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on Risk Management |
| By: | Patrick Cheridito; John Ery; Mario V. W\"uthrich |
| Abstract: | We introduce a neural network approach for assessing the risk of a portfolio of assets and liabilities over a given time period. This requires a conditional valuation of the portfolio given the state of the world at a later time, a problem that is particularly challenging if the portfolio contains structured products or complex insurance contracts which do not admit closed form valuation formulas. We illustrate the method on different examples from banking and insurance. We focus on value-at-risk and expected shortfall, but the approach also works for other risk measures. |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2105.12432&r= |
| By: | Glossner, Simon; Matos, Pedro Pinto; Ramelli, Stefano; Wagner, Alexander F |
| Abstract: | During the COVID-19 market crash, U.S. stocks with higher institutional ownership -- in particular, those held more by active, short-term, and more exposed institutions -- performed worse. Portfolio changes through the first quarter of 2020 reveal that institutional investors prioritized corporate financial strength over "soft" environmental and social performance. Trading data from a large discount brokerage (Robinhood) confirm that retail investors acted as liquidity providers. The effects did not reverse in the second quarter. Overall, the results suggest that when a tail risk realizes, institutional investors amplify price crashes by fire-selling and seeking shelter in "hard" measures of firm resilience. |
| Keywords: | Coronavirus; corporate cash holdings; Corporate Debt; COVID-19; ESG; Institutional Ownership; leverage; Retail investors; tail risk |
| JEL: | F14 G01 G12 G14 G32 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15070&r= |
| By: | Broll, Udo; Pelster, Matthias; Kit, Pong Wong |
| Abstract: | Abstracting from self-protection and self-insurance e ects of export produc-tion choices, exporting rms usually have access to a number of risk sharingmarkets that have an efficient risk management role. Two of the most strikingresults achieved from the existence of risk sharing markets are the separationtheorem and the and full-hedging theorem. This note examines the optimalproduction for exports and hedging decisions of a risk-averse rm facing bothhedgeable exchange rate risk and non-hedgeable (background) risk. While theseparation property holds in this context, the full-hedging property does not.The correlation between the non-hedgeable income risk and the hedgeableforeign exchange rate risk is pivotal We show that the concept of expectationdependence is useful in determining the optimal nancial risk management. |
| Keywords: | Export,Background Risk,Exchange Rate Risk,Expectation Dependence,Hedging,Hintergrundrisiko,Wechselkursrisiko,Erwartungsabhängigkeit,Absicherung |
| JEL: | D81 D84 F11 F30 F31 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tudcep:0221&r= |
| By: | Alary, David; Bobtcheff, Catherine; Haritchabalet, Carole |
| Abstract: | This paper explores how insurance companies can coordinate to extend their joint capacity for the coverage of new and undiversifiable risks. The undiversifiable nature of such risks causes a shortage of insurance capacity and their limited knowledge makes learning and information sharing necessary. We develop a unified theoretical model to analyse co-insurance agreements. We show that organizing this insurance supply amounts to sharing a common value divisible good between capacity constrained and privately informed insurers with a reserve price. Coinsurance via the creation of an insurance pool turns out to operate as a uniform price auction with an ``exit/re-entry'' option. We compare it to a discriminatory auction for which no specific agreements are needed. Both auction formats lead to different coverage/premium tradeoffs. If at least one insurer provides an optimistic expertise about the risk, the pool offers higher coverage. This result is reversed when all insurers are pessimistic about the risk. Static comparative results with respect to the severity of the capacity constraints and the reserve price are provided. In the case of completely new risks, a regulator aiming at maximizing the expected coverage should promote the pool when the reserve price is low enough or when competition is high enough. |
| Keywords: | Coinsurance; common value divisible goods auctions; Competition; reserve price; undiversifiable and new risks |
| JEL: | D44 D82 G22 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15234&r= |
| By: | De Polis, Andrea; Delle Monache, Davide; Petrella, Ivan |
