Financial Risk Management

Financial Risk Management

  • Giovanni Zambruno added an answer:
    What do you think of the "health" of the Capital Asset Pricing Model?

    The CAPM is based on a robust theoretical framework, but empirically demonstrated weakness. The beta does not seem to be the only factor that can explain the risk-return relationship. Do you really think that the CAPM is dead?

    Giovanni Zambruno · Università degli Studi di Milano-Bicocca

    I mostly agree with the preceding contributions. In my opinion CAPM is an excellent mathematical development based on weak assumptions. The crucial point, I believe, rests in the "expectations" characteristics of the quantities in  play. Expectations cannot be treated as mere averages of the past - otherwise risky returns less than the riskless rate could hardly be explained. Every agent has his/her own expectations, this prevents any attempt to develop a positive theory of rational market returns.

  • Shivan A.M Doski added an answer:
    What factors contribute to SMEs in emerging markets to adopt Innovation practices?

    Key Factors that are internal to firm or external to firm 

    Shivan A.M Doski · University of Duhok

    i think empowerment is the key factor to adopt innovation by SMEs. you can refer to prof. Dr. Mohd. Khairuddin Hashim books published on SMEs and Innovation in  UUM, Malaysia.

  • L. Spadafora added an answer:
    How can I manage too much volatility? What are the pricing implications?

    We provide some insight and concerns about cross asset portfolio diversification in relation with increased market volatility. While generally across asset diversification reduces volatility, we need to re-calibrate models (reassign correlation values). What should we consider the general correlation between asset classes?

    L. Spadafora · UniCredit SpA

    I am not sure that this paper will answer your question, maybe it could give you some insight. It explains the differences between implied and realized volatility and their effect on P&L and pricing.

  • If alpha should be zero (based on CAPM), would a FAMA-FRENCH 3 factor model explain your observations above more effectively?
    Alpha is a risk-adjusted measure of active return on an investment.

    The FF 3 factor model is emerging 2 classes of stock with CAPM to reflect a portfolio's theory.

    r - Rf = beta3 x ( Km - Rf ) + bs x SMB + bv x HML + alpha

    Alpha Coefficient can show that in an efficient market, the expected value of the alpha coefficient is zero. Therefore the alpha coefficient indicates how an investment has performed after accounting for the risk it involved:

    Alpha_i < 0 : the investment has earned too little for its risk (or, was too risky for the return)
    Alpha_i = 0 : the investment has earned a return adequate for the risk taken
    Alpha_i > 0 : the investment has a return in excess of the reward for the assumed risk
    Muhammad Jam e Kausar Ali Asghar · COMSATS Institute of Information Technology

    You need to rephrase your questions 

  • Robert Mugo added an answer:
    Does media coverage of financial news affect stock market movements ?

    media coverage and analyzing news affect people reaction to and new news.

    Robert Mugo · Egerton University

    I would say it does because biasness in media report may cause herding behaviour where uninformed investors may make decisions without looking at the fundamentals in a security price

  • Mark Young added an answer:
    Risk measurement in banking - do you know any examples of classification for risk measurement?
    I am looking for the classification of risk measurement in banking (credit, liquidity, market, operational). I have some ideas, but maybe I am reinventing the wheel. For example, you can measure risk directly (eg. probabilities) or indirectly (LTV or maturity mismatch). Any suggestions?
    Mark Young · Macquarie Graduate School of Management

    I'd encourage you to start with the BIS definition and also look at Marrison book too.

  • Andriansyah Andriansyah added an answer:
    Why are Chinese investors afraid of IPO?
    There is a really strange phenomenon in Chinese stock markets. When the regulation institution decides to get some new companies listed (it is noteworthy that IPO has to get permission from Securities Regulatory Commission in China), the stock market drastic falls and the Chinese investors sell out their stocks crazily.
    Some argue that more stocks listed means that more money is needed by the market, but the supply is constant in the short term. So the stock price falls. But I don't think it explains well what we observe.
    Andriansyah Andriansyah · Victoria University Melbourne

    New issues supply new shares to the secondary market, but if the new listed firms are dominated by state-owned enterprises which their shares cannot be free traded, the number of free-float shares are still limited. Chinese government may time the market when deciding to privatize the SOEs, I guess Investors then may see this as a signal that  the market has been overvalued.

  • Sebastian Majewski added an answer:
    What are the various ways of stock or securities markets behavior?

