Market Risk

This study examines the empirical relattonship between the return and the total market value of NYSE common stocks. It is found that smaller firms have had htgher risk adjusted returns, on average, than larger lirms. This 'size effect' has been in existence for at least forty years and is evidence that the capital asset pricing model is misspecttied. The size elfect is not linear in the market value; the main effect occurs for very small tirms while there is little difference m return between average sized and large firms. It IS not known whether size per se is responsible for the effect or whether size IS just a proxy for one or more true unknown factors correlated with size. on the portfolio weights, since from

In this thesis we develop a stochastic programming framework for the risk management of international portfolios. Risk management has been recognized to play an increasingly important role in financial problems such as the international asset allocation, where widespread deregulation has entailed a substantial increase in asset price and currency volatility. In this framework, risk encompasses market as well as currency risk. At the same time, the emergence of international diversification has enhanced the range and scope of derivative securities available in addition to standard assets, for hedging and speculation purposes. Financial contracts such as stock and currency options have been tailored to the risk positions of international investors.

This paper studies seven GARCH models, including RiskMetrics and two long memory GARCH models, in Value at Risk (VaR) estimation. Both long and short positions of investment were considered. The seven models were applied to 12 market indices and four foreign exchange rates to assess each model in estimating VaR at various confidence levels. The results indicate that both stationary and fractionally integrated GARCH models outperform RiskMetrics in estimating 1% VaR. Although most return series show fat-tailed distribution and satisfy the long memory property, it is more important to consider a model with fat-tailed error in estimating VaR. Asymmetric behavior is also discovered in the stock market data that t-error models give better 1% VaR estimates than normal-error models in long position, but not in short position. No such asymmetry is observed in the exchange rate data.

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This paper examines the determinants of the market-assessed sovereign risk premium, measured by the Brady bond stripped yield spread. Our study shows that, while standard economic fundamentals of a sovereign significantly affect the bond yield spread, the market's attitude towards risk is another important determinant. We construct a measure of the market's attitude towards risk called the risk appetite index (RAI), and find that for comparable changes in all the economic variables the RAI has a relatively large impact on the Brady bond yield spread. Our results explain why there is contagion in the Brady bond market and why often there is a divergence between the market's perception of the country risk premium and published ratings on sovereign creditworthiness.

This paper examines whether Asian emerging stock markets have become integrated into world capital markets since their official liberalization dates by estimating and testing a dynamic international asset pricing model (ICAPM) in the absence of purchasing power parity (PPP) using an asymmetric multivariate GARCH-in-Mean (MGARCH-M) approach. Also examined in this paper is whether there are pure contagion effects between stock and foreign exchange markets for each Asian country during the 1997-98 Asian crisis. The empirical results show that first, both currency and world market risks are priced, suggesting that omitting currency risk in pricing international assets might give rise to model misspecification. Second, the stock markets for India, Korea, Malaysia, Philippines, and Thailand are segmented from the world capital markets before their liberalization dates, but have become fully integrated since then. Third, the market liberalization has reduced the cost of capital and price volatility for most of the markets.

Under the new capital accord stress tests are to be included in market risk regulatory capital calculations. This development necessitates a coherent and objective framework for stress testing portfolios exposed to market risk. Following recent criticism of stress testing methods our tests are conducted in the context of risk models, building on the VaR literature. First, to identify the most suitable risk models for stress testing, we apply an extensive back testing procedure that focuses on extreme market movements. We consider eight possible risk models including both conditional and unconditional models and four possible return distributions (normal, Student's t, empirical and normal mixture) applied to three heavily traded currency pairs using a sample of daily data spanning more than 20 years. Finding that risk models accommodating both volatility clustering and heavy tails are the most accurate predictors of extreme returns, we develop a corresponding model-based stress testing methodology. Our results are compared with traditional stress tests and we assess the implications for capital adequacy. On the basis of our results we conclude that the new recommendations for market risk regulatory capital calculation will have little impact on current levels of foreign exchange regulatory capital.

