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on Risk Management |
| By: | Osadchiy, Maksim |
| Abstract: | The paper presents a small perturbation two-factor model designed to capture granularity risk, extending the Vasicek Asymptotic Single Risk Factor (ASRF) portfolio loss model. By applying the Lyapunov Central Limit Theorem, we demonstrate that, for small values of the Herfindahl-Hirschman Index (HHI), granularity risk, conditional on market risk, is proportional to a standard normal random variable. Instead of studying the behavior of a heterogeneous portfolio, we examine the behavior of a homogeneous portfolio subjected to a small perturbation induced by granularity risk. We introduce the Vasicek-Herfindahl portfolio loss distribution, which extends the Vasicek portfolio loss distribution for heterogeneous portfolios with low HHI values. Utilizing the Vasicek-Herfindahl distribution, we derive closed-form granularity adjustments for the probability density function and cumulative distribution function of portfolio loss, as well as for Value at Risk (VaR) and Expected Shortfall (ES). We compare the primary results of our approach with established findings and validate them through Monte Carlo simulations. |
| Keywords: | Credit portfolio model; Granularity adjustment; Value at Risk; Expected Shortfall |
| JEL: | C46 G21 G32 |
| Date: | 2025–03–31 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124190 |
| By: | D’Innocenzo, Enzo (University of Bologna); Lucas, André (Vrije Universiteit Amsterdam and Tinbergen Institute); Schwaab, Bernd (European Central Bank); Zhang, Xin (Research Department, Central Bank of Sweden) |
| Abstract: | We propose a robust semi-parametric framework for persistent time-varying extreme tail behavior, including extreme Value-at-Risk (VaR) and Expected Shortfall (ES). The framework builds on Extreme Value Theory and uses a conditional version of the Generalized Pareto Distribution (GPD) for peaks-over-threshold (POT) dynamics. Unlike earlier approaches, our model (i) has unit root-like, i.e., integrated autoregressive dynamics for the GPD tail shape, and (ii) re-scales POTs by their thresholds to obtain a more parsimonious model with only one time-varying parameter to describe the entire tail. We establish parameter regions for stationarity, ergodicity, and invertibility for the integrated time-varying parameter model and its filter, and formulate conditions for consistency and asymptotic normality of the maximum likelihood estimator. Using four exchange rate series, we illustrate how the new model captures the dynamics of extreme VaR and ES. |
| Keywords: | dynamic tail risk; integrated score-driven models; extreme value theory |
| JEL: | C22 G11 |
| Date: | 2025–02–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0446 |
| By: | Prtik Thakkar (Indira Gandhi Institute of Development Research) |
| Abstract: | We examine how weather variation influences economic activity through its impact on systemic risk in financial markets, an underexplored channel for a developing economy like India. Using a semi-parametric generalized additive model, we analyze weather effects on monthly systemic risk data from 898 listed Indian firms from January 2005 to November 2022. Our findings confirm that weather variation significantly impacts Indian systemic risk. However, we observe that these effects are reliably estimated when we consider decomposed weather- expected and anomaly-instead of aggregate weather variables. We find that a rise in temperature (precipitation) increases (decreases) systemic risk. Unlike existing studies, this paper highlights that the impact is more pronounced when we observe a rise in weather anomaly compared to its expected counterpart. Moreover, these weather effects vary across seasons and broad industry clusters. Supply chain disruptions, energy demand shifts, and credit supply constraints emerge as key mechanisms linking weather fluctuations to systemic risk. Finally, we show that weather-related systemic risk can predict future economic downturns, offering early warning signs for climate risk management. |
| Keywords: | Weather, Systemic risk, Forecast, Generalized additive models, India |
| JEL: | C14 E32 G10 O53 Q54 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2025-006 |
| By: | Barinov, Alexander; Chabakauri, Georgy |
| Abstract: | The value effect and the idiosyncratic volatility (IVol) discount arise because growth firms and high IVol firms beat the CAPM during periods of increasing aggregate volatility (market volatility and average IVol), that makes their risk low. All else equal, growth options' value increases with volatility, an effect that is stronger for high IVol firms, for which growth options take a larger fraction of the firm value and firm volatility responds more to aggregate volatility changes. The factor model with the market factor, the market volatility risk factor, and the average IVol factor explains the value effect and the IVol discount. |