    When answering the question, I also welcome investors behavior.

    Sebastian Majewski · University of Szczecin

    There is no simple answer to this question. The classics could say that prices are random, but we could meet many market anomalies. There are many researches about that. I suggests to visit a web page:

    There are many articles and some of them are possible to download.

  • Amit Mittal added an answer:
    Global bank models have resiliently adapted to the new capital regimes. Can banks now support the global ecosystem with fresh credit in NA and Asia?

    Is it fair to assume we have now crossed the rubicon and things are more tune with steady progress now and for another decade or more to come? While AIG and GM seem to need more help in the USA, banks have been building new markets. European banks of course seem to be hit because of the lack of viable collateral and fast closing avenues of fresh equity. Also maybe the use of Contingent Capital is not fair and Europe is actually headed for more trouble within banking?

    Amit Mittal · Indian Institute of Management, Lucknow

    I agree it could be treated as an ephemeral(temporary)/cyclical problem in Europe but for there seems to be no part of the cycle with positive fractions of growth. Similarily in the US how would one peg a cyclical recession into a largely event driven fault in 2008? 

  • Bo Jellesmark Thorsen added an answer:
    Does anyone have experience with research in infrastructure finance risks?
    I am undertaking a research on risk in Infrastructure project finance where I have ranked questions developed for my questionnaire. My interest is to see which risks are more severe within each of the nine categories that I have profiled (ie each category has 5 sub risks). What would be the best statistical outputs to analyse this data? Besides wanting to know which risks are more severe within each risk category, I would be interested in knowing the differences in the responses between the public and private sector. Your thoughts?
    Bo Jellesmark Thorsen · University of Copenhagen

    Dear Bruno

    Following up on Pauls second point about the ability/willingness of officials to answer in a usefull way, I think that you would be well adviced to study Professor Bent Flybjergs work on risks and failures in large infrastructure projects. Flyvbjerg is professor at Oxford these days. The problem is, that one reason why risks appear large is that they are often ignored (and hence not planned for/adapted to) in the initial stages of the decision making. Flyvbjergs work is not as much quantitatve as an anthropological/sociological study of a phenomenon, but if you could take his finding sinto account somehow, and perhaps elicit information of value to that discussion, that could improve your contribution to the field.

  • Nicholas Chileshe added an answer:
    What are some of the factors that affect the adoption of risk management by smallholder farmers?

    In smallholder agriculture, risk management is desirable, just like in any other business venture. Despite efforts to design schemes like agricultural insurance and other micro-insurance schemes, uptake is still low. This begs the questions:

    1. What makes smallholder farmers resist formal risk management approaches- insurance, capital markets?

    2. Are there cases in any country where formal risk management approaches have managed to achieve even limited success among-st smallholder farmers?

    3. What informal risk management mechanisms do smallholder farmers adopt?

    4. Are there better ways to design risk management mechanisms to attract smallholder farmers?

    Responses are welcome

    Nicholas Chileshe · University of South Australia

    Dear John,
    In addition to the excellent answers suggested by Sergei, Steven, Eleonora and Robert, I would also recommend some readings such as Greiner, R., Patterson, L. and Miller, O. (2009), “Motivations, risk perceptions and adoption of conservation practices by farmers”, Agricultural Systems, Vol. 99, Issues 2-3, pp. 86-104.

    The above study was aimed at investigating the perceptions of risk and issues around motivation associated with the adoption of ‘best management practices’ among graziers. While the focus of the study might have been on ‘BMP’, it would provide you with some insights towards ‘risk management’ given that it falls under the realms of ‘BMP’. While the majority of the studies that I have investigated have mainly being drawn from the construction industry perspective, some commonalities nevertheless among different sectors on while organisations or individuals might resist the adoption of risk management practices. The above study cited (Greiner et al. 2009) identified strong linkages between motivations, and risk attitudes, and the adoption of BMPs. This finding is similar to other studies conducted within the context of the construction industry, and among the Small and Medium Enterprises (SMEs) which might be equated to the ‘smallholder farmers’ as posed in your question.

    Relative to ‘some of the factors’ affecting RM, I would also recommend reading up the following citation or reference drawn from the Norwegian perspective:
    Flaten, O., Lien, G., Koesling, M., Valle, P.S. and Ebbesvk, M. (1995), “Comparing risk perceptions and risk management in organic and conventional dairy farming: empirical results from Norway”, Livestock Production Science, Vol. 95, Iss. 1-2, pp. 11-25
    While the above study was more focused on the risk perception and risk management, some insights on some of the socio-economic variables reported are also highly relevant to the issues at hand (i.e. risk and risk management).

