nep-rmg New Economics Papers
on Risk Management
Issue of 2023‒03‒20
fourteen papers chosen by

  1. Oil Prices Uncertainty, Endogenous Regime Switching, and Inflation Anchoring By Yoosoon Chang; Ana María Herrera; Elena Pesavento
  2. A Leveraged Gender Gap: The Combined Effect of Longevity Risk (Mis)-Perception and Financial Risk-Taking By Giovanna Apicella; Enrico G. De Giorgi
  3. Private Real Estate a Diversifier or More? By Stephen Lee
  4. The Role of Multi-Family Properties in Hedging Pension Liability Risk: Long-Run Evidence By Martin Hoesli; Louis Johner; Jon Lekander
  5. Wasserstein-Kelly Portfolios: A Robust Data-Driven Solution to Optimize Portfolio Growth By Jonathan Yu-Meng Li
  6. Weather, Credit, and Economic Fluctuations: Evidence from China By Chen, Zhenzhu; Li, Li; Tang, Yao
  7. Collective risk taking by couples: individual vs household risk By Zheng, Jiakun; Couprie, Helene; Hopfensitz, Astrid
  8. Data Driven Contagion Risk Management in Low-Income Countries using Machine Learning Applications with COVID-19 in South Asia By Abu S. Shonchoy; Moogdho M. Mahzab; Towhid I. Mahmood; Manhal Ali
  9. Loan guarantees, bank underwriting policies and financial fragility By Carletti, Elena; Leonello, Agnese; Marquez, Robert
  10. Selective Exercise of Discretion in Disability Insurance Awards By Garcia-Gomez, Pilar; Koning, Pierre; O'Donnell, Owen; Herl, Carlos Riumallo
  11. Deposit Insurance in 2023: Global Trends and Key Issues By Bert Van Roosebeke; Ryan Defina
  12. Rethink Forecasting By Mayer, J. H.; Meinecke, Milena; Fehr, Armin
  13. Macroeconomic risk factors and Chinese FDIs in real estate: Evidence from the Asia-Pacific public real estate markets By Alain Coen; Patrick Lecomte; Saadallah Zaiter
  14. Predicting Firm Exits with Machine Learning: Implications for Selection into COVID-19 Support and Productivity Growth By Lily Davies; Mark Kattenberg; Benedikt Vogt

  1. By: Yoosoon Chang; Ana María Herrera; Elena Pesavento
    Abstract: Using a novel approach to model regime switching with dynamic feedback and interactions, we extract latent mean and volatility factors in oil price changes. We illustrate how the volatility factor constitutes a useful measure of oil market risk (or oil price uncertainty) for policy makers and analysts as it captures uncertainty not reflected in other economic/financial uncertainty measures. Then, in the context of a VAR, we investigate the role of oil price uncertainty in driving inflation expectations and inflation anchoring. We show that shocks to the mean factor lead to higher expected inflation and inflation disagreement among professional forecasters and households. In contrast, shocks to the volatility factor act as aggregate demand shocks in that they result in lower expected inflation, yet they do increase disagreement about future inflation among professional forecasters and, especially, among households. We also provide econometric evidence suggesting the proposed endogenous volatility switching model can outperform other regime switching models.
    Keywords: oil price volatility, endogenous regime switching, expected inflation, inflation anchoring
    JEL: C13 C32 E32 Q35
    Date: 2023–02
  2. By: Giovanna Apicella (University of Udine); Enrico G. De Giorgi (University of St. Gallen - SEPS: Economics and Political Sciences; Swiss Finance Institute)
    Abstract: Financial risk and longevity risk are the main risks affecting pension income. This paper analyses gender differences related to how financial risk taking and survival expectations are correlated. We analyse data from the “Survey of Health, Ageing and Retirement in Europe” (SHARE) database and find a significant gender gap in self-assessed risk tolerance, consistently with previous literature. Moreover, we show that individuals with realistic survival expectations (i.e., survival expectations that are close to their actuarial counterparts) tend to take more financial risk. Because women show a significantly higher underestimation of their survival compared to men (-17% vs. -6% on average), the co-existence of no risk taking and longevity risk mis-perception is much stronger among women than men, what we call the leveraged gender gap, with important economic implications in relation to post-retirement income.
    Keywords: gender pension gap, financial risk tolerance, longevity risk, demographic literacy
    JEL: D15 H31
    Date: 2023–02
  3. By: Stephen Lee
    Abstract: A safe haven is an asset that is unrelated or negatively related to other assets in highly uncertain or turmoil markets. Therefore, a safe haven asset has the ability to mitigate risk and increase returns in extreme market conditions. A hedge is an asset that is negative related to other assets, on average, but does not have safe haven features during periods of market stress. While, a diversifier is an asset that has an imperfect positive correlation with other assets, on average, and like a hedge does not offer safe haven features.While, private real estate provides diversification benefits to stocks it may also be a hedge or safe haven asset as it is a hedge against inflation and the majority of real estate returns comes from rent payable in all market cycles. Yet as far as the author is aware, no study has examined whether private real estate is a safe haven or hedger in the US. Using monthly transaction based real estate data and both OLS and quantile regression we find that private real estate is both a “weak hedge” and a “weak a safe haven” asset. In other words, private real estate is more than a diversifier.