| Keywords: | Paul Woolley Centre |
| JEL: | G12 G13 |
| Date: | 2023–12–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:120814 |
| By: | Gopinath, Gita; Meyer, Josefin; Reinhart, Carmen M.; Trebesch, Christoph |
| Abstract: | Theory suggests that corporate and sovereign bonds are fundamentally different, also because sovereign debt has no bankruptcy mechanism and is hard to enforce. We show empirically that the two assets are more similar than you think, at least when it comes to high-yield bonds over the past 20 years. We use rich new data to compare high-yield US corporate ("junk") bonds to high-yield emerging market sovereign bonds 2002-2021. Investor experiences in these two asset classes were surprisingly aligned, with (i) similar average excess returns, (ii) similar average risk-return patterns (Sharpe ratios), (iii) similar default frequency, and (iv) comparable haircuts. A notable difference is that the average default duration is higher for sovereigns. Moreover, the two markets co-move differently with domestic and global factors. US "junk" bond yields are more closely linked to US market conditions such as US stock returns, US stock price volatility (VIX), or US monetary policy. |
| Keywords: | Sovereign debt and default, default risk, corporate bonds, corporate default, junk |
| JEL: | F3 G1 F4 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifwkwp:315469 |
| By: | Jinno, Masatoshi |
| Abstract: | This report examines a portfolio optimization methodology based on the investment allocation approach adopted by the Government Pension Investment Fund (GPIF). Employing quadratic programming, we derive optimal investment allocations for Japan, developed countries (excluding Japan), and emerging markets by incorporating market growth rates and variances. The analysis offers valuable insights into enhancing portfolio performance through a balanced approach to expected returns and risk management. |
| Keywords: | GPIF (Government Pension Investment Fund), Portfolio Optimization, Demographic Aging |
| JEL: | G11 G23 J14 |
| Date: | 2025–03–25 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124093 |
| By: | Dror, David Mark |
| Abstract: | This paper introduces a formal mathematical taxonomy of four principal health insurance models: Bismarckian, Beveridgean, Commercial, and Collaborative & Contributive (C&C). Each model is analyzed for its structural characteristics, sustainability conditions, and demographic resilience under stress. Unique to the C&C model is the incorporation of trust as a variable affecting sustainability and participation. By comparing the equilibrium and value functions across models, the paper reveals fundamental differences in their capacity to withstand demographic and financial pressures. The proposed taxonomy enhances both theoretical understanding and practical evaluation of global health insurance systems. |
| Abstract: | Gesundheitssysteme weltweit stehen vor wachsenden Herausforderungen in Bezug auf ihre Nachhaltigkeit. Dieser Beitrag bietet eine mathematisch fundierte Analyse von vier zentralen Modellen: Bismarck-Modell, Beveridge-Modell, kommerzielle Versicherung und das kollaborative & beitragsbasierte (C&C) Modell. Es werden formale Strukturen, Gleichgewichtsbedingungen und Resilienzmetriken dargestellt, wobei das C&C-Modell durch die explizite Einbindung von Vertrauen als besonders widerstandsfähig identifiziert wird. |
| Keywords: | Mathematical taxonomy, Healthcare financing, Health insurance models, Mathematical modeling, Demographic resilience, System equilibrium, Risk pooling, Sustainability thresholds, Bismarckian system, Beveridgean system, Commercial insurance, Collaborative and Contributive (C&C) model, Trust dynamics |
| JEL: | I13 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:315551 |
| By: | Mr. Divya Kirti; Akshat V. Singh |
| Abstract: | We study the role of life insurers in the transmission of US monetary policy. Insurers have uniquely long-term liabilities. We posit that they face a trade-off between matching liability duration exposure by investing in long-term government debt and earning higher yields by shifting to risky—but shorter-term—private debt. We show that, due to this tradeoff, long-term risk free rates play a critical role in shaping insurers' demand for risky private debt. Contractionary monetary policy shocks that raise long-term risk-free rates reduce insurers' demand for private debt, raising risk premia. We use granular, high frequency data and regulatory changes to trace how insurers' investment behavior transmits monetary policy shocks to risk premia. |
