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on Risk Management |
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Issue of 2015‒07‒04
fourteen papers chosen by |
| By: | Dominique Guégan (Department of Economics, University Of Venice Cà Foscari and University Paris1 Panthéon – Sorbonne.); Bertrand Hassani (University Paris1 Panthéon – Sorbonne and Grupo Santander.); Kehan Li (University Paris1 Panthéon – Sorbonne) |
| Abstract: | One of the key lessons of the crisis which began in 2007 has been the need to strengthen the risk coverage of the capital framework. In response, the Basel Committee in July 2009 completed a number of critical reforms to the Basel II framework which will raise capital requirements for the trading book and complex securitisation exposures, a major source of losses for many international active banks. One of the reforms is to introduce a stressed value-at-risk (VaR) capital requirement based on a continuous 12-month period of significant financial stress (Basel III (2011)). However the Basel framework does not specify a model to calculate the stressed VaR and leaves it up to the banks to develop an appropriate internal model to capture material risks they face. Consequently we propose a forward stress risk measure ``spectral stress VaR" (SSVaR) as an implementation model of stressed VaR, by exploiting the asymptotic normality property of the distribution of estimator of VaR_p. In particular to allow SSVaR incorporating the tail structure information we perform the spectral analysis to build it. Using a data set composed of operational risk factors we fit a panel of distributions to construct the SSVaR in order to stress it. Additionally we show how the SSVaR can be an indicator regarding the inner model robustness for the bank. |
| Keywords: | Value at Risk, Asymptotic theory, Distribution, Spectral analysis, Stress, Risk measure, Regulation. |
| JEL: | C1 C6 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2015:17&r=rmg |
| By: | Florentin Butaru; QingQing Chen; Brian Clark; Sanmay Das; Andrew W. Lo; Akhtar Siddique |
| Abstract: | Using account level credit-card data from six major commercial banks from January 2009 to December 2013, we apply machine-learning techniques to combined consumer-tradeline, credit-bureau, and macroeconomic variables to predict delinquency. In addition to providing accurate measures of loss probabilities and credit risk, our models can also be used to analyze and compare risk management practices and the drivers of delinquency across the banks. We find substantial heterogeneity in risk factors, sensitivities, and predictability of delinquency across banks, implying that no single model applies to all six institutions. We measure the efficacy of a bank’s risk-management process by the percentage of delinquent accounts that a bank manages effectively, and find that efficacy also varies widely across institutions. These results suggest the need for a more customized approached to the supervision and regulation of financial institutions, in which capital ratios, loss reserves, and other parameters are specified individually for each institution according to its credit-risk model exposures and forecasts. |
| JEL: | D12 D14 D18 E21 E51 G01 G17 G21 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21305&r=rmg |
| By: | Catherine Bruneau (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Alexis Flageollet (Natixis Asset Management - SAMS); Zhun Peng (EPEE - Centre d'Etudes des Politiques Economiques - Université d'Evry-Val d'Essonne) |
| Abstract: | In this paper, we propose a flexible tool to estimate the risk sensitivity of a high-dimensional portfolio composed of different classes of assets, especially in extreme risk circumstances. We build a so-called Cvine Risk Factors Model (CRFM), which is a non-linear version of a risk factor model in a copula framework. Our tool allows us to decompose the risk of any asset and any portfolio into specific risk directions depending on the context. As an application, we compare the sensitivity of different types of portfolios to extreme risks. We also give an example of a view-type analysis as usually performed by portfolio managers who examine what their portfolio becomes under specific circumstances: here we examine the case of a low inflation context. These analyses allow us to detect changes in the diversification opportunities over time. |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01166135&r=rmg |
| By: | Hamidi, Benjamin; Hurlin, Christophe; Kouontchou, Patrick; Maillet, Bertrand |
| Abstract: | This paper introduces a new class of models for the Value-at-Risk (VaR) and Expected Shortfall (ES), called the Dynamic AutoRegressive Expectiles (DARE) models. Our approach is based on a weighted average of expectile-based VaR and ES models, i.e. the Conditional Autoregressive Expectile (CARE) models introduced by Taylor (2008a) and Kuan et al. (2009). First, we briefly present the main non-parametric, parametric and semi-parametric estimation methods for VaR and ES. Secondly, we detail the DARE approach and show how the expectiles can be used to estimate quantile risk measures. Thirdly, we use various backtesting tests to compare the DARE approach to other traditional methods for computing VaR forecasts on the French stock market. Finally, we evaluate the impact of several conditional weighting functions and determine the optimal weights in order to dynamically select the more relevant global quantile model. |
