This issue of The Journal of Risk contains papers focused on various empirical aspects of enterprise risk management, with a particular emphasis on currency exchange, commodities, interest rates and funding liquidity.
In our first paper, “Determinants of foreign exchange risk: some further evidence”, Luke Lin and Wen-Yuan Lin address the contradictory evidence regarding the factors that affect the foreign exchange risk exposure faced by firms. Instead of the standard ordinary least squares approach favored in past studies, they use quantile regression. Consequently, they obtain robust results that show that factors such as export and debt-to-equity ratios are persistent for both low and high quantiles, in contrast to factors such as firm size and the book-to-market ratio.
“A vine copula–GARCH approach to corporate exposure management” by Christopher Wells, Ahmad Farhat, Christopher Richardson and T. Ryan Deering, this issue’s second paper, is set in a context involving both currency and commodity price exposures. Here, the authors identify tail dependencies and dynamic correlations using vine copulas together with generalized autoregressive conditional heteroscedasticity (GARCH) models. They illustrate how this approach is more reliable for the assessment of downside risk exposure than using copula and GARCH models separately.
Robert Brooks proposes a nested approach to assess the impact of a variety of factors on the balance sheet of an enterprise in “An enterprise perspective of performance attribution: introducing the keel model”. Through illustrative case studies, the third paper of this issue demonstrates how, for example, performances attributed to horizon, spot rates and spreads can change dramatically with the introduction of derivatives to hedge interest rate risk.
The fourth and final paper in this issue, “A model for the valuation of assets with liquidity risk” by Bert-Jan Nauta, contributes to a better understanding of asset valuation in the context of liquidity-related regulations. Specifically, Nauta proposes a model that accounts for the interaction between funding costs and liquidation loss. This model is applied to bonds and derivatives, and the effects of repurchase agreements and marking-to-market are highlighted.
Warrington College of Business, University of Florida
This paper employs the quantile regression model to examine Taiwanese companies and considers factors that researchers have identified which may influence orientation divergences for robustness testing.
This paper applies vine copulas with GARCH marginals to the problem of capturing asset dependence and tail dynamics for currency and commodity exposures commonly found in portfolios of global corporates.
In this paper, performance attribution is extended to an enterprise level based on the keel model. The keel model introduced here is applied to the problem of attributing enterprise value changes to various risk factors.
This paper describes a model for the valuation of assets on a bank balance sheet with liquidity risk. It applies the model to single cashflows, loans, bonds and derivatives. In addition, the calibration to London Interbank Offered Rate basis spreads is…