Abstract Low debt and inflation, and higher growth reduce default risk. FX reserves do not matter for risk whenever CDS spreads are below the median. But higher FX buffers clearly reduce risk at the higher end of the sovereign risk spectrum.
{"title":"Limiting Risk Premia in EMEs: The Role of FX Reserves","authors":"E. Kohlscheen","doi":"10.2139/ssrn.3657013","DOIUrl":"https://doi.org/10.2139/ssrn.3657013","url":null,"abstract":"Abstract Low debt and inflation, and higher growth reduce default risk. FX reserves do not matter for risk whenever CDS spreads are below the median. But higher FX buffers clearly reduce risk at the higher end of the sovereign risk spectrum.","PeriodicalId":251522,"journal":{"name":"Risk Management & Analysis in Financial Institutions eJournal","volume":"26 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132453127","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop a model of endogenous collateral requirements in the credit default swap (CDS) market. Our model provides an interpretation for the empirical findings of Capponi et al. (2020), according to which extreme tail risk measures have a higher explanatory power for observed collateral requirements than standard value at risk rules. The model predicts that this conservativeness of collateral levels can be explained through disagreement of market participants about the extreme states of the world, in which CDSs pay out and counter-parties default.
本文建立了信用违约互换(CDS)市场内生抵押品需求模型。我们的模型为Capponi et al.(2020)的实证研究结果提供了解释，根据该结果，极端尾部风险度量对观察到的抵押品要求具有比标准风险值规则更高的解释力。该模型预测，这种担保品水平的保守性可以通过市场参与者对世界极端状态的分歧来解释，在这种极端状态下，cds支付而交易对手违约。
{"title":"The Collateral Rule: Theory for the Credit Default Swap Market","authors":"Chuan Du, A. Capponi, Stefano Giglio","doi":"10.2139/ssrn.3655871","DOIUrl":"https://doi.org/10.2139/ssrn.3655871","url":null,"abstract":"We develop a model of endogenous collateral requirements in the credit default swap (CDS) market. Our model provides an interpretation for the empirical findings of Capponi et al. (2020), according to which extreme tail risk measures have a higher explanatory power for observed collateral requirements than standard value at risk rules. The model predicts that this conservativeness of collateral levels can be explained through disagreement of market participants about the extreme states of the world, in which CDSs pay out and counter-parties default.","PeriodicalId":251522,"journal":{"name":"Risk Management & Analysis in Financial Institutions eJournal","volume":"52 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133987150","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Comparisons are made of the Chicago Board of Options Exchange (CBOE) skew index with those derived from parametric skews of bilateral gamma models and from the differentiation of option implied characteristic exponents. Discrepancies can be due to strike discretization in evaluating prices of powered returns. The remedy suggested employs a finer and wider set of strikes obtaining additional option prices by interpolation and extrapolation of implied volatilities. Procedures of replicating powered return claims are applied to the fourth power and the derivation of kurtosis term structures. Regressions of log skewness and log excess kurtosis on log maturity confirm the positivity of decay in these higher moments. The decay rates are below those required by processes of independent and identically distributed increments.
{"title":"Option Implied VIX, Skew and Kurtosis Term Structures","authors":"D. Madan, King Wang","doi":"10.2139/ssrn.3654563","DOIUrl":"https://doi.org/10.2139/ssrn.3654563","url":null,"abstract":"Comparisons are made of the Chicago Board of Options Exchange (CBOE) skew index with those derived from parametric skews of bilateral gamma models and from the differentiation of option implied characteristic exponents. Discrepancies can be due to strike discretization in evaluating prices of powered returns. The remedy suggested employs a finer and wider set of strikes obtaining additional option prices by interpolation and extrapolation of implied volatilities. Procedures of replicating powered return claims are applied to the fourth power and the derivation of kurtosis term structures. Regressions of log skewness and log excess kurtosis on log maturity confirm the positivity of decay in these higher moments. The decay rates are below those required by processes of independent and identically distributed increments.","PeriodicalId":251522,"journal":{"name":"Risk Management & Analysis in Financial Institutions eJournal","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130499215","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
T. Allen, S. Dées, Carlos Mateo Caicedo Graciano, V. Chouard, Laurent Clerc, Annabelle de Gaye, Antoine Devulder, Sebastien Diot, Noemie Lisack, F. Pegoraro, Marie Rabaté, Romain Svartzman, Lucas Vernet
This paper proposes an analytical framework to quantify the impacts of climate policy and transition narratives on economic and financial variables necessary for financial risk assessment. Focusing on transition risks, the scenarios considered include unexpected increases in carbon prices and productivity shocks to reflect disorderly transition processes. The modelling framework relies on a suite of models, calibrated on the high-level reference scenarios of the Network for Greening the Financial System (NGFS). Relying on this approach, the ACPR has selected a number of quantitative scenarios to be submitted to agroup of voluntary banks and insurance companies to conduct the first bottom-up pilot climate-related risk assessment.