This article focuses on conditions that make cross-functional cooperation in new product development projects more or less productive. We investigate 40 NPD projects in the consumer electronics and pharmaceuticals industries in which R&D and marketing played key roles. We find that the contributions of cross-functional cooperation to NPD success are contingent on the type of market and technology opportunities being pursued. More specifically, our results suggest that when a project team pursues an opportunity characterized by high levels of technological and market risks, investments in high levels of cross-functional cooperation are warranted to increase NPD success. We do not find evidence that cross-functional cooperation moderates the relationship between the openness of an NPD project towards external information and knowledge and its performance. This suggests that less integrated project teams could achieve similar results as more integrated teams in terms of processing large quantities of information and knowledge without incurring the costs that may stem from high levels of cross-functional cooperation.

& Integrated multi-trophic aquaculture is one approach to mitigate ecological effects of finfish mariculture, and its benefits are prompting increased interest among researchers and commercial growers worldwide. A project in the Bay of Fundy in eastern Canada has demonstrated the biological and technical feasibility of integrated multi-trophic aquaculture, with uniformly positive results. This paper examines its economic and social implications. Capital-budgeting results suggest that using the waste of one crop as feed for another can increase profits. Scenario analysis also indicates that financial risks are reduced if weather-related or market risk for the various species are not correlated. Surveys indicate a positive perception towards integrated multi-trophic aquaculture by the public, which should assist integrated multi-trophic aquaculture applicants for site licences, and perhaps reduce litigation and lobbying by aquaculture opponents.

High-value export supply chains hold potential to improve smallholders' welfare, but their relative production inefficiency and moral hazard problems can cause exporters to prefer vertically integrated plantation production. However, pineapple exporters in Ghana produce both for their own account and purchase from smallholders. We hypothesize that vertical integration is only partial because exporters face large market risks that smallholders, surprisingly, are better able to absorb. We show empirically that exporters' average rejection rate of export-quality fruit is high and varies in response to unanticipated fluctuations in European demand. These results support the hypothesis and are consistent with theories of partial vertical integration but not the standard principal-agent paradigm.

Who could have thought that banks would become nationalised, that state debts would reach historical levels, that bulge bracket investment banks would go bankrupt and that the masters of the universe would be so widely vilified? Each in their own way, the four reflections collected in this article address the new issues raised by the financial meltdown for the past and future of financial geography. They also reflect back on the issues raised in the introduction to the special issue and the way the papers making up the special issue provide ammunition for future research. The comments offer a remarkably coherent message that reflects that conveyed in the introduction about the potential, and especially the need to realise the potential, of financial geography at the current time.

The Basel 2 Accord requires regulatory capital to cover stress tests, yet no coherent and objective framework for stress testing portfolios exists. We propose a new methodology for stress testing in the context of market risk models that can incorporate both volatility clustering and heavy tails. Empirical results compare the performance of eight risk models with four possible conditional and unconditional return distributions over different rolling estimation periods. When applied to major currency pairs using daily data spanning more than 20 years we find that stress test results should have little impact on current levels of foreign exchange regulatory capital.

Machine learning and artificial intelligence are big topics in the financial services sector these days. Financial institutions (FIs) are looking to more powerful analytical approaches in order to manage and mine increasing amounts of regulatory reporting data and unstructured data, for purposes of compliance and risk management (applying machine learning as " RegTech ") or in order to compete effectively with other FIs and FinTechs. This article aims to give an introduction to the machine learning field and discusses several application cases within financial institutions, based on discussions with IIF members and technology ventures: credit risk modeling, detection of credit card fraud and money laundering, and surveillance of conduct breaches at FIs. Two tentative conclusions emerge on the added value of applying machine learning in the financial services sector. First, FinTech/RegTech the ability of machine learning methods to analyze very large amounts of data, while offering a high granularity and depth of predictive analysis, can improve analytical capabilities across risk management and compliance areas in FIs. Examples are the detection of complex illicit transaction patterns on payment systems and more accurate credit risk modeling. Second , the application of machine learning approaches within the financial services sector is highly context-dependent. Ample , high-quality data for training or analysis are not always available in FIs. More importantly, the predictive power and granularity of analysis of several approaches can come at the cost of increased model complexity and a lack of explanatory insight. This is an issue particularly where analytics are applied in a regulatory context, and a supervisor or compliance team will want to audit and understand the applied model.

