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on Risk Management |
| By: | Caio Almeida (Unknown); Kim Ardison (Unknown); Gustavo Freire (Unknown); René Garcia (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Piotr Orlowski (Unknown) |
| Abstract: | We propose a novel measure of the market return tail risk premium based on minimum- distance state price densities recovered from high-frequency data. The tail risk premium extracted from intra-day S&P 500 returns predicts the market equity and variance risk premiums and expected excess returns on a cross section of characteristics-sorted portfolios. Additionally, we describe the differential role of the quantity of tail risk, and of the tail premium, in shaping the future distribution of index returns. Our results are robust to controlling for established measures of variance and tail risk, and of risk premiums, in the predictive models. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04927211 |
| By: | Herbst, Tobias; Roling, Christoph |
| Abstract: | We study the credit risk of banks in Germany from lending to non-financial firms. We model changes in Expected Credit Loss, which is derived from the guidelines in the IFRS 9 accounting standard. We map the accounting model to a dataset with individual loans as the unit of observation (AnaCredit). We present new approaches to modeling two well-known credit risk parameters: Loss Given Default (LGD), and Probability of Default (PD), which both affect Expected Credit Loss. First, we obtain an approxima tion of the Loss Given Default for each individual loan. This step makes use of the detailed collateral data available in AnaCredit and reveals a heterogeneity in LGD that is typically ignored in top-down stress tests. Second, regarding PD, we encounter a missing data problem since only a subset of banks reports default probabilities in AnaCredit. We employ machine learning algorithms to impute missing default probabilities. With the help of these credit risk parameters, we then apply the stress test model to two ad-hoc scenarios in which the downturn in CRE markets worsens to varying degrees and report how this would affect the capital of German banks. |
| Keywords: | Stress test, Credit Risk, Banks, Non-financial Firms, Commercial Real Estate, Germany |
| JEL: | G17 G21 C53 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:312404 |
| By: | Spencer Andrews; Salil Gadgil |
| Abstract: | This blog introduces a new OFR paper that analyzes how compensation influences a hedge fund manager’s investment strategy and the associated risk. |
| Date: | 2024–10–30 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:ofrblg:24-12 |
| By: | Metiu, Norbert |
| Abstract: | This paper describes the Bundesbank's weekly financial stress indicator for Germany. The indicator condenses several financial market variables into a summary measure of financial stress. It represents a contemporaneous, market-based indicator that captures the materialisation of systemic risk along three different risk dimensions - credit, liquidity and market risk. Judged by this measure, the German financial system has experienced its most severe financial stress period since 2002 during the 2008 global financial crisis, with highly elevated levels in all three dimensions of financial stress. The indicator also points to historically high stress levels during the euro area sovereign debt crisis in the early 2010s. Recent readings of the indicator, by contrast, indicate historically low levels of financial stress. |
| Keywords: | diffusion index, factor model, financial conditions, financial stability |
| JEL: | E44 E51 G12 G17 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:312405 |
| By: | Christopher Anderson |
| Abstract: | Regulating bank risk-taking is challenging since banks know more than regulators about the risks of their portfolios and can make adjustments to game regulations. To address this problem, I build a tractable model that incorporates this information asymmetry. The model is flexible enough to encompass many regulatory tools, although I focus on taxes. These taxes could also be interpreted as reflecting the shadow costs of other regulations, such as capital requirements. I show that linear risk-sensitive taxes should not generally be set more conservatively to address asymmetric information. I further show the efficacy of three regulatory tools: (1) not disclosing taxes to banks until after portfolio selection, (2) nonlinear taxes that respond to information contained in banks' portfolio choice, and (3) taxes on banks' realized pro ts that incentivize banks to reduce risk. |
| Keywords: | Symmetric information; Bank portfolio choice; Capital regulation; Bank regulation |
| JEL: | G21 G28 G18 G11 |
| Date: | 2025–02–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-09 |
| By: | Jose Maria Tapia; Ruth Leung; Hashim Hamandi |
| Abstract: | In April 2024, OFR enhanced its Bank Systemic Risk Monitor to include the Supplementary Leverage Ratio which measures a bank's Tier 1 Capital relative to its total leverage. |
| Date: | 2024–08–02 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:ofrblg:24-09 |
| By: | Dasol Kim; William Goetzmann; Robert Shiller |
| Abstract: | The transmission of narratives about past stock market crashes can influence investor beliefs, potentially create feedback loops on market outcomes. |
| Keywords: | stock market crash, financial crisis, market volatility |
| Date: | 2023–12–28 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:ofrblg:23-19 |
