Financial Risk Management

Financial Risk Management

  • Shian-Loong Bernard Lew added an answer:
    Is there a reference book explaining how to implement in practice a regional EC+IO model ?

    Related to a research project, I would like to use a regional econometric input-output (EC+IO) model in order to value economic impacts coming from the implementation of offshore wind project in Brittany (Brittany is a French region). A standard input-output model values only the gross effects (in production and employment for instance), but not the net effect explained by the reduction in household consumption coming from the increase in taxation required to finance the offshore wind project. A regional EC+IO model enables to overcome this limit inherent to the standard input-output model.

    I know that there are different types of EC+IO models (see for instance the article of Rey 1998 published in International Regional Science Review). But, there may be a book explaining and summarizing the different techniques required to implement a EC+IO model (for instance econometric techniques specific for regional models, …).

    Shian-Loong Bernard Lew

    Perhaps chapter 6  and all the chapters contained in Part 2 of this handbook:

  • Alessandra Dal Colle added an answer:
    Can we define remittance as a monetary variable?

    Migrant remittances are a steadily growing external source of capital for developing countries. While foreign direct investments and capital market flows fell sharply in the last years due to the recession in the lower-middle income countries, migrant remittances continued to grow.

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    Alessandra Dal Colle

    As evidenced by the papers sent by Faris Alshubiri I think the most important thing is how big remittances are with respect to domestic creation of money (i.e. open market operations and the likes)

    the paper on Haiti is a case in point....

  • Saqib Butt added an answer:
    How do I measure the asymmetrical information between stakeholders?

    In general, it is acknowledged that the managers are better informed than the shareholders. Also, controller shareholders seem to be better informed than the minority shareholders. How to measure the information asymmetry? Can we connect information asymmetry with the dividend policy of companies? 

    For instance, some studies prove that "Firms that pay consistently high dividends have lower insider returns than do firms that pay consistently low dividends" (e.g., Kenneth Khang and Tao-Hsien Dolly King, Financial Management, Vol. 35, No. 4, 2006). 

    Thank you in advance!

    Saqib Butt

    dividend policy is basically the distribution of income among the shareholders.There are other ways through which firm can distribute its income. dividend policy may vary depending on the nature of the firm and its ownership structure. if the firm is a growing firm or in simple words a firm is expanding its business or a firm is already at its maturity stage or firms having different financing needs may affect their dividend policy  decision. And may also affect the expectations of the investors. If there is a difference between the expectations and the actual dividend then there is a possibility of information asymmetry. Event study analysis might help you in this regard.

  • Soumitra K Mallick 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?

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      ABSTRACT: In pricing real estate with indifference pricing approach, market incompleteness significantly distorts the conventional pricing relationships between real estate and financial asset. In this paper, we focus on the pricing implication of market comovement because comovement tends to be stronger in financial crisis when investors are especially sensitive to price declines. We find that real estate price increases with expected financial asset return but only in weak market comovement (i.e., a normal market environment) when investors enjoy diversification benefit. When market comovement is strong, real estate price strictly declines with expected financial asset return. More importantly, contrary to the conventional positive relationship, real estate price generally declines with expected financial asset risk. Even when market comovement is strong, real estate price only increases with financial asset risk when the risk is low but eventually declines with the risk when it becomes high. These nonlinear price relationships highlight the importance of asset market comovement that is usually overlooked by conventional option pricing model developed in complete market setting.
      The Journal of Real Estate Finance and Economics 04/2011; DOI:10.2139/ssrn.1441260
    Soumitra K Mallick

    Dear Prof. Huszar,

                                    I think the financial market especially financial accounting literature which drives much of the information for asset prices is clear on this. The relevant problem to consider is that of excess volatility over and above that explained by the standard asset pricing model like the CAPM and to ask how alternative accounting disclosures can affect this excess volatility in markets. I think that is what the paper listed does. Financial Markets I believe can price correlations unless you explicitly model incomplete markets where also in the presence of options and Black Scholes Options pricing model you can have excess volatility (Polemarchakis & Ku, Journal of Mathematical Economics (1990), Mallick (2014)) on my RG webpage) where earnings disclosures can have real welfare effects on investors. I hope this discussion is useful to you. SKM QC FEPS(D)

  • Nabila Nisha added an answer:
    Could you refer me some studies on micro-equity experiences (success, failures) particularly in developing countries and MENA region?

