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on Risk Management |
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Issue of 2016‒02‒12
ten papers chosen by |
| By: | Nucera, Federico; Schwaab, Bernd; Koopman, Siem Jan; Lucas, André |
| Abstract: | We propose to pool alternative systemic risk rankings for financial institutions using the method of principal components. The resulting overall ranking is less affected by estimation uncertainty and model risk. We apply our methodology to disentangle the common signal and the idiosyncratic components from a selection of key systemic risk rankings that have been proposed recently. We use a sample of 113 listed financial sector firms in the European Union over the period 2002-2013. The implied ranking from the principal components is less volatile than most individual risk rankings and leads to less turnover among the top ranked institutions. We also find that price-based rankings and fundamentals-based rankings deviated substantially and for a prolonged time in the period leading up to the financial crisis. We test the adequacy of our newly pooled systemic risk ranking by relating it to credit default swap premia. JEL Classification: E |
| Keywords: | banking supervision, financial regulation, forecast combination, risk rankings, systemic risk contribution |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161875&r=rmg |
| By: | Christophette Blanchet-Scalliet (ICJ - Institut Camille Jordan [Villeurbanne] - ECL - École Centrale de Lyon - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - INSA - Institut National des Sciences Appliquées - CNRS - Centre National de la Recherche Scientifique); Diana Dorobantu (ICJ - Institut Camille Jordan [Villeurbanne] - ECL - École Centrale de Lyon - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - INSA - Institut National des Sciences Appliquées - CNRS - Centre National de la Recherche Scientifique); Yahia Salhi (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1) |
| Abstract: | In this paper, we study the pricing of life insurance portfolios in the presence of dependent lives. We assume that an insurer with an initial exposure to n mortality-contingent contracts wanted to acquire a second portfolio constituted of m individuals. The policyhold-ers' lifetimes in these portfolios are correlated with a Farlie-Gumbel-Morgenstern (FGM) copula, which induces a dependency between the two portfolios. In this setting, we compute the indifference price charged by the insurer endowed with an exponential utility. The optimal price is characterized as a solution to a backward differential equation (BSDE). The latter can be decomposed into (n − 1)n! auxiliary BSDEs. In this general case, the derivation of the indifference price is computationally infeasible. Therefore, while focusing on the example of death benefit contracts, we develop a model point based approach in order to ease the computation of the price. It consists on replacing each portfolio with a single policyholder that replicates some risk metrics of interest. Also, the two representative agents should adequately reproduce the observed dependency between the initial portfolios. |
| Keywords: | life insurance, utility maximization,indifference pricing, representative contract |
| Date: | 2016–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01258645&r=rmg |
| By: | Xavier Freixas; Kebin Ma |
| Abstract: | This paper re-examines the classical issue of the possible trade-offs between banking competition and financial stability by highlighting different types of risk and the role of leverage. We show that competition can affect portfolio risk, insolvency risk, liquidity risk, and systemic risk differently. The effect depends crucially on a bank’s type of funding (retail deposits vs. wholesale debts) and whether leverage is exogenous or endogenous. In particular, we argue that while competition might increase financial stability in a classical originate-to-hold banking industry, the opposite can be true for an originate-to-distribute banking industry with a large fraction of market short-term funding. |
| Keywords: | banking competition, financial stability, leverage |
| JEL: | G21 G28 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:874&r=rmg |
| By: | Augustin, Patrick; Boustanifar, Hamid; Breckenfelder, Johannes; Schnitzler, Jan |
| Abstract: | Using the announcement of the first Greek bailout on April 11, 2010, we quantify significant spillover effects from sovereign to corporate credit risk in Europe. A ten percent increase in sovereign credit risk raises corporate credit risk on average by 1.1 percent after the bailout. These effects are more pronounced in countries that belong to the Eurozone and that are more financially distressed. Bank dependence, public ownership and the sovereign ceiling are channels that enhance the sovereign to corporate risk transfer. JEL Classification: F34, F36, G15, H81, G12 |
| Keywords: | bailout, contagion, credit risk, Greece, risk transmission |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161878&r=rmg |
| By: | Demirgüç-Kunt, A.; Horváth, Bálint (Tilburg University, Center For Economic Research); Huizinga, Harry (Tilburg University, Center For Economic Research) |
| Abstract: | In an approach analogous to Rajan and Zingales (1998), we examine how the ability to access long-term debt affects firm-level growth volatility. We find that firms in industries with stronger preference to use long-term finance relative to short-term finance experience lower growth volatility in countries with better-developed financial systems, as these firms may benefit from reduced refinancing risk. Institutions that facilitate the availability of credit information and contract enforcement mitigate refinancing risk and therefore growth volatility associated with short-term financing. Increased availability of long-term finance reduces growth volatility in crisis as well as non-crisis periods. |
| Keywords: | debt maturity; finanical dependence; firm volatiliy; financial development |
| JEL: | G20 G32 O16 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:59312b2d-3418-4a1c-be24-49f1825cc552&r=rmg |
| By: | Nicolò Pecora; Alessandro Spelta (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore) |