| Keywords: | Expected Shortfall; Value-at-Risk; Expectile; Risk Measures; Backtests; |
| JEL: | C14 C15 C50 C61 G11 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:dau:papers:123456789/15232&r=rmg |
| By: | Dominique Guégan (Department of Economics, University Of Venice Cà Foscari and University Paris1 Panthéon – Sorbonne.); Bertrand Hassani (University Paris1 Panthéon – Sorbonne and Grupo Santander.) |
| Abstract: | This paper discusses the regulatory requirement (Basel Committee, ECB-SSM and EBA) to measure financial institutions' major risks, for instance Market, Credit and Operational, regarding the choice of the risk measures, the choice of the distributions used to model them and the level of confidence. We highlight and illustrate the paradoxes and the issues observed implementing an approach over another and the inconsistencies between the methodologies suggested and the goal to achieve. This paper makes some recommendations to the supervisor and proposes alternative procedures to measure the risks. |
| Keywords: | Risk measures - Sub-additivity - Level of confidence - Extreme value distributions - Financial regulation, aggregation. |
| JEL: | C1 C6 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2015:18&r=rmg |
| By: | Giovanni Bonaccolto; Massimiliano Caporin; Sandra Paterlini |
| Abstract: | It is well known that quantile regression model minimizes the portfolio extreme risk, whenever the attention is placed on the estimation of the response variable left quantiles. We show that, by considering the entire conditional distribution of the dependent variable, it is possible to optimize different risk and performance indicators. In particular, we introduce a risk-adjusted profitability measure, useful in evaluating financial portfolios under a pessimistic perspective, since the reward contribution is net of the most favorable outcomes. Moreover, as we consider large portfolios, we also cope with the dimensionality issue by introducing an l1-norm penalty on the assets weights. |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1507.00250&r=rmg |
| By: | Kelly, Robert (Central Bank of Ireland); O'Malley, Terence (Central Bank of Ireland); O'Toole, Conor (Central Bank of Ireland) |
| Abstract: | Macro-prudential policy is designed to address risk at a systemwide level, an example of which is mortgage default following a period of excessive residential property lending. Policy tools to address this risk, such as caps on loan-to-value (LTV) and loan-to-income (LTI) ratios should by design reflect the risk profile of lending. This research considers the heterogeneity of default risk between first time buyers and second and subsequent buyers and finds that first time buyers have lower default rates having controlled for borrower and loan characteristics. The potential implications for the macro prudential policy setting are empirically analysed: the default-differential between the two groups linearly increases with LTI and a non-linear difference is found to be maximised at 80-85 per cent for LTV. In addition, the role for a rule designed on house valuation is examined, with results showing a diminishing default-differential as valuations increase. This research is consistent with differential regulatory treatment of first time buyers with default risk remaining comparable to the remainder of mortgage lending. |
| Keywords: | Macro Prudential, Credit Risk, Mortgages, Ireland |
| JEL: | E32 E51 F30 G21 G28 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:02/rt/15&r=rmg |
| By: | Tobias Fissler; Johanna F. Ziegel; Tilmann Gneiting |
| Abstract: | In this note, we comment on the relevance of elicitability for backtesting risk measure estimates. In particular, we propose the use of Diebold-Mariano tests, and show how they can be implemented for Expected Shortfall (ES), based on the recent result of Fissler and Ziegel (2015) that ES is jointly elicitable with Value at Risk. |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1507.00244&r=rmg |
| By: | Ghosh, Saibal |
| Abstract: | Employing data on over 100 banks for Gulf Cooperation Council (GCC) countries during 1996-2011, we test the relation between risk and capital. The findings indicate that banks generally increase capital in response to an increase in risk, and not vice versa. Second, there is an uneven impact of regulatory pressure and market discipline on banks attitude towards risk and capital. Additionally, Islamic banks increased their capital as compared to conventional banks. |
| Keywords: | Z-score; capital; 2SLS; banks; Gulf Cooperation Council |
| JEL: | G21 G28 |
| Date: | 2014–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:65246&r=rmg |
| By: | White, Halbert; Kim, Tae-Hwan; Manganelli, Simone |
| Abstract: | This paper proposes methods for estimation and inference in multivariate, multi-quantile models. The theory can simultaneously accommodate models with multiple random variables, multiple confidence levels, and multiple lags of the associated quantiles. The proposed framework can be conveniently thought of as a vector autoregressive (VAR) extension to quantile models. We estimate a simple version of the model using market equity returns data to analyse spillovers in the values at risk (VaR) between a market index and financial institutions. We construct impulse-response functions for the quantiles of a sample of 230 financial institutions around the world and study how financial institution-specific and system-wide shocks are absorbed by the system. We show how the long-run risk of the largest and most leveraged financial institutions is very sensitive to market wide shocks in situations of financial distress, suggesting that our methodology can prove a valuable addition to the traditional toolkit of policy makers and supervisors. JEL Classification: C13, C14, C32 |
