The Information Content of Basel III Liquidity Risk Measures
Han Hong, Jing-Zhi Huang, Deming Wu
This paper examines the relationship between two liquidity measures and the probability of bank failures. It finds that the Liquidity Coverage Ratio (LCR) is positively related to bank failures and that the Net Stable Funding Ratio (NSFR) is negatively correlated. As expected less stable funding for a bank indicates higher risk of bank failure. However, the positive correlation of the Liquidity Coverage Ratio to bank failures associates bank failures with more liquidity. The authors hypothesize that this is due to hoarding of liquid assets in times of financial stress.
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Reducing Retirement Risk with a Rising Equity Glide-Path
Wade Pfau, Michael Kitces
The authors come up with a counterintuitive solution for managing the glide path of an in-retirement portfolio. Rather than the conventional decreasing equity allocation, this study argues that an increasing equity allocation actually lowers the risk of portfolio failure. Using this approach, several scenarios can be considered. If the stock market drops at the beginning of retirement, than the rising allocation puts more capital to work in an asset that has a depressed price and is likely to appreciate. If equities rise considerably at the beginning of the retirement period, then the portfolio is unlikely to run out of money anyway, and more risk can be taken.
CoCos: A Primer
Stefan Avdjiev, Anastasia Kartasheva, Bilyana Bogdanova
This paper introduces the mechanics behind a recent hybrid security, contingent convertible capital instruments, known as CoCos. CoCos are debt instruments issued by banks that absorb losses when capitalization levels fall too low. The market for such securities is still small, with only $70 billion worth of CoCos issued since 2009 compared to over $4 trillion of other debt instruments.
Corporate Hedging and Corporate Governance: The Role of the Board and the Audit Committee
Vivian V. Tai, Yi-Hsun Lai, Tung-Hsiao Yang, Min-The Yu
The authors examine the relationship between quantifiable board structure metrics and leverage and risk metrics. Corporate governance is measured by such metrics as larger boards, more audit committee members, or more independent directors. In general, companies with better corporate governance hedge more risks and have lower risk ratios.
Gold, Oil, and Stocks
Jozef Barunik, Evzen Kocenda, Lukas Vacha
The correlations between gold, oil, and stocks since 1987 appears to remain largely zero until the past decade, when the three assets all started to become positively correlate with each other. This pattern is true for correlations over various time frames including daily and monthly price data.
Tax Risk and Corporate Cash Holdings
Michelle Hanlon, Edward L. Maydew, Daniel Saavedra
Because corporate tax payments can be questioned by governments for several years, companies’ are at risk of being charged more taxes than were paid. For companies that are more aggressive in their tax accounting this leads to a higher risk. The authors of this paper find that companies with more aggressive tax accounting tend to hold more cash to cover this risk.
A Weighted Mean Model for Operational Risk Assessment
Yundong William Huang, Murphy Smith, David Durr
Understanding a firm’s operational risk is both important to managing the organization and difficult to measure. A simple model is proposed to avoid the issues that come with models that are theoretically sound, but impractical to use for many companies.
A Practical Approach to the Vexing Issue of ‘Risk Appetite’
Various methods for quantifying enterprise risk exist. However, to some extent the uncertainty of an organization is determined by the risk appetite of its managers, which is difficult to quantify. This paper discusses risk appetite in relation to organizations and how it can be assessed.
Ang takes an in depth look at investing factors, particularly with respect to active investing. The outperformance of factors can play a large role in the performance of an active strategy, and understanding and managing factors is important for managing risk.
Competition and Stability in Banking: The Interplay between Deposit and Loan Markets
Arping develops a model for banking incentives by separating the effects of the deposit market and the loan market. Various scenarios and the interdependence of the deposit and loan market are examined.
Funding Cost and a New Capital Model
Typical derivative funding models include two components, a market rate, such as LIBOR, and a bank’s cost of borrowing added on. A new model is proposed which replaces both components with one. This funding cost is based on expected loss rather than the probability of default.
Measuring Credit Risk in a Large Banking System: Econometric Modeling and Empirics
Andre Lucas, Bernd Schwaab, Xin Zhang
The authors create two measures of financial systemic risk based on the likelihood of simultaneous financial institution failure. The model is inspired by the Merton model, the idea that the risk of a firm can be measured by considering the company’s equity as an option on its assets.
Advances in Portfolio Risk Control. Risk! Parity?
Winfried G. Hallerbach
Hallerbach provides an overview of various portfolio risk management techniques from the perspective of a practitioner. The theory and characteristics of various portfolio construction methods are discussed, including equal weighted, maximum diversification, minimum variance, full risk parity, naïve risk parity, and maximum Sharpe ratio portfolios.
Robustness and Informativeness of Systemic Risk Measures
Gunter Loffler & Peter Raupach
Loffler & Raupach examine several proposed risk metrics for financial institutions; Marginal expected shortfall, Conditional Value at Risk (CoVaR), and Tail-Risk Gamma. They find several theoretical cases where these metrics would misrepresent the true risk of an institution.