Showing papers on "Financial risk published in 1992"

Financial indicators and growth in a cross section of countries

Abstract: The authors use existing measures of the financial system - and construct many new measures - to document the relationship between the financial system and long-run growth in a cross-section of countries between 1960 and 1989. They consider various measures of the size of the financial system, the importance of different financial institutions, the financial system's allocation of credit, the financial system's efficiency, and the degree of financial repression. They use graphs, correlations, and regressions to gauge the robustness of the partial correlation between growth and the financial indicators. They also examine two channels through which financial indicators may be linked to growth: the share of GDP allocated to investment; and the efficiency with which resources are used. They find that many of the financial system indicators are significantly correlated with growth through both investment and efficiency. Moreover, many of these partial correlations remain strong after controlling for initial conditions, dummy variables for Africa and Latin America, and measures of monetary, fiscal, and trade performance. Their analysis suggests that it is empirically important to identify which financial intermediaries are doing the intermediation and to whom the financial system is allocating credit rather than simply using proxies for the overall size of the financial system, as has been common in past studies.

Financial intermediary services and growth

Abstract: This paper constructs a model in which financial intermediaries arise in response to economic conditions and then examines how the financial services provided by these intermediaries—facilitating portfolio diversification, providing liquidity risk management, and gathering and processing information—affect economic growth. In addition, the paper shows that the predictions of the model are generally consistent with recent empirical evidence: measures of financial intermediary services are importantly related to the rate of economic growth, and there is some evidence that financial intermediary services stimulate economic development.

The dictionary of financial risk management

Abstract: This updated dictionary gives the recent financial vocabulary with regards to derivatives and financial risk. Risk management terminology comes from a number of different markets, including: cash; forwards/futures; swaps; options; and many disciplines such as - economics, tax and financial accounting; probability and statistics; and the law. Each entry is clearly defined and illustrated for clarity.

Rethinking risk management

Abstract: The purpose of this paper is to bring together the ideas of those who currently practice the many different forms of risk management on a global basis. These forms include guidance of public policy on macro risks, risk financing and insurance for many larger commercial organizations, managing credit, currency and interest rate risks for financial institutions, plus other extensions of risk management including security, quality control, and quality assurance in a health-care environment.

Financial risk management in banking : the theory & application of asset & liability management

Abstract: This book presents an in-depth review of the tremendous risk and volatility in bank financial management. "Financial Risk Management in Banking" provides a practical and comprehensive overview of aggressive asset and liability management (ALM), which highlights the nuances that set ALM apart from basic financial concepts and practices as they are taught even at the MBA level. It demonstrates how ALM can strengthen the capital position of today's financial institution. Topics include: how accounting concepts can interfere with ALM; currency and international funds risk; the multi-dimensional aspects of bank financial risk; and the relationship between cash flow, market value and risk.

A risk analysis of industrial buyers: The case of mid‐range computers

Abstract: One of the most problematic and risky purchases that an organization has to make is which computer system to buy. The rapid technological changes within the computer market further increase the high risk already perceived as the result of the high price tag and the far reaching organizational consequences of such a purchase. An examination of this purchase situation using a perceived risk framework would highlight the risks involved and how those risks can be reduced. A questionnaire survey of DEC computer purchasers showed that personal risks were as important as company risks to the respondents, and that the two underlying factors seemed to be psycho‐social risk and personal financial risk. In addition, the probability and seriousness components of all the risk statements were significantly correlated. The most useful strategies to reduce these risks were to obtain a warranty or guarantee and to see the product in operation before purchasing. Several underlying factors were discernible from the risk rel...

Risk and Equity in Agricultural Cooperatives

Abstract: This research examines the effect of risk on the proportion of equity held by agricultural cooperatives. The measured components of risk are business risk and the financial risk that is dependent on the proportion of debt in the cooperative's capital structure. The empirical results indicate the proportion of equity is inversely related to financial risk and positively related to business risk. These risk effects are estimated to differ based on the commodity handled by the cooperative. No significant relation between the proportion of equity and whether or not the cooperative operates on a pooling basis is estimated.