    Just to draw some comparative analysis between your sector (Smallholder farmers) and SMEs (within the construction industry), Steven rightly pointed to the ‘limited resources’. This appears to a universal problem facing smaller organisations. For example (the list is exhaustive), some of the factors (assuming this to be either barriers or critical success factors), one could point to the lack of knowledge; lack of manpower (same as resources among others), lack of time as the barriers that would be faced by smaller organisations irrespective of the industry. Conversely, the issue of ‘resistance’ as suggested by Eleonora has also being found to affect SMEs within construction (again just to illustrate the similarities facing smaller organisations. Generally, the resistance might be associated with the lack of knowledge & awareness of both the RM practices and benefits, hence requiring a cultural shift of the organisations or the ‘smallholder farmers’ in order to reap the adopted benefits. The behavior change might address some of the problem pointed out be Robert (i.e. Herd Behavior).  By providing examples from a different Industrial perspective such as ‘Construction’, one could then draw upon the lessons learned regarding best practices, implementation, and strategies to overcome the barriers.

    Good luck with your research,


  • Paul Louangrath added an answer:
    Are there any empirical models incorporating risks while re-issuing a debt offering?

    Many companies extend their debt maturities by re-issuing debt. Proceeds of the new debt are used to pay off existing debt. More and more companies might be tempted to follow this trend.

    However, this re-issuing has certain risks involved. Are there any research papers which add some color on the above topic?

    Paul Louangrath · Bangkok University

    This practice is done at all level: individual, corporate, and government. refinancing is a common practice.

    INDIVIDUAL CREDIT CONSOLIDATION: Individuals with credit car debts with several existing credit cards are offered with one balloon card issuer to pay off the existing cards. For example, the consumer has 5 cards with existing debts at various interest rates. Another credit card company would offer a credit card with cash advance that could use to pay off the 5 prior cards. Thus, a debt consolidation is accomplished. Now the consumer-debtor pays the new credit company in on payment with one interest charge. Similar practice is used in the mortgage industry in the US. When new interest is lower that what is charged on existing loan, the mortgagee would apply fr a new loan with lower interest rate to pay off the existing loan---of course the mortgagee starts the new loan with a new loan period, i.e. 20, 30 years. At the individual level, both secured and unsecured loans are used.

    CORPORATION: similar credit or debt consolidation is also used by corporation.  A good example for credit-refinancing is  Bonds or notes may be retired early or paid off when company gets a new loan to pay off prior loans with higher interest rate. Unlike individuals' unsecured refinancing loans, with the exception of junk bonds, some corporate loans are secured by its accounts receivable, i.e. factoring or advance cash out of letter of credit in the so-called packing money. If the corporation is publicly traded, the firm may have more options which makes its refinancing more flexible.

    GOVERNMENT: The US government bond sales is a good example of how large economy could use its sovereign credit to borrow more money on top of its existing debt. In fact, the debt of the US government, with exception of those years that the budget is balanced, may spend on credit. Despite some criticism or doubts, the US government's credit standing remains AA+ as of July 2014. For many investors, US government bond remains a safe heaven. Therefore, asking for additional loans (selling more bonds) will always find willing buyer (creditors).

    MODEL ON RISK ASSESSMENT FOR CREDIT EXTENSION: Generally, this is a proprietary knowledge. Each credit/finance company has their own model for assessing credit risk. However, Fitch, for instance, makes it known to the public what factor its uses to assess sovereign risk.

    SEE article by Baily and Elliott on financial crisis of 2008/2009 for discussions. The article by Calomiris about the subprime financial crisis of the US may shed some lights on troubles from easy credit extension.

  • Natasa Golo added an answer:
    Does anyone know about the application of social network analysis in the analysis of contagion in stock markets?
    Is there any kinds of quantitative analysis?

    I'd recommend you to read book Socio-Finance of Andersen and Nowak:

  • Easwar Krishna Iyer added an answer:
    What do you understand by Quantitative Risk Assessment?
    A dictionary definition says: "Quantitative Risk Assessment is Use of measurable, objective data to determine asset value, probability of loss, and associated risk(s)".
    Nevertheless in various fields (Environment, Finance, Occupational Health and Safety etc) and in different countries the meaning attributed to QRA differs sometimes significantly. Being highly interested in the field I invite you to brainstorming around this question. Many professionals, researchers and experts should be interested and involved. Thank you.
    Easwar Krishna Iyer · Great Lakes Institute of Management

    Dear Roland.