| By: | Tom Doolittle; Arthur Fliegelman; Ruth Leung |
| Abstract: | The commercial and residential real estate markets have shown resilience until recently, but their strength will be tested if a recession occurs. Keywords: commercial real estate, real estate market |
| Date: | 2023–03–23 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:ofrblg:23-07 |
| By: | Philip Mulder; Yanjun Liao |
| Abstract: | Understanding why so few homeowners insure their flood risk is important for understanding how increasing flood risk could affect financial markets. |
| Date: | 2024–07–24 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:ofrblg:24-08 |
| By: | Khalil, Makram; Osten, David; Strobel, Felix |
| Abstract: | In recent years, major exporting economies experienced rising geopolitical risk. From the perspective of the US and the euro area, we employ detailed product data panels to study the consequences of trading-partner geopolitical risk shocks on bilateral imports. We find that these shocks lower import volumes and raise import prices. The decline in imports is stronger when the shocks hit countries that exhibit greater geopolitical distance to the US and the euro area, or when geopolitical risk shocks hit countries that are under US sanctions. Thus, increasing geopolitical risk triggers dynamics that are conducive to a fragmentation of global trade. A case in point are large effects for geopolitical risk shocks originating in China. We find that US and euro area imports from non-Chinese trading partners are also affected by such shocks, which also owes to US dollar and global oil price movements as well as trading-partner value chain linkages with China. |
| Keywords: | Geopolitical risk, imports, United States, euro area |
| JEL: | F14 F41 F61 F62 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:311836 |
| By: | Peter Bednarek (Deutsche Bundesbank); Olga Briukhova (University of Zurich - Department of Banking and Finance; Swiss Finance Institute); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Natalja von Westernhagen (Deutsche Bundesbank) |
| Abstract: | What is the impact of a sudden and sizeable increase in bank capital requirements on the lending activity by directly affected banks and by non-affected non-bank financial institutions (NBFIs)? To answer this question, we apply a difference-in-differences methodology around the capital exercise by the European Banking Authority (EBA) in 2011 with German credit register data. We find that insurance companies, financial enterprises, and factoring companies — but not leasing companies or very large NBFIs — and Non-EBA banks expand their corporate lending relative to EBA banks. In particular, NBFIs use the opportunity to expand their credit activities, in riskier and more competitive borrower segments. |
| Keywords: | non-bank financial intermediation, bank capital requirements, EBA capital exercise |
| JEL: | E50 G21 G23 G28 C33 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2512 |
| By: | Tervola, Jussi; Iivonen, Saija; Hiilamo, Heikki |
| Abstract: | Social insurance and social assistance reflect fundamental principles of social policies. Social insurance benefits cover employed individuals against a social risk event such as unemployment or disability in exchange of paid contributions. Social assistance benefits, in turn, are designed typically to secure the minimum standard of living, regardless of past contribution. In this article we ask if the dualism is feasible to depict contemporary social benefits that cover traditional social risks: unemployment, childbirth, sickness, disability, and old age. A policy analysis of six European countries with extensive social security systems – Denmark, Estonia, Finland, Netherlands, Sweden, and United Kingdom – demonstrates that while traditional insurance benefits and assistance benefits still make up the majority of risk-based benefits, also different kinds of deviations from the pure forms are observed. Some countries provide hybrid benefits where past contribution affects benefit rate, but non-contributory minimum is guaranteed for all facing the risk. Some countries provide income-tested contributory benefits which is against the traditional insurance logic. Moreover, universal flat-rate benefits are found especially covering the risk of old age. |
| Date: | 2024–03–15 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:97xzj_v1 |
| By: | Petrella, Ivan; De Polis, Andrea; Melosi, Leonardo |
| Abstract: | We document that inflation risk in the U.S. varies significantly over time and is often asymmetric. To analyze the macroeconomic effects of these asymmetric risks within a tractable framework, we construct the beliefs representation of a general equilibrium model with skewed distribution of markup shocks. Optimal policy requires shifting agents’ expectations counter to the direction of inflation risks. We perform counterfactual analyses using a quantitative general equilibrium model to evaluate the implications of incorporating real-time estimates of the balance of inflation risks into monetary policy communications and decisions. JEL Classification: E52, E31, C53 |
| Keywords: | asymmetric risks, balance of inflation risks, flexible average inflation targetin, optimal monetary policy, risk-adjusted inflation targeting |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253028 |
| By: | Gregory Phelan; William Chen |