In order to correctly estimate the unpredictable effects on their transaction portfolios, the banks developed stress testing methods which turned out to be a very important tool in the bank supervision process. Moreover, the supervision authorities started using stress-testing methods for evaluating systemic risk and for determining the adequacy degree of capital in the banking sector. Taking into account the importance of these simulations, the present paper presents methodologies with which stress testing methods could be implemented by banks as well as their role in the management of credit risk, market risk and liquidity risk while also meeting the requirements imposed by the Basel II accord. By means of a case study we have simulated several scenarios in which the inter-bank market interest rate was varied, quantifying its impact on bank revenues as well as on the market value of their portfolios.

Intervento al convegno Confcommercio-Ambrosetti I protagonisti del mercato e gli scenari per gli anni 2000 23 marzo 2019, Villa d'Este, Cernobbio


https://www.centroeuroparicerche.it/wp-content/uploads/2019/03/20190412Cernobbio_Giacche.pdf

We model and examine the financial aspects of the land development process incorporating the industry practice of preselling lots to builders through the use of option contracts as a risk management technique. Using contingent claims valuation, we are able to determine endogenously the land value, presale option value, credits spreads and the effects of presales on debt pricing and equity expected returns. We show that using presales options effectively shift market risk from the land developer to the builder. Results from the model are consistent with the high rates of return on equity observed in empirical surveys; they also suggest that developers may be justified in pursuing projects with substantially lower expected returns to equity when a large number of lots can be presold. Additionally, we show that presales reduce default risk dramatically for leveraged projects and can support a considerable reduction in the cost of construction financing. Large debt risk premiums are justified for highly levered projects, which helps explain the use of mezzanine financing in the land development industry to reduce expected default costs.

Value at Risk (VaR) is a measure of the maximum potential change in value of a portfolio of financial assets with a given probability over a given time horizon. VaR became a key measure of market risk since the Basle Committee stated that banks should be able to cover losses on their trading portfolios over a ten-day horizon, 99 percent of the time. A common practice is to compute VaR by assuming that changes in value of the portfolio are normally distributed, conditional on past information. However, assets returns usually come from fat-tailed distributions. Therefore, computing VaR under the assumption of conditional normality can be an important source of error. We illustrate this point with Chilean and U.S. returns series by resorting to extreme value theory (EVT) and GARCH-type models. In addition, we show that dynamic estimation of empirical quantiles can also give more accurate VaR estimates than quantiles of a standard normal.

This paper performs an overview of the essential components in crisis management and an empirical analysis of the crisis management preparedness of the pharmaceutical companies in Greece. It also presents a best practice model for the business leaders in the Greek pharmaceutical market to help them to assess their level of preparedness and create their own crisis management plans, through adapting the current study findings. The results, obtained from an original questionnaire survey, confirm that the pharmaceutical industry is especially vulnerable to crisis situations and that the Greek economic crisis had a severe adverse impact on that industry. Nonetheless, the survey findings suggest that the pharmaceutical companies in Greece have a respectable level of crisis management adoption, although there is still room for improvements to address various types of future market risks.

The clients of public sector works have an obligation to ensure that the large scale investment in public works is effective and can achieve improvement in social and economic performance. However, construction activity is usually subject to more risk than other business activities because of its complexity particularly in coordinating a wide range of disparate and interrelated skills and activities. This complexity is further compounded in implementing public sector projects where multiple project objectives are expected by a wide range of stakeholders who have different interests associated with the projects. With reference to current practice in Hong Kong, this paper examines the major risks in implementing public sector works, and the ways that the application of public private partnership (PPP) can help to manage risks in project delivery. The example of Hong Kong Disneyland (KDLD) demonstrates how various major risks in committing to a PPP project are allocated and shared effectively between public and private partners. In this typical PPP project, it is found that allocation of site acquisition risk and legal and policy risks to the public sector is more effective while private sector could effectively allocate the design and construction risks, operation risks and industrial action risk to the private sector. Also, development risks, market risks, financial risks and force majeure could be shared effectively between the two partners. These results present valuable lessons for both the practitioners and researchers in application of PPPs to manage risks in delivering of public sector projects in other countries and regions.

