Human mortality: written in the stars?Michael R. Powers
2007 The Journal of Risk Finance
doi: 10.1108/15265940710721037
Purpose – This paper seeks to consider certain characteristics of the human mortality table, and the possibility that mortality rates are governed by an underlying natural law. Design/methodology/approach – After providing a brief overview of the mathematics of the mortality table, explores the reasonableness of using a simple analytic function to model the mortality hazard rate. Findings – By comparing the perceived accuracy of Makeham's Law in actuarial science with that of the Titius‐Bode Law in astronomy, it is seen that simple mathematical rules are not always as useful as they may appear initially. Originality/value – The editorial identifies a problem common to all branches of the natural and social sciences: the possibility of “discovering” formal mathematical relationships where none in fact exists.
Securitization and risk: empirical evidence on US banksHatice Uzun; Elizabeth Webb
2007 The Journal of Risk Finance
doi: 10.1108/15265940710721046
Purpose – This paper aims to offer a comprehensive comparison of the characteristics between banks that securitize and banks that do not and to provide evidence of the capital arbitrage theory of securitization. Design/methodology/approach – First, the fundamental financial similarities and differences between banks that securitize assets and banks that do not participate in the securitization market are tested. Second, variables that help predict whether a bank securitizes assets are analyzed. Third, the determinants of securitization extent in banks that securitize assets are investigated – for general securitization extent and for specific type of asset securitized. Using a sample of 112 banks that securitize different assets, a matched sample of banks that do not securitize based on entity type and size is created. A quarterly panel data set of these banks dating back to 2001 is used. Findings – The results indicate that bank size is a significant determinant of whether a bank securitizes. Further, overall securitization extent is negatively related to the bank's capital ratio (in support of capital arbitrage theory), but this result is primarily driven by credit card securitization. Originality/value – Utilizing a unique data set of quarterly data from bank Call Reports; the panel data set is large relative to past studies. A matched sample approach was used to test fundamental financial similarities and differences between securitizing and non‐securitizing banks. In addition to aggregated securitization, an examination was made of how different classes of assets affect the banks' risk‐based capital ratios and test the capital arbitrage theory of securitization.
Managing credit risk with info‐gap uncertaintyBryan Beresford‐Smith; Colin J. Thompson
2007 The Journal of Risk Finance
doi: 10.1108/15265940710721055
Purpose – The paper aims to provide a quantitative methodology for dealing with (true) Knightian uncertainty in the management of credit risk based on information‐gap decision theory. Design/methodology/approach – Credit risk management assigns clients to credit risk categories with estimated probabilities of default for each category. Since probabilities of default are subject to uncertainty the estimated expected loss given default on a loan‐book can be subject to significant uncertainty. Information‐gap decision theory is applied to construct optimal loan‐book portfolios that are robust against uncertainty. Findings – By choosing optimal interest‐rate ratios among the credit risk categories one can simultaneously satisfy regulatory requirements on expected losses and an institution's aspirations on expected profits. Research limitations/implications – In the analysis presented here only defaults over specific time frames have been considered. However, performance requirements expressed in terms of defaults and profits over multiple time frames that allow for transitions of clients between credit risk categories over time could also be incorporated into an information‐gap analysis. Practical implications – An additional management analysis tool for applying information‐gap modeling to credit risk has been provided. Originality/value – This paper provides a new methodology for analyzing credit risk based on information‐gap decision theory.
Mapping corporate drift towards default Part 1: a market‐based approachArindam Bandyopadhyay
2007 The Journal of Risk Finance
doi: 10.1108/15265940710721064
Purpose – The purpose of this article is to discuss a Black‐Scholes‐Merton (BSM)‐based market approach to quantify the default risk of publicly‐listed individual companies. Design/methodology/approach – Using the contingent claim approach, a framework is presented to optimally use stock market and balance sheet information of the company to predict its probability of failure as well as ordinal risk ranking over a horizon of one year. Findings – By applying the methodology, yearly estimates of the risk neutral and real probability of default for 150 Indian corporates from 1998 to 2005 were constructed, that give up‐to‐date point‐in‐time perspective of their risk assessment. It was found that option model can provide ordinal ranking of companies on the basis of their default risk which also has good early warning predictability. Originality/value – The option‐based default probability estimation may be an innovative approach for measuring and managing credit risk even in the emerging market economy. The asset value model developed in this paper based on the BSM model can facilitate the Indian banks as well as investors to get an early warning signal about the company's default status.
Mapping corporate drift towards default Part 2: a hybrid credit‐scoring modelArindam Bandyopadhyay
2007 The Journal of Risk Finance
doi: 10.1108/15265940710721073
Purpose – The purpose of this paper is to develop a hybrid logistic model by using the inputs obtained from BSM equity‐based option model described in the companion paper, “Mapping corporate drift towards default – Part 1: a market‐based approach” that can more accurately predict corporate default. Design/methodology/approach – In a set of logistic regressions, the ability of the market value of assets, asset volatility and firm's leverage structure measures to predict future default is investigated. Next, a check is made as to whether accounting variables and other firm specific characteristics can provide additional significant information in assessing the real world credit quality of a firm in a multifactor model Findings – From analysis of 150 publicly‐traded Indian corporates over the year 1998 to 2005 it was found that in a volatile equity market like India, one needs to enhance the BSM model with other accounting information from financial statements and develop hybrid models. The results in this paper indicate that a mix of asset volatility, market value of asset and firm's leverage structure along with other financial and non financial factors can give us a more accurate prediction of corporate default than the ratio‐based reduced form model. Originality/value – The hybrid model developed in this paper allows us to integrate information from the structural model as well as profitability of firms, liquidity risk, other firm specific supplementary information and macroeconomic factors to predict real world corporate distress potential through a multivariate analysis.
The impact of capital structure on the performance of microfinance institutionsAnthony Kyereboah‐Coleman
2007 The Journal of Risk Finance
doi: 10.1108/15265940710721082
Purpose – The purpose of this paper is to examine the impact of capital structure on the performance of microfinance institutions. Design/methodology/approach – Panel data covering the ten‐year period 1995‐2004 were analyzed within the framework of fixed‐ and random‐effects techniques. Findings – Most of the microfinance institutions employ high leverage and finance their operations with long‐term as against short‐term debt. Also, highly leveraged microfinance institutions perform better by reaching out to more clientele, enjoy scale economies, and therefore are better able to deal with moral hazard and adverse selection, enhancing their ability to deal with risk. Originality/value – This is the first study of its kind in the sector, especially within sub‐Saharan Africa.
Value‐at‐risk concept by Swiss private banksAndrey Rogachev
2007 The Journal of Risk Finance
doi: 10.1108/15265940710721091
Purpose – The purpose of this paper is to consider the problem of using the Value‐at‐Risk (VaR) technique and examine its practical implementation by Swiss Private Banks. Design/methodology/approach – The paper is based on a survey originally undertaken in 2003 and updated in 2005. The research results provide details on how asset and portfolio managers understand and apply VaR methodology in their daily business. Findings – From the banks' perspectives, VaR has both positive and negative points. It is like a common denominator for various risks. The reason is that VaR is used by portfolio managers as comparable risk measurement across different asset classes and business lines. Originality/value – This analysis shows how banks can implement VaR concept more effectively through its practical implementation areas in: portfolio management decisions and asset allocation; the “what‐if” modeling of candidate traders; and measuring and monitoring market risk.