{"title":"Climate-Related Scenarios for Financial Stability Assessment: An Application to France","authors":"T. Allen, S. Dées, Carlos Mateo Caicedo Graciano, V. Chouard, Laurent Clerc, Annabelle de Gaye, Antoine Devulder, Sebastien Diot, Noemie Lisack, F. Pegoraro, Marie Rabaté, Romain Svartzman, Lucas Vernet","doi":"10.2139/ssrn.3653131","DOIUrl":"https://doi.org/10.2139/ssrn.3653131","url":null,"abstract":"This paper proposes an analytical framework to quantify the impacts of climate policy and transition narratives on economic and financial variables necessary for financial risk assessment. Focusing on transition risks, the scenarios considered include unexpected increases in carbon prices and productivity shocks to reflect disorderly transition processes. The modelling framework relies on a suite of models, calibrated on the high-level reference scenarios of the Network for Greening the Financial System (NGFS). Relying on this approach, the ACPR has selected a number of quantitative scenarios to be submitted to agroup of voluntary banks and insurance companies to conduct the first bottom-up pilot climate-related risk assessment.","PeriodicalId":251522,"journal":{"name":"Risk Management & Analysis in Financial Institutions eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129746024","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In the paper, we document how the dynamics of linkages between selected major exchange rates changes during a day, depending on the activity of different groups of traders, and show the impact of important events and news on the dependence structures. The exchange rates under scrutiny are EUR/USD, AUD/USD, GBP/USD, and NZD/USD. We consider dai-ly returns calculated using the exchange rates quoted at different times of day. The analysis is performed separately for bid and ask prices. The dynamics of the dependence is modeled by means of DCC-copula models, and the strength of the linkages is described using dynam-ic Spearman’s rho coefficients. Moreover, we obtain the results concerning quantile depend-ence probabilities. The approach used enables us to scrutinize changes in the dynamics of the conditional dependence structure, depending on the time of day, which can be useful in risk management.
{"title":"How Do Linkages Between Major Exchange Rates Differ When the Daily Quotations Come From Different Times of Day? Analysis Using Bid and Ask Prices and DCC-Copula Models","authors":"Małgorzata Doman, R. Doman","doi":"10.2139/ssrn.3652077","DOIUrl":"https://doi.org/10.2139/ssrn.3652077","url":null,"abstract":"In the paper, we document how the dynamics of linkages between selected major exchange rates changes during a day, depending on the activity of different groups of traders, and show the impact of important events and news on the dependence structures. The exchange rates under scrutiny are EUR/USD, AUD/USD, GBP/USD, and NZD/USD. We consider dai-ly returns calculated using the exchange rates quoted at different times of day. The analysis is performed separately for bid and ask prices. The dynamics of the dependence is modeled by means of DCC-copula models, and the strength of the linkages is described using dynam-ic Spearman’s rho coefficients. Moreover, we obtain the results concerning quantile depend-ence probabilities. The approach used enables us to scrutinize changes in the dynamics of the conditional dependence structure, depending on the time of day, which can be useful in risk management.","PeriodicalId":251522,"journal":{"name":"Risk Management & Analysis in Financial Institutions eJournal","volume":"87 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121041724","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the design of an optimal insurance contract in which the insured maximizes her expected utility and the insurer limits the variance of his risk exposure while maintaining the principle of indemnity and charging the premium according to the expected value principle. We derive the optimal policy semi-analytically, which is coinsurance above a deductible when the variance bound is binding. This policy automatically satisfies the incentive-compatible condition, which is crucial to rule out ex post moral hazard. We also find that the deductible is absent if and only if the contract pricing is actuarially fair. Focusing on the actuarially fair case, we carry out comparative statics on the effects of the insured's initial wealth and the variance bound on insurance demand. Our results indicate that the expected coverage is always larger for a wealthier insured, implying that the underlying insurance is a normal good, which supports certain recent empirical findings. Moreover, as the variance constraint tightens, the insured who is prudent cedes less losses, while the insurer is exposed to less tail risk.
{"title":"Variance Contracts","authors":"Yichun Chi, X. Zhou, S. Zhuang","doi":"10.2139/ssrn.3656850","DOIUrl":"https://doi.org/10.2139/ssrn.3656850","url":null,"abstract":"We study the design of an optimal insurance contract in which the insured maximizes her expected utility and the insurer limits the variance of his risk exposure while maintaining the principle of indemnity and charging the premium according to the expected value principle. We derive the optimal policy semi-analytically, which is coinsurance above a deductible when the variance bound is binding. This policy automatically satisfies the incentive-compatible condition, which is crucial to rule out ex post moral hazard. We also find that the deductible is absent if and only if the contract pricing is actuarially fair. Focusing on the actuarially fair case, we carry out comparative statics on the effects of the insured's initial wealth and the variance bound on insurance demand. Our results indicate that the expected coverage is always larger for a wealthier insured, implying that the underlying insurance is a normal good, which supports certain recent empirical findings. Moreover, as the variance constraint tightens, the insured who is prudent cedes less losses, while the insurer is exposed to less tail risk.","PeriodicalId":251522,"journal":{"name":"Risk Management & Analysis in Financial Institutions eJournal","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116740315","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper is the second of a multi-part series on the calibration of the one-factor Hull-White short rate model for the purpose of computing CVAs (and xVAs) with an xVA system. The first part introduces an atypical bootstrapping scheme for the calibration of the short rate volatility. The present second part focuses on the selection of the mean reversion parameter. In both expositions we present long-term time series results for EUR, JPY, and USD, covering the period from the beginning of 2009 (at the earliest) to spring 2020.
