Financial risk

About: Financial risk is a research topic. Over the lifetime, 11899 publications have been published within this topic receiving 231404 citations. The topic is also known as: economic risk.

Credit risk management: a survey of practices

Abstract: Purpose – Proposes to investigate the current practices of credit risk management by the largest US‐based financial institutions. Owing to the increasing variety in the types of counterparties and the ever‐expanding variety in the forms of obligations, credit risk management has jumped to the forefront of risk management activities carried out by firms in the financial services industry. This study is designed to shed light on the current practices of these firms.Design/methodology/approach – A short questionnaire, containing seven questions, was mailed to each of the top 100 banking firms headquartered in the USA.Findings – It was found that identifying counterparty default risk is the single most‐important purpose served by the credit risk models utilized. Close to half of the responding institutions utilize models that are also capable of dealing with counterparty migration risk. Surprisingly, only a minority of banks currently utilize either a proprietary or a vendor‐marketed model for the management ...

Projection Bias and Financial Risk Tolerance

Abstract: Behavioral finance theories explain "why" individuals exhibit behaviors that do not maximize expected utility. This study explores how projection bias, as explained by regret theory, may shape financial risk tolerance attitudes. The results suggest that gender, income, and stock market price changes, as measured by the NASDAQ, the Dow Jones Industrial Average, and the Standard & Poor's 500 indexes, help explain risk attitudes. Risk tolerance appears to be an elastic and changeable attitude. This research expands on the work of Shefrin [2000], who reported that recent stock market price changes exert a strong influence on risk tolerance attitudes and behaviors.

Incorporating Systemic Influences into Risk Measurements: A Survey of the Literature

Abstract: Procyclicality has emerged as a potential drawback to adoption of risk-sensitive bank capital requirements. Systematic risk factors may result in increases (decreases) in bank capital requirements when the economy is depressed (overheated), thereby decreasing (increasing) bank lending capacity and exacerbating business cycle fluctuations. Procyclicality may result from systematic risk emanating from common macroeconomic influences or from interdependencies across firms as financial markets and institutions consolidate internationally. We describe cyclical effects on operational risk, credit risk and market risk measures.

The Impact of Institutional Differences on Derivatives Usage

Abstract: textThis paper examines the influence of institutional differences on risk management practices in the US and the Netherlands. This comparison is interesting because the Dutch firms' institutional setting differs from the US setting with respect to shareholder orientation, international trade, disclosure regulation, and reliance on financial markets. In contrast with previous comparisons, we apply a matching and weighting strategy that corrects for differences over industry and size classes across the Dutch and US samples. After these corrections, the remaining results can be attributed more directly to institutional differences. We find that due to the greater openness of the Netherlands, Dutch firms hedge more financial risk, especially more currency risk, than US firms. Dutch firms, however, show a lower level of concern over derivatives usage, which is consistent with having less active minority shareholders and less strict disclosure requirements than the US has. Dutch firms focus le ss on stabilizing accounting earnings with derivatives than US firms, which is likely attributable to the strong shareholder orientation in the US versus the stakeholder orientation in the Netherlands. Whereas Dutch firms tend to rely almost exclusively on OTC-transactions, US firms use exchange-traded derivatives and more counter-parties. This results in US firms imposing stricter requirements on counter-party rating for derivatives transactions. This distinction can be attributed to the differences in the financial environments between the US and the Netherlands. These, and other results, strongly suggest that institutional differences between the US and the Netherlands have an important impact on risk management practices and derivatives use across US and Dutch firms.