| Abstract: | We document a substantial increase in downside risk to US economic growth over the last 30 years. By modeling secular trends and cyclical changes of the predictive density of GDP growth, we recover an accelerating decline in the skewness of the conditional distributions, with significant, procyclical variations. Decreasing trend-skewness, turning negative in the aftermath of the Great Recession, is associated with the long-run growth slowdown stared in the early 2000s. Short-run skewness fluctuation imply negatively skewed predictive densities ahead, and during recessions, often anticipated by deteriorating financial conditions, while positively skewed distributions characterize expansions. The model delivers competitive out-of-sample (point, density and tail) forecasts, improving upon standard benchmarks, due to financial conditions providing strong signals of increasing downside risk. |
| Keywords: | Business cycle; Downside risk; financial conditions; score driven models; Skewness |
| JEL: | C53 E32 E44 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15109&r= |
| By: | De Nova, Carolina Carbajal |
| Keywords: | Research Methods/ Statistical Methods, Risk and Uncertainty |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aesc21:311085&r= |
| By: | Chia, Ricky Chee-Jiun; Liew, Venus Khim-Sen; Rowland, Racquel |
| Abstract: | ABSTRACT The Movement Control Order (MCO) not only restricts movement of human being, it also reduces firms’ financial profits and brings significant impact to stock returns. The objective of this study is to examine the relation between Malaysian stock market returns and variables related to the novel Coronavirus (COVID-19) pandemic outbreak. The FTSE Bursa Malaysia KLCI Index and eight selected main indices from 2 January 2020 to April 30, 2020, which includes the first three MCOs, are considered in this study. The results show that daily new confirmed COVID-19 cases and deaths had negative but insignificant impact on the returns on indices. Interestingly, MCO had significant and positive impact on all the indices’ returns while oversea financial risks had negative impact on these returns. Furthermore, it is found that the degree of impacts of MCO and oversea financial risks varied positively with the firm size of the indices’ constituent companies. China’s decision on unchanged loan prime rate on the 20 February 2020 was a favorable news to the Malaysia stock markets as indicated by the positive returns on all the indices. Similarly, the degree of impact of the China interest policy also varied positively with the firms’ characteristics. These findings are useful for investors in the Bursa Malaysia to manage their investment portfolios based on their appetites for risk. |
| Keywords: | COVID-19; Movement Control Order; Pandemic outbreak; Bursa Malaysia |
| JEL: | G10 G14 H0 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107988&r= |
| By: | Karlsson, Sune (Örebro University School of Business); Mazur, Stepan (Örebro University School of Business); Nguyen, Hoang (Örebro University School of Business) |
| Abstract: | With uncertain changes of the economic environment, macroeconomic downturns during recessions and crises can hardly be explained by a Gaussian structural shock. There is evidence that the distribution of macroeconomic variables is skewed and heavy tailed. In this paper, we contribute to the literature by extending a vector autore- gression (VAR) model to account for a more realistic assumption of the multivariate distribution of the macroeconomic variables. We propose a general class of generalized hyperbolic skew Student's t distribution with stochastic volatility for the error term in the VAR model that allows us to take into account skewness and heavy tails. Tools for Bayesian inference and model selection using a Gibbs sampler are provided. In an empirical study, we present evidence of skewness and heavy tails for monthly macroe- conomic variables. The analysis also gives a clear message that skewness should be taken into account for better predictions during recessions and crises. |
| Keywords: | Vector autoregression; Skewness and heavy tails; Generalized hyper- bolic skew Students t distribution; Stochastic volatility; Markov Chain Monte Carlo |
| JEL: | C11 C15 C16 C32 C52 |
| Date: | 2021–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:oruesi:2021_008&r= |
| By: | Dew-Becker, Ian; Giglio, Stefano W; Kelly, Bryan |
| Abstract: | We study the pricing of shocks to uncertainty and volatility using a wide-ranging set of options contracts covering a variety of different markets. If uncertainty shocks are viewed as bad by investors, they should carry negative risk premia. Empirically, however, uncertainty risk premia are positive in most markets. Instead, it is the realization of large shocks to fundamentals that has historically carried a negative premium. In other words, we find that the return premium for gamma is negative while that for vega is positive. These results imply that it is jumps, for which exposure is measured by gamma, not forward-looking uncertainty shocks, measured by vega, that drive investors' marginal utility. In further support of the jump interpretation, the return patterns are more extreme for deeper out of the money options. |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15239&r= |
