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on Risk Management |
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Issue of 2007‒01‒23
eight papers chosen by |
| By: | ilya, gikhman |
| Abstract: | In this notice we are comment popular approaches to the credit risk modeling. |
| Keywords: | Credit risk; credit derivatives; risk neutral world; risk neutral probability; structural model; reduced form. |
| JEL: | G12 G13 C63 C6 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:1451&r=rmg |
| By: | Filip Žikeš (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper studies the dependence structure on Central European, German and UK stock markets within the framework of a semiparametric copula model for weekly stock index return pairs. Although the linear correlation is much lower, we find similar degree of lower tail dependence as between returns on stocks indices representing developed markets. We show in a simulation exercise that the implications of the estimated nonlinear dependencies for portfolio selection and risk management may be not only statisticaly but also economicaly important. |
| Keywords: | dependence structure; tail dependence; portfolio selection; risk measures |
| JEL: | G11 G15 C46 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2007_02&r=rmg |
| By: | Timotheos Angelidis; Stavros Degiannakis |
| Abstract: | Academics and practitioners have extensively studied Value-at-Risk (VaR) to propose a unique risk management technique that generates accurate VaR estimations for long and short trading positions and for all types of financial assets. However, they have not succeeded yet as the testing frameworks of the proposals developed, have not been widely accepted. A two-stage backtesting procedure is proposed to select a model that not only forecasts VaR but also predicts the losses beyond VaR. Numerous conditional volatility models that capture the main characteristics of asset returns (asymmetric and leptokurtic unconditional distribution of returns, power transformation and fractional integration of the conditional variance) under four distributional assumptions (normal, GED, Student-t, and skewed Student-t) have been estimated to find the best model for three financial markets, long and short trading positions, and two confidence levels. By following this procedure, the risk manager can significantly reduce the number of competing models that accurately predict both the VaR and the Expected Shortfall (ES) measures. |
| Keywords: | Value-at-Risk, Expected Shortfall, Volatility Forecasting, Arch Models |
| JEL: | C22 C52 G15 |
| Date: | 2007–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:crt:wpaper:0701&r=rmg |
| By: | Roman Kraeussl (Center for Financial Studies, Frankfurt am Main, Germany) |
| Abstract: | This paper deals with the proposed use of sovereign credit ratings in the “Basel Accord on Capital Adequacy” (Basel II) and considers its potential effect on emerging markets financing. It investigates in a first attempt the consequences of the planned revisions on the two central aspects of international bank credit flows: the impact on capital costs and the volatility of credit supply across the risk spectrum of borrowers. The empirical findings cast doubt on the usefulness of credit ratings in determining commercial banks’ capital adequacy ratios since the standardized approach to credit risk would lead to more divergence rather than convergence between investment-grade and speculative-grade borrowers. This conclusion is based on the lateness and cyclical determination of credit rating agencies’ sovereign risk assessments and the continuing incentives for short-term rather than long-term interbank lending ingrained in the proposed Basel II framework. |
| Keywords: | Sovereign Risk, Credit Ratings, Basel II |
| JEL: | E44 E47 G15 |
| URL: | http://d.repec.org/n?u=RePEc:crt:wpaper:0315&r=rmg |
| By: | Ying Chen; Vladimir Spokoiny |
| Abstract: | In the ideal Black-Scholes world, financial time series are assumed 1) stationary (time homogeneous) and 2) having conditionally normal distribution given the past. These two assumptions have been widely-used in many methods such as the RiskMetrics, one risk management method considered as industry standard. However these assumptions are unrealistic. The primary aim of the paper is to account for nonstationarity and heavy tails in time series by presenting a local exponential smoothing approach, by which the smoothing parameter is adaptively selected at every time point and the heavy-tailedness of the process is considered. A complete theory addresses both issues. In our study, we demonstrate the implementation of the proposed method in volatility estimation and risk management given simulated and real data. Numerical results show the proposed method delivers accurate and sensitive estimates. |
| Keywords: | Exponential Smoothing, Spatial Aggregation. |
| JEL: | C14 C53 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2007-002&r=rmg |
| By: | Helena Suvova; Eva Kozelkova; David Zeman; Jaroslava Bauerova |
| Abstract: | The Basel Committee on Banking Supervision in 1999 issued a draft New Basel Capital Accord (Basel 2). Its principles are to be incorporated into the European legislation and into the Czech banking regulations. The Standardised Approach to calculating the capital requirement for credit risk is newly based on external credit assessments (ratings). Banking regulators and supervisors have to be prepared for the process of determining eligible credit assessment institutions (ECAIs) and will have to elaborate a formal recognition procedure. This paper investigates the approaches a supervisor may apply to ECAI recognition and elaborates on the criteria of recognition. First, the paper reviews the available rating agencies on the market (including their rating penetration on the Czech market), their best practices and the experience with the use of their ratings for regulatory purposes. Second, drawing on international experience and the proposed Basel 2 rules, we outline the fundamental supervisory approaches to recognition, including the legal aspects thereof, and analyse their pros and cons and the frontiers of supervisory decision making. Third, we outline the rules for recognition, including requirements or expectations (e.g. soft limits), documentation and typical interview questions with the potential candidates. We find the CNB's approach to be in compliance with CEBS Consultative Paper CP07 (issued for public consultation in June 2005). |
| Keywords: | Basel capital accord, Basel II, Credit rating, default, eligibility criteria, eligibility evaluation, external credit assessment institution (ECAI), export credit agency (ECA), mapping rating grades, market acceptance of ECAIs, rating agency, recognition process |
| JEL: | E65 G21 G18 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:rpnrpn:2005/03&r=rmg |
| By: | Zoltán Varsányi (Magyar Nemzeti Bank) |
| Abstract: | The present regulation of concentration risk does not take into consideration recent, sophisticated methods in credit risk quantification; the new Basle Capital Accord has left the regulatory treatment unchanged. Recently, substantial work has begun within the EU on this issue with the formation of the Working Group on Large Exposures within CEBS. The present paper is concerned with the models available under Basle 2 for credit risk quantification: it is searching for tools that can be applied in a new regime in general and that are capable of replicating the riskiness of credit portfolios with risk concentrations - an area that the original Basel model does not cover. The main idea of the paper is to disassemble nongranular portfolios into homogenous parts whose loss can then be directly simulated - taking into consideration the correlation between the parts - without the need to simulate single exposures. This makes the calculation of portfoliowide loss very fast. |
| Keywords: | Basel regulation, multifactor model, NORTA, numerical integration. |
| JEL: | C15 G28 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2006/11&r=rmg |
| By: | Jokivuolle , Esa (Bank of Finland Research); Peura , Samu (Sampo Bank) |
| Abstract: | The solvency standards implicit in bank capital levels, as reported eg in Jackson et al (2002), are much higher than those required for top ratings, if standard single period economic capital models are taken se-riously. We explain this excess capital puzzle by forward looking rating targeting behaviour by banks, which aims at maintaining rating above a minimum target in future periods. We calibrate to data on actual bank capital the confidence level used by the median US AA rated bank to maintain at least a single A rating. The calibrated confidence level is in line with the historical probability of an AA rated bank to be downgraded below A. |
| Keywords: | bank capital; credit rating; value-at-risk; economic capital; capital structure |
| JEL: | G21 G32 |
| Date: | 2006–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2006_027&r=rmg |