{"title":"One-factor Hull-White Model Calibration for CVA - Part II: Optimizing the Mean Reversion Parameter","authors":"Christoph M. Puetter, Stefano Renzitti","doi":"10.2139/ssrn.3659443","DOIUrl":"https://doi.org/10.2139/ssrn.3659443","url":null,"abstract":"This paper is the second of a multi-part series on the calibration of the one-factor Hull-White short rate model for the purpose of computing CVAs (and xVAs) with an xVA system. The first part introduces an atypical bootstrapping scheme for the calibration of the short rate volatility. The present second part focuses on the selection of the mean reversion parameter. In both expositions we present long-term time series results for EUR, JPY, and USD, covering the period from the beginning of 2009 (at the earliest) to spring 2020.","PeriodicalId":251522,"journal":{"name":"Risk Management & Analysis in Financial Institutions eJournal","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125145570","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Thiago Ramos-Almeida, Juan Arismendi-Zambrano, J. Reboredo, M. Rivera-Castro
In this paper a multidimensional term structure model is used to find statistical arbitrage opportunities in the interest rates derivatives market. The implied volatility of the model is calibrated by using a genetic algorithm optimization method. Two different options over the same underlying interest rate asset are tested, using data from a weak efficient economy market. The results show that there is no systematic mis-pricing between these two options, but temporary arbitrage opportunities perceptible to the average informed trader are possible.
{"title":"Identifying Statistical Arbitrage in Interest Rate Markets: A Genetic Algorithm Approach","authors":"Thiago Ramos-Almeida, Juan Arismendi-Zambrano, J. Reboredo, M. Rivera-Castro","doi":"10.2139/ssrn.3654219","DOIUrl":"https://doi.org/10.2139/ssrn.3654219","url":null,"abstract":"In this paper a multidimensional term structure model is used to find statistical arbitrage opportunities in the interest rates derivatives market. The implied volatility of the model is calibrated by using a genetic algorithm optimization method. Two different options over the same underlying interest rate asset are tested, using data from a weak efficient economy market. The results show that there is no systematic mis-pricing between these two options, but temporary arbitrage opportunities perceptible to the average informed trader are possible.","PeriodicalId":251522,"journal":{"name":"Risk Management & Analysis in Financial Institutions eJournal","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125366860","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-07-01DOI: 10.5089/9781513549088.001
M. Gross, Dimitrios Laliotis, Mindaugas Leika, Pavel Lukyantsau
The objective of this paper is to present an integrated tool suite for IFRS 9- and CECL-compatible estimation in top-down solvency stress tests. The tool suite serves as an illustration for institutions wishing to include accounting-based approaches for credit risk modeling in top-down stress tests.
{"title":"Expected Credit Loss Modeling from a Top-Down Stress Testing Perspective","authors":"M. Gross, Dimitrios Laliotis, Mindaugas Leika, Pavel Lukyantsau","doi":"10.5089/9781513549088.001","DOIUrl":"https://doi.org/10.5089/9781513549088.001","url":null,"abstract":"The objective of this paper is to present an integrated tool suite for IFRS 9- and CECL-compatible estimation in top-down solvency stress tests. The tool suite serves as an illustration for institutions wishing to include accounting-based approaches for credit risk modeling in top-down stress tests.","PeriodicalId":251522,"journal":{"name":"Risk Management & Analysis in Financial Institutions eJournal","volume":"418 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132451612","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We show that financial variables contribute to the forecast of GDP growth during the Great Recession, providing additional insights on both first and higher moments of the GDP growth distribution. If a recession is due to an unforeseen shock (such as the Covid-19 recession), financial variables serve policymakers in providing timely warnings about the severity of the crisis and the macroeconomic risk involved, because downside risks increase as financial stress and corporate spreads become tighter. We use quantile regression and the skewed t-distribution and evaluate the forecasting properties of models using out-of-sample metrics with real-time vintages.
{"title":"Forecasting Macroeconomic Risk in Real Time: Great and Covid-19 Recessions","authors":"Roberto A. De Santis, Wouter Van der Veken","doi":"10.2139/ssrn.3641428","DOIUrl":"https://doi.org/10.2139/ssrn.3641428","url":null,"abstract":"We show that financial variables contribute to the forecast of GDP growth during the Great Recession, providing additional insights on both first and higher moments of the GDP growth distribution. If a recession is due to an unforeseen shock (such as the Covid-19 recession), financial variables serve policymakers in providing timely warnings about the severity of the crisis and the macroeconomic risk involved, because downside risks increase as financial stress and corporate spreads become tighter. We use quantile regression and the skewed t-distribution and evaluate the forecasting properties of models using out-of-sample metrics with real-time vintages.","PeriodicalId":251522,"journal":{"name":"Risk Management & Analysis in Financial Institutions eJournal","volume":"58 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123024369","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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