    Keywords: Hedger or Safe Haven; Monthly Transaction Data; Private real estate; Quantile Regression
    JEL: R3
    Date: 2022–01–01
  4. By: Martin Hoesli (University of Geneva - Geneva School of Economics and Management (GSEM); Swiss Finance Institute; University of Aberdeen - Business School); Louis Johner (University of Geneva - Geneva School of Economics and Management); Jon Lekander (Aberdeen Property Investors Nordic Region)
    Abstract: Pension funds aim to hold assets that match their future liabilities. For this purpose, there is a growing interest in multi-family properties as their returns should be positively related to wage growth and hence pension liabilities. Using data for Sweden over 145 years, we investigate the role that multi-family properties play in the context of a mixed-asset portfolio that aims to track wage growth. The benefits from holding multi-family properties are the greatest for low-risk allocation approaches. For more risky strategies, the role of real estate is also positive but more muted, and it varies greatly over time. Holding real estate was most beneficial during the first two decades of the 21st century. Multi-family properties are found to be the only asset class to be positively related to wage growth. We show that the net operating income acts as the transmission channel between wages and property returns.
    Keywords: Multi-family properties, Mixed-asset portfolio, Pension fund, Wages, Long run, Sweden
    JEL: R33 G11 G23 C63
    Date: 2023–02
  5. By: Jonathan Yu-Meng Li
    Abstract: We introduce a robust variant of the Kelly portfolio optimization model, called the Wasserstein-Kelly portfolio optimization. Our model, taking a Wasserstein distributionally robust optimization (DRO) formulation, addresses the fundamental issue of estimation error in Kelly portfolio optimization by defining a ``ball" of distributions close to the empirical return distribution using the Wasserstein metric and seeking a robust log-optimal portfolio against the worst-case distribution from the Wasserstein ball. Enhancing the Kelly portfolio using Wasserstein DRO is a natural step to take, given many successful applications of the latter in areas such as machine learning for generating robust data-driven solutions. However, naive application of Wasserstein DRO to the growth-optimal portfolio problem can lead to several issues, which we resolve through careful modelling. Our proposed model is both practically motivated and efficiently solvable as a convex program. Using empirical financial data, our numerical study demonstrates that the Wasserstein-Kelly portfolio can outperform the Kelly portfolio in out-of-sample testing across multiple performance metrics and exhibits greater stability.
    Date: 2023–02
  6. By: Chen, Zhenzhu; Li, Li; Tang, Yao
    Abstract: We constructed an Actuary Climate Index to measure extreme weather risks in China. Analyzing macroeconomic data through a structural vector auto-regression model suggests that a negative weather shock leads to persistently low GDP and credit obtained by non-financial firms. In our regression analysis of a panel of firms listed in China, the negative effects of weather shocks on firm level loans were statistically and practically significant. Further analysis suggests that credit risk and expectations are two important impact channels. A high existing credit risk or low confidence among firm managers, amplifies the negative effects of extreme weather on loans.
    Keywords: extreme weather shocks, credit risk, expectations, Chinese economy
    JEL: E32 E44 G32 Q54
    Date: 2023–02–16
  7. By: Zheng, Jiakun; Couprie, Helene; Hopfensitz, Astrid
    Abstract: 101 real couples participated in a controlled experimental risk taking task involving variations in household and individuals’ income risks, but controlling for ex-ante income inequal- ity. Our design disentangles the effect of household risk, of intra-household risk inequality and of ex-post pay-off inequality. We find that most couples (about 79%) did pool their risk at the household level when risks were borne symmetrically but a significant proportion of couples (about 36%) failed to do so when individual risks were borne asymmetrically. Furthermore, we find that intra-household risk inequality has a larger impact on non-married couples than married ones.
    Keywords: Experiment; Income pooling; Household risk taking; Inequality
    JEL: C91 C92 D19 D81
    Date: 2022
  8. By: Abu S. Shonchoy (Department of Economics, Florida International University); Moogdho M. Mahzab (Stanford University); Towhid I. Mahmood (Texas Tech University); Manhal Ali (University of Leeds)
    Abstract: In the absence of real-time surveillance data, it is difficult to derive an early warning system and potential outbreak locations with the existing epidemiological models, especially in resource-constrained countries. We proposed a Contagion Risk Index (CR-Index) - based on publicly available national statistics – founded on communicable disease spreadability vectors. Utilizing the daily COVID-19 data (positive cases and deaths) from 2020-2022, we developed country-specific and sub-national CR-Index for South Asia (India, Pakistan, and Bangladesh) and identified potential infection hotspots-aiding policymakers with efficient mitigation planning. Across the study period, the week-by-week and fixed-effects regression estimates demonstrate a strong correlation between the proposed CR-Index and sub-national (district-level) COVID-19 statistics. We validated the CR-Index using machine learning methods by evaluating the out-of-sample predictive performance. Machine learning driven validation showed that the CR-Index can correctly predict districts with high incidents of COVID-19 cases and deaths more than 85% of the time. This proposed CR-Index is a simple, replicable, and easily interpretable tool that can help low-income countries prioritize resource mobilization to contain the disease spread and associated crisis management with global relevance and applicability. This index can also help to contain future pandemics (and epidemics) and manage their far-reaching adverse consequences.
