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on Risk Management |
| By: | Ian Dew-Becker; Stefano Giglio |
| Abstract: | Equity index options historically displayed sharply negative returns and CAPM alphas. This could reflect investor risk preferences or intermediary frictions. We document that over the past 15 years, option alphas have become indistinguishable from zero. We also introduce synthetic options, that, under some conditions, reflect risk preferences of the average equity investor, independent of option-market frictions. Synthetic options never, over the last 100 years, had negative alpha, indicating that equity investors never required high compensation for market downturns. An intermediary-based model explains the patterns in both synthetic and traded options, including the recent decline in the variance risk premium. |
| Keywords: | Options; Tail risk; Financial friction |
| JEL: | G1 G12 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:101806 |
| By: | Hazell, Peter B. R.; Timu, Anne G. |
| Abstract: | Much of the recent literature on agricultural insurance focuses on ways to increase farmers’ demand for insurance, but this paper revisits the supply side of the insurance market. To better understand the conditions under which private insurance has been successful or failed the paper draws on the available empirical and theoretical literature, on case studies, and interviews with selected insurers. While there are many examples of innovative solutions to some of the product design, marketing and delivery challenges facing agricultural insurance, our review suggests that private unsubsidized insurance can only play a limited role in terms of the overall risk management needs of agriculture. Fundamentally, agricultural insurance can only address certain types of risks, and these are often not the most important from the farmers’ perspective. For most farmers insurance is best seen as part of a broader risk management approach, and its relevance for commercial farmers linked to value chains can be quite different from that for more subsistence-oriented smallholders. Commercial farmers generally have the most options for managing risk and may benefit most from specific types of indemnity or index-based products to protect specific agricultural investments and there are many examples of insurers meeting this need on an affordable and unsubsidized basis. On the other hand, subsistence-oriented farmers, especially poor and vulnerable ones, need insurance that can help protect their household income and consumption from negative shocks. This kind of insurance is expensive and difficult to supply without subsidies and requires strong public sector support. Even if targeted in this way, private unsubsidized insurance will only thrive given a supporting policy environment and, to keep costs down and improve the relevance and delivery of its products, insurers need to take full advantage of new and emerging digital and remote sensing innovations, and where possible, partner with intermediaries who can bundle their insurance with credit, farm inputs and other services. |
| Keywords: | agricultural insurance; case studies; farmers; literature review; private sector |
| Date: | 2024–12–14 |
| URL: | https://d.repec.org/n?u=RePEc:fpr:ifprid:169010 |
| By: | Martial Phélippé-Guinvarc'h (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université, UM - Le Mans Université); Marcelo Moreno Porras (URJC - Universidad Rey Juan Carlos = Rey Juan Carlos University) |
| Abstract: | Actuarial formula cheat sheet created using $\LaTeX$ that includes essential formulas for actuarial science including probability distributions, life tables, annuities, insurance calculations, risk theory, and financial mathematics concepts used in actuarial practice. |
| Date: | 2025–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05272596 |
| By: | Azamat Abdymomunov; Ronel Elul; Doriana Ruffino; James Z. Wang |
| Abstract: | In this note, we focus on examining bank lenders' pricing of credit risk, and how higher loan interest rates may serve as compensation for higher credit losses. First, we study the extent to which loan-level and regional-level risk is priced at the product level. |
| Date: | 2025–09–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2025-09-24-1 |
| By: | Isabel Culver; Friederike Niepmann; Leslie Sheng Shen |
| Abstract: | Business sentiment shapes real outcomes. Firms respond not only to hard data but also act on how they perceive risks and uncertainty. A growing literature shows that shifts in business sentiment can meaningfully affect investment, employment, and firm performance, even when fundamentals are unchanged. |
| Date: | 2025–08–29 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2025-08-29-2 |
| By: | Albertazzi, Ugo; Ponte Marques, Aurea; Abbondanza, Aurora; Travaglini, Giulia Leila |
| Abstract: | This paper presents the first causal evidence on how banks adjust their voluntary capital buffers (the capital headroom above the required level) in response to changes in capital requirements. Using granular euro area data and exploiting the threshold-based assignment of Other Systemically Important Institution (O-SII) buffers within a regression discontinuity design, we study the liability side of banks’ balance sheets, complementing the asset-focused literature on lending and risk-taking. This allows us to assess whether capital regulation is effective in enhancing bank resilience, arguably its main objective. We find that banks offset about half of higher capital requirements by cutting their voluntary buffers rather than raising new equity. The offsetting effect is more pronounced among banks with weaker balance sheets, particularly those with higher levels of non-performing loans. These results indicate that regulation aimed at strengthening resilience may be only partially effective, as banks use existing voluntary buffers when subject to higher requirements. JEL Classification: E44, E51, E58, G21, G28 |
| Keywords: | capital buffers, higher requirements, macroprudential policy, voluntary buffer |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253128 |
| By: | Giancarlo Corsetti; Anna Lipinska; Giovanni Lombardo |
| Abstract: | We study international risk sharing across countries differing in size, openness, and productivity distributions, emphasizing fat tails. In a canonical IRBC model, safer economies benefit through asset and terms-of-trade revaluations, while riskier ones smooth consumption at the cost of lower wealth. Calibrated to non-Gaussian shocks, country size and openness, the model predicts welfare gains between 0.03% and 6.9% of permanent consumption (median 6%). Assuming Gaussian shocks reduces gains by about 2 percentage points, while assuming equal country size and no home bias renders them negligible. Clustering economies by openness, size, and higher moments accounts for the cross-country distribution of gains. |
| Keywords: | asymmetries in risk, openness, country size, tail risk, gains from risk sharing, consumption smoothing, terms of trade, wealth transfers |
