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on Risk Management |
| By: | Rebeca Anguren (BANCO DE ESPAÑA); Gabriel Jiménez (BANCO DE ESPAÑA); José-Luis Peydró (BANCO DE ESPAÑA) |
| Abstract: | We study the short-term effects of both tighter and looser bank capital requirements on bank risk-taking in a crisis period. We exploit credit register data matched with firm and bank level data in conjunction with changes in capital requirements stemming from Basel III, including the introduction of a SME supporting bank capital factor in the European Union. We find that tighter capital requirements reduce the supply of bank credit to firms, while looser capital requirements mitigate the credit supply effects of increasing capital. Importantly, at the loan level (credit supply), banks more affected by capital requirements temporarily change less the supply of credit to riskier than to safer firms, and these asymmetric effects occur for both the tightening and the loosening of bank capital requirements. Finally, these effects are also important at the firm-level for total credit availability and for firm survival. Interestingly, our results suggest that those banks most impacted by the tighter Basel III capital requirements prioritize credit among ex-ante riskier firms to avoid their closure, consistent with loan evergreening. |
| Keywords: | bank capital requirements, credit supply, bank risk-taking, Basel III, loan evergreening |
| JEL: | G21 G28 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2508 |
| By: | Martin Iseringhausen; Konstantinos Theodoridis |
| Date: | 2025–02–11 |
| URL: | https://d.repec.org/n?u=RePEc:stm:wpaper:68 |
| By: | Bahadursingh, Roman |
| Abstract: | This paper presents a novel approach to portfolio management by leveraging the properties of the Complex Wishart Distribution. This distribution, unlike its real counterpart, is adept at modeling the covariance of complex-valued data, making it particularly suitable for financial returns that can exhibit complex dependencies. The methodology proposed herein provides a more robust framework for estimating and managing risk in diversified portfolios. This work is entirely self-contained and introduces the necessary background, theoretical framework, and practical applica- tions of this novel approach. |
| Date: | 2024–07–12 |
| URL: | https://d.repec.org/n?u=RePEc:osf:thesis:ma2hx_v1 |
| By: | H. Peyton Young; Tom Doolittle |
| Abstract: | This brief introduces two new forward-looking metrics which could enable regulators to assess the future risk of fair-value losses in bank securities portfolios (Brief no. 23-04). |
| Date: | 2023–12–27 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:briefs:23-04 |
| By: | Mawuli Segnon (Department of Economics (CQE), University of Munster, Germany); Bjorn Schulte-Tillmann (Department of Economics (CQE), University of Munster, Germany); Riza Demirer (Department of Economics & Finance, Southern Illinois University Edwardsville, Illinois, USA); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | This paper investigates the relationship between supply chain pressures and foreign exchange (FX) volatility in fundamentals-based component frameworks. We utilize mixed data sampling (MIDAS) volatility models that formalize FX rate volatility as a product of short- and long-run components. We allow the long-run component to be driven by the monthly global supply chain pressure (GSCPI) and the global economic conditions (GECON) indicators along with monetary and economic control variables. The dynamics governing short-run component of FX volatility is modeled via GARCH, GJR, Markov switching multifractal (MSM) and factorial hidden Markov volatility (FHMV) processes. Our analysis yields a statistically significant and positive relationship between supply chain pressures and foreign exchange volatility in both the developed and developing economies and across the different model specifications. The positive impact of global supply chain pressures is particularly prevalent during the post-2017 period which coincides with the beginning of Donald Trump's first term as president as the promised America first policy took effect. Out-ofsample tests further show that the information content in the global supply pressures index can help improve the accuracy of both the volatility and Value at Risk forecasts in the FX market. Our findings establish a clear link between proxies of deglobalization and foreign exchange volatility, while they also provide valuable insights that can be used in the management of currency exposures by firms. |
| Keywords: | Supply chain pressure index, Foreign exchange rate volatility, Deglobalization, MIDAS volatility models, EPA test, Encompassing test, Backtesting |
| JEL: | F31 G17 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202506 |
| By: | Erica Ordali; Chiara Rapallini |
