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on Risk Management |
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Issue of 2018‒12‒03
twenty papers chosen by |
| By: | Abdul Haque (COMSAT Institute of Information Technology, Lahore); Adeel Nasir (University of the Punjab, Jhelum Campus) |
| Abstract: | Fama and French (1992) three factor and Fama and French (2014) five-factor Model estimated relevant idiosyncratic factors and CAPM beta as the systematic risk factor for stock returns? variations. Application of Value at Risk (VaR) and Expected Shortfall (ES) modified the risk management criteria. This study applies traditional one factor, three factor and five factor model on Pakistan?s manufacturing companies. Compares and modifies the stated models while using VaR and ES as systematic risk factor and check the robustness of the significant extent of worst expected loss provided by VaR and ES by measuring 95% and 99% confidence levels and their impact on the stock returns. In comparison with traditional market risk factor, our findings are in favor of VaR and ES factor as it significantly affects the cross-sectional of excess stock returns and fulfills the criteria of risk aversion. |
| Keywords: | Value at Risk, Expected Shortfall, Fama and French Three Factor Model, Five Factor Model, Systematic Risk, Idiosyncratic Risk |
| JEL: | G10 G11 G14 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iefpro:7108551&r=rmg |
| By: | Acosta-Smith, Jonathan (Bank of England); Grill, Michael (European Central Bank); Lang, Jan Hannes (European Central Bank) |
| Abstract: | This paper addresses the trade-off between additional loss-absorbing capacity and potentially higher bank risk-taking associated with the introduction of the Basel III leverage ratio. This is addressed in both a theoretical and empirical setting. Using a theoretical micro model, we show that a leverage ratio requirement can incentivise banks that are bound by it to increase their risk-taking. This increase in risk-taking however, should be more than outweighed by the benefits of higher capital, thereby leading to more stable banks. These theoretical predictions are tested and confirmed in an empirical analysis on a large sample of EU banks. Our baseline empirical model suggests that a leverage ratio requirement would lead to a significant decline in the distress probability of highly leveraged banks. |
| Keywords: | Bank capital; risk-taking; leverage ratio; Basel III |
| JEL: | G01 G21 G28 |
| Date: | 2018–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0766&r=rmg |
| By: | Cyril B\'en\'ezet; J\'er\'emie Bonnefoy; Jean-Fran\c{c}ois Chassagneux; Shuoqing Deng; Camilo Garcia Trillos; Lionel Len\^otre |
| Abstract: | In this work, we present a numerical method based on a sparse grid approximation to compute the loss distribution of the balance sheet of a financial or an insurance company. We first describe, in a stylised way, the assets and liabilities dynamics that are used for the numerical estimation of the balance sheet distribution. For the pricing and hedging model, we chose a classical Black & Scholes model with a stochastic interest rate following a Hull & White model. The risk management model describing the evolution of the parameters of the pricing and hedging model is a Gaussian model. The new numerical method is compared with the traditional nested simulation approach. We review the convergence of both methods to estimate the risk indicators under consideration. Finally, we provide numerical results showing that the sparse grid approach is extremely competitive for models with moderate dimension. |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1811.08706&r=rmg |
| By: | Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Northern Cyprus, Turkey; Department of Economics, University of Pretoria, Pretoria, South Africa; Montpellier Business School, Montpellier, France.); Elie Bouri (USEK Business School, Holy Spirit University of Kaslik, Jounieh, Lebanon); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha, Omaha, USA, and School of Business and Economics, Loughborough University, Leicestershire, UK.) |
| Abstract: | Recent evidence, based on a linear framework, tend to suggest that while mortgage default risks can predict weekly and monthly housing returns of the United States, the same does not hold at the daily frequency. We however indicate that, the relationship between daily housing returns with mortgage default risks is in fact nonlinear, and hence a linear predictive model is misspecified. Given this, we use a k-th order nonparametric causality-in-quantiles test, which in turn, allows us to test for predictability over the entire conditional distribution of not only housing returns, but also volatility, by controlling for misspecification due to nonlinearity. Based on this model, we show that mortgage default risks do indeed predict housing returns and volatility, barring at the extreme upper end of the respective conditional distributions. |
