nep-rmg New Economics Papers
on Risk Management
Issue of 2022‒05‒23
fifteen papers chosen by

  1. Calibrating distribution models from PELVE By Hirbod Assa; Liyuan Lin; Ruodu Wang
  2. Penerapan Manajemen Resiko Operasional Pada Unit Teller PT. Bank Pembangunan Daerah Sumatera Barat By Romamti, Haniel; Susanto, Romi
  3. Ensemble learning for portfolio valuation and risk management By Lotfi Boudabsa; Damir Filipovi\'c
  4. Voluntary Equity, Project Risk, and Capital Requirements By Andreas Haufler; Christoph Lülfesmann
  5. Willingness to pay, surplus and Insurance policy under dual theory By Neji Saidi
  6. United Kingdom: Financial Sector Assessment Program-Select Issues in Systemic Risk Oversight and Macroprudential Policy By International Monetary Fund
  7. Second-order accuracy metrics for scoring models and their practical use By M. V. Pomazanov
  8. Pandemic-Era Uncertainty By Brent H. Meyer; Emil Mihaylov; Jose Maria Barrero; Steven J. Davis; David Altig; Nicholas Bloom
  9. Banking Resolution: Expansion of the Resolution Toolkit and the Changing Role of Deposit Insurers By Ryan Defina
  10. Heterogeneous Information Network based Default Analysis on Banking Micro and Small Enterprise Users By Zheng Zhang; Yingsheng Ji; Jiachen Shen; Xi Zhang; Guangwen Yang
  11. Privatizing disability insurance By Seibold, Arthur; Seitz, Sebastian; Siegloch, Sebastian
  12. Perpetual American standard and lookback options with event risk and asymmetric information By Gapeev, Pavel V.; Li, Libo
  13. Risky Moms, Risky Kids? Fertility and Crime after the Fall of the Wall By Arnaud Chevalier; Olivier Marie
  14. Five Emerging Issues in Deposit Insurance By Bert Van Roosebeke; Ryan Defina
  15. Estimating Equilibrium in Health Insurance Exchanges: Price Competition and Subsidy Design under the ACA By Pietro Tebaldi

  1. By: Hirbod Assa; Liyuan Lin; Ruodu Wang
    Abstract: The Value-at-Risk (VaR) and the Expected Shortfall (ES) are the two most popular risk measures in banking and insurance regulation. To bridge between the two regulatory risk measures, the Probability Equivalent Level of VaR-ES (PELVE) was recently proposed to convert a level of VaR to that of ES. It is straightforward to compute the value of PELVE for a given distribution model. In this paper, we study the converse problem of PELVE calibration, that is, to find a distribution model that yields a given PELVE, which may either be obtained from data or from expert opinion. We discuss separately the cases when one-point, two-point and curve constraints are given. In the most complicated case of a curve constraint, we convert the calibration problem to that of an advanced differential equation. We further study some technical properties of PELVE by offering a few new results on monotonicity and convergence.
    Date: 2022–04
  2. By: Romamti, Haniel; Susanto, Romi
    Abstract: This research was conducted to find out how the Implementation of Operational Risk Management at the Teller Unit was carried out at PT. Bank Pembangunan Daerah Sumatera Barat. The research method used was a qualitative method which explained descriptively, namely by describing the data systematically from the facts obtained and then connected with the implementation operasional risk management at the teller unit of PT. Bank Pembangunan Daerah Sumatera Barat. Judging from the result of the research that occurred,the Implementation of Operational Risk Management at the Teller unit of PT. Bank Pembangunan Daerah Sumatera Barat is carried out by identifying risks, measuring risk, monitoring risk and controlling risks.
    Date: 2022–03–23
  3. By: Lotfi Boudabsa; Damir Filipovi\'c
    Abstract: We introduce an ensemble learning method for dynamic portfolio valuation and risk management building on regression trees. We learn the dynamic value process of a derivative portfolio from a finite sample of its cumulative cash flow. The estimator is given in closed form. The method is fast and accurate, and scales well with sample size and path space dimension. The method can also be applied to Bermudan style options. Numerical experiments show good results in moderate dimension problems.
    Date: 2022–04
  4. By: Andreas Haufler; Christoph Lülfesmann
    Abstract: We introduce a model of the banking sector that formally incorporate a buffer function of capital. Heterogeneous banks choose their portfolio risk, bank size, and capital holdings. Banks voluntarily hold equity when the buffer effect against the risk of default outweighs the cost advantages of debt financing. In the optimum, banks with lower monitoring costs are larger, choose riskier portfolios, and have less equity. Binding capital requirements or levies on bank borrowing are shown to make higher-risk portfolios more attractive. Accounting for banks’ interior capital choices can thus explain why higher capital ratios incentivize banks to undertake riskier projects.