| Abstract: | Banking-sector stability may suffer, yet household welfare may improve should a digital currency be fully integrated into the financial system. Keywords: Central bank digital currency, CBDC, volatility, digital assets, stable coins |
| Date: | 2023–03–22 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:ofrblg:23-06 |
| By: | Thomas Ruchti; Yashar Barardehi; Andrew Bird; Stephen A. Karolyi |
| Abstract: | An OFR blog discusses a recent working paper that quantifies the impacts of short-selling restrictions to illuminate the role these limits could play during financial downturns and periods of market turmoil. |
| Keywords: | short-selling, short selling, market stability |
| Date: | 2023–10–11 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:ofrblg:23-16 |
| By: | Christoph Kaufmann; Jaime Leyva; Manuela Storz |
| Abstract: | The insurance sector and its relevance for real economy financing have grown significantly over the last two decades. This paper analyses the effects of monetary policy on the size and composition of insurers’ balance sheets, as well as the implications of these effects for financial stability. We find that changes in monetary policy have a significant impact on both sector size and risk-taking. Insurers’ balance sheets grow materially after a monetary loosening, implying an increase of the sector’s financial intermediation capacity and an active transmission of monetary policy through the insurance sector. We also find evidence of portfolio re-balancing consistent with the risktaking channel of monetary policy. After a monetary loosening, insurers increase credit, liquidity and duration risk-taking in their asset portfolios. Our results suggest that extended periods of low interest rates lead to rising financial stability risks among non-bank financial intermediaries. |
| JEL: | E52 G11 G22 G20 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202502 |
| By: | Chotibhak Jotikasthira (Southern Methodist University (SMU) - Finance Department); Anastasia Kartasheva (University of St. Gallen - School of Finance; Swiss Finance Institute; Joshua J. Harris Alternative Investment Program); Christian T. Lundblad (University of North Carolina Kenan-Flagler Business School; Frank Hawkins Kenan Institute of Private Enterprise); Tarun Ramadorai (Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)) |
| Abstract: | Following adverse events, insurers not only raise premiums but also delay claim payments, potentially imposing high state-contingent costs on clients who experience losses. These delays increase losses payable, one of the largest liability items on insurers’ balance sheets, augmenting insurer liquidity analogously to interest-free credit. Claim payment delays are larger and more prevalent for insurers that are less capitalized, less liquid, and those who serve clients who are less likely to complain to the regulator. In addition to losses in the same line of business, delays, unlike premiums, also increase in response to losses in unrelated lines of business. |
| Keywords: | Claim payments, Delays, Financial constraints |
| JEL: | G21 G32 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2514 |
| By: | Damast, Dominik; Kubitza, Christian; Sørensen, Jakob Ahm |
| Abstract: | We document a novel transmission channel of monetary policy through the homeowners insurance market. On average, contractionary monetary policy shocks result in higher homeowners insurance prices. Using granular data on insurers' balance sheets, we show that this effect is driven by the interaction of financial frictions and the interest rate sensitivity of investment portfolios. Specifically, rate hikes reduce the market value of insurers' assets, tightening insurers' balance sheet constraints and increasing their shadow cost of capital. These frictions in insurance supply amplify the effects of monetary policy on real estate and mortgage markets by making housing less affordable. We find that monetary policy shocks have a stronger impact on home prices and mortgage applications when local insurers are more sensitive to interest rates. This channel is particularly pronounced in areas where households face high climate risk exposure. Our findings highlight the role of insurance markets in amplifying macroeconomic shocks and the interconnections between homeowners insurance, residential real estate, and mortgage lending |
| Keywords: | Insurance Markets, Monetary Policy, Financial Frictions, Housing Markets |
| JEL: | E5 E44 G21 G22 G5 R3 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:icirwp:312410 |
| By: | Ambati, Murari |
| Abstract: | The Fractal Market Hypothesis (FMH) proposes that financial markets have fractal behaviors. Fractal behaviors are patterns that are primarily characterized by self-similarity. Furthermore, there are other methods to characterize fractal behaviors by checking long-range dependencies and for a non-linear structure. Thus, this paper showcases the theoretical and mathematical foundations of FMH. There is a significant focus on FMHs applications to financial markets. Furthermore, this includes focusing on volatility, market crashes, and long-range dependencies. The paper analyzes using fractal geometry, multifractal models, statistical tools, fractal dimension, and power-law distributions to model financial time series. This paper also compares FMH with classical market theories like the Efficient Market Hypothesis (EMH). We then highlight FMH’s capacity to describe real-world market phenomena better. |
| Date: | 2025–02–21 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:rx3vj_v1 |