    For example Micro-equity vs. microcredit? or Micro-equity vs. islamic microfinance?

    Nabila Nisha

    You may find these pieces interesting:

    Ahmad, M. M. (2010). Microfinance in Poverty Reduction in Bangladesh: Challenges and pportunities. Retrieved, January 30, 2015, from

    Bhuiyan, D. M. H. U. and Islam, M. R. (2014). Ngo Approaches to Rural Development in Bangladesh. International Journal of Research in Commerce, IT & Management, 4(9), 14-16.

    Chowdhury, A. M. R. and Bhuiya, A. (2004). The wider impacts of BRAC poverty alleviation programme in Bangladesh. Journal of International Development, 16(3), 369-386.

  • Mustafa Hasan added an answer:
    Can anyone share papers on the role of auditors industry specialization?

    I am going to study the effect of the auditors industry specialization on audit risk.

    Mustafa Hasan

    thank you all

  • Gary Cokins added an answer:
    How can Cost Driver be identified, beside brain storming methodology?

    - Identifiying Cost Driver for Activity Based Costing (ABC) in Management Accounting (for internal controlling)

    - Cost Driver (in German: "Kostentreiber") in addition to Cost Type ("Kostenart"), Cost Center ("Kostenstelle") and Cost Object ("Kostenträger")

    - Cost Driver as defined by AccountingCoach:

    Gary Cokins

    Eugenio ... I appreciate Pierre's reference to me in his answer. He is spot-on correct that cost drivers (which I prefer to refer to as "activity drivers" ... the lower section of a multiple-stage ABC cost assignment network) should comply with "costing's causality principle".

    I am not a faculty member or a PhD. I am a practitioner. I have implement ABC since 1988 Here is my simple rule: For each activity cost (which traditionally is referred to as a "cost pool") ask, "What would make the amount of the activity cost to significantly increase or decrease?" The answer should be "The number of XXXX." The XXXX is the activity driver. No brainstorming. Follow this rule for every activity cost, and the result will be reasonably accurate costs of the "final cost objects" (i.e., product, service-line, channel, and customer costs).

    I have attached an article I authored on ABC this year for the Institute of Management Accountants which may be useful

    Gary ... Gary Cokins

  • Alfonso A. Rojo Ramírez added an answer:
    The effect on firm value of enterprise risk management: May I link the between firm value and enterprise risk management. Which methods can I apply?

    Which methods can I apply? Which variables can I choose as enterprise risk management?

    Alfonso A. Rojo Ramírez

    The value of the firm is affected by risk. Usually risk is taking into account by the discount rate. Thus, you have to look at this variable. In this sense, the minimum rate of return is a key factor. 

    I suggest to read the paper:

    Rojo Ramírez, A. A. 2014. Privately held company valuation and cost of capital. Journal of Business Valuation and Economic Loss Analysis, 9(1): 1–22.

  • S. Mostapha Kalami Heris 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. Mostapha Kalami Heris

    This an open-source implementation of Portfolio Optimization using metaheuristics in MATLAB:

    However, the MATLAB itself is not free to use. You can use Octave instead of MATLAB, if you will. Maybe you have to modify the codes, to bu runnable in Octave.

  • Soumitra K Mallick added an answer:
    Is there a correlation between the volume of traded credit default swap (CDS) and the actual probability of default?

    More precise: Is a company more likely to go bankrupt, if there are a lot CDS traded "betting on its default"?

    Are there any researches about statistical and causal relations? I could not find publications and I am concerned that ones can not find reliable information about the volume, as CDS are traded OTC.

    It would be great if one has an idea how to get these data or maybe knows about existing research.