    Keywords: voluntary equity, capital requirements, bank heterogeneity
    JEL: G28 G38 H32
    Date: 2022
  5. By: Neji Saidi
    Abstract: In this paper, we aims to state some proprieties of willingness to pay (WTP) for partial risk reduction and links with insurance within the dual theory of decision. In the case of partial reduction, we get as Langlais (2005) that a risk-averse decision maker (DM) can have a willingness to pay small than this of a neutral one. By decomposition the WTP as Courbage and al (2008), we get that a strong averse DM is willing to give more for a reduction of a high probability portion rather than a low probability one. The main result is that in the dual theory, reducing probability of risk and supply insurance can be complementary if the surplus is increasing in risk reduction.
    Date: 2022–04
  6. By: International Monetary Fund
    Abstract: The United Kingdom’s macroprudential policy framework has proven its effectiveness. After the Global Financial Crisis (GFC) of 2007–09, the United Kingdom assigned the Bank of England (BOE) a clear financial stability mandate, created a new Financial Policy Committee (FPC) to set macroprudential policy, and shifted to a “twin peaks” model of financial oversight. The 2016 Financial Sector Assessment Program (FSAP) concluded that the new framework appeared appropriate for effectively conducting macroprudential policy. However, the framework was then relatively new. The 2021 FSAP represents an opportunity to review its performance in building systemic resilience through the financial cycle, including the market volatility resulting from the Brexit vote and the COVID-19 pandemic.
    Keywords: FPC mortgage market Recommendations; housing price development; mortgage market; FPC member; policy measure; policy action; affordability stress test; Financial sector stability; Systemic risk; Stress testing; Countercyclical capital buffers; Financial sector risk; Global
    Date: 2022–04–08
  7. By: M. V. Pomazanov
    Abstract: The paper proposes new second-order accuracy metrics for scoring or rating models, which show the target preference of the model, it is better to diagnose good objects or better to diagnose bad ones for a constant generally accepted predictive power determined by the first order metric that is known as the Gini index. There are two metrics, they have both an integral representation and a numerical one. The numerical representation of metrics is of two types, the first of which is based on binary events to evaluate the model, the second on the default probability given by the model. Comparison of the results of calculating the metrics allows you to validate the calibration settings of the scoring or rating model and reveals its distortions. The article provides examples of calculating second-order accuracy metrics for ratings of several rating agencies, as well as for the well known approach to calibration based on van der Burg's ROC curves.
    Date: 2022–04
  8. By: Brent H. Meyer; Emil Mihaylov; Jose Maria Barrero; Steven J. Davis; David Altig; Nicholas Bloom
    Abstract: We examine several measures of uncertainty to make five points. First, equity market traders and executives at nonfinancial firms have shared similar assessments about one-year-ahead uncertainty since the pandemic struck. Both the one-year VIX and our survey-based measure of firm-level uncertainty at a one-year forecast horizon doubled at the onset of the pandemic and then fell about half-way back to pre-pandemic levels by mid 2021. Second, and in contrast, the 1-month VIX, a Twitter-based Economic Uncertainty Index, and macro forecaster disagreement all rose sharply in reaction to the pandemic but retrenched almost completely by mid 2021. Third, Categorical Policy Uncertainty Indexes highlight the changing sources of uncertainty – from healthcare and fiscal policy uncertainty in spring 2020 to elevated uncertainty around monetary policy and national security as of March 2022. Fourth, firm-level risk perceptions skewed heavily to the downside in spring 2020 but shifted rapidly to the upside from fall 2020 onwards. Perceived upside uncertainty remains highly elevated as of early 2022. Fifth, our survey evidence suggests that elevated uncertainty is exerting only mild restraint on capital investment plans for 2022 and 2023, perhaps because perceived risks are so skewed to the upside.
    JEL: D80 E22 E32
    Date: 2022–04
  9. By: Ryan Defina (International Association of Deposit Insurers)
    Abstract: In this Policy Brief, we provide quantitative evidence demonstrating that the resolution toolkit has expanded considerably since the 2008 Global Financial Crisis (GFC). Purchase and assumption transactions, bridge bank facilitation and bail-in mechanisms have all become more available for bank resolution purposes. The use of such resolution tools is increasingly subject to least cost rules and to systemic failure considerations. These resolution tools may be available to different authorities, such as deposit insurers or resolution authorities, depending on the jurisdiction in question. Two of the three statistical models applied point to a significant increase in resolution powers for deposit insurers.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2021–08
  10. By: Zheng Zhang; Yingsheng Ji; Jiachen Shen; Xi Zhang; Guangwen Yang
    Abstract: Risk assessment is a substantial problem for financial institutions that has been extensively studied both for its methodological richness and its various practical applications. With the expansion of inclusive finance, recent attentions are paid to micro and small-sized enterprises (MSEs). Compared with large companies, MSEs present a higher exposure rate to default owing to their insecure financial stability. Conventional efforts learn classifiers from historical data with elaborate feature engineering. However, the main obstacle for MSEs involves severe deficiency in credit-related information, which may degrade the performance of prediction. Besides, financial activities have diverse explicit and implicit relations, which have not been fully exploited for risk judgement in commercial banks. In particular, the observations on real data show that various relationships between company users have additional power in financial risk analysis. In this paper, we consider a graph of banking data, and propose a novel HIDAM model for the purpose. Specifically, we attempt to incorporate heterogeneous information network with rich attributes on multi-typed nodes and links for modeling the scenario of business banking service. To enhance feature representation of MSEs, we extract interactive information through meta-paths and fully exploit path information. Furthermore, we devise a hierarchical attention mechanism respectively to learn the importance of contents inside each meta-path and the importance of different metapahs. Experimental results verify that HIDAM outperforms state-of-the-art competitors on real-world banking data.
