nep-rmg New Economics Papers
on Risk Management
Issue of 2019‒11‒04
seventeen papers chosen by



  1. A generalized reserving model: bridging the gap between pricing and individual reserving By Jonas Crevecoeur; Katrien Antonio
  2. France; Financial Sector Assessment Program-Technical Note-Risk Analysis of Banking and Insurance Sector By International Monetary Fund
  3. Weekly idiosyncratic risk metrics and idiosyncratic momentum: Evidence from the Chinese stock market By Huai-Long Shi; Wei-Xing Zhou
  4. Credit scoring in SME asset-backed securities: An Italian case study By Bedin, Andrea; Billio, Monica; Costola, Michele; Pelizzon, Loriana
  5. Sparsity and Stability for Minimum-Variance Portfolios By Sven Husmann; Antoniya Shivarova; Rick Steinert
  6. Credit risk with asymmetric information and a switching default threshold By Imke Redeker; Ralf Wunderlich
  7. Portfolio Optimization with Expectile and Omega Functions By Alexander Wagner; Stan Uryasev
  8. Option-based Equity Risk Premiums By Alan L. Lewis
  9. How Informative is High-Frequency data for Tail Risk Estimation and Forecasting? By Halbleib, Roxana; Dimitriadis, Timo
  10. Systemic Risk from Interbank Credit Markets? By Gries, Thomas; Mitschke, Alexandra
  11. High-Frequency Volatility Forecasting of US Housing Markets By Mawuli Segnon; Rangan Gupta; Keagile Lesame; Mark E. Wohar
  12. Risk Attitudes with State-Dependent Indivisibilities in Consumption By Fels, Markus
  13. Time-Varying Risk Shocks and the Zero Lower Bound By Strobel, Johannes; Lee, Gabriel; Dorofeenko, Victor; Salyer, Kevin
  14. ECB Announcements and Stock Market Volatility By Neugebauer, Frederik
  15. Hedging and the regret theory of the competitive firm By Broll, Udo; Welzel, Peter; Wong, Kit Pong
  16. Are the Pacific Islands Insurable? Challenges and Opportunities for Disaster Risk Finance By Vijaya Ramachandran; Junaid Sadiq Masood
  17. The Banking Fragility Index Panorama in China By Wang Yunyi

  1. By: Jonas Crevecoeur; Katrien Antonio
    Abstract: Insurers record detailed information related to claims (e.g. the cause of the claim) and policies (e.g. the value of the insured risk) for pricing insurance contracts. However, this information is largely neglected when estimating the reserve for future liabilities originating from past exposures. We present a flexible, yet highly interpretable framework for including these claim and policy-specific covariates in a reserving model. Our framework focuses on three building blocks in the development process of a claim: the time to settlement, the number of payments and the size of each payment. We carefully choose a generalized linear model (GLM) to model each of these stochastic building blocks in discrete time. Since GLMs are applied in the pricing of insurance contracts, our project bridges the gap between pricing and reserving methodology. We propose model selection techniques for GLMs adapted for censored data to select the relevant covariates in these models and demonstrate how the selected covariates determine the granularity of our reserving model. At one extreme, including many covariates captures the heterogeneity in the development process of individual claims, while at the other extreme, including no covariates corresponds to specifying a model for data aggregated in two-dimensional contingency tables, similar to the run-off triangles traditionally used by reserving actuaries. The set of selected covariates then naturally determines the position the actuary should take in between those two extremes. We illustrate our method with case studies on real life insurance data sets. These case studies provide new insights in the covariates driving the development of claims and demonstrate the accuracy and robustness of the reserving methodology over time.