| Keywords: | Mortgage Default Risks, Housing Returns and Volatility; Higher-Order Nonparametric Causality in Quantiles Test |
| JEL: | C22 R30 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201875&r=rmg |
| By: | Nikolaos Kolliopoulos |
| Abstract: | We consider a large portfolio limit where the asset prices evolve according certain stochastic volatility models with default upon hitting a lower barrier. When the asset prices and the volatilities are correlated via systemic Brownian Motions, that limit exist and it is described by a SPDE on the positive half-space with Dirichlet boundary conditions which has been studied in \cite{HK17}. We study the convergence of the total mass of a solution to this stochastic initial-boundary value problem when the mean-reversion coefficients of the volatilities are multiples of a parameter that tends to infinity. When the volatilities of the volatilities are multiples of the square root of the same parameter, the convergence is extremely weak. On the other hand, when the volatilities of the volatilities are independent of this exploding parameter, the volatilities converge to their means and we can have much better approximations. Our aim is to use such approximations to improve the accuracy of certain risk-management methods in markets where fast volatility mean-reversion is observed. |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1811.08808&r=rmg |
| By: | Christian Wei{\ss}; Zoran Nikoli\'c |
| Abstract: | Practitioners sometimes suggest to use a combination of Sobol sequences and orthonormal polynomials when applying an LSMC algorithm for evaluation of option prices or in the context of risk capital calculation under the Solvency II regime. In this paper, we give a theoretical justification why good implementations of an LSMC algorithm should indeed combine these two features in order to assure numerical stability. Moreover, an explicit bound for the number of outer scenarios necessary to guarantee a prescribed degree of numerical stability is derived. We embed our observations into a coherent presentation of the theoretical background of LSMC in the insurance setting. |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1811.08509&r=rmg |
| By: | Fausto Corradin (GRETA Associati, Venice); Domenico Sartore (Department of Economics, University Of Venice Cà Foscari) |
| Abstract: | The condition of Risk Aversion implies that the Utility Function must be concave. We take into account the dependence of the Utility Function on the return that has any type of two-parameter distribution; it is possible to define Risk and Target, the former may be the Standard Deviation of the return, and the latter is usually the Expected value of the return, as a generic function of these two parameters. Considering the 3D space of Risk, Target and Expected Utility, this paper determines the Differential Conditions for these three functions so that the Expected Utility Function depends decreasingly on Risk and increasingly on Target, that means the iso-utility curves have positive slope in the plane of Risk and Target. As a specific case, we discuss these conditions in the case of the CRRA Utility Function and the Truncated Normal distribution. Furthermore, different measures of Risk are chosen, such as Value at Risk (VaR) and Expected Shortfall (ES), to verify if these measures maintain a positive slope of the iso-utility curves in the Risk-Target plane. |
| Keywords: | Concavity, CRRA, Differential Condition, Expected Shortfall, Expected Utility Function, Quadratic Utility Function, Risk Aversion, Standard Deviation, Transformation of Parametric Functions, Truncated Normal distribution, Value at Risk |
| JEL: | G11 G14 G23 G24 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2018:24&r=rmg |
| By: | Tanapol Rattanasamakarn (Faculty of Economics, Chiang Mai University); Roengchai Tansuchat (Faculty of Economics, Chiang Mai University) |
| Abstract: | The objectives of this paper are to construct the efficient frontier and optimum portfolio of agricultural commodity futures, and to evaluate financial risk by Value at Risk. We evaluated alternative volatility forecasting and computed daily Value at Risk (VaR) based on Realized Volatility approach and ARFIMA ? FIGARCH model. The intraday trade data of three agricultural commodity futures prices, namely corn, wheat and soybean traded in the Chicago Board of Trade (CBOT) with three different frequencies namely 1 minute, 5 minutes and 15 minutes, were collected from Bloomberg database. The complete data set covered the period from November 2015 to December 2016. The empirical results showed that the calculated realized volatility from Realized Covariance Measure (Andersen et al. 2003) of corn, wheat and soybean futures returns have the long memory feature for every frequency based on R/S test and GPH test. The simulated returns from ARFIMA ? FIGARCH are applied to construct the efficient frontier and optimum portfolio. The optimum portfolio suggested investing more than half in corn followed by soybean and wheat, respectively. |