| Abstract: | This paper proposes a new methodology based on non-negative matrix factor- ization to detect communities and to identify Systemically Important Financial In- stitutions in the interbank network as well as within communities. The method is speci cally designed for directed weighted networks and it is able to take into account exposures on both sides of banksbalance sheets, distinguishing between Systemically Important Borrowers and Lenders. Using interbank transactions data from the e-Mid platform, we show that the systemic importance associated with Italian banks decreased during the 2007-2009 nancial crisis while the opposite happened for foreign institutions. We also show that, as the transactions volume grew, the number of communities rose as well. The contrary happened during the crisis phase. Moreover results indicate that, during nancial crisis, banks strongly operate into non overlapping communities with few institutions playing the role of SIFIs. On the contrary during business as usual times banks act in several and overlapping modules. |
| Keywords: | Financial networks, community detection, systemic risk. |
| JEL: | D8 L14 C02 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie1:def037&r=rmg |
| By: | Johannes Rauch; Carol Alexander |
| Abstract: | We use the P&L on a particular class of swaps, representing variance and higher moments for log returns, as estimators in our empirical study on the S&P500 that investigates the factors determining variance and higher-moment risk premia. This class is the discretisation invariant sub-class of swaps with Neuberger's aggregating characteristics. Besides the market excess return, momentum is the dominant driver for both skewness and kurtosis risk premia, which exhibit a highly significant negative correlation. By contrast, the variance risk premium responds positively to size and negatively to growth, and the correlation between variance and tail risk premia is relatively low compared with previous research, particularly at high sampling frequencies. These findings extend prior research on determinants of these risk premia. Furthermore, our meticulous data-construction methodology avoids unwanted artefacts which distort results. |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1602.00865&r=rmg |
| By: | Fagereng, Andreas; Guiso, Luigi; Pistaferri, Luigi |
| Abstract: | Estimating the effect of background risk on individual financial choices faces two challenges. First, the identification of the marginal effect requires a measure of at least one component of human capital risk that qualifies as "background" (a risk that an individual cannot diversify or avoid). Absent this, estimates suffer from measurement error and omitted variable bias. Moreover, measures of background risk must vary over time to eliminate unobserved heterogeneity. Second, once the marginal effect is identified, an evaluation of the economic significance of background risk requires knowledge of the size of all the background risk actually faced. Existing estimates are problematic because measures of background risk fail to satisfy the "non-avoidability" requirement. This creates a downward bias which is at the root of the small estimated effect of background risk. To tackle the identification problem we match panel data of workers and firms and use the variability in the profitability of the firm that is passed over to workers to obtain a measure of risk that is hardly avoidable. We rely on this measure to instrument total variability in individual earnings and find that the marginal effect of background risk is much larger than estimates that ignore endogeneity. We bound the economic impact of human capital background risk and find that its overall effect is contained, not because its marginal effect is small but because its size is small. And size of background risk is small because firms provide substantial wage insurance. |
| Keywords: | background risk; portfolio choice; uninsurable labor income risk |
| JEL: | E20 E24 G11 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11051&r=rmg |
| By: | Stephanie Chan (University of Amsterdam, the Netherlands); Sweder van Wijnbergen (University of Amsterdam, the Netherlands) |
| Abstract: | We highlight the ex ante risk-shifting incentives faced by a bank's shareholders/managers when CoCos (contingent convertible capital) are part of the capital structure. The risk shifting incentive arises from the wealth transfers that the shareholders will receive upon the CoCo's conversion under CoCo designs widely used in practice. Specifically we show that for principal writedown and nondilutive equity-converting CoCos, shareholders/managers have an incentive to take on more risk to make conversion more likely because of those wealth transfers. As a consequence, wide spread use of CoCos will increase systemic fragility. We show that such improperly designed CoCos should not be allowed to fill in loss absorption capacity requirements unless accompanied by higher required equity ratios to mitigate the increased risk taking incentives they lead to. Sufficiently dilutive CoCos do not lead to undesired risk taking behavior. |
| Keywords: | Contingent Convertible Capital, Systemic Risk, Risk Shifting Incentives, Capital Requirements |
| JEL: | G01 G13 G21 G28 G32 |
| Date: | 2016–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20160007&r=rmg |
| By: | Savas Papadopoulos (Bank of Greece); Pantelis Stavroulias (Democritus University of Thrace); Thomas Sager (University of Texas) |
| Abstract: | Reliable forecasts of an economic crisis well in advance of its onset could permit effective preventative measures to mitigate its consequences. Using the EU15 crisis of 2008 as a template, we develop methodology that can accurately predict the crisis several quarters in advance in each country. The data for our predictions are standard, publicly available macroeconomic and market variables that are preprocessed by moving averages and filtering. The prediction models then utilize the filtered data to distinguish pre-crisis from normal quarters through standard statistical classification methodology plus a proposed new combined method, enhanced by an innovative threshold selection and goodness-of-fit measure. Empirical results are very satisfactory: Country-stratified 14-fold cross validation achieves 92.1% correct classification and 85.7% for both true positive rate and positive predictive value for the EU15 crisis of 2008. Results will be of use to policy makers, investors, and researchers who are interested in estimating the probability of a crisis as much as one and a half years in advance in order to deploy prudential policies. |
| Keywords: | Banking crisis; financial stability; macroprudential policy; classification methods; goodness-of-fit measures |
| JEL: | C53 E58 G28 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:202&r=rmg |