    Date: 2019–10
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1910.12692&r=all
  2. By: International Monetary Fund
    Abstract: France is home to numerous banks and insurers which are very active at a global scale. Four Global Systemically Important Banks (G-SIBs) are incorporated in France as well as multiple number of large insurers. Assets of banking system exceed GDP by 2.7 times. Four G-SIBs dominate France’s financial landscape, also taking into account bancassurance (i.e., banking and insurance companies working under financial conglomerate structure) business model they have. Global presence and diversification, integration of banking and insurance activities defined the perimeter and scope of systemic risk assessment (including stress testing) of FSAP. This technical note contributes to the FSAP’s assessment of systemic risk with a comprehensive set of stress testing exercises. The assessment is based on stress tests, which simulate the health of banks, insurers under severe yet plausible (counterfactual) adverse scenarios. Scenarios include global and regional financial market turmoil (shocks to term and risk premiums), a major slowdown of economic activity in Euro Area (EA) and France due to secular stagnation and trade shocks. The analyses include simulations based on solvency and liquidity scenarios.
    Date: 2019–10–28
    URL: http://d.repec.org/n?u=RePEc:imf:imfscr:19/322&r=all
  3. By: Huai-Long Shi; Wei-Xing Zhou
    Abstract: This paper focuses on the weekly idiosyncratic momentum (IMOM) as well as its risk-adjusted versions with respect to various idiosyncratic risk metrics. Using the A-share individual stocks in the Chinese market from January 1997 to December 2017, we first evaluate the performance of the weekly momentum and idiosyncratic momentum based on raw returns and idiosyncratic returns, respectively. After that the univariate portfolio analysis is conducted to investigate the return predictability with respect to various idiosyncratic risk metrics. Further, we perform a comparative study on the performance of the IMOMportfolios with respect to various risk metrics. At last, we explore the possible explanations to the IMOM as well as risk-based IMOM portfolios. We find that 1) there is a prevailing contrarian effect and a IMOM effect for the whole sample; 2) a negative relation exists between most of the idiosyncratic risk metrics and the cross-sectional returns, and better performance is found that is linked to idiosyncratic volatility (IVol) and maximum drawdowns (IMDs); 3) additionally, the IVol-based and IMD-based IMOM portfolios exhibit a better explanatory power to the IMOM portfolios with respect to other risk metrics; 4) finally, higher profitability of the IMOM as well as IVol-based and IMD-based IMOM portfolios is found to be related to upside market states, high levels of liquidity and high levels of investor sentiment.
    Date: 2019–10
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1910.13115&r=all
  4. By: Bedin, Andrea; Billio, Monica; Costola, Michele; Pelizzon, Loriana
    Abstract: We investigate the default probability, recovery rates and loss distribution of a portfolio of securitised loans granted to Italian small and medium enterprises (SMEs). To this end, we use loan level data information provided by the European DataWarehouse platform and employ a logistic regression to estimate the company default probability. We include loan-level default probabilities and recovery rates to estimate the loss distribution of the underlying assets. We find that bank securitised loans are less risky, compared to the average bank lending to small and medium enterprises.
    Keywords: credit scoring,probability of default,small and medium enterprises,asset-backed securities
    Date: 2019
    URL: http://d.repec.org/n?u=RePEc:zbw:safewp:262&r=all
  5. By: Sven Husmann; Antoniya Shivarova; Rick Steinert
    Abstract: The popularity of modern portfolio theory has decreased among practitioners because of its unfavorable out-of-sample performance. Estimation errors tend to affect the optimal weight calculation noticeably, especially when a large number of assets is considered. To overcome these issues, many methods have been proposed in recent years, although most only address a small set of practically relevant questions related to portfolio allocation. This study therefore sheds light on different covariance estimation techniques, combines them with sparse model approaches, and includes a turnover constraint that induces stability. We use two datasets - comprising 319 and 100 companies of the S&P 500, respectively - to create a realistic and reproducible data foundation for our empirical study. To the best of our knowledge, this study is the first to show that it is possible to maintain the low-risk profile of efficient estimation methods while automatically selecting only a subset of assets and further inducing low portfolio turnover. Moreover, we provide evidence that using the LASSO as the sparsity-generating model is insufficient to lower turnover when the involved tuning parameter can change over time.
