |
| Keywords: | CDS, spillover, sovereign debt, systemic risk, SVAR, identification by heteroskedasticity |
| JEL: | C58 G01 G18 G21 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:798&r=all |
| By: | Tzougas, George; Jeong, Himchan |
| Abstract: | This article presents the Exponential–Generalized Inverse Gaussian regression model with varying dispersion and shape. The EGIG is a general distribution family which, under the adopted modelling framework, can provide the appropriate level of flexibility to fit moderate costs with high frequencies and heavy-tailed claim sizes, as they both represent significant proportions of the total loss in non-life insurance. The model’s implementation is illustrated by a real data application which involves fitting claim size data from a European motor insurer. The maximum likelihood estimation of the model parameters is achieved through a novel Expectation Maximization (EM)-type algorithm that is computationally tractable and is demonstrated to perform satisfactorily. |
| Keywords: | Exponential–Generalized Inverse Gaussian Distribution; EM Algorithm; regression models for the mean; dispersion and shape parameters; non-life insurance; heavy-tailed losses |
| JEL: | C1 |
| Date: | 2021–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:108210&r=all |
| By: | R. G Gelos; Lucyna Gornicka; Robin Koepke; Ratna Sahay; Silvia Sgherri |
| Abstract: | The volatility of capital flows to emerging markets continues to pose challenges to policymakers. In this paper, we propose a new framework to answer critical policy questions: What policies and policy frameworks are most effective in dampening sharp capital flow movements in response to global shocks? What are the near- versus medium-term trade-offs of different policies? We tackle these questions using a quantile regression framework to predict the entire future probability distribution of capital flows to emerging markets, based on current domestic structural characteristics, policies, and global financial conditions. This new approach allows policymakers to quantify capital flows risks and evaluate policy tools to mitigate them, thus building the foundation of a risk management framework for capital flows. |
| Keywords: | Capital flows;Exchange rate arrangements;Foreign exchange;Emerging and frontier financial markets;Capital account;WP,portfolio inflow,portfolio,capital flow |
| Date: | 2019–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/279&r=all |
| By: | Ferrari, Massimo; Le Mezo, Helena |
| Abstract: | This paper proposes a new methodology based on textual analysis to forecast U.S. recessions. Specifically, the paper develops an index in the spirit of Baker et al. (2016) and Caldara and Iacoviello (2018) which tracks developments in U.S. real activity. When used in a standard recession probability model, the index outperforms the yield curve based forecast, a standard method to forecast recessions, at medium horizons, up to 8 months. Moreover, the index contains information not included in yield data that are useful to understand recession episodes. When included as an additional control to the slope of the yield curve, it improves the forecast accuracy by 5% to 30% depending on the horizon. These results are stable to a number of different robustness checks, including changes to the estimation method, the definition of recessions and controlling for asset purchases by major central banks. Yield and textual analysis data also outperform other popular leading indicators for the U.S. business cycle such as PMIs, consumers' surveys or employment data. JEL Classification: E17, E47, E37, C25, C53 |
| Keywords: | forecast, textual analysis, U.S. recessions |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212516&r=all |
| By: | Lilas Demmou; Sara Calligaris; Guido Franco; Dennis Dlugosch; Müge Adalet McGowan; Sahra Sakha |
| Abstract: | This paper investigates the likelihood of corporate insolvency and the potential implications of debt overhang of non-financial corporations induced by economic shock associated with the outbreak of COVID-19. Based on simple accounting models, it evaluates the extent to which firms deplete their equity buffers and increase their leverage ratios in the course of the COVID-19 crisis. Next, relying on regression analysis and looking at the historical relationship between firms’ leverage and investment, it examines the potential impact of higher debt levels on investment during the recovery. Against this background, the discussion outlines a number of policy options to flatten the curve of crisis-related insolvencies, which could potentially affect otherwise viable firms, and to lessen the risk of debt-overhang, which could slow down the speed of recovery. |
| Keywords: | COVID-19, debt, equity, insolvency, investment |
| JEL: | D22 D24 G33 G34 |
| Date: | 2021–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1651-en&r=all |
| By: | David R. Ba\~nos |
| Abstract: | The main purpose of this work is to derive a partial differential equation for the reserves of life insurance liabilities subject to stochastic interest rates where the benefits and premiums depend directly on changes in the interest rate curve. In particular, we allow the payment streams to depend on the performance of an overnight technical interest rate, making them stochastic as well. This opens up for considering new types of contracts based on the performance of the insurer's returns on their own investments. We provide explicit solutions for the reserves when the premiums and benefits vary according to interest rate levels or averages under the Vasicek model and conduct some simulations computing reserve surfaces numerically. We also give an example of a reinsurance treaty taking over pension payments when the insurer's average returns fall under some specified threshold. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2012.15541&r=all |