    One of my own papers is in an advanced process of acceptance (Carbon Footprint and Bow Tie. Will share that as soon as it gets published).

    Here goes two other Bow Tie Articles.

  • Kotreshwar Gowdara added an answer:
    How can rainfall risk be securitized?

    Monsoon (rainfall ) derivatives to Indian subcontinent ( like temperature derivatives in the West ) could play a crucial role in creation of weather risk markets for  hedging rainfall risk by a wide range of stakeholders and simultaneously help tap the vast potential for monsoon speculation tendency .

    Kotreshwar Gowdara · University of Mysore

    Thank you for answer to my question.It is precisely about creation of rainfall futures and options on par with temperature futures and options

  • Peter Sandman added an answer:
    How can one capture "near miss events" in a risk system?

    I am trying to formulate decision rules for capturing and segregating near miss catastrophic events in a risk management system. I would like suggestions on how to segregate near miss into robust system or intervention driven .

    How can one design a mechanism to analyse this? Is there any research work on this?

    Thank you

    Peter Sandman · Rutgers, The State University of New Jersey

    A broader issue is how to interpret near-miss events.

    If you know (or think you know) what percentage of potentially dangerous behaviors end in a near-miss and what percentage end in a serious accident, then an an increase in the number of near-misses is a warning: the more near-misses, the higher the probability of a serious accident.  "We almost exploded the tank!"

    But if you don't know that, then a near-miss can be seen as evidence that a serious accident is unlikely.  "We've 'almost exploded the tank' hundreds of times and yet the tank has never exploded.  Defense-in-depth must be working.  Those 'near-misses' aren't so near after all!"

    This is a fundamental problem in talking to people about near-misses.  What is intended by the communicator as a warning can easily be seen as reassuring by the audience.

  • Amit Mittal added an answer:
    How do I carry out stress testing in a medium-sized mortgage banking entity?
    Stress testing is a process for evaluating the potential impact of a specific event and/or movement in a set of financial variables on company balance sheets. In view of this, I would appreciate it if you could avail me practical insight into this exercise. I would also appreciate it if you could avail me any spreadsheet model with on same.
    Amit Mittal · Indian Institute of Management, Lucknow

    you can easily construct your own using any sensitivity analysis template. consider a weak and a strong economic scenario with at least a20-50% impact on prices/yields on either side and compute capital requirements

  • S. S. Zhu added an answer:
    What is the best software for performing financial portfolio optimization?
    Which software programs are best at performing optimization of investment portfolios? What makes the programs preferable? Please provide pros and cons if applicable.
    S. S. Zhu · Sun Yat-Sen University


  • Felix Lopez-Iturriaga added an answer:
    Which methodologies or models can be applied to measure the quality of accounting information through the disclosure of financial statements?
    The quality shown in the financial statements accounting information (the conceptual framework of IFRS and FASB, as well as by standard-setting) is treated based on the relevance and faithful representation of the same, keeping the economic substance of the transactions summarized. To declare that it meets the IFRS or national GAAP is not enough to measure quality. Several studies conducted have focused on measuring the amount of disclosure made ​​in accordance with the standards set and asked how we can measure the quality of mandatory disclosure and also generate inferences or proxies for voluntary disclosure, such as "Theories for Disclosure" (Verrecchia) and "Relevance of Accounting Information" (Barth et al).
    Felix Lopez-Iturriaga · Universidad de Valladolid

    From my point of view, this paper is one of the best and most comprehensive approaches to the quality or reported earnings

    Dechow, P., Ge, W. and Schrand, C. 2010. Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50, 344-401.

  • Paulo Pereira Silva added an answer:
    How do you measure the relationship between audit fee and stock market risk (unsystematic risk)?

    How do you measure the relationship between audit fee and stock market risk (unsystematic risk)?

    Paulo Pereira Silva · Comissão do Mercado de Valores Mobiliários CMVM

    I aggree with Erik in that there is simultaneity between the variables.

    You should first scale audit fees as a percentage of the assets or enterprise value, because audit fees depend on the size of the firm. After that, you may evaluate whether there is significant time series variation of audit fees to justify a pooled data analysis.

