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Author:Gibson, Michael S. 

Working Paper
\"Big Bang\" deregulation and Japanese corporate governance: a survey of the issues

The "Big Bang" deregulation of Japanese financial markets focuses on financial modernization. I argue that financial modernization is of secondary importance for improving the performance of the Japanese economy. A key long-term issue facing Japan is to maintain its high level of per capita income in the face of an aging population and slower productivity growth. To achieve this, it is important to increase the return earned on Japan's large stock of wealth. I argue the low return on wealth reflects characteristics of the Japanese corporate governance system. The proper focus of the Big ...
International Finance Discussion Papers , Paper 624

Working Paper
Improving grid-based methods for estimating value at risk of fixed-income portfolios

Jamshidian and Zhu (1997) propose a discrete grid method for simplifying the computation of Value at Risk (VaR) for fixed-income portfolios. Their method relies on two simplifications. First, the value of fixed income instruments is modeled as depending on a small number of risk factors chosen using principal components analysis. Second, they use a discrete approximation to the distribution of the portfolio's value. We show that their method has two serious shortcomings which imply it cannot accurately estimate VaR for some fixed-income portfolios. First, risk factors chosen using principal ...
Finance and Economics Discussion Series , Paper 2000-25

Working Paper
Long-term banking relationships in general equilibrium

I examine the relationship between a financial intermediary ("bank") and a borrowing firm in a three-period overlapping generations model. The model can accommodate two financing arrangements between the bank and the firm: one requires commitment to a long-term contract, the other does not. Which arrangement is chosen depends on whether such a commitment can be credibly made. After defining the two arrangements, I compare their features with real-world financial dealings. Once the form of the long-term relationship between the bank and the firm is set, investment and output of the economy ...
International Finance Discussion Papers , Paper 452

Working Paper
Understanding the risk of synthetic CDOs

Synthetic collateralized debt obligations, or synthetic CDOs, are popular vehicles for trading the credit risk of a portfolio of assets. Following a brief summary of the development of the synthetic CDO market, I draw on recent innovations in modeling to present a pricing model for CDO tranches that does not require Monte Carlo simulation. I use the model to analyze the risk characteristics of the tranches of synthetic CDOs. The analysis shows that although the more junior CDO tranches -- equity and mezzanine tranches -- typically contain a small fraction of the notional amount of the CDO's ...
Finance and Economics Discussion Series , Paper 2004-36

Working Paper
The implications of risk management information systems for the organization of financial firms

Financial dealer firms have invested heavily in recent years to develop information systems for risk measurement. I take it as given that technological progress is likely to continue at a rapid pace, making it less expensive for financial firms to assemble risk information. I look beyond questions of risk measurement methodology to investigate the implications of risk management information systems. By examining several theoretical models of the firm in the presence of asymmetric information, I explore how a financial firm's capital budgeting, incentive compensation, capital structure, and ...
International Finance Discussion Papers , Paper 632

Working Paper
Evaluating forecasts of correlation using option pricing

A forecast of the correlation between two asset prices is required to price or hedge an option whose payoff depends on both asset prices or to measure the risk of a portfolio whose return depends on both asset prices. However, a number of factors make it difficult to evaluate forecasts of correlation. We develop a forecast evaluation methodology based on option pricing, extending a technique that Engle et al. (1993) introduced to evaluate volatility forecasts. A forecast of the variance-covariance matrix of joint asset returns is used to generate a trading strategy for a package of simulated ...
International Finance Discussion Papers , Paper 600

Conference Paper
Dynamic estimation of volatility risk premia and investor risk aversion from option-implied and realized volatilities

Proceedings

Working Paper
Pitfalls in tests for changes in correlations

Correlations are crucial for pricing and hedging derivatives whose payoff depends on more than one asset. Typically, correlations computed separately for ordinary and stressful market conditions differ considerably, a pattern widely termed "correlation breakdown." As a result, risk managers worry that their hedges will be useless when they are most needed, namely during "stressful" market situations. ; We show that such worries may not be justified since "correlation breakdowns" can easily be generated by data whose distribution is stationary and, in particular, whose correlation ...
International Finance Discussion Papers , Paper 597

Working Paper
Credit derivatives and risk management

The striking growth of credit derivatives suggests that market participants find them to be useful tools for risk management. I illustrate the value of credit derivatives with three examples. A commercial bank can use credit derivatives to manage the risk of its loan portfolio. An investment bank can use credit derivatives to manage the risks it incurs when underwriting securities. An investor, such as an insurance company, asset manager, or hedge fund, can use credit derivatives to align its credit risk exposure with its desired credit risk profile.> However, credit derivatives pose risk ...
Finance and Economics Discussion Series , Paper 2007-47

Working Paper
Dynamic estimation of volatility risk premia and investor risk aversion from option-implied and realized volatilities

This paper proposes a method for constructing a volatility risk premium, or investor risk aversion, index. The method is intuitive and simple to implement, relying on the sample moments of the recently popularized model-free realized and option-implied volatility measures. A small-scale Monte Carlo experiment suggests that the procedure works well in practice. Implementing the procedure with actual S&P 500 option-implied volatilities and high-frequency five-minute-based realized volatilities results in significant temporal dependencies in the estimated stochastic volatility risk premium, ...
Finance and Economics Discussion Series , Paper 2004-56

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