    Date: 2023–02
  9. By: Carletti, Elena; Leonello, Agnese; Marquez, Robert
    Abstract: Loan guarantees represent a form of government intervention to support bank lending. However, their use raises concerns as to their effect on bank risk-taking incentives. In a model of •nancial fragility that incorporates bank capital and a bank incentive problem, we show that loan guarantees reduce depositor runs and improve bank underwriting standards, except for the most poorly capitalized banks. We highlight a novel feedback effect between banks•' underwriting choices and depositors' •run decisions, and show that the effect of loan guarantees on banks' incentives is different from that of other types of guarantees, such as deposit insurance. JEL Classification: G21, G28
    Keywords: bank monitoring, charter value, fundamental runs, panic runs
    Date: 2023–02
  10. By: Garcia-Gomez, Pilar (Erasmus University Rotterdam); Koning, Pierre (Vrije Universiteit Amsterdam); O'Donnell, Owen (Erasmus University Rotterdam); Herl, Carlos Riumallo (Erasmus University Rotterdam)
    Abstract: Variation in assessor stringency in awarding benefits leaves applicants exposed to uninsured risk that could be systematic if discretion were exercised selectively. We test for this using administrative data on applications to the Dutch disability insurance program. We find that discretion is more often exercised in favor of lower-waged applicants. Pre-disability wages drop discontinuously just above disability thresholds for entitlement to partial benefits. Assessors are more likely to discard the highest-paying algorithm-generated job matches that determine earnings capacity and entitlement when evaluating lower-waged applicants. While these applicants benefit on average, they are exposed to greater risk from between assessor variation.
    Keywords: disability insurance, screening
    JEL: D73 H42 H55
    Date: 2023–02
  11. By: Bert Van Roosebeke (International Association of Deposit Insurers); Ryan Defina (International Association of Deposit Insurers)
    Abstract: The IADI Deposit Insurance report provides, on a yearly basis, an overview of global trends in deposit insurance and investigates key issues. IADI has identified the following five themes: macroeconomic environment; deposit insurers and bank resolution; digitalisation: CBDCs and stablecoins; climate changes and ESG; IADI Core Principles review and update. The report also highlighted many areas whereby deposit insurers are continuing to improve their overall compliance with the IADI Core Principles for Effective Deposit Insurance Systems.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2023–02
  12. By: Mayer, J. H.; Meinecke, Milena; Fehr, Armin
    Date: 2022
  13. By: Alain Coen; Patrick Lecomte; Saadallah Zaiter
    Abstract: The aim of this study is to analyze the role of Chinese foreign direct investments (FDIs) in the dynamics of real estate in the Asia-Pacific region after the global financial crisis. We use a linear asset pricing model including macroeconomic risk factors and develop a metric to measure FDIs in the real estate sector. Based on panel econometrics, our robust results report that Chinese FDIs significantly influence Asia-Pacific region’s public real estate markets, shedding new light on China’s economic internationalization in the Asia and the Pacific region. We also provide strong evidence that our findings are not driven by a reverse causality phenomenon, whereby a country with superior performance of public real estate sector is in better position to attract Chinese FDIs.
    Keywords: Asia-Pacific region; Chinese foreign direct investments; Macroeconomic risks; REITs
    JEL: R3
    Date: 2022–01–01
  14. By: Lily Davies (CPB Netherlands Bureau for Economic Policy Analysis); Mark Kattenberg (CPB Netherlands Bureau for Economic Policy Analysis); Benedikt Vogt (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: Evaluations of support measures for companies often require a good assessment of the viability of firms or the probability that a firm will exit the market. On March 17, 2020, a lockdown and associated social-restriction measures were announced, which hit specific in the economy severely. To compensate companies and the self-employed for the loss of income, an extensive package of support measures has been designed. These support measures had hardly any restrictions, because they had to be paid out quickly. This raises the question whether unhealthy companies have made disproportionate use of support and to what extent these support measures have kept viable or non-viable companies afloat. In this paper, we use machine learning techniques to predict whether a company would have left the market in a world without corona. These predictions show that unhealthy companies applied for support less often than healthy companies. But we also show that the COVID-19 support has prevented most exits among unhealthy companies. This indicates that the corona support measures have had a negative impact on productivity growth.
    JEL: C18 E61 E65 G33
    Date: 2023–03

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