| Abstract: | Decades of research have assumed the stability of risk preferences across domains and ages. However, recent evidence has shown that it might not be the case since variations in the level of risks taken are, in fact, observable. Economics and Psychology literature investigated such issues, providing mixed evidence regarding age changes. This paper provides the first exhaustive meta-analytical review of the economic and psychology literature results regarding the association between aging and financial risk attitudes. We find differences in the effect mainly due to the methods used for measuring risk preferences. In particular, we find that the positive association between risk aversion and age is verified for survey data and lotteries, while psychological tasks underline the role played by the learning process and, ultimately, that cognitive abilities and health status may affect preferences. The meta-regression on effect sizes derived from studies based on surveys shows that cognitive abilities and healthstatus explain a significant part of the heterogeneity of this sample of studies. |
| Keywords: | Ageing, financial risk-taking, meta-analysis, survey data, lottery, task |
| JEL: | J1 D91 D81 D01 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:frz:wpaper:wp2024_27.rdf |
| By: | Ahoniemi, Katja; Kerola, Eeva; Koskinen, Kimmo |
| Abstract: | This paper examines the current dependencies and exposures of the euro area's financial sector in a context of rising geopolitical tensions. Focusing on Russia, China, and the Middle East, we analyze direct exposures through lending and securities holdings of banks and large investors. Our findings suggest that the already modest exposures of the euro area have decreased in recent years. Notably, euro area banks and investors have significantly reduced their exposure to Russia in the wake of the Ukraine invasion, and China in response to regulatory uncertainty. Euro area banks reacted quickly to heightened geopolitical risk in the Middle East by reducing their exposure to countries affected by recent turmoil. A new set of potential risks have emerged, however, as a result of strengthened financial ties with the United States. |
| Keywords: | Geopolitical tensions, financial exposure, banking sector, China, Russia, Middle East |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitb:311211 |
| By: | Joaquin Blaum; Federico Esposito; Sebastian Heise |
| Abstract: | We study the effect of climate risk on how firms organize their supply chains. We use transaction-level data on U.S. manufacturing imports to construct a novel measure of input sourcing risk based on the historical volatility of ocean shipping times. Our measure isolates the unexpected component of shipping times that is induced by weather conditions along more than 40, 000 maritime routes. We first document that unexpected shipping delays induced by weather shocks have significant negative effects on importers’ revenues, profits, and employment. We then show that more exposed firms actively diversify the risk of weather delays by using more routes and sourcing from more foreign suppliers, although their total imports decline. To rationalize these findings, we introduce shipping time risk into a general equilibrium model of importing with firm heterogeneity. Our quantitative analysis predicts substantial costs for the U.S. economy associated with different sources of supply chain risk. |
| Keywords: | supply chains; Climate shocks; shipping time risk; input sourcing |
| JEL: | F10 F15 Q54 |
| Date: | 2025–02–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:99545 |
| By: | Yang, Fan; Havranek, Tomas; Irsova, Zuzana; Novak, Jiri |
| Abstract: | We examine the factors influencing published estimates of hedge fund performance. Using a sample of 1, 019 intercept terms from regressions of hedge fund returns on risk factors (the alphas) collected from 74 studies, we document a strong downward trend in the reported alphas. The trend persists even after controlling for heterogeneity in hedge fund characteristics and research design choices in the underlying studies. Estimates of current performance implied by best practice methodology are close to zero across all common hedge fund strategies. Additionally, our data allow us to estimate the mean management and performance fees charged by hedge funds. We also document how reported performance estimates vary with hedge fund and study characteristics. Overall, our findings indicate that, while hedge funds historically generated positive value for investors, their ability to do so has diminished substantially. |
| Date: | 2024–04–09 |
| URL: | https://d.repec.org/n?u=RePEc:osf:metaar:ps2yn_v1 |
| By: | Gabriel Desgranges (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université); Stéphane Gauthier (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Institute for Fiscal Studies - University of Manchester [Manchester]) |
| Abstract: | Financial investors choose the capital they invest into risky firms based on the return they expect. The actual return depends on fundamental shocks and the aggregate investment, which gives rise to beauty-contest issues. The paper characterizes how the ability of investors to solve these issues relates to the amount of fundamental volatility. It exploits this link to provide a quantitative assessment of the contribution of fundamentals to market volatility. Volatility would be driven by fundamentals in most markets. However out-ofequilibrium beliefs significantly contribute to observed volatility in markets of the financial sector. |
| Keywords: | Rational expectations, Market efficiency, Rationalizability, Beautycontest, Fundamental volatility, Behavioral finance, Excess volatility |