    Soumitra K Mallick

    Dear Prof. Wilkes,

                                     I cannot answer your question about CDS but I can add that in the case of Indian Emerging Economy regime banks post globalisation, the bad loan assets which were swapped with regular loan assets by debt restructuring called NPA assets had an improvement in their probability of default over decades and actually when geometrically plotted showed continuous convergence by the larger banks overtaking the convergence of smaller banks, hence showing convergence by the "overtaking criterion" applied to turnpike models. You can if you want to take a look at my work with my coauthors on NPAs on my RG webpage. I hope that helps your research. SKM

  • Subhash C. Kundu 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.

    Subhash C. Kundu

    Past research has shown mass media can influence people’s beliefs or behavior in general. Such studies are at least partly behind advertisers’ willingness to pay higher rates to ensure their spots appear in popular newspapers and magazines and on air during time slots when the largest audience is believed to be watching or listening.

    Over the years, the media has devoted more and more attention to the stock market and its key players, such as analysts. Recent research shows the media plays an important role both in the stock price formation process and in accounting settings. Such research, however, focuses primarily on firms and not analysts.

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  • Soumitra K Mallick added an answer:
    Where is the state of financial risk management and financial supervision of large firms compared to six years ago?
    I have just returned from the Federal Reserve Bank of Atlanta's excellent 2013 Financial Markets Conference "Maintaining Financial Stability: Holding a Tiger by the Tail". Presenters included Fed Chairman Ben Bernanke, Professor John Taylor (Taylor Rule fame), Columbia's Professor Calomiris, Bank of England's Andy Haldane among many others. Topics included stress tests, a new proposed bankruptcy chapter for financial firms, the usefulness or otherwise of VAR, Too Big to Fail (TBTF) and Dodd-Frank.

    I came away with the impression that people don't think TBTF is fixed and that Dodd-Frank's orderly resolution authority would still lead to backdoor bailouts. That stress tests in the U.S. on banks and SiFis are improving and useful but there is room for more improvement. The push for simple rules over the complexity of Basle III is still alive. Everyone with an interest in the field should follow BoE's Haldance (Director of Financial Stability).

    Thoughts on the topic?
    Soumitra K Mallick

    With digitisation proceeding at a brisk pace information is becoming much more readily available so that you can calculate any kind of betas very quickly of course subject to certain discretionary assumptions at the top level. Hence Financial Stability has become much more a Financial Stability Algorithm problem not for.e.g. subjectivity wars problem over intrepretation of norms and statutes for e.g.

  • Patrick Navatte added an answer:
    Does a low correlation between cash flow and investment need to make a firm financially constrained?

    What is the behavior of a "high-hedging needs" firm at refinancing points? What about its profitability impact on the financial package it will choose/ accept from the bank or the market? Do you know papers on that subject?  

    Patrick Navatte

    Thanks you Massimo!

    Your paper is interesting and relevant. It is quite different from the Hadlock and Pierce approach (2010) RFS vol 23, N°5,p 1909 -1940 that tested the Kaplan and Zingales index (1997) or the Whited and Wu index (2006). Moreover as you said firm size and age are relevant for predicting financial constrants.

    Thanks you one more time

  • Mohd Halim Kadri 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).
    Mohd Halim Kadri

    Dear Poueri Mario. One way of measuring the quality of published accounting information is by applying the value relevance methodology. See Landsman (1986), Ohlson (1995) and many other followers of this methodology for example Goodwin and Ahmed (2006) and Schiebel A (2006).

  • Patrick Navatte added an answer:
    How do I characterize a board of directors primarily focused on advising and not on monitoring?

    Boards of directors  have two main activities: Advising and Monitoring. The last quoted role was extensively treated in the literature. For example, the auditing  committee was examined with a lot of details. But what about the advising part of the role of the board of directors? How to measure the implication of directors in the advising side of the board's activity?

    Patrick Navatte

    I try to go further,

    Are good advisers boards really bad monitors of management? In fact proximity may help trust to take place. But connected boards with the CEO may be bad monitors when it is needed. What is your feeling about that?