| Keywords: | Realized Volatility, Agriculture futures, Long-memory, Portfolio Optimization |
| JEL: | C58 G11 G32 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iefpro:7109342&r=rmg |
| By: | David P. Glancy; Robert J. Kurtzman |
| Abstract: | We study how bank loan rates responded to a 50% increase in capital requirements for a subcategory of construction lending, High Volatility Commercial Real Estate (HVCRE). To identify this effect, we exploit variation in the loan terms determining whether a loan is classified as HVCRE and the time that a treated loan would be subject to the increased capital requirements. We estimate that the HVCRE rule increases loan rates by about 40 basis points for HVCRE loans, indicating that a one percentage point increase in required capital raises loan rates by about 9.5 basis points. |
| Keywords: | Basel III ; Capital Requirements ; Commercial Real Estate |
| JEL: | G38 G28 G21 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-79&r=rmg |
| By: | Calem, Paul S. (Federal Reserve Bank of Philadelphia); Jagtiani, Julapa (Federal Reserve Bank of Philadelphia); Maingi, Ramain Quinn (Federal Reserve Bank of Philadelphia) |
| Abstract: | This paper examines changes in the redefault rate of mortgages that were selected for modification during 2008–2011, compared with that of similarly situated self-cured mortgages. We find a large decline in the redefault rate of both modified and self-cured mortgages over this period, but the improvement was greatest for modifications. Our analysis has identified several important factors contributing to the greater improvement for modified loans, including an increasing share of principal-reduction modifications, which appear to be more effective than other types of modification and increasingly generous modification terms (larger payment reductions). The favorable impacts of principal and payment reductions on household finances were enhanced by improving economic conditions, resulting in more effective modifications. Even after accounting for these factors, we still observe a larger decline in the redefault rate for modifications compared with similarly situated self-cured loans. This residual effect may reflect servicer “learning-by-doing”; that is, servicers gained knowledge as modification activity ramped up, resulting in more successful modification programs for later cohorts. |
| Keywords: | mortgage modification; mortgage default; mortgage servicing |
| JEL: | G21 G28 |
| Date: | 2018–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:18-26&r=rmg |
| By: | Chala, Alemu Tulu (Department of Economics, Lund University) |
| Abstract: | This paper explores whether refinancing risk is an important determinant of maturity decisions by investigating how firms with refinancing risk choose the maturity of new loans they obtain during the 2007-2009 financial crisis. The firms' refinancing risk is measured by the maturing portion of outstanding long-term debt. The result shows that firms with a high refinancing risk choose longer maturities. This effect is stronger for speculative-grade and low-cash-flow firms. There is also evidence that firms with refinancing risk obtain longer maturities from their relationship lenders. |
| Keywords: | Refinancing risk; Debt maturity; financial crisis |
| JEL: | G01 G32 G39 |
| Date: | 2018–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2018_033&r=rmg |
| By: | Konstantinos Gkillas (Department of Business Administration, University of Patras – University Campus, Rio, Greece); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Christian Pierdzioch (Department of Economics, Helmut Schmidt University, Hamburg, Germany) |
| Abstract: | This study investigates U.S. political cycles and the impact, thereof on stock market volatility in advanced economies (Canada, France, Germany, Italy, Japan, Switzerland and the U.K.) using monthly data over the period January 1921 to December 2017. Overall, the results indicate that the type (Democratic or Republican) of presidential administration does play a role in the behaviour of stock returns, and volatility, but the results and direction of the impact are sample specific. In general, the results tend to suggest an increase in returns and volatility of other stock markets when there is a democratic government in the U.S. This study suggests that there is a need for market participants to start analysing the trajectory of a certain election, beginning at the proposed event window, in order to manage their risks and be at a stable position during these periods of uncertainties. |
