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.

A framework for collateral risk control determination

Abstract: This paper derives a general framework for collateral risk control determination in repurchase transactions. The objective is to treat consistently heterogeneous collateral so that the collateral taker has a similar risk exposure whatever the collateral pledged. The framework measures the level of risk with the probability of incurring a loss higher than a pre-specified level given two well known parameters used to manage the intrinsic risk of collateral: marking to market and haircuts. It allows for the analysis in a closed form of the way in which different relevant factors interact in the risk control of collateral (e.g. marking to market frequency, level of interest rate volatility, time to capture and liquidity risk, counterparty default probability, etc.). The framework, which combines the recent theoretical literature on credit and interest risk, provides an alternative quantifiable and objective approach to the existing more ad-hoc rule-based methods used in haircut determination.

The Financial Stress Index: Identification of Systemic Risk Conditions

Abstract: This paper describes a financial stress index for the United States, the CFSI, which provides a continuous signal of financial stress and broad coverage of the areas that could indicate it. The index is based on daily public market data collected from four sectors of the financial markets – credit markets, foreign exchange markets, equity markets, and interbank markets. A dynamic weighting method is employed to capture changes in the relative importance of these four sectors as they occur. In addition, the design of the index allows the origin of the stress to be identified. We compare the CFSI to alternative indexes using a detailed benchmarking methodology and show how the index can be applied to systemic stress monitoring and early warning system design. To that end, we investigate alternative stress signaling thresholds and frequency regimes and establish optimal frequencies for filtering out market noise and idiosyncratic episodes. Finally, we quantify a powerful CFSI-based rating system that assigns a probability of systemic stress to ranges of CFSI outcomes.

A framework for regulating microfinance institutions

Abstract: The continuum of institutions providing microfinance cannot develop fully without a regulatory environment conducive to their growth. Without such an environment, fragmentation and segmentation will continue to inhibit the institutional transformation of microfinance institutions. The authors recommend a tiered approach to external regulations, one that takes into account the different types of microfinance institutions, the products they offer, and the markets they service. A tiered approach can be useful in designing regulatory standards that recognize the basic differences in structure of capital, funding, and risks faced by different kinds of microfinance institutions. The model they develop for a regulatory framework identifies thresholds of financial intermediation activities, thresholds that trigger the requirement that an institution satisfy external or mandatory regulatory guidelines. It focuses on risk-taking activities that must be managed and regulated. They illustrate the usefulness of the model by practically applying prudential considerations to various categories and values of financial risk for each of three broad categories of microfinance institution: 1) Those that depend on other peoples' money (such as donor or public sector funding). 2) Those that depend on members' money. 3) Those that leverage the general public's money to fund microfinance loans. For each category, the model highlights: 1) The observed value ranges for selected indicators of financial risk. 2) Recommended ranges of value suitable for consideration under internal governance. 3) Suggested threshold values that indicate the need for external regulation. A transparent, inclusive framework for regulation will preserve the market specialties of different types of microfinance institutions - and will promote their ultimate integration into the formal financial system. One example of the kind of regulation the authors recommend: Require standard registration documents and procedures - no different from those required of regular corporations - including the designation of a central government agency with which they should register as corporate entities.

Managing financial risk : a guide to derivative products, financial engineering, and value maximization

Abstract: The Evolution of Risk Management Products. An Overview of the Risk Management Process. Impact of the Introduction of the Risk Management Products. Forward Contracts. Applications of Forwards. Futures. Applications of Futures. Swaps. Applications of Swaps. A Primer on Options. First-Generation Options. Applications of Options. Second-Generation Options. Engineering "New" Risk Management Products. Hybrid Securities. The Dealer's Perspective. Measuring and Managing Default Risk. Managing Price Risk in a Portfolio of Derivatives. Risk Governance. Risk Management and the Value of a Nonfinancial Firm. Measuring a Nonfinancial Firm's Exposure to Financial Price Risk. Implementing a Risk Management Program. Uses of Risk Management Products by Banks and Other Financial Institutions. Uses of Risk Management Products by Institutional Investors.