nep-rmg New Economics Papers
on Risk Management
Issue of 2025–04–21
nineteen papers chosen by
Stan Miles, Thompson Rivers University


  1. Risk Expensive Evolution in Aspects of Risk Management By Ghafoor, Laiba
  2. Risk measures beyond quantiles By Daouia, Abdelaati; Stupfler, Gilles
  3. Risk of Employee Indecisiveness of Applied Psychology By Ghafoor, Laiba
  4. The expert’s edge? Bank lending specialization and informational advantages for credit risk assessment By Simoens, Mathieu; Tamburrini, Fabio
  5. Tail Sensitivity of US Bank Net Interest Margins: A Bayesian Penalized Quantile Regression Approach By Nicholas Fritsch
  6. Novel Approach of Risk of Lack of Employee Commitment By Zulfiqar, Kiran
  7. Optimizing Risk Strategies in Multiple Dimensions By Tom, Daniel M. Ph.D.
  8. Joint estimation of liquidity and credit risk premia in bond prices with an application By Jens H. E. Christensen; Daan Steenkamp
  9. Portfolio Margining Using PCA Latent Factors By Shengwu Du; Travis D. Nesmith
  10. The Macroeconomic Fragility of Critical Mineral Markets By Wilson Kang; Russell Smyth; Joaquin Vespignani
  11. A Stochastic Volatility Approximation for a Tick-By-Tick Price Model with Mean-Field Interaction By Paolo Dai Pra; Paolo Pigato
  12. Coverage Neglect in Homeowner's Insurance By J Anthony Cookson; Emily Gallagher; Philip Mulder
  13. Techniques Methodology and Implementation of Supply Chain Risk-Management By Ghafoor, Laiba
  14. Logistic Regression Collaborating with AI Beam Search By Tom, Daniel M. Ph.D.
  15. The effects of Basel III capital and liquidity requirements on the growth of banking functions performed by nonbank financial institutions and fintech platforms in South Africa By Chimwemwe Chipeta; Lerato Mapela
  16. Basel III regulations and financing decisions of nonfinancial firms the South African evidence By Tesfaye T Lemma; Michael Machokoto; Tendai Gwatidzo
  17. The Risk Sensitivity of Global Liquidity Flows: Heterogeneity, Evolution, and Drivers By Stefan Avdjiev; Leonardo Gambacorta; Linda S. Goldberg; Stefano Schiaffi
  18. When the Household Pie Shrinks, Who Gets Their Slice? By Jacob Conway; Natalia Fischl-Lanzoni; Matthew Plosser
  19. Global or Regional Safe Assets: Evidence from Bond Substitution Patterns By Tsvetelina Nenova

  1. By: Ghafoor, Laiba
    Abstract: Risk Expensive Evolution in Aspects of Risk Management
    Date: 2023–03–12
    URL: https://d.repec.org/n?u=RePEc:osf:osfxxx:abjqv_v1
  2. By: Daouia, Abdelaati; Stupfler, Gilles
    Abstract: The use of quantiles forms the basis of the overwhelming majority of current risk management procedures. Yet, there exist alternative instruments of risk protection that are not (unlike quantiles) based solely on the frequency of tail observations and instead take their severity into account, while adhering to axiomatic requirements. These alternative risk measures have seen increasing interest in the past decade. The current state of development of risk measures beyond quantiles is discussed with a particular focus on three prominent classes: (i) Expected Shortfall (ES) and extremiles, part of the class of spectral and distortion risk measures, (ii) expectiles, which constitute a particular case of generalized M-quantiles, and (iii) systemic risk measures including Marginal Expected Shortfall (MES). A structured overview of their strengths and weaknesses with respect to axiomatic theory, estimation properties, and ease-of-use by risk practitioners will be given. In addition, challenges arising in the asymptotics and mathematical developments will be discussed and the use of each of the ES, extremile, expectile and MES risk measures will be illustrated with real data applications to storm losses in China, tornado losses in the United States, and financial returns series.