| By: | Alexis Catanzaro (Labex Entreprendre - UM - Université de Montpellier, COACTIS - COACTIS - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet [Saint-Étienne]); Christine Teyssier (COACTIS - COACTIS - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet [Saint-Étienne]) |
| Abstract: | The purpose of the study is to analyze the effectiveness of public policies on the international performance of the small-and medium-sized enterprises (SMEs). Specifically, we investigate the effect of public export promotion programs (EPPs) on two types of organizational capabilities, i.e., export capabilities which have been already used in previous modelization and international risk management practices as an original variable intended to better explain the effectiveness of public policies on the SME's international performance. We use a quantitative methodology based on a structural equation modeling approach applied to a sample of 147 internationalized French SMEs that used EPPs. Our results add value to theoretical and empirical knowledge on the effectiveness of public support programs on the international performance of SMEs, since we demonstrate an indirect effect between EPPs and international performance, through export capabilities and risk management practices. We also show that by strengthening the risk management practices, EPPs stimulate the SME in implementing foreign direct investment strategies. |
| Keywords: | France,Structural equation models,Risk management practices,Organizational capabilities,International performance,Export promotion programs,SMEs |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03034452&r=all |
| By: | Arif, Muhammad (Department of Business Administration, Shaheed Benazir Bhutto University, Shaheed Benazirabad, Pakistan); Naeem, Muhammad Abubakr (School of Economics and Finance, Massey University, New Zealand and Business Administration Department, Faculty of Management Sciences, ILMA University, Karachi, Pakistan); Farid, Saqib (School of Business and Economics, University of Management and Technology, Pakistan); Nepal, Rabindra (Faculty of Business and Law, School of Accountancy Economics and Finance, University of Wollongong, Australia); Jamasb, Tooraj (Department of Economics, Copenhagen Business School) |
| Abstract: | Against the backdrop of the Covid-19 pandemic, this study explores the hedging and safe-haven potential of green bonds for conventional equity, fixed income, commodity, and forex investments. We use the cross-quantilogram approach that provides a better understanding of the dynamic relationship between assets under different market conditions. Our full sample results show that the green bond index could serve as a diversifier asset for medium- and long-term equity investors. Besides, it can also serve as a hedging and safe haven instrument for currency and commodity investments. Moreover, the sub-sample analysis of the pandemic crisis period shows a heightened short- and medium-term lead-lag association between the green bond index and conventional investment returns. However, the green bond index emerges as a significant hedging and safe-haven asset for the long-term investors of conventional financial assets. Our results offer insights for long-term investors whose portfolios comprise conventional assets such as equities, commodities, forex, and fixed income securities. Further, our findings reveal the potential role that the green bond investments could play in global financial recovery efforts without compromising the low-carbon transition targets. |
| Keywords: | Green bonds; Hedge; Safe-haven; Cross-quantilogram; COVID-19 |
| JEL: | G10 G11 G19 Q01 |
| Date: | 2020–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cbsnow:2021_001&r=all |
| By: | Baruník, Jozef; Bevilacqua, Mattia; Tunaru, Radu |
| Abstract: | This paper introduces forward-looking measures of the network connectedness of fears in the financial system, arising due to the good and bad beliefs of market participants about uncertainty that spreads unequally across a network of banks. We argue that this asymmetric network structure extracted from call and put traded option prices of the main U.S. banks contains valuable information for predicting macroeconomic conditions and economic uncertainty, and it can serve as a tool for forward-looking systemic risk monitoring. |
| Keywords: | ES/K002309/1; ES/R009724/1 |
| JEL: | J1 C1 |
| Date: | 2020–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:108199&r=all |
| By: | Bahar Akthari; Francesca Biagini; Andrea Mazzon; Katharina Oberpriller |
| Abstract: | In this paper we provide a generalization of the Feynmac-Kac formula under volatility uncertainty in presence of discounting. We state our result under different hypothesis with respect to the derivation given by Hu, Ji, Peng and Song (Comparison theorem, Feynman-Kac formula and Girsanov transformation for BSDEs driven by G-Brownian motion, Stochastic Processes and their Application, 124 (2)), where the Lipschitz continuity of some functionals is assumed which is not necessarily satisfied in our setting. In particular, we obtain the $G$-conditional expectation of a discounted payoff as the limit of $C^{1,2}$ solutions of some regularized PDEs, for different kinds of convergence. In applications, this permits to approximate such a sublinear expectation in a computationally efficient way. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2012.08163&r=all |
| By: | Nicola Comincioli (University of Brescia and Fondazione Eni Enrico Mattei); Paolo M. Panteghini (University of Brescia and CESifo); Sergio Vergalli (University of Brescia and Fondazione Eni Enrico Mattei) |