Banking in the European Economic Community: Structure, Competition, and Public Policy

Abstract: In most countries, banking is a heavily regulated industry. “ Indeed, banking is among the most heavily regulated of economic activities.” 1 And even after years of attempts in several countries to disencumber this industry from regulations that foster inefficiencies and, contrary to original intent, distort incentives for risk-taking, it remains highly regulated. Governments have played a major role in shaping the nature of bank loan markets and deposit contracts in attempts to provide countries with a particular kind of financial service industry, together with a variety of explicit and implicit support systems. This role has had the good effect of securing considerable financial stability in many industrialized economies during the postwar period. At the same time, in some cases the price of this stability has been an inefficient industry for certain types of financial services and at times has stunted the growth and efficiency of competing capital markets. In a few cases, it has also exposed governments to substantial financial risk and losses.

Liberalization of the Capital Account: Experiences and Issues

Abstract: This paper reviews the experience with capital controls in industrial and developing countries, considers the policy issues raised when the effectiveness of capital controls diminishes, examines the medium-term benefits and costs of an open capital account, and analyzes the policy measures that could help sustain capital account convertibility. As the effectiveness of capital controls eroded more rapidly in the 1980s than in earlier periods, new constraints were placed on the formulation of stabilization and structural reform programs. However, experience suggests that certain macroeconomic, financial, and risk management policies would allow countries to attain the benefits of capital account convertibility and reduce the financial risks created by an open capital account.

Flexibility and risk in the firm

Abstract: This paper analyzes the role of use flexibility in investment and production decisions under risk. The underlying relationships between price risk, risk attitudes of the decision maker, and the degree of use flexibility chosen for a firm are derived from an ex ante-ex post-expected value variance model. It is shown that increasing output price risk and risk aversion lead firms to choose a less flexible organization. However, if production input or output constraints are uncertain, the firm may choose a more flexible organization in response to increases in risk and risk aversion. Thus, it is concluded that the preference for flexible investment designs changes as the source of risk changes. Copyright 1992 by Oxford University Press.

Financial Innovation and Endogenous Uncertainty in Incomplete Asset Markets

Abstract: We study endogenous uncertainty stemming from the introduction of new financial assets, so as to evaluate the risks as well as the welfare gains of financial innovation. The introduction of financial assets to hedge individual risk can lead to the risk of default, which is a collective risk. The possibility of default represents endogenous uncertainty, since it depends on economic variables. A proper allocation of risk in the face of new states of endogenous uncertainty requires the introduction of a large number of additional new securities, without which the market is incomplete. We prove the existence of a general equilibrium with default, in which the agents recontract trading positions and prices in the states of default (Theorem 1). We establish the existence of an open set of general equilibrium economies, called complex economies, in which the pattern of trade is highly interconnected so that default by one agent leads to default by an overwhelming majority of all other individuals (Theorem 2). We exhibit examples of complex economies in which the expected amount of default increases with the population (Proposition 3, Examples 3, and 4). JEL Classification Numbers: G14, D50, G33

Does hospital financial performance measure up

Abstract: Comparisons are continuously being made between the financial performance, products and services, of the healthcare industry and those of non-healthcare industries. Several useful measures of financial performance--profitability, liquidity, financial risk, asset management and replacement, and debt capacity, are used by the authors to compare the financial performance of the hospital industry with that of the industrial, transportation and utility sectors. Hospitals exhibit weaknesses in several areas. Goals are suggested for each measure to bring hospitals closer to competitive levels.

Uncertain Perception of Economic Exchange Risk and Financial Hedging

Abstract: This paper provides some justification for the observation that managers hedge transaction and translation risk through financial contracts and not economic risk as recommended by economists. One reason for the observed behavior is uncertainty in the perception of economic risk. If the manager is more heavily penalized for mishedging than rewarded for proper hedging, then uncertainty of perception may induce him not to hedge economic risk. Another reason is that accounting rules may lead to high accounting losses if economic risk is properly hedged by financial contracts.

Prospective payment for psychiatric services.