    Date: 2025–04–01
    URL: https://d.repec.org/n?u=RePEc:tse:wpaper:130486
  3. By: Ghafoor, Laiba
    Abstract: Risk of Employee Indecisiveness of Applied Psychology
    Date: 2023–03–12
    URL: https://d.repec.org/n?u=RePEc:osf:osfxxx:k6zgr_v1
  4. By: Simoens, Mathieu; Tamburrini, Fabio
    Abstract: We examine whether loan portfolio sectoral specialization provides informational advantages to banks, enabling better credit risk assessment. Using euro area credit register data, we compare probabilities of default assigned by specialized and non-specialized banks to the same borrowing firm several quarters before the borrower defaults. We find that banks specialized in the borrower’s sector are better in predicting future defaults. This is mostly driven by specialized banks actively raising probabilities of default earlier, not by higher probabilities of default when loans are issued. As a result, specialized banks also increase provisions to these borrowers. We do not observe differences in credit risk assessment towards healthy borrowers, suggesting that the effect is not attributable to general conservatism but to more accurate evaluation of credit risk in the sectors of banks’ specialization. Our results are more pronounced for smaller firms and when banks do not have long-term relationships with their defaulting borrowers. JEL Classification: G21, G32, D82
    Keywords: default, euro area banks, informational asymmetries, specialization
    Date: 2025–03
    URL: https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253041
  5. By: Nicholas Fritsch
    Abstract: Bank net interest margins (NIM) have been historically stable in the US on average, but this stability deteriorated in the post-2020 period, particularly in the tails of the distribution. Recent literature disagrees on the extent to which banks hedge interest rate risk, and past literature shows that credit risk and persistence are also important considerations for bank NIM. I use a novel approach to Bayesian dynamic panel quantile regression to document heterogeneity in US bank NIM estimated sensitivities to interest rates, credit risk, and own persistence. I find increased sensitivity to interest rates in the tails of the conditional NIM distribution during the post-2020 period, driven by increased interest rate sensitivities of bank loans and deposits. Density forecast evaluation shows that the model forecasts outperform frequentist benchmark models, and standard tail risk measures show that risks to bank NIM have material implications for bottom-line measures of bank profitability.
    Keywords: net interest margins; interest rate risk; Bayesian quantile regression; dynamic panel; density forecasting
    JEL: C21 C23 E43 G21
    Date: 2025–03–07
    URL: https://d.repec.org/n?u=RePEc:fip:fedcwq:99663
  6. By: Zulfiqar, Kiran
    Abstract: Novel Approach of Risk of Lack of Employee Commitment
    Date: 2023–03–12
    URL: https://d.repec.org/n?u=RePEc:osf:osfxxx:3qk8n_v1
  7. By: Tom, Daniel M. Ph.D.
    Abstract: We optimize risk strategies going beyond a simple score cut to a dual score multi-cell strategy matrix. We further generalize to higher dimensions, and provide an example 3-D stairstep risk strategy optimization in code. Such algorithm is necessary to handle the huge number of stairstep boundaries for large matrices in high dimensions.
    Date: 2023–04–02
    URL: https://d.repec.org/n?u=RePEc:osf:osfxxx:4e58b_v1
  8. By: Jens H. E. Christensen; Daan Steenkamp
    Abstract: This paper introduces a novel arbitrage-free dynamic term structure model that jointly accounts for liquidity and credit risk premia in panels of bond prices. While liquidity risk is bond-specific, credit risk is common across bonds and follows a square-root process to ensure nonnegativity and econometric identification. A simulation study confirms the separate identification of liquidity and credit risk. We apply the model to South African government bond prices and document the existence of large and weakly correlated liquidity and credit risk premia. This underscores that liquidity and credit stresses are distinct risks to bond investors.
    Date: 2025–01–09
    URL: https://d.repec.org/n?u=RePEc:rbz:wpaper:11074
  9. By: Shengwu Du; Travis D. Nesmith
    Abstract: Filtered historical simulation (FHS)—a simple method of calculating Value-at-Risk that reacts quickly to changes in market volatility—is a popular method for calculating margin at central counterparties. However, FHS does not address how correlation can vary through time. Typically, in margin systems, each risk factor is filtered individually so that the computational burden increases linearly as the number of risk factors grows. We propose an alternative method that filters historical returns using latent risk factors derived from principal component analysis. We compare this method's performance with "traditional" FHS for different simulated and constructed portfolios. The proposed method performs much better when there are large changes in correlation. It also performs well when that is not the case, although some care needs to be taken with certain concentrated portfolios. At the same time, the computational requirements can be reduced significantly. Backtesting comparisons are performed using data from 2020 when markets were stressed by the COVID-19 crisis.