This paper considers the joint role of macro-economic, structural and bank specific factors in explaining the occurrence of banking problems in the nineteen Eastern European transition countries over the last decade. With data at the individual bank level we show, using a discretetime survival model, that all three factors interact in their impact and have a rich dynamic profile, which underlines the highly volatile cycles challenging the stability of banks in this region. The study suggests that transition economies exhibit several specific patterns of bank distress uncommon to other regions. Changes in bank earnings, efficiency and relative size of credit portfolio are not early warning indicators. A fragile funding basis accompanied by high exposure to market risk in an environment of reforms and macroeconomic disturbances is the typical precursor of bank distress in Eastern European transition countries. JEL: G21, G33, C41, P20 Most of the transition countries have experienced severe banking problems over the 1990s.

The expected return on the market is a number frequently required for the solution of many investment and corporate finance problems. However, by comparison with other financial variables, there has been relatively little academic research on estimating this expected return. The current practice for estimating the expected return on the market is to take the historical average of realized excess returns on the market and add, :It to'the current observed inte're~t: rate. While th;i:smodel does explicitly relfect the dependence of the market experience return ,on the interest rate, it does not take into account the effect of changes in the level of risk associated with the market.

Value-at-Risk (VaR) is widely used as a tool for measuring the market risk of asset portfolios. However, alternative VaR implementations are known to yield fairly different VaR forecasts. Hence, every use of VaR requires choosing amongst alternative forecasting models.

Aquaculture in China accounts for nearly 70% of world aquaculture production. Aquaculture, including a wide variety of freshwater and marine fishes, shellfish, crustaceans, and aquatic plants, has become one of the most vital primary industries and a center of economic activity within the local and global economies. Along with the development of aquaculture, concerns come about such problems in the

The estimation of medium-term market risk dictated by limited data availability, is a challenging issue of concern amongst academics and practitioners. This paper addresses the issue by exploiting the concepts of volatility and quantile scaling in order to determine the best method for extrapolating medium-term risk forecasts from high frequency data. Additionally, market risk model selection is investigated for a new dataset on ocean tanker freight rates, which refer to the income of the capital goodtanker vessels. Certain idiosyncrasies inherent in the very competitive shipping freight rate markets, such as excessive volatility, cyclicality of returns and the medium-term investment horizonsfound in few other marketsmake these issues challenging. Findings indicate that medium-term risk exposures can be estimated accurately by using an empirical scaling law which outperforms the conventional scaling laws of the square and tail index root of time. Regarding the market risk model selection for short-term investment horizons, findings contradict most studies on conventional financial assets: interestingly, freight rate market risk quantification favors simpler specifications, such as the GARCH and the historical simulation models. (M.G. Kavussanos). 1 A risk metric is coherent if it fulfills the conditions of monotonicity, sub-additivity, positive homogeneity and transitional invariancy. VaR fails to fulfill the sub-additivity condition of coherency, which requires the risk of the total positions to be less than or equal to the sum of the risk of the individual positions.

The carbon market experiences of Brazil and India represent policy success stories under several criteria. A careful evaluation, however, reveals challenges to market development that should be addressed in order to make the rollout of a post-2012 CDM more effective. We conducted firm-level interviews covering 82 CDM plants in the sugar and cement sectors in Brazil and India, focusing on how individual managers understood the potential benefits and risks of undertaking clean development mechanism (CDM) investments. Our results indicate that the CDM operates in a far more complex way in practice than that of simply adding a marginal increment to a project's internal rate of return. Our results indicate the following: first, although anticipated revenue played a central role in most managers' decisions to pursue CDM investments, there was no standard practice to account for financial benefits of CDM investments; second, some managers identified non-financial reputational factors as their primary motivation for pursuing CDM projects; and third, under fluctuating regulatory regimes with real immediate costs and uncertain CDM revenue, managers favored projects that often did not require carbon revenue to be viable. The post-2012 CDM architecture can benefit from incorporating these insights, and in particular reassess goals for strict additionality and mechanisms for achieving it.