| Keywords: | Exchange rates, Realized volatility, Forecasting |
| JEL: | C22 F31 F37 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201879&r=rmg |
| By: | K.S. , A.; Khan, T.; Kishore, A. |
| Abstract: | Crop insurance is one of the important risk management strategies adopted by farmers. However, one of the biggest challenge Government faces while promoting insurance is in setting optimum premium for crop insurance which can achieve higher participation of farmers in Insurance programme. With premium rate set at 1.5% of sum insured for wheat crop, are the farmers are willing to pay the premium at this rate to insure their wheat crop? It would be interesting to investigate this question in state like Punjab which has not implemented crop insurance. We conducted a Contingent Valuation Study to elicit Willingness to Pay (WTP) for crop insurance of wheat farmers in Punjab state. The sample consisted of 617 wheat farmers spread across 60 villages of 12 districts in Punjab. We found that it is farmers who has suffered crop loss in the past found to have higher WTP. Asset worthy farmers, banking literacy, extension contact was also found to have positive impact on WTP. The study indicated that WTP for crop insurance is around Rs 297 / acre, which is less than the existing rate of premium which is approximately Rs. 400 /acre (premium rate of 1.5%). Acknowledgement : |
| Keywords: | Risk and Uncertainty |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277516&r=rmg |
| By: | Simona Malovana |
| Abstract: | This paper studies the pro-cyclicality of risk weights with respect to the business, credit and financial cycles using data for the Czech Republic. The empirical results indicate that risk weights behave pro-cyclically under the IRB approach and acyclically under the STA approach. The pro-cyclical behaviour of IRB risk weights for credit exposures is caused primarily by the procyclicality of risk weights for retail credit exposures, the strongest effects being in the highest and lowest quantiles of risk weights. The risk weights for retail exposures behave pro-cyclically not only with regard to the business cycle, but also with respect to the financial cycle and house price growth. |
| Keywords: | Housing market, internal ratings-based approach, procyclicality, quantile regression, risk weights |
| JEL: | C22 E32 G21 G28 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2018/12&r=rmg |
| By: | Wensheng Kang; Ronald A. Ratti; Joaquin Vespignani |
| Abstract: | We decompose global stock market volatility shocks into financial originated shocks and non-financial originated shocks. Global stock market volatility shocks arising from financial sources reduce substantially more global outputs and inflation than non-financial sources shocks. Financial stock market volatility shocks forecasts 16.85% and 16.88% of the variation in global growth and inflation, respectively. In contrast, the non-financial stock market volatility shocks forecasts only 8.0% and 2.19% of the variation in global growth and inflation. Beside this markable difference global interest/policy rate responds similarly to both shocks. |
| Keywords: | Global, Stock market volatility Shocks, Monetary Policy, FAVAR |
| JEL: | D80 E44 E66 G10 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2018-58&r=rmg |
| By: | Ozdenoren, Emre; Yuan, Kathy |
| Abstract: | We study effort and risk-taking behaviour in an economy with a continuum of principal-agent pairs where each agent exerts costly hidden effort. Principals write contracts based on both absolute and relative performance evaluations (APE and RPE) to make individually optimal risk-return trade-o↵s but do not take into account their impact on endogenously determined aggregate variables. This results in contractual externalities when these aggregate variables are used as benchmarks in contracts. Contractual externalities have welfare changing e↵ects when principals put too much weight on APE or RPE due to information frictions. Relative to the second best, if the expected productivity is high, risk-averse principals over-incentivise their own agents, triggering a rat race in e↵ort exertion, resulting in over-investment in e↵ort and excessive exposure to industry risks. The opposite occurs when the expected productivity is low, inducing pro-cyclical investment and risk-taking behaviours |
| Keywords: | Contractual externalities; relative and absolute performance contracts; procyclical effort exertion and risk taking; many principal-agent pairs |
| JEL: | D86 G30 |
| Date: | 2017–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:75998&r=rmg |
| By: | Liu, Y.; Ker, A. |
