nep-rmg New Economics Papers
on Risk Management
Issue of 2016‒07‒02
ten papers chosen by



  1. Bail in or Bail out? The Atlante example from a systemic risk perspective By Paolo Giudici; Laura Parisi
  2. Risk management of the Vietnamese banking system: A market research survey By Matousek, Roman; Nguyen, Thao Ngoc; Stewart, Chris
  3. Credit risk spillover between financials and sovereigns in the euro area during 2007-2015 By Vergote, Olivier
  4. Asset encumbrance, bank funding and financial fragility By Ahnert, Toni; Anand, Kartik; Gai, Prasanna; Chapman, James
  5. Pricing of Rainfall Insurance in India using Gaussian and t Copulas By Shah, Anand
  6. Systemic Risk in Clearing Houses: Evidence from the European Repo Market By Thesmar, David; Ors, Evren; Derrien, Francois; Boissel, Charles
  7. Revisiting modern portfolio theory By Tenani, Paulo
  8. Risk Management of Demand Deposits in a Low Interest Rate Environment By Hana Dzmuranova
  9. Measures of Individual Risk Attitudes and Portfolio Choice: Evidence from Pension Participants* By Mehmet Y. Gürdal; Tolga U. Kuzubaþ; Burak Saltoðlu
  10. Risk-sharing deposits in islamic banks: do interest rates have any influence on them? By Tariq, Anam; Masih, Mansur

