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Reasons
for Limited Sovereign Risk Management and How to Improve
It
-- Stijn
Claessens
This
paper reviews the current state of affairs in developing
countries and their thinking on external risk management.
It identifies the reasons behind the limited risk management
by sovereigns. Perverse incentives arising from a too generous
international safety net, developing countries' limited
access to international financial markets arising from low
creditworthiness, a limited supply of financial risk management
tools of developing countries, and a poor supply of skills
are the reasons that have inhibited risk management. Another
constraint has been the limited attention given to the strategic
objectives for risk management. Going forward, the paper
identifies actions by international financial markets, governments
and international financial institutions that can help to
improve risk management.
©
2006 IUP . All Rights Reserved.
An
Operational Approach for Evaluating Investment Risk: An
Application to the No-till Transition
--
Bharat
Mani Upadhyay and Douglas L Young
The
measures provided by Roy's safety-first rule are popular
among farmers managing their short- and long-term business
risks associated with various no-till transition strategies
over an investment horizon. The short-run rule provides
more sensitivity to inter-year financial risk than other
commonly used criteria. Results have revealed that the speed
of adoption has influenced the probability of successful
transition more than the sequence of drill acquisition methods;
higher equity and larger farms have a greater chance of
transition success; and the slow acreage expansion with
a custom or rental drill reduces risk until a no-till yield
penalty is eliminated.
©
2006 IUP . All Rights Reserved.
The
Benefits of Hedge Funds in Asset Liability Management
-- Lionel
Martellini and Volker Ziemann
This
paper examines the benefits of including hedge funds for
investors facing liability constraints. The authors cast
the problem in a stochastic surplus optimization set-up
where hedge funds are treated as a complement, and not as
an addition to traditional asset classes, which alleviates
the concern over ex ante modeling of hedge fund returns,
a notoriously difficult challenge, given the short history
and complexity of these alternative investment styles. The
authors conclude that, when added to bonds and stocks, suitably
designed portfolios of hedge funds can allow for significant
benefits in an ALM (Asset Liability Management) context,
as can be measured in terms of reduction of the expected
mismatch between assets and liabilities. This impact is
more pronounced when the relevant objective turns to extreme
risks. In fact, we show that the probability of extreme
deficits (value of the assets falling below 75% of the value
of liabilities) can be reduced by as much as 50% by allocating
not more than 20% to hedge funds.
©
2005 EDHEC. This paper had earlier appeared in the Alternative
Investment Quarterly, published by ISI Publications
(www.isipublications.com), Issue No. 5, Second Quarter 2005,
pp. 17-26. Reprinted with permission.
Multivariate
Nonparametric Capital Asset Pricing Model
--
Diganta
Mukherjee and Amit Kumar
This
paper studies the error pattern in case of asset pricing
models, using the multivariate nonparametric regression
technique to extrapolate possible improvement of fit for
the nonparametric model over the usual parametric one. The
authors have attempted to compare the parametric and the
nonparametric regressions in terms of fit. The study concludes
that the nonparametric regression is better than its parametric
counterpart and the Epanechnikov Kernel gives better estimate
than the Gaussian Kernel.
©
2006 IUP . All Rights Reserved.
Managing
Credit Risk: An Overview of Basel Norms
-- Neetu
Prakash
In
most of the countries of the world, banks have been facing
serious credit issue-related problems besides market risk
and operational risk because 90-95% of a bank's business
stems from credit operations. Managing credit risk is crucial
on account of default of principal itself. Banks have to
appropriately price their loan products on the basis of
directions given by the Reserve Bank of India such as fixation
of exposure limits, provisioning of NPAs, risk rating models,
risk diversification, risk sharing techniques such as credit
derivatives, securitization, intra-bank participation, consortium
finance, risk insurance, etc. In fact, adopting risk management
practices, proper governance and disclosure practices reduce
losses and provide more robust framework for evaluating
the creditworthiness of the borrowers. Apart from these,
the Board of Directors and the executive management should
conduct the credit risk management process with competence
and integrity. Only then will our credit system in banks
grow stronger. Although the Basel Accord guidelines are
well-intended, these are substantially focused on the Western
banking environment, which is why Indian banks are not in
a position to implement them within the year 2006. Indian
banks, particularly the public sector banks, are ready to
migrate to Basel II Accord only at a conceptual level and
academic level. They have to make necessary changes in the
risk management framework and the technological framework,
enhance further adoption of sound MIS, best international
banking practices, upgrade skills and developments of the
staffs, appropriate credit rating mechanism, etc. Indian
banking sector can then implement the Basel Norms, and can
face international banking competition smoothly.
©
2006 IUP . All Rights Reserved.
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