Financial time series analysis deals with the understanding of data collected on financial markets. Several parametric distribution models have been entertained for describing, estimating and predicting the dynamics of financial time series. Alternatively, this article considers a Bayesian semiparametric approach. In particular, the usual parametric distributional assumptions of the GARCH-type models are relaxed by entertaining the class of location-scale mixtures

The Basel II capital adequacy framework constitutes a very comprehensive regulatory approach to risk assessment in banks. It is far more detailed and sophisticated than the first Basel accord. A special feature is that the new accord is not only targeting banks' financial risk exposures in terms of credit risks and market risks. The scope has been widened to also explicitly incorporate banks' exposure to operational risks in the capital adequacy requirement. For banks this novelty means a major change. Unless they choose to use the highly unsophisticated ‗basic indicator approach' or the ‗standardized approach' proposed in the new Basel accord, it will put significant pressure on them to develop and design appropriate internal risk information models and systems. In this paper we explore banks' operational risk assessment under Basel II in Sweden, where all banks-regardless of size-have to comply with the new regulatory framework. The overall aim is to provide deeper insights into the capability of banks to identify and measure exposures to operational risk and their choice of method for calculating regulatory capital against such exposures.

Financial markets are a part of the changing business paradigms, across the globe.
In fact, the financial markets are the first to unleash the creativity and imagination
and lead the revolution. Today, globalization of competencies, thinking and
perspectives has been the part of Strategic Action Plan of all the major players in
the financial markets, globally. The cut throat competition across the market
operators and the pressure to perform by the stakeholders has resulted in
competition being fiercer than ever before. Both the business landscape and
chemistry of the competition has changed significantly over the period of time.
All around, there is a fresh thinking on the financial products, structure of market
players and possibilities for value creation. We can say financial markets are
being redefined, reinvented and reconfigured on a persistent basis.
*Prof. Vishal Sood, Finance & Accounts, Indore Indira Institute of Career Studies, Indore

For many insurers, the direct exposure to the epicentre of the crisis, the US mortgage market, and to related securities appears to have been limited. But the financial crisis has nonetheless had an increasingly visible impact on the insurance industry, primarily through their investment portfolios, as the crisis spread and financial market valuations and the outlook for real activity deteriorated significantly. The financial crisis may primarily be a banking crisis, and as insurance industry representatives have regularly emphasised, the solvency of the insurance sector as a whole does not appear to be threatened. Nonetheless, companies from that sector have been affected, and in mostly adverse ways. A number of concentrated exposures to credit and market risks have been revealed, including in US mortgage and financial guarantee insurance companies, as well as in certain other insurance-dominated financial groups. Beyond these immediate issues related to the financial health of insurance sectors and companies, the crisis has clearly demonstrated that protection against systemic risks should also include monitoring and mitigating risks in the insurance sectors and companies.

Aquaculture in China accounts for nearly 70% of world aquaculture production. Aquaculture, including a wide variety of freshwater and marine fishes, shellfish, crustaceans, and aquatic plants, has become one of the most vital primary industries and a center of economic activity within the local and global economies. Along with the development of aquaculture, concerns come about such problems in the industry such as aquatic pollution, disease, genetic degradation of aquaculture species, decline of comparative profitability, lack of knowledge on market risks, and financial crises. Thus, there is a need to acquire further knowledge on this industry and provide sound suggestions for its sustainable development. This review aims to identify the current state of and challenges facing the aquaculture industry in China and to provide some suggestions for its sustainable development.

