nep-rmg New Economics Papers
on Risk Management
Issue of 2017‒08‒20
thirteen papers chosen by



  1. Persistence of insurance activities and financial stability By Kubitza, Christian; Regele, Fabian
  2. Risk Analysis for Three Precious Metals: An Application of Extreme Value Theory By Qinlu Chen & David E. Giles
  3. Real effects of bank capital regulations : Global evidence By Deli, Yota D.; Hasan, Iftekhar
  4. Tail dependence between gold and sectorial stocks in China: Perspectives for portfolio diversication By Joscha Beckmann; Theo Berger; Robert Czudaj; Thi-Hong-Van Hoang
  5. The risk-taking channel of monetary policy in the US : Evidence from corporate loan data By Delis, Manthos D.; Hasan, Iftekhar; Mylonidis, Nikolaos
  6. The Effect of Bank Supervision on Risk Taking : Evidence from a Natural Experiment By John Kandrac; Bernd Schlusche
  7. To what extent does income predict an individual’s risk profile in the UK (2012- 2014) By Wright, Joshua
  8. Risk Preference, Time Preference, and Salience Perception By Jonathan W. Leland; Mark Schneider
  9. Rising interest rates, lapse risk, and the stability of life insurers By Berdin, Elia; Gründl, Helmut; Kubitza, Christian
  10. Bundling and Insurance of Independent Risks By Benjamin Davies; Richard Watt
  11. Uncovering the time-varying nature of causality between oil prices and stock market returns: A multi-country study By Jose Eduardo Gomez-Gonzalez; Jorge Hirs-Garzon
  12. Systemic Risk in Financial Systems: a feedback approach By Thiago Christiano Silva; Michel Alexandre da Silva; Benjamin Miranda Tabak
  13. Valuation of a Bermudan DB underpin hybrid pension benefit By Xiaobai Zhu; Mary Hardy; David Saunders

  1. By: Kubitza, Christian; Regele, Fabian
    Abstract: Different insurance activities exhibit different levels of persistence of shocks and volatility. For example, life insurance is typically more persistent but less volatile than non-life insurance. We examine how diversification among life, non-life insurance, and active reinsurance business affects an insurer's contribution and exposure to the risk of other companies. Our model shows that a counterparty's credit risk exposure to an insurance group substantially depends on the relative proportion of the insurance group's life and non-life business. The empirical analysis confirms this finding with respect to several measures for spillover risk. The optimal proportion of life business that minimizes spillover risk decreases with leverage of the insurance group, and increases with active reinsurance business.
    Keywords: Insurance Companies,Financial Stability,Persistence
    JEL: G01 G22 G23 G28
    Date: 2017
    URL: http://d.repec.org/n?u=RePEc:zbw:icirwp:3017&r=rmg
  2. By: Qinlu Chen & David E. Giles (Department of Economics, University of Victoria)
    Abstract: Gold, and other precious metals, are among the oldest and most widely held commodities used as a hedge against the risk of disruptions in financial markets. The prices of such metals fluctuate substantially, introducing risks of their own. This paper’s goal is to analyze the risk of investment in gold, silver, and platinum by applying Extreme Value Theory to historical daily data for changes in their prices. The risk measures adopted in this paper are Value at Risk and Expected Shortfall. Estimates of these measures are obtained by fitting the Generalized Pareto Distribution, using the Peaks-Over-Threshold method, to the extreme daily price changes. The robustness of the results to changes in the sample period, threshold choice, and distributional assumptions, are discussed. Our results show that silver is the most risky metal among the three considered. For negative daily returns, platinum is riskier than gold; while the converse is true for positive returns.
    Keywords: Precious metals; extreme values; portfolio risk; value-at-risk; generalized Pareto distribution
    JEL: C46 C58 G10 G32
    Date: 2017–08–10
    URL: http://d.repec.org/n?u=RePEc:vic:vicewp:1704&r=rmg
  3. By: Deli, Yota D.; Hasan, Iftekhar
    Abstract: We examine the effect of the full set of bank capital regulations (capital stringency) on loan growth, using bank-level data for a maximum of 125 countries over the period 1998-2011. Contrary to standard theoretical considerations, we find that overall capital stringency only has a weak negative effect on loan growth. In fact, this effect is completely offset if banks hold moderately high levels of capital. Interestingly, the components of capital stringency that have the strongest negative effect on loan growth are those related to the prevention of banks to use as capital borrowed funds and assets other than cash or government securities. In contrast, compliance with Basel guidelines in using Basel- and credit-risk weights has a much less potent effect on loan growth.