Abstract: The Medicare prospective payment system (PPS) was designed to create financial incentives for providers to contain costs, but it also places them at financial risk. The system includes provisions to mitigate the risk, but, because they may have limited effectiveness in the case of psychiatric services, specialty psychiatric hospitals and eligible psychiatric units of general hospitals are exempt from the system. A variety of payment options have been proposed to integrate these facilities into the PPS. Empirical studies on the financial risk entailed by these options have focused on their impact on risk in the long run. Our study uses a broader framework to evaluate their impact on short-run as well as long-run risk. We use Medicare discharge data for 1985 to simulate alternative PPS payment options under the assumption that treatment patterns remain fixed. Our results suggest that under current PPS payment rules, risk would be high for psychiatric specialty hospitals. However, alternative options exist, which could substantially reduce their exposure to risk, while maintaining incentives to contain costs.

Risk Costs and the Choice of Market Return Index

Abstract: Six measures of returns are used to estimate the most "appropriate" market index for southeast Kansas farms. Results suggest that localized indices are more appropriate than state indices for use as the market index. The appropriate index was used to estimate systematic and nonsystematic risk and risk costs for farm planning. Estimated risks depend on the choice of market index, whereas risk costs depend on the index choice and the risk aversion level. Rankings of enterprises change when risk costs and risk aversion are considered. More risk-averse specialized farmers are not completely compensated for risk. Farm income variability is a problem farm businesses deal with each year. Farm diversification is one method that can be used to reduce income risk. However, it is difficult for farmers to understand and plan for risk because of the various sources of risk and because farmers often do not understand the riskreturn tradeoffs based upon correlations, means, standard deviations, and risk-aversion coefficients. Meanvariance techniques used to derive efficient diversification strategies usually do not consider an individual enterprise's contribution to the risk of the farm. In order for a farmer to make decisions more wisely, improved information about risk associated with individual farm enterprises is necessary. Including risk cost information in enterprise budgets will allow farmers to begin to see some of the risk-return tradeoffs that occur when comparing alternative enterprises. Considering risk costs may change the preferred ordering of enterprises. The objective of this study is to determine the levels of systematic and nonsystematic risk and corresponding costs for a selection of farm enterprises in southeast Kansas using enterprise budgets from actual farm data. In addition, this article considers whether the results will differ using alternative definitions of the market portfolio. Nonsystematic risk is reduced as a farm diversifies, while systematic risk is not. If a farm is fully diversified, nonsystematic risk is zero. A risk cost can be estimated from systematic and nonsystematic risks of an enterprise and can be subtracted from the budgeted returns. By estimating the risk costs of different enterprises, farm managers can use this risk information in the selection of efficient portfolios. The single index model (SIM) has been used in finance and agriculture to simplify the information needs of mathematical programming models (Sharpe; Collins and Barry; Turvey, Driver, and Baker). It provides estimates of risk that represent the variance-covariance structure of enterprise returns. Several studies have used the SIM either to provide risk information and derive optimal enterprise combinations or to determine the risk costs (Collins and Barry; Turvey and Driver; Turvey, Driver, and Baker; Gempesaw et al.; Sharpe and Baker). The problem of market index choice has been considered ex post in the finance literature (Frankfurter). Frankfurter found that on an ex post basis, some index measures performed as well as others. However, Frankfurter argued that better efforts should be made to determine the appropriate market index. Several SIM applications in agriculture have used state enterprise extension budgets and various measures of the market index. Collins and Barry used deflated averages of enterprises to form the market index. Turvey, Driver, and Baker chose nominal averages of individual enterprises for the market index. Gempesaw et al. used deflated detrended averages of individual enterprises for the market index. Sharpe and Baker chose real Indiana net farm income and a rate of return on assets as possible indices. Thus, their indices

Income risk varies with what you grow, where you grow it

Abstract: Farmers seeking credit today are up against a lending “crunch” that is forcing them to re-assess what they grow and where they grow it. To assist those looking for new market opportunities, a new study offers ways of calculating the kinds of financial risks that concern the lenders who read today's credit applications.

