November 08, 2011
New Issue of Journal of Risk Management in Financial Institutions Now Available
The newest issue of the Journal of Risk Management in Financial Institutions (JRMFI) - Volume 4, Number 4 - is now available. Here is a snapshot of the issue:
Managing inflationary risk in a dollar-priced world - A key policy priority for the G-20
Editorial Board Member (author wishes to remain anonymous)
An evolving differentiation in recovery rates across the G-20's constituent economies has resulted in an increasingly politicised fragmentation in policy coordination. The Seoul summit endorsed, for the first time, member states pursuing unilateral macro-prudential measures to manage cross-border capital flows. The implications for the control of risk are uncertain as such measures are likely to challenge the assumption that capital is cross-border fungible. This commentary reappraises the evolution in risk transmission processes which have led to a polarised G-20 endorsing unilateral regulatory policy initiative. In addition, it presents an alternative framework whereby inflationary sensitive commodities markets might function in a multi-currency clearing system thus short-circuiting the causal relationship between a devaluing dollar and emerging economies' inflation.
Risk-minimising investment strategies - Embedding portfolio optimisation into a dynamic insurance framework
Ursula Theiler
While Markowitz's framework of portfolio optimisation aims to eliminate diversifiable risk, it does not consider protection against the undiversifiable, systematic risk of market downturns. This paper investigates a concept of risk-minimising investment strategies, which embeds revolving portfolio optimisations into a framework of dynamic portfolio insurance and thus links the two approaches of minimising the diversifiable and controlling the undiversifiable risk.
The computation of optimised credit transition matrices
Kete Long, Sean C. Keenan, Radu Neagu, John A. Ellis and Jason W. Black
In this paper, a framework for generating empirically consistent Transition probability matrices (TPMs), using an optimisation methodology, is presented. Optimised TPMs produce default term structures that are substantially more accurate in terms of their ability to match empirical observations over multiple time periods than those produced by exponentiating single period empirical TPMs. Additionally, it is found that optimised TPMs show smoother surfaces with consistent probability mass distributions (monotonicity), reduce the impact of the Markov assumption, and reduce discrepancies of credit migration over multiple time horizons.
The Crash-NIG copula model: Risk measurement and management of credit portfolios
Anna Schlosser and Rudi Zagst
The one-factor copula models became very popular for modelling dependence in credit portfolios and collateralised debt obligation (CDO) valuation owing to their simplicity. Still, it is also well known that they are too simple for an exact pricing. Nevertheless, it is possible to extend the model in various ways so that it is possible to describe historical correlation behaviour realistically. Such an extension of the one-factor copula model, called the Crash-NIG copula model is proposed by the authors.
Market BuVaR: A countercyclical risk metric
Max Wong
The malfunction of the value-at-risk (VaR) model during the 2008 credit crisis was a key risk management failure. This metric is now criticised for being too little, too late. An improvement is proposed - making VaR countercyclical and more robust to fat tails. The new metric is called bubble-VaR (BuVaR), the expected shortfall of a trading book portfolio with the effects of procyclicality removed. This method is useful for the purpose of a countercyclical capital buffer for market risk. The approach relaxes the VaR assumptions of independent and identically distributed (i.i.d.), and stationarity of variables. It postulates that the empirical phenomena of fat tails, skewness, volatility clustering and the leverage effect can be better understood by modelling the noise and cycle components together, instead of just the noise of the time series as modelled in VaR.
PRMIA full Sustaining members receive the digital version of the JRMFI as a part of their membership. Volume 4, Number 4 will be accessible in their "My Library" area of the PRMIA website later this week. To purchase a Journal subscription, visit http://prmia.org/index.php?page=training&option=trainingRMFILibraryJournal.
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November 03, 2011
Share your views on U.S. Consumer Credit
PRMIA and FICO invite anyone living in the United States to share their views on U.S. Consumer Credit. This quarterly survey examines such topics as consumer credit delinquencies, underwriting standards, the balance of supply and demand, and related issues. The survey is becoming a bellwether for banker sentiment, with the most recent survey results covered by TIME Magazine, The Wall Street Journal, Reuters, American Banker, CNBC TV and many other media outlets.
The short survey will take 10 minutes or less to complete. All responses are strictly confidential. To begin, please click this link: http://www.surveymk.com/s/RBG73ZW. The survey closes on November 14. Everyone completing the survey receives a copy of the full results.
Posted by PRMIA_Marketing at 04:10 PM
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