    JEL: G21 G28 E6 O4
    Date: 2017–08–12
    URL: http://d.repec.org/n?u=RePEc:bof:bofrdp:2017_023&r=rmg
  4. By: Joscha Beckmann (University of Duisburg-Essen, Department of Economics, Chair for Macroeconomics); Theo Berger (University of Bremen, Department of Business Administration, Chair for Applied Statistics and Empirical Economy); Robert Czudaj (Chemnitz University of Technology, Department of Economics, Chair for Empirical Economics); Thi-Hong-Van Hoang (Montpellier Business School, Montpellier Research in Management)
    Abstract: This article analyzes the relationship between gold quoted on the Shanghai Gold Exchange and Chinese sectorial stocks from 2009 to 2015. Using different copulas, our results show that there is weak but significant tail dependence between gold and Chinese sectorial stock returns. This means that the dependence between extreme movements of the two assets is not pronounced and confirms the role of gold as a safe haven asset. Based on analyzing the efficient frontier, CCCGARCH optimal weights, hedge ratios and hedging effectiveness, we further show that adding gold into Chinese stock portfolios can help to reduce their risk. Gold appears to be the most efficient diversifier for stocks of the materials sector and the less efficient for the utilities sector. As a robustness check, we also compare gold to oil and indicate that gold is more efficient than oil in the diversification of Chinese stock portfolios.
    Keywords: Shanghai Gold Exchange, Chinese sectorial stocks, oil, copulas, portfolio implications
    JEL: G11 C58
    Date: 2017–07
    URL: http://d.repec.org/n?u=RePEc:tch:wpaper:cep012&r=rmg
  5. By: Delis, Manthos D.; Hasan, Iftekhar; Mylonidis, Nikolaos
    Abstract: To study the presence of a risk-taking channel in the US, we build a comprehensive dataset from the syndicated corporate loan market and measure monetary policy using different measures, most notably Taylor (1993) and Romer and Romer (2004) residuals. We identify a negative relation between monetary policy rates and bank risk-taking, especially in the run up to the 2007 financial crisis. However, this effect is purely supply-side driven only when using Taylor residuals and an ex ante measure of bank risk-taking. Our results highlight the sensitivity of the potency of the risk-taking channel to the measures of monetary policy innovations.
    JEL: G21 G01 E43 E52
    Date: 2017–08–07
    URL: http://d.repec.org/n?u=RePEc:bof:bofrdp:2017_018&r=rmg
  6. By: John Kandrac; Bernd Schlusche
    Abstract: In this paper, we exploit a natural experiment in which thrifts in several states witnessed an exogenous reduction in supervisory attention to assess the effect of supervision on financial institutions' willingness to take risk. We show that the affected institutions took on much more risk than their unaffected counterparts in other districts that were subject to identical regulations. Subsequent to the emergency enlistment of examiners and supervisors from other parts of the country two years later, additional risk taking by the affected thrifts ceased. We find that the expansion in risk taking resulted in a higher incidence of failure as well as more costly failures. None of these patterns are present in commercial banks subject to a different primary supervisory agent but otherwise similar to the thrifts in our sample.
    Keywords: S&L crisis ; Bank supervision ; Lending ; Resolution costs ; Risk taking
    JEL: G01 G21 G28
    Date: 2017–08–09
    URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2017-79&r=rmg
  7. By: Wright, Joshua
    Abstract: This study seeks to estimate whether income is predictive of an individual’s risk profile. The consensus amongst the existing literature is that income is predictive of an individual’s risk profile and the two do have a relationship. This study uses a quantitative approach by estimating a series of statistical models that estimate the relationship between an individual’s income and their risk profile using a large UK based longitudinal dataset. The research finds that income is positively related to risk and that for every £1,000 increase in income, an individual’s odds of becoming risk seeking increase by 1%. Moreover, the research finds that not only is income predictive of an individual’s risk, but so too are;; gender, education level, age and self-employment.
    Keywords: Individuals, Risk Profiles, Income, UK.
    JEL: D1 D81
    Date: 2017–08–10
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:80757&r=rmg
  8. By: Jonathan W. Leland; Mark Schneider
    Abstract: A model of decision making is introduced that provides a unified approach for predicting choices under risk and over time. The model predicts systematic departures from expected utility and discounted utility using the same mathematical structure and the same psychological intuition and shows that a dozen diverse choice anomalies can be given a common underlying explanation. The model weights attribute differences both by their importance (consistent with expected utility and discounted utility) and by their salience or similarity (consistent with procedural models based on heuristics), and so provides a bridge between rational and heuristic representations of decision making.
    Keywords: Framing Effects, Risk, Time, Ambiguity
    JEL: D81 D91
    Date: 2017
    URL: http://d.repec.org/n?u=RePEc:chu:wpaper:17-16&r=rmg
  9. By: Berdin, Elia; Gründl, Helmut; Kubitza, Christian
    Abstract: This paper investigates the effects of a rise in interest rate and lapse risk of endowment life insurance policies on the liquidity and solvency of life insurers. We model the book and market value balance sheet of an average German life insurer, subject to both GAAP and Solvency II regulation, featuring an existing back book of policies and an existing asset allocation calibrated by historical data. The balance sheet is then projected forward under stochastic financial markets. Lapse rates are modeled stochastically and depend on the granted guaranteed rate of return and prevailing level of interest rates. Our results suggest that in the case of a sharp increase in interest rates, policyholders sharply increase lapses and the solvency position of the insurer deteriorates in the short-run. This result is particularly driven by the interaction between a reduction in the market value of assets, large guarantees for existing policies, and a very slow adjustment of asset returns to interest rates. A sharp or gradual rise in interest rates is associated with substantial and persistent liquidity needs, that are particularly driven by lapse rates.