  1. By: Paolo Giudici (Department of Economics and Management, University of Pavia); Laura Parisi (Department of Economics and Management, University of Pavia)
    Abstract: Giudici and Parisi (2016) have proposed a novel econometric approach that measures systemic risk as a probabilistic "add-on" to the idiosyncratic probability of default of an economic sector (sovereign, corporate or bank). In this contribution we extend their approach to financial institutions and, doing so, we investigate the relative advantage, in terms of systemic risk, of a bail-in versus a bail-out scenario. We apply our methods to the Italian bail-out private intervention scheme named Atlante. The results show that the bail-out of a troubled bank and, specifically of the Banca Popolare di Vicenza, is more convenient for the smaller, safer and highly correlated banks.
    Date: 2016–06
    URL: http://d.repec.org/n?u=RePEc:pav:demwpp:demwp0124&r=rmg
  2. By: Matousek, Roman (University of Kent); Nguyen, Thao Ngoc (Nottingham Trent University); Stewart, Chris (Kingston University London)
    Abstract: The purpose of this paper is to examine risk management of the Vietnamese banking system. This is the first such study of the Vietnamese banking system. To be able to carry out a comparative analysis and provide policy recommendations for risk management, we carry out an original survey of Vietnamese commercial banks using a questionnaire. 42% of the interviewees are General/Deputy General Directors and 58% are Heads/Deputies of a risk management department. The Kruskal-Wallis, Pearson chi-square and other tests are employed to examine the relationship between risk management and bank efficiency. The survey results indicate that there is a difference between banks in terms of risk area identification, risk intensification methods prioritised, risk monitoring methods, efficiency improvement suggestions, awareness of other banks’ risk management systems and credit risk analysis.
    Keywords: Banking; Risk Management; Efficiency; Vietnam
    JEL: C12 C14 G21 L25
    Date: 2016–06–20
    URL: http://d.repec.org/n?u=RePEc:ris:kngedp:2016_010&r=rmg
  3. By: Vergote, Olivier
    Abstract: This paper presents time-varying contagion indices of credit risk spillover and feedback between 64 financials and sovereigns in the euro area, where spillover is identified based on bilateral Granger causality regressions. Over-identification of contagion between financials’ true credit risk and sovereign credit risk is avoided 1) by controlling for common factors; 2) by relying on fair value CDS spreads as the credit risk measure for financials. The results show that in particular the run-up to the financial crisis and the more intense phases of the crisis were associated with credit risk contagion and feedback. The institutions identified as most central to the network during those episodes are known to have played important roles during the crisis. Furthermore, the tense periods were short-lived and sovereign-to-bank spillover is found to normalise when policy makers took measures to stem the crisis. Finally, a proxy for the value of implicit government guarantees to the financial sector was still positive towards the end of the sample, suggesting the financial-sovereign nexus had not been removed yet by new bank resolution mechanisms and regulatory changes. JEL Classification: C45, E44, E65, G01, G13, G28, H81
    Keywords: bank-sovereign nexus, contagion, credit risk, feedback loops, Granger causality, spillover
    Date: 2016–04
    URL: http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161898&r=rmg
  4. By: Ahnert, Toni; Anand, Kartik; Gai, Prasanna; Chapman, James
    Abstract: How does asset encumbrance affect the fragility of intermediaries subject to rollover risk? We offer a model in which a bank issues covered bonds backed by a pool of assets that is bankruptcy remote and replenished following losses. Encumbering assets allows a bank to raise cheap secured debt and expand profitable investment, but it also concentrates risk on unsecured debt and thus exacerbates fragility and raises unsecured funding costs. Deposit insurance or wholesale funding guarantees induce excessive encumbrance and fragility. To mitigate such risk shifting, we study prudential regulatory tools, including limits on encumbrance, minimum capital requirements and surcharges for encumbrance.
    Keywords: asset encumbrance,covered bonds,financial fragility,guarantees,rollover risk,wholesale funding
    JEL: D82 G01 G21 G28
    Date: 2016
    URL: http://d.repec.org/n?u=RePEc:zbw:bubdps:172016&r=rmg
  5. By: Shah, Anand
    Abstract: Low income households, especially in the developing countries such as India could suffer losses due to weather related events such as drought, hurricanes, floods etc. Such losses could cast a household into a chronic poverty cycle - a poverty trap from which the household may find it difficult to re-emerge. Rainfall derivatives are the insurance contracts that compensate a household based on the weather outcome rather than the actual crop yield. Traditional methods for pricing rainfall derivatives include burn analysis, index value simulation and daily rainfall simulation. In this work, we price the rainfall derivatives using a different method that uses the Gaussian and t copulas to capture the dependence between the monthly rainfalls in the monsoon season in India. We find that though the premiums calculated using burn analysis and our proposed method were equal, the standard deviation and Value at Risk “VaR” of the insurance payoffs calculated using both the methods differed. Therefore, in practice, the actuarial pricing of the rainfall insurance contract using burn analysis and our proposed method could be different. Our method could be easily applied to price rainfall derivatives for the regions that exhibit extreme rainfall patterns.
    Keywords: Weather derivatives, rainfall insurance in India, pricing in incomplete markets, Gaussian and t Copulas, agriculture yields, Monte Carlo simulations, Environmental Economics and Policy, Q14, G13, G17, G22,
    Date: 2016–04
    URL: http://d.repec.org/n?u=RePEc:ags:aesc16:236288&r=rmg
  6. By: Thesmar, David; Ors, Evren; Derrien, Francois; Boissel, Charles
    Abstract: How do crises affect Central clearing Counterparties (CCPs)? We focus on CCPs that clear and guarantee a large and safe segment of the repo market during the Eurozone sovereign debt crisis. We start by developing a simple framework to infer CCP stress, which can be measured through the sensitivity of repo rates to sovereign CDS spreads. Such sensitivity jointly captures three effects: (1) the effectiveness of the haircut policy, (2) CCP member default risk (conditional on sovereign default) and (3) CCP default risk (conditional on both sovereign and CCP member default). The data show that, during the sovereign debt crisis of 2011, repo rates strongly respond to movements in sovereign risk, in particular for GIIPS countries, indicating significant CCP stress. Our model suggests that repo investors behaved as if the conditional probability of CCP default was very large.
    Keywords: repurchase agreement; sovereign debt crisis; LTRO; secured money market lending
    JEL: E43 E58 G01 G21
    Date: 2015–07–27
    URL: http://d.repec.org/n?u=RePEc:ebg:heccah:1112&r=rmg
  7. By: Tenani, Paulo
    Abstract: This paper revisits Modern Portfolio Theory and derives eleven properties of Efficient Allocations and Portfolios in the presence of leverage. With different degrees of leverage, an Efficient Portfolio is a linear combination of two portfolios that lie in different efficient frontiers - which allows for an attractive reinterpretation of the Separation Theorem. In particular a change in the investor risk-return preferences will leave the allocation between the Minimum Risk and Risk Portfolios completely unaltered - but will change the magnitudes of the tactical risk allocations within the Risk Portfolio. The paper also discusses the role of diversification in an Efficient Portfolio, emphasizing its more tactical, rather than strategic character
    Date: 2016–05–30
    URL: http://d.repec.org/n?u=RePEc:fgv:eesptd:419&r=rmg
  8. By: Hana Dzmuranova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: In this paper, we focus on the liquidity characteristics (stability and maturity) of retail deposits in the Czech Republic and changes in the structure of retail deposit products that occurred because of low interest-rate environment. Retail deposits are a primary source of funding for banks in the Czech Republic. In simplicity, we divide retail deposits into two main groups: (i) demand deposits are products with non-maturing features as maturity (timing of cash flows) is not known by a bank as a client can withdraw a deposit on notice while in reality deposits remain in a bank for a longer period; (ii) term deposits are products with maturing characteristics, i.e. a timing of cash flows is known. Bankers deem retail deposits as a largely stable and cheap funding source. Our research shows that demand deposits are a stable funding source with much higher maturity than term deposits. Moreover, we conclude that the transfer of term deposits to demand deposits that accelerated in recent years resulted from a low interest rate environment. This transfer implies increasing liquidity risk of the Czech banking sector. However, we argue that banks should be able to hedge this risk properly.
    Keywords: asset and liability management, demand deposits, term deposits, liquidity risk, interest rate sensitivity
    JEL: G21 C22 C53
    Date: 2016–05
    URL: http://d.repec.org/n?u=RePEc:fau:wpaper:wp2016_10&r=rmg
  9. By: Mehmet Y. Gürdal; Tolga U. Kuzubaþ; Burak Saltoðlu
    Date: 2016–02
    URL: http://d.repec.org/n?u=RePEc:bou:wpaper:2016/02&r=rmg
  10. By: Tariq, Anam; Masih, Mansur
    Abstract: It has been proven time and again, that Islamic banking performance tends to imitate that of conventional banks, especially since Islamic banks seem to be vulnerable to the same type of risks, whether it is because of monetary policy actions leading to changes in interest rates or other macroeconomic variables. We would like to take a closer look at this verdict and see if it truly holds true if we separate risk-based instruments of financing in Islamic banks and analyze their performance specifically. Our focus is on analyzing the level of impact of interest rates on risk-based deposits in Islamic banks. We use dynamic panel techniques in the form of difference GMM to come to the conclusion that separating risk-based from relatively fixed-rate instruments of financing can provide us with very different results. Our findings suggest that interest rates do not play a significant role in determining the level of deposits that are risk-based in nature and do not depend on a given and guaranteed rate of return. Based on this finding, we see that risk-based deposits and financing can prove to be the antidote that not only Islamic banks but the whole financial industry can think of, to deal with the detrimental effects of an interest-based system.
    Keywords: risk-based deposits, Islamic banks, interest rates, dynamic GMM
    JEL: C58 G21
    Date: 2016–05–31
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:71680&r=rmg

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