| Keywords: | Monetary policy; risk premia; NBFIs; life insurance |
| Date: | 2025–03–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/054 |
| By: | Huu Nhan DUONG; Jota ISHIKAWA; Katsumasa NISHIDE; S. Ghon RHEE |
| Abstract: | This study examines the impact of geopolitical risk (hereafter GPR) on the behavior of multinational manufacturing firms from Japan. We construct firm-level exposures to GPR indices using data on foreign direct investment and international trade. We find that only large firms respond to GPR, whereas small firms exhibit no significant reaction. Furthermore, the effect of GPR on accounting-based decisions, such as cash holdings and investment, varies depending on firms’ modes of internationalization. In particular, the results indicate that firms exposed to GPR through FDI reduce asset-side variables, such as cash holdings and capital expenditures. |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:25029 |
| By: | Thomas Lejeune (Economics and Research Department, National Bank of Belgium); Jolan Mohimont (Economics and Research Department, National Bank of Belgium) |
| Abstract: | We extend the reference DSGE model used for policy analysis at the NBB with a financial sector, by incorporating multi-period fixed-rate corporate and mortgage loans, an imperfect pass-through from policy rates to the deposit rate, and bank capital re-quirements. Adding multi-period fixed-rate loans amplifies the propagation of default risks and strengthens the effectiveness of macroprudential policy. This amplification operates through a bank capital channel and a market timing effect that delays borrowing and investment when rates are expected to fall. The bank capital channel also propagates shocks across sectors, and amplifies the effects of monetary policy when the duration of banks’ assets is larger than that of their liabilities. With universal banks, that grant both corporate and mortgage loans, sectoral prudential policy instruments can have unintended consequences on credit supply in the untreated sector. These crowding out effects increase with the loan duration in the treated sector and decrease with the risk weight differential between the treated and untreated sectors. Finally, we apply our model to the mortgage risk weight add-on introduced by the NBB in 2013. |
| Keywords: | Macroprudential policy, credit risks, loan maturity, financial accelerator, sectoral spillovers, unintended consequences, DSGE. |
| JEL: | E3 E44 E5 G21 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202504-474 |
| By: | Marir, Imene; Asma, Salhi |
| Abstract: | This study aims to investigate the determinants of financial solvency for Algerian insurance companies and the strength and direction of their impact on the solvency margin of these companies. This was done by constructing an econometric model of financial solvency and its influencing variables using the Autoregressive Distributed Lag (ARDL) methodology with Eviews 12 software for the period 1998–2021. The study found that the determinants of solvency—namely, insurance premiums, compensation, financial investments, and technical provisions—maintain a long-term equilibrium relationship with financial solvency. The findings revealed that a 1% increase in insurance premiums, financial investments, and technical provisions will lead to an increase in the financial solvency margin by 1.75%, 0.38%, and 0.78%, respectively, in the long term. Moreover, the study identified a long-term inverse relationship between compensation and the financial solvency margin, where a 1% increase in compensation results in a 1.79% decrease in the financial solvency margin. Additionally, the study found that any 1% shock to solvency determinants will have a lasting impact for one year and seven months before returning to its normal equilibrium state. |
| Keywords: | Financial Solvency Margin, Solvency Determinants, Insurance Companies, Algerian Solvency System, ARDL. |
| JEL: | E1 H00 O2 |
| Date: | 2024–12–28 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124126 |
| By: | Yuanchen Cai (Boston College); Pablo Guerron-Quintana (Boston College) |