    Date: 2019–10
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1910.11840&r=all
  6. By: Imke Redeker; Ralf Wunderlich
    Abstract: We investigate the impact of available information on the estimation of the default probability within a generalized structural model for credit risk. The traditional structural model where default is triggered when the value of the firm's asset falls below a constant threshold is extended by relaxing the assumption of a constant default threshold. The default threshold at which the firm is liquidated is modeled as a random variable whose value is chosen by the management of the firm and dynamically adjusted to account for changes in the economy or the appointment of a new firm management. Investors on the market have no access to the value of the threshold and only anticipate the distribution of the threshold. We distinguish different information levels on the firm's assets and derive explicit formulas for the conditional default probability given these information levels. Numerical results indicate that the information level has a considerable impact on the estimation of the default probability and the associated credit yield spread.
    Date: 2019–10
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1910.14413&r=all
  7. By: Alexander Wagner; Stan Uryasev
    Abstract: This paper proves equivalences of portfolio optimization problems with negative expectile and omega ratio. We derive subgradients for the negative expectile as a function of the portfolio from a known dual representation of expectile and general theory about subgradients of risk measures. We also give an elementary derivation of the gradient of negative expectile under some assumptions and provide an example where negative expectile is demonstrably not differentiable. We conducted a case study and solved portfolio optimization problems with negative expectile objective and constraint.
    Date: 2019–10
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1910.14005&r=all
  8. By: Alan L. Lewis
    Abstract: We construct the term structure of the (forward-looking, US market) equity risk premium from SPX option chains. The method is "model-light". Risk-neutral probability densities are estimated by fitting $N$-component Gaussian mixture models to option quotes, where $N$ is a small integer (here 4 or 5). These densities are transformed to their real-world equivalents by exponential tilting with a single parameter: the Coefficient of Relative Risk Aversion $\kappa$. From history, I estimate $\kappa = 3 \pm 0.5$. From the inferred real-world densities, the equity risk premium is readily calculated. Three term structures serve as examples.
    Date: 2019–10
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1910.14522&r=all
  9. By: Halbleib, Roxana; Dimitriadis, Timo
    JEL: C1 C4 C5
    Date: 2019
    URL: http://d.repec.org/n?u=RePEc:zbw:vfsc19:203669&r=all
  10. By: Gries, Thomas; Mitschke, Alexandra
    JEL: E44 E52 G11 G21
    Date: 2019
    URL: http://d.repec.org/n?u=RePEc:zbw:vfsc19:203582&r=all
  11. By: Mawuli Segnon (Department of Economics, Institute for Econometric and Economic Statistics, University of Münster, Germany); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Keagile Lesame (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Mark E. Wohar (Department of Economics, University of NE-Omaha, USA and School of Business and Economics, Loughborough University, UK)
    Abstract: We propose a logistic smooth transition autoregressive fractionally integrated [STARFI(p,d)] process for modeling and forecasting US housing price volatility. We discuss the statistical properties of the model and investigate its forecasting performance by assuming various specifications for the dynamics underlying the variance process in the model. Using a unique database of daily data on price indices from ten major US cities, and the corresponding daily Composite 10 Housing Price Index, and also a housing futures price index, we find that using the Markov-switching multifractal (MSM) and FIGARCH frameworks for modeling the variance process helps improving the gains in forecast accuracy.