| Abstract: | County crop yield data from USDA-NASS are extensively used in the literature as well as practice. In many applications, yield data are adjusted for the first two moments then assumed independent and identically distributed. For most major crop-region combinations, yield data exist from 1955 onwards and reflect significant innovations in both seed and farm management technologies. These innovations have likely changed the yield distribution raising doubt regarding the identically distributed assumption. We consider the question of how much historical yield data should be used in empirical analyses. First, we use distributional tests to assess if and when the adjusted yield data result from different DGPs. Second, we consider the application to crop insurance by using an out-of-sample rating. Third, we estimate DGPs and then simulate to quantify the additional error. Overall, the results indicate that using yield data more than 30 years old can substantially increase estimation error. Given that discarding data is unappetizing, we propose three methodologies that can re-incorporate the discarded data. Our results suggest gains in efficiency by using these methodologies. While our results are most applicable to the crop insurance literature, we certainly feel they suggest proceeding with caution when using historical yield data in other applications. Acknowledgement : |
| Keywords: | Crop Production/Industries |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277293&r=rmg |
| By: | Christophe Courbage (Geneva School of Business Administration (HES-SO), Switzerland); Guillem Montoliu-Montes (University of Lausanne, Department of Actuarial Science, Switzerland); Béatrice Rey (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France) |
| Abstract: | This paper empirically assesses how financial risk aversion reacts to a change in individuals’ wealth and health and to the presence of both financial and health risks using the Survey of Health, Ageing, and Retirement in Europe (SHARE). Individuals in our sample exhibit financial risk aversion decreasing both in wealth and health. Financial risk aversion is also found to increase in the presence of a background financial risk and a background health risk. Interestingly, risk aversion is shown to be convex in wealth but linear in health. Such findings complement the literature on risk aversion behaviours and can help to better understand various economic decisions in a risky environment. |
| Keywords: | risk aversion, (cross-) DARA, (cross-) risk vulnerability, background risk, health risk |
| JEL: | D01 D81 I12 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1827&r=rmg |
| By: | Raouf Boucekkine (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE; Institute for Advanced Studies (Iméra) & Institut Universitaire de France (IUF)); Kazuo Nishimura (RIEB, Kobe University); Alain Venditti (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE & EDHEC Business School) |
| Abstract: | This note introduces to the literature streams explored in the special section on international financial markets and banking systems crises. All topics tackled are related to the Great Recession. A brief overview of the research questions and related literatures is provided. |
| Keywords: | financial frictions, financial instability, international transmission, credit crunch, banking and sovereign debt crisis |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1824&r=rmg |
| By: | Sharma, S.; Walters, C. |
| Abstract: | At the beginning of each agricultural cycle producers face risks from uncertain harvest yields and prices. To assist in managing these risks the federal government offers subsidized crop insurance. Since the 1996 Farm Act, crop insurance has been the cornerstone of risk management. In 2015, federal crop insurance represented over $9.5 billion in premiums and $102 billion in liabilities, compared to only $1.8 billion dollars in premiums and $26 billion in liabilities in 1996 (Risk Management Agency (RMA)). While the premium rate tailoring by the RMA is aimed at improving actuarial performance, it may not be sufficient. That is, are there other farm characteristics that the insurer observes, which deserve consideration? For the producer, this could mean the opportunity for excess returns and for the insurance provider and the government, excess returns imply an inefficient program resulting in misallocation of scarce resources and increase in taxpayer cost. In this article, we empirically examine the impact of two specific farm characteristics, farm size and insured share on returns from crop insurance. Our results suggest that large producers are attaining higher crop insurance returns across regions and crops. Acknowledgement : |
| Keywords: | Risk and Uncertainty |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277399&r=rmg |