| By: | Alexandros Skouralis |
| Abstract: | The high degree of financial contagion across the Euro area during the sovereign debt crisis highlighted the importance of systemic risk. In this paper we employ a Global VAR (GVAR) model to analyse the systemic risk spillovers across the Euro area and to assess their role in the transmission of monetary policy. The results indicate a strong interconnectedness among core countries and also that peripheral economies have a disproportionate importance in spreading systemic risk. A systemic risk shock results in economic slowdown domestically and causes negative spillovers to the rest of the EMU economies. To examine how monetary policy impacts systemic risk, we incorporate high-frequency monetary surprises into the model. We find evidence of the risk-taking channel during normal times, whereas the relationship is reversed in the period of the ZLB with expansionary shocks to result in a more stable financial system. Our findings indicate that the signalling channel is the main driver of this effect and that the initiation of the QE program boosts the economic activity but results in higher systemic risk. Finally, our results suggest that spillovers play an important role in the transmission of the monetary policy and that there is evidence of significant heterogeneity amongst countries’ responses with core countries to benefit the most from changes in monetary policy. |
| Keywords: | Systemic risk, Global VAR model, Eurozone, High-frequency monetary policy shocks |
| JEL: | C32 E44 F36 F45 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:lan:wpaper:326919507&r= |
| By: | Bubeck, Johannes; Maddaloni, Angela; Peydró, José Luis |
| Abstract: | We show that negative monetary policy rates induce systemic banks to reach-for-yield. For identification, we exploit the introduction of negative deposit rates by the European Central Bank in June 2014 and a novel securities register for the 26 largest euro area banking groups. Banks with more customer deposits are negatively affected by negative rates, as they do not pass negative rates to retail customers, in turn investing more in securities, especially in those yielding higher returns. Effects are stronger for less capitalized banks, private sector (financial and non-financial) securities and dollar-denominated securities. Affected banks also take higher risk in loans. |
| Keywords: | banks; negative rates; Non-Standard Monetary Policy; reach-for-yield; securities |
| JEL: | E43 E52 E58 G01 G21 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14988&r= |
| By: | Sune Karlsson; Stepan Mazur; Hoang Nguyen |
| Abstract: | With uncertain changes of the economic environment, macroeconomic downturns during recessions and crises can hardly be explained by a Gaussian structural shock. There is evidence that the distribution of macroeconomic variables is skewed and heavy tailed. In this paper, we contribute to the literature by extending a vector autoregression (VAR) model to account for a more realistic assumption of the multivariate distribution of the macroeconomic variables. We propose a general class of generalized hyperbolic skew Student's t distribution with stochastic volatility for the error term in the VAR model that allows us to take into account skewness and heavy tails. Tools for Bayesian inference and model selection using a Gibbs sampler are provided. In an empirical study, we present evidence of skewness and heavy tails for monthly macroeconomic variables. The analysis also gives a clear message that skewness should be taken into account for better predictions during recessions and crises. |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2105.11182&r= |
| By: | Christoph J. B\"orner; Ingo Hoffmann; Jonas Krettek; Lars M. K\"urzinger; Tim Schmitz |
| Abstract: | This paper evaluates and assesses the risk associated with capital allocation in cryptocurrencies (CCs). In this regard, we take a basket of 27 CCs and the CC index EWCI$^-$ into account. After considering a series of statistical tests we find the stable distribution (SDI) to be the most appropriate to model the body of CCs returns. However, as we find the SDI to possess less favorable properties in the tail area for high quantiles, the generalized Pareto distribution is adapted for a more precise risk assessment. We use a combination of both distributions to calculate the Value at Risk and the Conditional Value at Risk, indicating two subgroups of CCs with differing risk characteristics. |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2105.12334&r= |