    Keywords: Interest Rate Risk,Lapse Risk,Life Insurance
    Date: 2017
    URL: http://d.repec.org/n?u=RePEc:zbw:icirwp:2917&r=rmg
  10. By: Benjamin Davies; Richard Watt (University of Canterbury)
    Abstract: Risky prospects can often by disaggregated into several identifiable, smaller risks. In such cases, at least two modes of insurance are available: either (i) the disaggregated risks can be insured independently or (ii) the aggregate risk can be insured as one. We identify (ii) as risk bundling prior to insurance and (i) as separate, or unbundled, insurance. We investigate whether (i) or (ii) is preferable among consumers, insurers and the insurance market as a whole using numerical simulations. Our simulations reveal that separate contracts provide the socially optimal form of insurance when the insurer is able to charge the profit-maximising premia and has perfect information. Under asymmetric information with respect to consumers’ risk aversion, we find that separation is again the dominant method of insurance in terms of the market share it represents.
    Keywords: Optimal insurance, risk bundling, simulation
    JEL: D8
    Date: 2017–08–14
    URL: http://d.repec.org/n?u=RePEc:cbt:econwp:17/05&r=rmg
  11. By: Jose Eduardo Gomez-Gonzalez (Banco de la República de Colombia); Jorge Hirs-Garzon (Banco de la República de Colombia)
    Abstract: We study the relation between oil prices and stock market returns for a set of six countries, including important oil consumers and demanders. We study interconnectedness between oil and stock markets and characterize the dynamics of transmission and reception between them. We test for Granger causality between markets dynamically, endogenously identifying periods for which oil prices have responded to innovations in financial markets. Our results on connectedness show that the direction of transmission is mainly from stock markets to crude petroleum prices. Additionally, connectedness increased importantly around the global financial crisis, and reports high levels until 2014. Regarding causality, we find evidence of bidirectional relations between stock market returns and crude petroleum prices. Causality is stronger during times of financial volatility as well. Our results have important implications both for investors and policy makers. Classification JEL: G01; G12; C22.
    Keywords: Time-varying causality; Oil price; Stock market returs; Emerging market economies.
    Date: 2017–08
    URL: http://d.repec.org/n?u=RePEc:bdr:borrec:1009&r=rmg
  12. By: Thiago Christiano Silva; Michel Alexandre da Silva; Benjamin Miranda Tabak
    Abstract: We develop an innovative framework to estimate systemic risk that accounts for feedback effects between the real and financial sectors. We model the feedback effects through successive deterioration of borrowers’ creditworthiness and illiquidity spreading, thus giving rise to a micro-level financial accelerator between firms and banks. We demonstrate that the model converges to a unique fixed point and the key role that centrality plays in shaping the level of amplification of shocks. We also provide a mathematical framework to explain systemic risk variations in time as a function of the network characteristics of economic agents. Finally, we supply empirical evidence on the economic significance of the feedback effects on comprehensive loan-level data of the Brazilian credit register. Our results corroborate the importance of incorporating new contagion channels besides the traditional interbank market in systemic risk models. Our model sheds light on the policy issue regarding risk-weighting of assets that also internalizes the costs of systemic risk
    Date: 2017–08
    URL: http://d.repec.org/n?u=RePEc:bcb:wpaper:461&r=rmg
  13. By: Xiaobai Zhu; Mary Hardy; David Saunders
    Abstract: In this paper we consider three types of embedded options in pension benefit design. The first is the Florida second election (FSE) option, offered to public employees in the state of Florida in 2002. Employees were given the option to convert from a defined contribution (DC) plan to a defined benefit (DB) plan at a time of their choosing. The cost of the switch was assessed in terms of the ABO (Accrued Benefit Obligation), which is the expected present value of the accrued DB pension at the time of the switch. If the ABO was greater than the DC account, the employee was required to fund the difference. The second is the DB Underpin option, also known as a floor offset, under which the employee participates in a DC plan, but with a guaranteed minimum benefit based on a traditional DB formula. The third option can be considered a variation on each of the first two. We remove the requirement from the FSE option for employees to fund any shortfall at the switching date. The resulting option is very similar to the DB underpin, but with the possibility of early exercise. Since we assume that exercise is only permitted at discrete, annual intervals, this option is a Bermudan variation on the DB Underpin. We adopt an arbitrage-free pricing methodology to value the option. We analyse and value the optimal switching strategy for the employee by constructing an exercise frontier, and illustrate numerically the difference between the FSE, DB Underpin and Bermudan DB Underpin options.
    Date: 2017–08
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1708.04281&r=rmg

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