This issue of The Journal of Risk contains articles that concern regulatory capital requirements, the linkage between granular transactional data and systemic risk and dependencies, and the empirical performance of a variety of hedging portfolios involving investments in oil.
In “Hedging incentives for financial institutions”, Frans J. de Weert makes use of a standard continuous-time model to derive hedging incentives for financial institutions that are particularly relevant in the context of asset substitution. The author identifies, in particular, explicit conditions under which a financial firm’s market value is maximized by reducing the volatility of its regulatory capital ratio. This result is consistent with the Basel III regulatory framework, which regards available capital in relation to market value of equity.
The next paper in the issue, “An internal default risk model: simulation of default times and recovery rates within the new Fundamental Review of the Trading Book framework”, is by Andrea Bertagna, Dragos Deliu, Luca Lopez, Aldo Nassigh, Michele Pioppi, Fabian Reffel, Peter Schaller and Robert Schulze. In it, the authors propose a simulation approach to determine the default risk charge to cover losses due to issuer default. Their model addresses specific features that internal credit models must account for in order to comply with the 2019 Basel framework for market risk assessment.
In “Near-real-time monitoring in real-time gross settlement systems: a traffic light approach”, our third paper, Ron Berndsen and Ronald Heijmans develop a method to convert transaction-level data into indicators that capture operational risk, concentration risk and liquidity dependencies. The authors use a traffic light analogy to segment severity levels into three categories: benign, moderate and severe. As a result, they show that granular level data can be used to identify broader risk features in financial market infrastructures.
The issue’s fourth and final paper, “Empirical analysis of oil risk-minimizing portfolios: the DCC–GARCH–MODWT approach” by Dejan Zivkov, Jovan Njegic and Vladimir Zakic, is an empirical assessment of the performance of two-asset portfolios, where one of the assets is oil and the other comes from a variety of asset classes, including US Treasury bonds, US dollars, gold, natural gas futures, corn futures, and Europe, Australasia and Far East exchange-traded funds (EAFE- ETFs). Under standard volatility models, the authors provide evidence favoring the combination of oil with different asset classes, depending on the risk metrics used.
Warrington College of Business, University of Florida
Using a simple model, this paper derives two results that provide guiding principles for hedging by, and capital regulation of, financial institutions.
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.
This paper develops a method to identify quantitative risks in financial market infrastructures (FMIs) that is inspired by the Principles for Financial Market Infrastructures.
This paper strives to analyze hedging strategies between Brent oil and six other het- erogeneous assets – American ten-year bonds, US dollars, gold, natural gas futures, corn futures, and Europe, Australasia and Far East exchange-traded funds (EAFE- ETFs…