    Keywords: Portfolio risk; Value-at-Risk; Margin; CCPs; Principal component analysis (PCA); Historical simulation; FHS
    JEL: G00 G20
    Date: 2025–02–25
    URL: https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-16
  10. By: Wilson Kang; Russell Smyth; Joaquin Vespignani
    Abstract: This paper applies the macroeconomic fragility framework for studying the effects of supply chain disruptions, proposed by Acemoglu and Tahbaz-Salehi (2024), to critical minerals markets. A key prediction of the macroeconomic fragility framework is that equilibrium supply chains are inherently fragile, meaning that even small shocks can trigger cascading supply chain breakdowns that can significantly magnify the discontinuous response of aggregate supply to shocks, leading to higher volatility and prices of critical minerals. We highlight the important role that the non-technical risk premium plays in magnifying global supply chain shocks in the specific case of critical minerals. Using a mixed-frequency Structural VAR model with agnostic sign restrictions and newly constructed data on non-technical risk premiums, we estimate the impact of supply chain disruption, the non-technical risk premium and their interaction on the prices and volatility of six critical minerals. We find that global supply chain disruptions, magnified by non-technical risk premiums, significantly increase critical mineral prices and price volatility for all six critical minerals studied, indicating inefficient outcomes which we interpret as macroeconomic fragility in critical minerals markets. We also show that stockpiling has the potential to reduce macroeconomic fragility in critical mineral markets.
    Keywords: global supply chain disruption, critical minerals, non-technical risk premiums macroeconomic fragility
    JEL: F62 Q43 Q30
    Date: 2025–04
    URL: https://d.repec.org/n?u=RePEc:een:camaaa:2025-21
  11. By: Paolo Dai Pra (Department of Informatics, University of Verona); Paolo Pigato (DEF, University of Rome "Tor Vergata")
    Abstract: We consider a tick-by-tick model of price formation, in which buy and sell orders are modeled as self-exciting point processes (Hawkes process), similar to the one in [El Euch, Fukasawa, Rosenbaum, The microstructural foundations of leverage effect and rough volatility, Finance and Stochastics, 2018]. We adopt an agent based approach by studying the aggregation of a large number of these point processes, mutually interacting in a mean-field sense. The financial interpretation is that of an asset on which several labeled agents place buy and sell orders following these point processes, influencing the price. The mean-field interaction introduces positive correlations between order volumes coming from different agents that reflect features of real markets such as herd behavior and contagion. When the large scale limit of the aggregated asset price is computed, if parameters are set to a critical value, a singular phenomenon occurs: the aggregated model converges to a stochastic volatility model with leverage effect and faster-than-linear mean reversion of the volatility process. The faster-than-linear mean reversion of the volatility process is supported by econometric evidence, and we have linked it in [Dai Pra, Pigato, Multi-scaling of moments in stochastic volatility models, Stochastic Processes and their Applications, 2015] to the observed multifractal behavior of assets prices and market indices. This seems connected to the Statistical Physics perspective that expects anomalous scaling properties to arise in the critical regime.
    Keywords: Stochastic Volatility, Hawkes processes, multifractality, mean-field, non-linearity, criticality
    Date: 2025–04–08
    URL: https://d.repec.org/n?u=RePEc:rtv:ceisrp:596
  12. By: J Anthony Cookson; Emily Gallagher; Philip Mulder
    Abstract: Most homeowners do not have enough insurance coverage to rebuild their house after a total loss. Using contract-level data from 24 homeowner's insurance companies in Colorado, we show wide differences in average underinsurance across insurers that persist conditional on policyholder characteristics. Underinsurance matters for disaster recovery. Across households that lost homes to a major wildfire, each 10 percentage point increase in underinsurance reduces the likelihood of filing a rebuilding permit within a year of the fire by 4 percentage points. To understand why consumers purchase underinsured policies, we build a discrete choice insurance demand model. The results suggest that policyholders treat insurers that write less coverage as if they set lower premiums, forgoing options to get more coverage at the same premium from other insurers — a pattern we call coverage neglect. Our findings suggest that coverage limits are either not salient to consumers or difficult to estimate without the input of insurance agents. Under a counterfactual without coverage neglect, consumer surplus increases by $290 per year, or 10 percent of annual premiums, on average
    Keywords: Disaster Insurance; Disaster Recovery; Information Frictions and Limited Attention; Insurance Demand
    JEL: G22 G41 G52 G53 Q54 R22
    Date: 2025–03–11
    URL: https://d.repec.org/n?u=RePEc:fip:fedpwp:99690
  13. By: Ghafoor, Laiba
    Abstract: Techniques Methodology and Implementation of Supply Chain Risk-Management
    Date: 2023–03–12
    URL: https://d.repec.org/n?u=RePEc:osf:osfxxx:ejn9p_v1
  14. By: Tom, Daniel M. Ph.D.
    Abstract: We systematically explore the universe of all models using AI search methods. We automate much of the data preparation and testing of each model built along the way. The result is a method and system that generate superior production ready logistic regression models, beating an industry standard consumer credit risk score, GBM and NN ML models. We also incorporate into our system a method to eliminate disparate impact used by the FRB and the FTC.