| Keywords: | CAViaR, codependence, quantile impulse-responses, spillover |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20151814&r=rmg |
| By: | Morgan, Peter (Asian Development Bank Institute); Regis, Paulo Jose (Asian Development Bank Institute); Salike, Nimesh (Asian Development Bank Institute) |
| Abstract: | Credit creation in the housing market has been a key source of systemic financial risk, and therefore is at the center of the debate on macroprudential policies. The loan-to-value (LTV) ratio is a widely used macroprudential tool aimed at moderating mortgage loan creation, and its effectiveness needs to be estimated empirically. This paper is unique in that it analyzes the effect of LTV on mortgage lending, the direct channel of influence, using a large sample of banks in 10 Asian economies. It uses estimation techniques to deal with the large presence of outliers in the data. Robust-to-outlier estimations show that economies with LTV polices have expanded residential mortgage loans by 6.7% per year, while non-LTV economies have expanded by 14.6%, which suggests LTV policies have been effective. |
| Keywords: | loan-to-value policy; residential mortgage loans; macroprudential policy; financial risk |
| JEL: | C23 E58 G21 G28 |
| Date: | 2015–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0528&r=rmg |
| By: | Campbell, John Y; Giglio, Stefano W; Polk, Christopher; Turley, Robert |
| Abstract: | This paper studies the pricing of volatility risk using the first-order conditions of a long-term equity investor who is content to hold the aggregate equity market rather than tilting towards value stocks and other equity portfolios that are attractive to short-term investors. We show that a conservative long-term investor will avoid such tilts in order to hedge against two types of deterioration in investment opportunities: declining expected stock returns, and increasing volatility. Empirically, we present novel evidence that low-frequency movements in equity volatility, tied to the default spread, are priced in the cross-section of stock returns. |
| Keywords: | ICAPM; stochastic volatility; time-varying expected returns; value premium |
| JEL: | G12 N22 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10681&r=rmg |
| By: | Griselda Deelstra (Université Libre de Bruxelles (ULB)); Guillaume Plantin (Université Toulouse 1 Capitole) |
| Abstract: | Reinsurance is an important production factor of non-life insurance. The efficiency and the capacity of the reinsurance market directly regulate those of insurance markets. The purpose of this book is to provide a concise introduction to risk theory, as well as to its main application procedures to reinsurance. The first part of the book covers risk theory. It presents the most prevalent model of ruin theory, as well as a discussion on insurance premium calculation principles and the mathematical tools that enable portfolios to be ordered according to their risk levels. The second part describes the institutional context of reinsurance. It first strives to clarify the legal nature of reinsurance transactions. It describes the structure of the reinsurance market and then the different legal and technical features of reinsurance contracts, known as reinsurance ‘treaties’ by practitioners. The third part creates a link between the theories presented in the first part and the practice described in the second one. Indeed, it sets out, mostly through examples, some methods for pricing and optimizing reinsurance. The authors aim is to apply the formalism presented in the first part to the institutional framework given in the second part. It is reassuring to find such a relationship between approaches seemingly abstract and solutions adopted by practitioners. Risk Theory and Reinsurance is mainly aimed at master's students in actuarial science but will also be useful for practitioners wishing to revive their knowledge of risk theory or to quickly learn about the main mechanisms of reinsurance. |
| Keywords: | Reinsurance; Risk Theory; Reinsurance market; Actuarial Science |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/2iocb3a66198q8ovlu1gfkqie7&r=rmg |
| By: | Christopher J. Rook |
| Abstract: | Dynamic retirement glidepaths evolve over time based on some measure such as the retiree's funded status or current market valuations. Conversely, static glidepaths are fixed at a starting point and selected under the assumption that they will not change. In practice, new static glidepaths may be derived periodically making them more flexible. The optimal static retirement glidepath would be the one that performs better than all others with respect to some metric. When systematic withdrawals are made from a retirement portfolio, glidepaths are often assessed via the probability of ruin (or success). Our goal here is to derive the optimal static glidepath with respect to this metric. It is a result new to the literature and the shape will be of special interest to retirees, financial advisors, retirement researchers, and target-date fund providers. |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1506.08400&r=rmg |