| Abstract: | This paper studies the macroeconomic consequences of asymmetric interest rate shocks at which small open economies borrow in international financial markets. Empirically, we document that borrowing spreads have two distinct regimes. The first one features stable borrowing rates, i.e., low risk. In contrast, the second phase displays large spreads with significant volatility and –asymmetry, high risk. We fit the spreads to a rich statistical process that allows for changes in the level, volatility, skewness and kurtosis of the spread’s distribution. Each of the spread regimes is estimated to be highly persistent. When we embed the estimated spreads in a standard small-open economy model, we find that 1) spread shocks alone explain a large fraction of the volatility in consumption and investment in the data; 2) interest shocks of similar magnitude have stronger contractionary effects in an economy where only low risk exists than in one with changes between high and low risk; 3) the transition from an economy with only low-risk interest rate shocks to one like in the data results in a significant and persistent contraction. The welfare cost of this transition equals 2.4% of consumption. Finally, an unexpected increase in skewness pushes the economy into a recession with output, consumption, and investment dropping by as much as 1%, 2%, and 5%, respectively. This contraction resembles those experienced by developing countries during sudden stop episodes. |
| Keywords: | Borrowing spreads, risk, skewness, business cycles, welfare cost, sudden stops |
| JEL: | F4 C2 |
| Date: | 2025–04–16 |
| URL: | https://d.repec.org/n?u=RePEc:boc:bocoec:1088 |
| By: | Audi, Marc; Poulin, Marc; Ahmad, Khalil; Ali, Amjad |
| Abstract: | This study investigates the interplay between oil price variations and stock market performance in Europe over the period 1991–2023. By analysing Europe as a cohesive economic entity, the research provides a unified view of how trends in energy markets and broader macroeconomic factors affect equity outcomes. The methodology combines ordinary least squares and quantile regression to robustly capture average impacts and variations across different segments of stock returns. Findings reveal that rising oil prices typically exert downward pressure on European equities by increasing production costs in petroleum-reliant industries. However, abrupt oil price shifts have nuanced effects: some segments exhibit heightened sensitivity, while others remain resilient, suggesting that adaptive industries may fare better than energy-intensive ones. Additionally, strong economic growth often intensifies fears of inflation, interest rate hikes, and market overheating, creating a negative association with stock performance. Inflation challenges equities, with higher-performing stocks especially vulnerable to price increases. The shift toward renewable energy appears to have short-term adverse effects, largely due to capital redistribution and transitional hurdles affecting traditional energy sectors. These results offer guidance for stakeholders. It underscores the need to align energy strategies with equity markets. Policymakers can enhance market resilience by addressing oil price volatility through transparency and risk mitigation, and by clearly communicating monetary policies to reduce inflation-induced uncertainty. While accelerating renewable adoption is vital for sustainability, careful management is needed to minimize disruptions to established sectors. Firms should hedge against energy price risks and invest in cleaner technologies to remain competitive in a changing landscape. |
| Keywords: | Stock Market Performance, Oil Price Shocks, Inflation, Renewable Energy Consumption |
| JEL: | E31 G10 Q20 Q41 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124295 |
| By: | Ferri, Valentina; Gallo, Giovanni; Scicchitano, Sergio |
| Abstract: | The COVID-19 pandemic triggered widespread economic disruptions, raising concerns about surging bankruptcy rates globally. Italy, one of the hardest-hit countries, faced significant risks of business insolvency. This paper empirically investigates the short-term impact of government interventions on bankruptcy rates in Italy during the initial phase of the pandemic. Using a national dataset of Italian firms and employing interrupted-time-series analysis, we find that bankruptcy rates declined significantly following the introduction of extensive economic support measures, including loan moratoria, guaranteed credit schemes, and direct grants. Our results suggest that these interventions mitigated liquidity constraints and prevented the immediate insolvency of firms, averting a sharp rise in bankruptcies despite severe economic contractions. However, we also highlight potential concerns regarding the postponement of insolvencies, contributing to the "zombification" of non-viable firms. The findings provide critical insights for policymakers regarding the balance between short-term economic stabilization and long-term market efficiency in crisis management. |
| Keywords: | Bankruptcy, COVID-19, Government interventions, Interrupted-time-series |
| JEL: | E65 G33 H12 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:glodps:1601 |