Current industry practice largely follows one of two restrictive approaches to market risk management: historical simulation or RiskMetrics. In contrast, exploiting recent developments in financial econometrics we propose flexible methods which are likely to produce more accurate assessments of market risk. Clearly, the demands of real-world risk management in financial institutions -in particular, real-time risk tracking in very high-dimensional situations -impose strict limits on model complexity. Hence we stress parsimonious models that are easily estimated, and we discuss a variety of practical approaches for high-dimensional covariance matrix modeling, along with what we see as some of the pitfalls and problems in current practice. In so doing we hope to encourage further dialog between the academic and practitioner communities and to stimulate the development of improved market risk management technologies that draw on the best of both worlds. _________________ * This paper is prepared for Mark Carey and René Stulz (eds.), Risks of Financial Institutions, University of Chicago Press for NBER. For helpful comments we would like to thank

La remunerazione degli amministratori nelle società quotate nell'ordinamento spagnolo 135 José María Garrido La remunerazione degli amministratori nelle società quotate nell'ordinamento spagnolo [in "L'attività gestoria nelle società di capitali. Profili di diritto societario italiano e spagnolo a confronto", 135 ss.] A cura di: A. Sarcina -J.A. García Cruces (Cacucci, Bari 2010) A parte le suggestioni, spesso demagogiche, del particolare momento di crisi che stiamo vivendo, è indiscutibile come una profonda rivisitazione del sistema remunerativo si renda non più rinviabile; in primo luogo mediante l'introduzione di misure regolative coerenti allo scopo di contenere, nei limiti del possibile, il rischio di abusi da parte del management. si rende invece ineludibile un profondo intervento razionalizzante dentro e fuori l'Europa, a cominciare dalla Spagna dove nello specifico, le carenze del modello remunerativo sono tali da imporre una riforma ab imis, nel solco, com'è naturale, del percorso tracciato in sede comunitaria. Presta il fianco ad una molteplicità di perversi meccanismi, solitamente a detrimento degli interessi degli azionisti, che possono arginarsi solo attravero una celere e profonda manovra correttiva del legislatore.

This is an attempt to empirically investigate the risk and return relationship of individual stocks traded at Karachi Stock Exchange (KSE), the main equity market in Pakistan. The analysis is based on daily as well as monthly data of 49 companies and KSE 100 index is used as market factor covering the period from July 1993 to December 2004. The

L'indicatore di rischio sistemico SRISK mostra che in una situazione di stress le banche più indicatore di rischio sistemico SRISK mostra che in una situazione di stress le banche più esposte sono quelle franco tedesche. Così capiamo una cosa strana vista in queste settimane. esposte sono quelle franco tedesche. Così capiamo una cosa strana vista in queste settimane. L'analisi di Vladimiro Giacché (presidente Cer) sentito da Giuseppe Liturri

A growing body of literature examines the formation of strategic alliances as an important value-added role provided by venture capital firms. This paper contributes to this literature by examining two related questions: whether venture capital firms use strategic alliances as a substitute or compliment to capital infusion, and how venture capital firms use alliances to mitigate different types of risk. Results from 2505 venture-backed startups reveal that venture capital firms treat alliance formation as a substitute for capital infusion and that the breadth of the network of syndication partners investing in the startup increases the number of its strategic alliances. We also find intentionality in alliance formation. Specifically, firms operating in industry environments characterized by technical risk are more likely to form alliances with partners capable of mitigating technical risks, and firms operating in environments characterized by market risk are more likely to form alliances with partners capable of mitigating market risk. Our findings lend additional support to the perspective that alliances represent an important mechanism through which venture capital firms add value to their portfolio companies.

The Basel 2 Accord requires regulatory capital to cover stress tests, yet no coherent and objective framework for stress testing portfolios exists. We propose a new methodology for stress testing in the context of market risk models that can incorporate both volatility clustering and heavy tails. Empirical results compare the performance of eight risk models with four possible conditional and unconditional return distributions over different rolling estimation periods. When applied to major currency pairs using daily data spanning more than 20 years we find that stress test results should have little impact on current levels of foreign exchange regulatory capital.