    Keywords: US housing prices, GARCH processes, MSM processes, Model confidence set
    JEL: C22 C53 C58
    Date: 2019–10
    URL: http://d.repec.org/n?u=RePEc:pre:wpaper:201977&r=all
  12. By: Fels, Markus
    JEL: D01 D81
    Date: 2019
    URL: http://d.repec.org/n?u=RePEc:zbw:vfsc19:203489&r=all
  13. By: Strobel, Johannes; Lee, Gabriel; Dorofeenko, Victor; Salyer, Kevin
    JEL: E3 E5 E2
    Date: 2019
    URL: http://d.repec.org/n?u=RePEc:zbw:vfsc19:203491&r=all
  14. By: Neugebauer, Frederik
    JEL: E52 E58 G12 G14
    Date: 2019
    URL: http://d.repec.org/n?u=RePEc:zbw:vfsc19:203554&r=all
  15. By: Broll, Udo; Welzel, Peter; Wong, Kit Pong
    Abstract: This paper examines the production and hedging decisions of the competitive firm under price uncertainty when the firm is not only risk averse but also regret averse. Regret-averse preferences are characterized by a modified utility function that includes disutility from having chosen ex-post suboptimal alternatives. The extent of regret depends on the difference between the actual profit and the maximum profit attained by making the optimal production and hedging decisions had the firm observed the true realization of the random output price. While the separation theorem holds under regret aversion, the prevalence of hedging opportunities may have perverse effect on the firm's optimal output level, particularly when the firm is sufficiently regret averse. The full-hedging theorem, however, does not hold. We derive sufficient conditions under which the regret-averse firm's optimal futures position is an under-hedge (over-hedge). We further show that the firm optimally increases (decreases) its futures position when the price risk possesses more positive (negative) skewness.
    Keywords: Futures,Production,Regret theory
    JEL: D21 D24 D81
    Date: 2019
    URL: http://d.repec.org/n?u=RePEc:zbw:tudcep:0519&r=all
  16. By: Vijaya Ramachandran (Center for Global Development); Junaid Sadiq Masood (Center for Global Development)
    Abstract: There are several efforts underway in the Pacific Islands to insure public and private assets against natural disasters such as cyclones and earthquakes. These efforts are designed to mitigate the annual costs of such disasters which range from a few percent to over 50 percent of GDP. However, insurance is not a substitute for aid. Most islands are heavily aid dependent and cannot afford to pay the high premiums associated with disaster risk insurance. Insurance to cover disaster risk likely needs to be subsidized to offset costs and to build trust. Governments and donors must also manage basis risk which can be substantial. Over time, investments in resilient infrastructure, coupled with a more comprehensive approach to risk management, may reduce costs and shift premiums to recipients. Finally, current and proposed schemes which provide insurance cover or other products must provide information in a transparent manner on effective demand along with costs, benefits and administrative fees. A clearly defined exit strategy is necessary if funds are not disbursed in a timely manner.
    Keywords: disaster risk, finance, insurance, Pacific Islands
    JEL: G0 O1 O2
    Date: 2019–09–20
    URL: http://d.repec.org/n?u=RePEc:cgd:wpaper:516&r=all
  17. By: Wang Yunyi (Tokyo University of Foreign Studies, Tokyo, Japan,)
    Abstract: The corresponding impact on china’s banking system is becoming the focus issues of international economy and has become the major theoretical and practical issues for China to deal with the increasingly complex international economic situation. Since 2004 the formation mechanism reform started, China’s banking system experienced a steady development and the supervision on banking fragility keeps pace with times to meet the requirement of operation. How to measure a bank’s operational performance is not get to a conclusion in academic field. This paper aims to review the measurement of banking fragility index of Western and Eastern world and using data on Chinese banks to develop an index of banking fragility and subsequently examine the factors affecting the index. Industry analysis will be introduced in this paper. The academic debates on factors affecting banking fragility index are analyzed and this paper will choose a number of widely-used index for the regression test. The findings about the effective countermeasures to the banking fragility Chinese banks facing as well as the objectives of the financial reform are discussed. A conclusion presents the resulting implications for further research.
    Keywords: Banking, Fragility, China, Regression
    Date: 2019–08
    URL: http://d.repec.org/n?u=RePEc:smo:epaper:031yw&r=all

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