| Date: | 2023–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:hal:psewpa:halshs-04210677 |
| By: | Ricardo Cris\'ostomo |
| Abstract: | We estimate the loss of value that companies might suffer from nature overexploitation. We find that global equities shed 26.8% in a scenario of unabated nature decline, while the worst-performing firms lose ~75% of their value. Our risk framework considers five environmental hazards: biodiversity loss, land degradation, climate change, human population and nature capital. We also introduce two metrics to assess nature-related risks: a Country Degradation Index that tracks the damage caused by environmental hazards in specific territories, including nonlinear dynamics and tipping points; and a Nature Risk Score that summarizes the risk that companies face due to the decline of nature and its services. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.14391 |
| By: | Edwige Dubos-Paillard (GC (UMR_8504) - Géographie-cités - UP1 - Université Paris 1 Panthéon-Sorbonne - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - UPCité - Université Paris Cité); Emmanuelle Lavaine (CEE-M - Centre d'Economie de l'Environnement - Montpellier - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - UM - Université de Montpellier); Katrin Millock (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | The article estimates flood risk perceptions by exploiting the different release dates of flood risk information around Paris from 2003 to 2012. This period is characterised by the absence of significant floods since 1955, making flood risk less salient. We apply a stacked event study to detailed property transaction data combined with geo-localised amenities. The results show that transaction prices for similar properties are 3-7% lower following the release of information if they are located in a flood risk zone, and that the effect persists, at least over the period we analyse. The results are robust to varying the control group to a neighbourhood at different distances from the flood risk boundary. The effect is more negative for flats on the ground floor. We find no evidence of sorting among buyers along different characteristics, in particular based on past exposure to flooding in their previous municipality. The results indicate a significant effect of flood risk information in a context where we can isolate it from the financial consequences of insurance cover and from flood damage per se. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:halshs-04850441 |
| By: | Yoontae Hwang; Yaxuan Kong; Stefan Zohren; Yongjae Lee |
| Abstract: | This paper addresses the critical disconnect between prediction and decision quality in portfolio optimization by integrating Large Language Models (LLMs) with decision-focused learning. We demonstrate both theoretically and empirically that minimizing the prediction error alone leads to suboptimal portfolio decisions. We aim to exploit the representational power of LLMs for investment decisions. An attention mechanism processes asset relationships, temporal dependencies, and macro variables, which are then directly integrated into a portfolio optimization layer. This enables the model to capture complex market dynamics and align predictions with the decision objectives. Extensive experiments on S\&P100 and DOW30 datasets show that our model consistently outperforms state-of-the-art deep learning models. In addition, gradient-based analyses show that our model prioritizes the assets most crucial to decision making, thus mitigating the effects of prediction errors on portfolio performance. These findings underscore the value of integrating decision objectives into predictions for more robust and context-aware portfolio management. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.00828 |
| By: | George Fatouros; Kostas Metaxas; John Soldatos; Manos Karathanassis |
| Abstract: | MarketSenseAI is a novel framework for holistic stock analysis which leverages Large Language Models (LLMs) to process financial news, historical prices, company fundamentals and the macroeconomic environment to support decision making in stock analysis and selection. In this paper, we present the latest advancements on MarketSenseAI, driven by rapid technological expansion in LLMs. Through a novel architecture combining Retrieval-Augmented Generation and LLM agents, the framework processes SEC filings and earnings calls, while enriching macroeconomic analysis through systematic processing of diverse institutional reports. We demonstrate a significant improvement in fundamental analysis accuracy over the previous version. Empirical evaluation on S\&P 100 stocks over two years (2023-2024) shows MarketSenseAI achieving cumulative returns of 125.9% compared to the index return of 73.5%, while maintaining comparable risk profiles. Further validation on S\&P 500 stocks during 2024 demonstrates the framework's scalability, delivering a 33.8% higher Sortino ratio than the market. This work marks a significant advancement in applying LLM technology to financial analysis, offering insights into the robustness of LLM-driven investment strategies. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.00415 |