| Abstract: | In this article we introduce model to describe the behavior of a multinational company (MNC) that operates transfer pricing and debt shifting, with the purpose of incrementing its value, intended as the sum of equity and debt. We compute, in a stochastic environment and under default risk, the optimal shares of profit and debt to be shifted and show how they are a ected by exogenous features of the market. In addition, by means of a numerical analysis, we simulate and quantify the benefit arising from the exploitation of tax avoidance practices and study the corresponding impact on MNC's fundamental indicators. A wide sensitivity analysis on model's parameters is also provided. |
| Keywords: | Capital Structure, Default Risk, Business Taxation and Welfare |
| JEL: | H25 G33 G38 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2020.16&r=all |
| By: | Lopes Moreira Da Veiga, María Helena; Rue, Havard; Marín Díazaraque, Juan Miguel; Zea Bermudez, P. De |
| Abstract: | The aim of the paper is to implement the integrated nested Laplace (INLA) approximations,known to be very fast and efficient, for a threshold stochastic volatility model. INLAreplaces MCMC simulations with accurate deterministic approximations. We use properal though not very informative priors and Penalizing Complexity (PC) priors. The simulation results favor the use of PC priors, specially when the sample size varies from small to moderate. For these sample sizes, they provide more accurate estimates of the model'sparameters, but as sample size increases both type of priors lead to reliable estimates of the parameters. We also validate the estimation method in-sample and out-of-sample by applying it to six series of returns including stock market, commodity and crypto currency returns and by forecasting their one-day-ahead volatilities, respectively. Our empirical results support that the TSV model does a good job in forecasting the one-day-ahead volatility of stock market and gold returns but faces difficulties when the volatility of returns is extreme, which occurs in the case of cryptocurrencies. |
| Keywords: | Threshold Stochastic Volatility Model; Pc Priors; Inla |
| JEL: | C58 C52 C32 C13 |
| Date: | 2021–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:31804&r=all |
| By: | Nicola Comincioli; Paolo Panteghini; Sergio Vergalli |
| Abstract: | In this article we introduce a stochastic model with a multinational company (MNC) that exploits tax avoidance practices. We focus on both transfer pricing (TP) and debt shifting (DS) activities and show how their optimal level is chosen by the shareholders. In addition, we perform an extensive numerical simulation, fine-tuned on empirical data, to measure the impact of tax avoidance practices on the MNC’s value and to study their sensitivity to exogenous variables. We will show that: an increase in risk sharply reduces leverage and slightly decreases a MNC’s value; the cost of TP leads to a sharp reduction in the MNC’s value, whereas it does not affect leverage; the impact on MNC’s decisions is increasing in the tax rate differential; finally, the cost of DS has always a relevant impact on both MNC’s value and leverage. |
| Keywords: | capital structure, default risk, business taxation and welfare |
| JEL: | H25 G33 G38 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8807&r=all |
| By: | Martin Hodula; Jan Janku; Martin Casta; Adam Kucera |
| Abstract: | This paper tests potential determinants of the development of the insurance sector. Using a rich dataset for 24 European countries spanning two decades, we identify a set of macro-financial factors that are the most robust predictors of growth of gross premiums in the life and non-life insurance sectors. We show that both life and non-life premiums co-move with the business cycle and are positively related to higher savings and a more developed financial system. In addition, we provide new evidence on the role of market concentration and price effects. We find that market concentration matters only for life insurance, whereas the price channel is significant only for non-life insurance. From a policy perspective, our empirical estimates can be used to refine the existing macroprudential stress tests of the insurance sector. |
| Keywords: | Business cycle, insurance, life insurance, macro-financial determinants, non-life insurance |
| JEL: | D4 E32 G22 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2020/8&r=all |
| By: | Filippo de Feo |
| Abstract: | In this work we study the averaging principle for non-autonomous slow-fast systems of stochastic differential equations. In particular in the first part we generalize Khasminskii's averaging principle to the non-autonomous case, assuming the sublinearity, the Lipschitzianity and the Holder's continuity in time of the coefficients, an ergodic hypothesis and an $\mathcal{L}^2$-bound of the fast component. In this setting we prove the weak convergence of the slow component to the solution of the averaged equation. Moreover we provide a suitable dissipativity condition under which the ergodic hypothesis and the $\mathcal{L}^2$-bound of the fast component, which are implicit conditions, are satisfied. In the second part we propose a financial application of this result: we apply the theory developed to a slow-fast local stochastic volatility model. First we prove the weak convergence of the model to a local volatility one. Then under a risk neutral measure we show that the prices of the derivatives, possibly path-dependent, converge to the ones calculated using the limit model. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2012.09082&r=all |