    Date: 2023–03–07
    URL: https://d.repec.org/n?u=RePEc:osf:osfxxx:qv76j_v1
  15. By: Chimwemwe Chipeta; Lerato Mapela
    Abstract: We examine the effects of the implementation of the Basel III accord on the growth of non-bank financial institutions and fintech platforms in South Africa. Using a difference-in-difference estimation procedure, we find evidence of regulatory arbitrage, suggesting that the imposition of minimum capital requirements results in the growth of deposit-taking non-bank financial institutions. Our results are robust to alternative event windows and falsification tests. In contrast, country-level estimations show that tighter minimum capital restrictions constrain the growth of fintech platforms in South Africa, while innovation plays a crucial role in driving the growth and funding of fintech ventures in select African economies. Our results highlight the need for targeted policies that enable and sustain a vibrant fintech ecosystem.
    Date: 2024–11–08
    URL: https://d.repec.org/n?u=RePEc:rbz:wpaper:11070
  16. By: Tesfaye T Lemma; Michael Machokoto; Tendai Gwatidzo
    Abstract: This study examines the impact of the Basel III regulatory framework on financing decisions within South Africas real sector. Using a sample of 2 045 firm-year observations spanning the years 20112015 and employing the difference-in-differences approach, we find a significant decrease in debt financing and debt maturity for firms deemed constrained relative to unconstrained firms in the post-Basel III implementation period. Further analyses suggest that the Basel III regulatory framework has a persistent effect on financing decisions in the real sector. Our findings indicate that the Basel III regulatory framework reduces leverage and debt maturity, especially for constrained firms.
    Date: 2024–10–14
    URL: https://d.repec.org/n?u=RePEc:rbz:wpaper:11067
  17. By: Stefan Avdjiev; Leonardo Gambacorta; Linda S. Goldberg; Stefano Schiaffi
    Abstract: The period after the Global Financial Crisis (GFC) was characterized by a considerable risk migration within global liquidity flows, away from cross-border bank lending towards international bond issuance. We show that the post-GFC shifts in the risk sensitivities of global liquidity flows are related to the tightness of the balance sheet (capital and leverage) constraints faced by international (bank and nonbank) lenders and to the migration of borrowers across funding sources. We document that the risk sensitivity of global liquidity flows is higher when funding is provided by financial intermediaries that are facing greater balance sheet constraints. We also provide evidence that the post-GFC migration of borrowers from cross-border loans to international debt securities was associated with a decline in the risk sensitivity of global liquidity flows to EME borrowers.
    Keywords: global liquidity; international bank lending; international bond flows; emerging markets; advanced economies
    JEL: G10 F34 G21
    Date: 2025–04–01
    URL: https://d.repec.org/n?u=RePEc:fip:fednsr:99824
  18. By: Jacob Conway; Natalia Fischl-Lanzoni; Matthew Plosser
    Abstract: When households face budgetary constraints, they may encounter bills and debts that they cannot pay. Unlike corporate credit, which typically includes cross-default triggers, households can be delinquent on a specific debt without repercussions from their other lenders. Hence, households can choose which creditors are paid. Analyzing these choices helps economists and investors better understand the strategic incentives of households and the risks of certain classes of credit.
    Keywords: household finance; household debt; default; debt prioritization; mortgages
    JEL: G2 G5
    Date: 2025–03–06
    URL: https://d.repec.org/n?u=RePEc:fip:fednls:99659
  19. By: Tsvetelina Nenova
    Abstract: This paper provides novel empirical evidence on portfolio rebalancing in international bond markets through the prism of investors' demand for bonds. Using a granular dataset of global government and corporate bond holdings by mutual funds domiciled in the world's two largest currency areas, I estimate heterogeneous and time varying demand elasticities for bonds. Safe assets such as US Treasuries or German Bunds face especially inelastic demand from investment funds compared to riskier bonds. But spillovers from these safe assets to global bond markets are strikingly different. Funds substitute US Treasuries with global bonds, including risky corporate and emerging market bonds, whereas German Bunds are primarily substitutable within a narrow set of euro area safe government bonds. Substitutability deteriorates in times of stress, impairing the transmission of monetary policy.
    Keywords: international finance, portfolio choice, safe assets
    JEL: F30 G11 G15
    Date: 2025–04
    URL: https://d.repec.org/n?u=RePEc:bis:biswps:1254

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