  • Bola Babajide added an answer:
    Anyone know any database(s) that hold information about financial derivative instruments used by UK firms for hedging purposes? - Annual data please
    Need annual foreign exchange, interest rate and commodity contracts committed to by UK non-financial firms
    Bola Babajide

    Hi nkamaobong,

    There seems to be no database for the data I was looking for I resulted to firms financial statements. Depending on your Data type, you may check Thomson One Banker for aggregate derivative usage.


  • Mohd Hafizuddin Syah Bangaan Abdullah added an answer:
    The impact of Enterprise Risk Management on firm performance
    I'm interested in this topic for my PhD research but haven't look into it in deep. Can anyone advise me?
    Mohd Hafizuddin Syah Bangaan Abdullah

    modern finance theories posit that shareholder can diversified by themselves through diversification. But in the case of aggregate downfall e.g. economic crisis/ financial crisis, diversification might not works effectively or not work at all. So in my opinion, firm should implements ERM to protect its shareholder for economic aggregate downfall.

  • Mark Vaughan added an answer:
    Do we need to categorize business lines as required by Basel when measuring required capital to account for operational risk or we can customize this?

    There are eight business lines when calculating required capital to account for operational risk

    Mark Vaughan

    When you are measuring regulatory capital for a financial institution this would be the case, otherwise you are free to use different categories the best match the business model.   

  • Frank S. Skinner added an answer:
    Research on risk free curves in emerging markets?

    African countries has limited data available, how to accurately price their financial instruments, how to go about this

    Frank S. Skinner

    If you have some sort of short term t-bill rate,  say a prime rate or a bankers acceptance, and a few reasonably well priced bonds, you should be able to estimate a yield curve using Nelson and Seigle (1987). We have used this technique when estimating a AA bond yield curve so in principle you should be able to estimate a sovereign yield curve under fairly weak data requirements. See the paper below. You can Google Nelson and seigle (1987).

    (2005)  Skinner, FS.  and Ioannides, M. , FRS17 and the sterling double a corporate yield curve, Journal of Business Finance and Accounting 32 (5-6)  : 1141- 1169

  • Stavros Stavroyiannis added an answer:
    Is there an expected Shortfall for log-returns?

    When dealing with historical data and log-returns, if someone finds the Value-at-Risk then the translation to money via regular returns is $VaR=P(1-exp(-VaR)) where P is the portfolio value. Anybody knows how to translate Expected Shortfall (Conditional VaR) from historical log-returns?

    Stavros Stavroyiannis

    Dear Gianluca,

    Thanks. You are correct. Under this perspective, since the optimum weights have a small bias due to differences in the covariance matrix and returns, I should probably start from the beginning with regular returns.

  • Saty Dev 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.
    Saty Dev

    Quantitative risk assessment may also be defined as the method to know the level of crisis incur due to unwanted factors in supply chain management. There is no unit to know the quantity of risk it represented in quantitative way by assuming a suitable scale for indicating the level of impact. I read the answer attached by Johnson Eze, and Roland they told very nice about QRA and I got a motivation that I am thinking in some way good about same. Thank you sir, Johnson and Roland

  • E. Ray Canterbery added an answer:
    What's the meaning of detecting the cross-correlation of spot exchange rate and forward exchange rate?

    I have read several papers on the cross-correlation between spot exchange rate and forward exchange rate, but find little economic meaning of that relationship.

    In my opinion,export or import-company can avoid exchange rate risk by hedging with forward contracts. The central bank needs to adjust the monetary policy based on the changing relationship over time.

    Any theory to analyze the meaning of spot and forward exchange rate?or any papers?


    E. Ray Canterbery

    See E. Ray Canterbery, "The Modern Theory of Foreign Exchange and the Net Speculative Residual (Southern Economic Journal, Vol. 41, No. 2 (October 1974), pp. 182-187, and the articles cited therein.

    E. Ray Canterbery

  • Mari Latoja added an answer:
    What are the profitability determinants of Palestinian micro firms? how it can influence the profitability of the firm?