The Operating Cycle: Risk, Return and Opportunities

Abstract: Highlights the operating cycle, its importance, and reviews basic relationships related to the cycle. In particular, it focuses on capital “flow through”, invested capital, capital at risk, and economic returns generated relative to capital employed. Reveals an amplification effect that results from improvements in the management of the cycle, that benefit traceable to a reduction in operating risk allowing incremental benefits from financial leverage. Suggests specific actions to take with respect to the cycle that will improve the value of your firm. Shows that small improvements in operating factors within the cycle yield amplified benefits to the firm. The discussion ignores taxes except in instances when tax effects are important. This does not detract from the discourse or conclusions. Reveals that increases in firm value that result from improved management of the operating cycle stem from several sources: greater levels of economic returns from operations; a reduction in operating risk; less capit...

Liberalization of the Capital Account; Experiences and Issues

Abstract: This paper reviews the experience with capital controls in industrial and developing countries, considers the policy issues raised when the effectiveness of capital controls diminishes, examines the medium-term benefits and costs of an open capital account, and analyzes the policy measures that could help sustain capital account convertibility. As the effectiveness of capital controls eroded more rapidly in the 1980s than in earlier periods, new constraints were placed on the formulation of stabilization and structural reform programs. However, experience suggests that certain macroeconomic, financial, and risk management policies would allow countries to attain the benefits of capital account convertibility and reduce the financial risks created by an open capital account.

Risk Management in Financial Institutions

Abstract: Overview Measuring changing financial risk, Robert Trevor Risks in bank treasury, Achut Bommakanti Measuring and managing interest rate risk, Peter Smith & Mario Benci Loan risk and the anticipation of corporate distress - West Australian evidence, Keith Houghton & Malcolm Smith The relevance of portfolio theory to risk management in financial institutions, Jeff Carmichael & Paul Davis Treasury and risk management in small financial institutions - is small different?, Mary Gottschalk A supervisor's view of risk management in financial institutions, Les Austin Payments system risk, Geoff Gloster Risk management of Australian superannuation funds, David Lee Active management of portfolio risk, Wilson Sly.

Mortgage securitisation : legal aspects

Abstract: The UK mortgage markets and an overview of an issue of mortgage-backed securities. Vesting the pool of assets in the issuing vehicle. Creation and perfection of the backing for the securities and the role of the trustee during the life of the issue. The making of a public issue of mortgage-backed securities - documents and formal requirements. Administration and regulation. Accounting and capital adequacy. Financial risks and insolvency concerns. UK tax aspects. Appendices.

Apparatus for and method of bill payment

Abstract: A computerized payment system by which a consumer may instruct a service provider by telephone, computer terminal, or other telecommunications means (34) to pay various bills without the consumer having the write a check for each bill. The system operates without restriction as to where the consumer banks and what bills are to be paid. The service provider collects consumers' information, financial institutions' information and merchant information and arranges payment based on a financial risk analysis to the merchants according to the consumers' instructions.

Accuracy of investment risk models varies.

Abstract: Financial analysis of proposed capital investments must include an assessment of risk as well as return. Four assessment techniques can be used to provide insight into the risk inherent in any capital investment project: breakeven analysis, sensitivity analysis, scenario analysis, and Monte Carlo simulation. The most complete picture of a project's stand-alone risk is provided by a Monte Carlo simulation, which generates a profitability probability distribution. The primary concern of most hospital decision makers, however, is the amount of risk the capital investment adds to the riskiness of the hospital in the aggregate.

Systemic Risk and International Financial Markets

Abstract: Regulatory concerns about systemic risk in international financial markets at a theoretical level are examined in this chapter. First, a description is given about how systemic risk arises in these markets today. Next, systemic risk is unbundled into four components (subrisks), and questions are raised as to whether any form of regulation might reduce such risks efficiently. Third, current and proposed rules for the reduction of systemic risk are discussed. This chapter essentially argues that one of the four subrisks— that associated with interdependence among market participants—should be given more direct and serious attention than the other subrisks.