    If you are trying to see if audit fees are explained by idiosyncratic volatility, you should bear in mind that idiosyncratic risk proxies are noisy in the sence that it captures specific information, information risk and microstructure noise if measured at high frequency data. So there are lots of controls to account for.

  • Montserrat Guillen added an answer:
    Can anyone help with the scaling the time horizon for VAR (Value At Risk)?
    I would like to compute the value at risk for a portfolio of several financial instruments (their returns are not normally distributed). My underlying for all of them is the oil price, with normally distributed returns with mean of 0.

    My problem is that I want to compute the VAR for several days from now (10,15, maybe even 30). The common idea says that if the return is normally distributed with mean of 0 you can scale up the VAR by multiplying it with SQRT(Time). Obviously I cannot do that for the entire portfolio VAR.

    Am I allowed to compute VAR for oil price, scale it up by SQRT(Time) and then introduce that (my 5th quantile of oil) into the portfolio valuation and compute the portfolio once?
    Montserrat Guillen · University of Barcelona

    I sometimes go back to the original data and take the time gap I want to consider for VaR calculation. This is handy if you have enough data.

  • Marcus Martin added an answer:
    What is the best risk measurement tools in banks regarding financial risks and how are they calculated?
    Risk measurement practices.
    Marcus Martin · Technische Hochschule Mittelhessen

    According to the current discussions on the so-called "Trading Book Review" by the Basel Committee on Banking Supervision, Value-at-Risk is to be replaced by expected shortfall (or tail conditional expectation) which is also used in internal models for measuring credit risk. Hence, I would suggest to also have a look on this coherent risk measure (cf., e.g., McNeil, A., Frey, R., and Embrechts, P. (2005). Quantitative Risk Management: Concepts, Techniques and Tools. Princeton University Press, Princeton).

  • Levente Szelitzky asked a question:
    What is the criticallity of the transaction BD87 SAP?

    I am pondering about the criticallity of the transaction BD87 as a singular transaction. In combination with WE19 you have the possibility to reprocess and resend successfull IDOCs, enabling fraud risk of false invoices. But what about using the BD87 alone. What security risks could arise?

  • M.Thomas Paul added an answer:
    How to use SWAP (Derivative) as a instrument for hedging risk?
    How to use SWAP (Derivative) as a instrument for hedging risk in risk management?
    M.Thomas Paul · University of the South Pacific
    Once the SBI has already declared such big NPAs , the credit swaps can not be used. Credit swaps can be used at the time of creating assets
  • Dr. Nizar Matar added an answer:
    How objective are subjective assessments?
    Can we trust the rating agencies. What is your attitude towards the ratings of banks and insurance companies?
    Dr. Nizar Matar · An-Najah National University
    It is really very difficult to find a rating agency which is 100% reliable, 100% trustworthy, 100% transparent and 100% independent. What proves the success, of a bank or an insurance company or even a university, is the actual performance in the real world.
    No one can confirm that a rating agency is free from political intervention or bias.
    Figures alone can be manipulated and what is needed is (facts & figures).
    In my opinion, there is considerable doubt in how universities are rated. A certain university publicized once that, according to so & so rating agency, it is at the top in its country & one of the top 5 in its region. I was informed by some experienced friends, that the rating was built on the number of visitors to universities websites!!
  • Sébastien Gyger added an answer:
    Do portfolios selected through value drivers have good market performance and are located near the efficient frontier?
    For over 50 years, researchers have studied the influence of financial indicators, accounting practices or other variables (called here 'value drivers') on stock prices or stock returns. But if we select portfolios using some model based on value drivers, will these portfolios have good market performance and be located near the efficient frontier?
    Sébastien Gyger · Banque Lombard Odier & Cie SA
    If value drivers refer to value stocks, i.e. stocks with lower price-to-book than average, then yes these stocks tend to perform better than the average over time.
    Best regards
  • Michal Kravec added an answer:
    What is the interpretation that ROE is less than 1?
    I have conducted a research of financial ratios and one result is very interesting: return on equity was than -1, i.e. net income is in absolute value higher than total shareholder equity.
    Michal Kravec · University of Economics in Bratislava
    Some of them sold inefficient and unprofitable mills in order to decrease their debt and increase liquidity

About Financial Risk Management

This group aims to be a link between researchers interested by financial risk management and modelisation.

Topic Followers (14818) See all