    Firm profitability is generally regarded as an important precondition for long-term firm survival and success; moreover, the variable significantly affects the firm’s achievement of other financial goals. Another factor explaining the importance of firm profitability is its effect on economic growth, employment, innovation, and technological change. However, due to increasing competition, improved efficiency, and pricing pressure, firms are experiencing greater difficulty attaining the required profitability. The question of what factors determine profitability should accordingly be one of high priority for both researchers and practitioners, including managers, investors, debt holders, and policy makers.

  • Patrick Navatte added an answer:
    What is the effect of the securitization transactions on credit risk in an emerging economy?

    There is no clear evidence regarding the effect of securitization transactions on the risk in the financial system. The literature about this subject is incipient for emerging economies and, in particular, for Latin American countries. A possible justification for this fact can be a lack of a developed financial system in these countries.

    Patrick Navatte


    if credit risk is transferred by selling (securitizing) a loan, the bank's incentive to credit-screen and monitor declines. Keys and al (2010) QJE find that securitized pools of subprime loans had default rates hat were 10% to 25% higher than similar mortgages  that were not securitized. Elul (2011) present additional evidence consistent with reduced screening of securitized mortgages.

    If investors in mortgage and asset-backed Securities recognize the loan-selling bank's suboptimal-screening, they should discount the value of securitizred loans, forcing the bank to internalize this inefficiency.

    In others words, a bank de cision to sell or retain a loan would weight the economic benefits of risk transfer against the economic costs of inefficient screening. (see Han and al (2015) Journal of finance.


  • Ola Sholarin added an answer:
    Does the deposit insurance system increase financial risks or not?

    Many counties adopted the explicit insurance deposit system, and some think it works well because it may decrease the tendency of high risk activity taken by banks. however, it seems some guys don't agree with that and they mentioned it may trigger more risks, like moral hazard. Can anyone share your opinions or recommmend some materials?

    Ola Sholarin

    Deposit insurance provides protection to savers against the risk of  loss of their deposits. As such, it offers incentives for savers. This, in turn, enables financial insterediaries (such as banks) to channel the deposit to deficit areas to engender economic growth. 

    Although deposit insurance could trigger morral hazard, it does not pose risk to an economy, provided financial markets are efficient and sound regulatory measures are in place.

  • Dávid Zibriczky 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?

    Dávid Zibriczky

    We have studied CAPM whether it's linearity holds in extreme conditions or not. We found that in come cases the nullhypothesis of CAPM linearity should be rejected. You can find more details here:

    We also studied the capability of capturing risk in one meausre and predicting future returns for securities. We compared one factor models, like standard deviation, CAPM beta, and additional two entropy based methods. Based on the results we found both advantages and disadvantages. CAPM beta is good for explaining returns in short term, but it less effective predict them for the next period because the value of CAPM beta for each securities is changing with a high variance over the time. More details here:

    Overally I think the theory is usable, however it has weaknesses. It can be a good basis for a more efficient multi-factored models, like Fama-French model (SMB-HML), Carhart model (SMB-HML-Moment) or additional factors like liquidity or entropy.

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      ABSTRACT: We find that the CAPM fails to explain the small firm effect even if its non-parametric form is used which allows time-varying risk and non-linearity in the pricing function. Furthermore, the linearity of the CAPM can be rejected, thus the widely used risk and performance measures, the beta and the alpha, are biased and inconsistent. We deduce semi-parametric measures which are non-constant under extreme market conditions in a single factor setting; on the other hand, they are not significantly different from the linear estimates of the Fama-French three-factor model. If we extend the single factor model with the Fama-French factors, the simple linear model is able to explain the US stock returns correctly.
      Economic Modelling 03/2011; 28(3):1150-1162. DOI:10.1016/j.econmod.2010.12.008

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  • 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

    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.

  • Amin Babaei falah added an answer:
    How can I measure the real systematic risk in an industry where not all the related companies have published their financial reports?

    Imagine I am to determine the systematic risk of pharmaceutical industry in a certain country, but more than 20 percent of the active companies have not provided their financial information. Is there any option for at least a good estimation?

    Amin Babaei falah

    But lets for the sake of argument, say that there are other good indicators for measuring the systematic risk besides Beta. How can I compare them and come to a conclusion that which indicator is showing systematic risk better in a certain short or long time horizon?

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