| By: | Cutura, Jannic; Parise, Gianpaolo; Schrimpf, Andreas |
| Abstract: | We examine the incentive of corporate bond fund managers to manipulate portfolio risk in response to competitive pressure. We find that bond funds engage in a reverse fund tournament in which laggard funds actively de-risk their portfolios, trading-off higher yields for more liquid and safer assets. De-risking is stronger for laggard funds that have a more concave sensitivity of flows-to-performance, in periods of market stress, and when bond yields are high. We provide evidence that debt de-risking also reduces ex post liquidation costs by mitigating the investors' incentive to run ex ante. We argue that, in the presence of de-risking behaviors, flexible NAVs (swing pricing) may be counter-productive and induce moral hazard. |
| Keywords: | bonds; De-risking; liquidity; Mutual funds; swing pricing; tournaments |
| JEL: | E43 G11 G23 G32 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14817&r= |
| By: | Filippou, Ilias; Gozluklu, Arie; Nguyen, My; Taylor, Mark P |
| Abstract: | We develop a novel measure of U.S. populist rhetoric. Aggregate Populist Rhetoric (APR) Index spikes around populist events. We decompose the APR Index into sub-indices. We show that APR Index and International Relations sub-index are negatively priced in the cross-section of currency excess returns. Currencies that perform well (badly) when U.S. populist rhetoric is high yield low (high) expected excess returns. Investors require high risk premium for holding currencies which underperform in times of rising U.S. populist rhetoric, especially in the post-crisis period. A long-short strategy that buys (sells) currencies with high (low) exposure to U.S. populism offers strong diversification benefits. |
| Keywords: | Foreign exchange market; populism; textual analysis |
| JEL: | G11 G12 G14 G32 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15054&r= |
| By: | Traore, Fousseini; Diop, Insa |
| Abstract: | Over the past two decades, the prices of agricultural commodities have experienced large and unpredictable fluctuations that have attracted the attention of researchers, policymakers and the media to better understand the mechanisms that govern this phenomenon. It is therefore important to acquire basic tools to assess the level of price volatility to warn of abnormal movements. The main objective of this technical note is to provide an overview of this literature in constant evolution, and tools for measuring food price volatility. The tools developed in this technical note help understand the complexity of measuring volatility and the caution required in their use. Thus, the application of these tools requires their adaptation to the nature of the data generating process and the use of appropriate tests and criteria in order to choose the best approach. |
| Keywords: | food prices, price volatility, tools, agricultural products, commodities, food price volatility, |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:fpr:agrotn:19&r= |
| By: | Longden, Elaine (Tilburg University, School of Economics and Management) |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiutis:e1d97882-8cf3-40a4-a82e-8ad900e59177&r= |
| By: | Christoph J. B\"orner; Ingo Hoffmann; Jonas Krettek; Lars M. K\"urzinger; Tim Schmitz |
| Abstract: | Cryptocurrencies (CCs) become more interesting for institutional investors' strategic asset allocation and will be a fixed component of professional portfolios in future. This asset class differs from established assets especially in terms of the severe manifestation of statistical parameters. The question arises whether CCs with similar statistical key figures exist. On this basis, a core market incorporating CCs with comparable properties enables the implementation of a tracking error approach. A prerequisite for this is the segmentation of the CC market into a core and a satellite, the latter comprising the accumulation of the residual CCs remaining in the complement. Using a concrete example, we segment the CC market into these components, based on modern methods from image / pattern recognition. |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2105.12336&r= |
| By: | Andreas Krause |
| Abstract: | I demonstrate that with the market return determined by the equilibrium returns of the CAPM, expected returns of an asset are affected by the risks of all assets jointly. Another implication is that the range of feasible market returns will be limited and dependent on the distribution of weights in the market portfolio. A large and well diversified market with no dominating asset will only return zero while a market dominated by a small number of assets will only return the risk-free rate. In the limiting case of atomistic assets, we recover the properties of the standard CAPM. |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2105.10252&r= |