Technical paper/Risk management
Body and tail: an automated tail-detecting procedure
The quality of a tail model, which is determined by data from an unknown distribution, depends critically on the subset of data used to model the tail. Based on a suitably weighted mean square error, the authors present a completely automated method that…
Ten laws of operational risk
This paper sets out ten laws that govern the behavior of operational risk relating to the occurrence and detection/duration of events; the rapidity with which firms suffer losses; the lags in crystallization of losses; and internal and external drivers…
Modeling loss given default regressions
The authors investigate the puzzle in the literature that various parametric loss given default (LGD) statistical models perform similarly, by comparing their performance in a simulation framework.
Client engineering of XVA
A client’s guide to reducing XVA in times of need
Supervisory bank risk early warning modeling: an examiner’s first line of defense
The results of this paper show that robust forward-looking statistical models are superior to backward-looking assessments of supervisory compliance, which could lead to less regulatory burden when integrated into the examination process, particularly at…
Evaluating cyclic risk propagation through an organization
Many large organizations have risk that propagates because of the dependencies between their various major organizational components. This paper addresses when cycles of dependencies exist in an organization or system of systems.
Concentration in cleared derivatives: the case for broadening access to direct central counterparty clearing
In this paper, the authors explore the benefits and challenges of encouraging major end-users of derivatives to become direct clearing members of central counterparties (CCPs).
The impact of corporate social and environmental performance on credit rating prediction: North America versus Europe
The authors quantify the extent to which the quality of credit rating predictions improves by integrating measures of corporate social performance (CSP) in an established credit risk model. Their analysis provides comprehensive evidence of the…
What is essential is invisible to the eye: prioritizing near misses to prevent future disasters
Near misses represent a primary information source to analyze the operational risk exposure of a company, since they can reveal gaps in the control environment. The model proposed in this paper aims at identifying the most dangerous events that could…
Strategic and technology risks: the case of Co-operative Bank
This paper studies the growth by acquisition strategy embarked upon by a mid-sized UK bank, the Co-operative Bank; this strategy was a disaster, leaving a heretofore successful bank in dire trouble and on the block for buyers at a substantial discount to…
An emergent taxonomy for operational risk: capturing the wisdom of crowds
In this paper, the author takes a data-driven approach and combines the individual active taxonomies of sixty large financial institutions (fifty-eight for construction and two for validation) to create a coherent new reference taxonomy: the ORX…
Art-secured lending: a risk analysis framework
In this study, the authors identify the three types of risks involved in an art-secured lending operation and present a framework to assess their combined effects via a Monte Carlo simulation.
Measuring economic cycles in data
This paper determines if enough data is available for forecasting or stress testing, a better measure of data length is required.
The pricing of firm-specific risk in emerging markets
This paper finds that a zero-investment strategy that goes long (short) in the highest (lowest) quintiles of firm-specific risk earns overall positive excess returns across twenty-one emerging markets.
An internal default risk model: simulation of default times and recovery rates within the new Fundamental Review of the Trading Book framework
This paper presents a new default risk model for market risk that is consistent with these requirements. The recovery rates follow a waterfall model that is based on a minimum entropy principle.
Hedging incentives for financial institutions
Using a simple model, this paper derives two results that provide guiding principles for hedging by, and capital regulation of, financial institutions.
Currency risk in foreign currency accounts for small and medium-sized businesses
This paper estimates the currency exposure before and after the hedging of active foreign currency (FC) accounts, using stochastic models for spot exchange rates and cashflow movements.
Cyber risk management: an actuarial point of view
This paper points out the peculiarities of cyber insurance contracts compared with the classical nonlife insurance contracts from both the insurer’s and the insured’s perspectives. The main actuarial principles that are fundamental to any valuation in a…
Factor-based tactical bond allocation and interest rate risk management
This paper offers two composite bond market factor investment strategies each for the Swiss bond market and for the global sovereign bond market.
Central counterparty anti-procyclicality tools: a closer assessment
This paper investigates whether the substantial focus placed on the procyclicality of initial margin reflects both the original concerns at the time of the 2007-8 financial crisis and the intrinsic 'modus operandi' of CCPs.
Estimation of losses due to cyber risk for financial institutions
The objective of this paper is to analyze cyber risk from an operational risk perspective and to measure cyber risk empirically.
Could holding multiple safe havens improve diversification in a portfolio? The extended skew-t vine copula approach
In this paper, the authors propose a vine copula model based on a bivariate extended skew-t distribution and derive its corresponding multivariate tail dependence function.
Loss given default estimation: a two-stage model with classification tree-based boosting and support vector logistic regression
In this paper, the authors using a data set composed of five Japanese regional banks, propose an loss given default estimation model using a two-stage model, classification tree-based boosting and support vector regression (SVR).
Introducing a novel system-of-systems axiomatic risk management technique for production systems
This paper focuses on conceptual and modeling frameworks in an attempt to explore qualitative and quantitative risk management techniques for hierarchical SoS risks, exemplifying the production systems for demonstration.