    Date: 2022–04
  11. By: Seibold, Arthur; Seitz, Sebastian; Siegloch, Sebastian
    Abstract: Public disability insurance (DI) programs in many countries face pressure to reduce their generosity in order to remain sustainable. In this paper, we investigate the welfare effects of giving a larger role to private insurance markets in the face of public DI cuts. Exploiting a unique reform that abolished one part of the German public DI system for younger cohorts, we find that despite significant crowding-in effects, overall private DI take-up remains modest. Private DI tends to be concentrated among high-income, high-education and low-risk individuals. We do not find any evidence of adverse selection on unpriced risk. Finally, we estimate individual insurance valuations via a revealed preferences approach, a key input for welfare calculations. We find that observed willingness-to-pay of many individuals is low, such that providing coverage partly via a private DI market improves welfare. However, we show that distributional concerns as well as individual risk misperceptions can provide grounds for justifying a full public DI mandate.
    Keywords: disability insurance,privatization,welfare,microdata
    JEL: H55 G22 G52
    Date: 2022
  12. By: Gapeev, Pavel V.; Li, Libo
    Abstract: We derive closed-form solutions to the perpetual American standard and lookback put and call options in an extension of the Black-Merton-Scholes model with event risk and incomplete information. It is assumed that the contracts are terminated with linear recoveries at the last hitting times for the underlying asset price process of its running maximum or minimum over the infinite time interval which are not stopping times with respect to the observable filtration. We show that the optimal exercise times are the first times at which the asset price reaches some lower or upper stochastic boundaries depending on the current values of its running maximum or minimum. The proof is based on the reduction of the original optimal stopping problems to the associated free-boundary problems and the solution of the latter problems by means of the smooth-fit and normalreflection conditions. The optimal exercise boundaries are proven to be the maximal or minimal solutions of some first-order nonlinear ordinary differential equations.
    Keywords: perpetual American options; optimal stopping problem; Brownian motion; rst passage time; last hitting time; running maximum and minimum processes; stochastic boundary; free-boundary problem; instantaneous stopping and smooth t; normal refection; a change-of-variable formula with local time on surfaces
    JEL: F3 G3 G32
    Date: 2022–04–22
  13. By: Arnaud Chevalier; Olivier Marie
    Abstract: Following the collapse of the Berlin Wall, the birth rate halved in East Germany. Despite their small sizes, the cohorts conceived during this period of socio-economic turmoil were, as they grew up in reunified Germany, markedly more likely to be arrested than cohorts conceived a few years earlier. This is consistent with negative parental selection during the period of turmoil. We highlight risk attitude as an important selection mechanism, beyond education and other observable characteristics, which explains: (i) why some women did not alter their fertility decisions during these uncertain economic times, (ii) that this risk preference was passed on to their children and (iii) that risk preference is correlated with criminal participation. Maternal selection along risk preference might thus be an important mechanism explaining the greater criminal activity of the children conceived after the fall of the Wall.
    Keywords: fertility, crime, parental selection, economic uncertainty, risk attitude
    JEL: J13 K42
    Date: 2022
  14. By: Bert Van Roosebeke (International Association of Deposit Insurers); Ryan Defina (International Association of Deposit Insurers)
    Abstract: Deposit insurers operate within an ever-evolving global financial system. This Policy Brief offers an overview of five emerging issues that are expected to significantly affect the activities of deposit insurers in the near future – climate change, utilisation of financial technology (‘fintech’), Covid-19 policy implications, deposit insurers’ role in resolution, and cross-border considerations. These issues were selected for inclusion based on their relevance to the operations of deposit insurers, connection to the IADI Core Principles for Effective Deposit Insurance Systems, and relative weight assigned in recent dialogue within the international community. Following a description of each of the issues, this Policy Brief explains why these issues are relevant to deposit insurers and identifies relevant global and regional policy initiatives. Deposit insurers may wish to consider these five emerging issues within the context of their own domestic policy settings, and to calibrate their response accordingly.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2021–09
  15. By: Pietro Tebaldi
    Abstract: In government-sponsored health insurance, subsidy design affects market outcomes. First, holding premiums fixed, subsidies determine insurance uptake and average cost. Insurers then respond to these changes, adjusting premiums. Combining data from the first four years of the California ACA marketplace with a model of insurance demand, cost, and insurers’ competition, I quantify the impact of alternative subsidy designs on premiums, enrollment, costs, public spending, and consumer surplus. Younger individuals are more price sensitive and cheaper to cover. Increasing subsidies to this group would make all buyers better off, increase market participation, and lower average costs and average subsidies.
    JEL: I13 I18 L98
    Date: 2022–03

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