| JEL: | F15 F41 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1293 |
| By: | David M. Arseneau; Gazi I. Kara |
| Abstract: | This paper uses a large-scale redrawing of flood zone maps for the City of New Orleans in 2016 to identify how banks respond to changes in perceived flood risk in residential mortgage origination. Using geo-coding, we separate loan-level data on mortgage originations into treatment versus control groups based on how individual properties were affected by the map changes. We find banks charged interest rates that were roughly 6 basis points higher for mortgages on treated properties that were removed from the special floods zones as a result of the map changes. In addition, lower loan-to-value ratios for mortgages on these properties suggest that banks also required higher downpayments. Both effects are temporary, lasting under two years. Further analysis using flood insurance claims data following a major flooding event in 2017 suggests the temporary nature of these effects may reflect learning by banks about the true extent of flood risk and insurance take-up following the map changes. |
| Keywords: | FEMA Maps; Flood insurance; Mortgage lending |
| JEL: | G21 Q54 R30 |
| Date: | 2025–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-81 |
| By: | Jules H. van Binsbergen; João F. Cocco; Marco Grotteria; S. Lakshmi Naaraayanan |
| Abstract: | We quantify the impact of perceived cancer risk on housing values using widely advertised national reclassifications of chemical carcinogenicity in the United States. Combining these information events with an empirical design that compares changes in house values closer to affected toxic plants against those farther away isolates the effect of cancer risk news from other local factors. Focusing on plants previously emitting reclassified carcinogenic chemicals, we estimate a 1-2% decline in housing values within a 3-mile radius compared to those located farther away. The effects are stronger in areas with higher media presence underscoring the role of salience as a mechanism. |
| JEL: | G11 G50 Q51 Q53 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34305 |
| By: | Cecilia Aubrun; Rudy Morel; Michael Benzaquen (LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique); Jean-Philippe Bouchaud |
| Abstract: | We introduce an unsupervised classification framework that leverages a multi-scale wavelet representation of time-series and apply it to stock price jumps. In line with previous work, we recover the fact that time-asymmetry of volatility is the major feature that separates exogenous, news-induced jumps from endogenously generated jumps. Local mean-reversion and trend are found to be two additional key features, allowing us to identify new classes of jumps. Using our wavelet-based representation, we investigate the endogenous or exogenous nature of co-jumps, which occur when multiple stocks experience price jumps within the same minute. Perhaps surprisingly, our analysis suggests that a significant fraction of co-jumps result from an endogenous contagion mechanism.E xtreme events and cascades of events are widespread occurrences in both natural and social systems (1). Examples include earthquakes, volcanic eruptions, hurricanes, epileptic crises (2, 3), epidemic spread, financial crashes (4-6), economic crises (7, 8), book sales shocks (9, 10), riot propagation (11, 12) or failures in socio-technical systems (13). Understanding the origin of such events is essential for forecasting and possibly stabilizing their dynamics.A widely studied question is the reflexive, self-exciting nature of those shocks. The concept of financial market reflexivity was introduced by Soros in ( 14), to describe the idea that price dynamics are mostly endogenous and arise from internal feedback mechanisms, as was first surmised by Cutler, Poterba and Summers in 1988 (15) (see also ( 16)). Extreme events, in particular, often arise from feedback mechanisms within the system's structure (1, 17, 18). Quantifying the extent of endogeneity in a complex system and distinguishing events caused by external shocks from those provoked endogenously, and more generally identifying different classes of events, are crucial questions.Prior research has proposed to differentiate between endogenous and exogenous dynamics by analyzing the profile of activity around the shock (9, 10, 19, 20), in particular in the context of financial markets (21-23). It has been observed that endogenous shocks are preceded by a growth phase mirroring the post event powerlaw relaxation, in contrast to exogenous shocks that are strongly asymmetric. The universality of this result is quite intriguing as they have been observed in various contexts: intra-day book sales on Amazon (9, 10), daily views of YouTube videos (20) and intra-day financial market volatility and price jumps (23, 24). Meanwhile, Wu et al. (25) differentiate exogenous and endogenous bursts of comment posting on social media using the analysis of collective emotion dynamics and time-series distributions of comment arrivals.Furthermore, in complex systems, events can propagate along two directions: temporally and towards other elements of the system. Financial markets offer an attractive setting for studying multi-dimensional shocks due to the abundance of available data, the frequent occurrence of financial shocks and price jumps and the inter-connectivity of markets. In fact, a recent study by Lillo et al. (26, 27) demonstrates the frequent occurrence of "co-jumps", defined as simultaneous jumps of multiple stocks (as illustrated in Fig. 1) and establishes a correlation between their prevalence and the inter-connectivity of different markets.In this paper, we address the problem of classifying financial price jumps (and co-jumps), in particular measuring their self-exciting character, by analyzing their time-series using wavelets. We introduce an unsupervised classification based on an embedding Φ(x) of each jump time-series of returns x(t) into a low dimensional-space more appropriate to clustering. Such embedding, composed of wavelet scattering coefficients (see (28) and below), relies on wavelet coefficients of the time-series at the time of the jump t = 0 and wavelet coefficients of volatility. Such coefficients are Significance StatementCascades of events and extreme occurrences have garnered significant attention across diverse domains like seismology, neuroscience, economics, finance, and other social sciences. Such events may arise from internal system dynamics (endogenous) or external shocks (exogenous). Devising rigorous methods to distinguish between them is vital for professionals and regulators to create early warning systems and effective responses. Understanding these dynamics could improve the stability and resilience of crisisprone socio-economic systems. We show how wavelets can be used for the unsupervised separation of shocks in financial time-series, based on time-asymmetry around the shock. Additionally, we highlight the significant role contagion mechanisms play in financial markets. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04735506 |