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The IUP Journal of Financial Risk Management

March' 08
Focus

Let me take the opportunity to wish all of you a very fulfilling 2008. The first issue of our journal once again contains papers relating to varied risk type. The first paper, "Integrating Market and Credit Risk in Stochastic Portfolio Optimization" by José Luiz Barros Fernandes

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Integrating Market and Credit Risk in Stochastic Portfolio Optimization
Performance Evaluation of Indian Commercial Banks in the Prompt Corrective Action Framework: An Assurance Region Approach
Return and Risk Analysis of Indian Information Technology Sector Stocks
Impact of Futures on Spillovers in the UK Stock Market
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Integrating Market and Credit Risk in Stochastic Portfolio Optimization

--José Luiz Barros Fernandes,
José Renato Haas Ornelas and Marcelo Yoshio Takami

This paper has two main objectives. The first is to propose a measure to integrate the market and credit risk. We define a way to convert credit risk into market risk, and then define an integrated risk measure. Based on this integrated measure, an Adjusted Sharpe Index is defined as a metric to compare various portfolios in the surface frontier in terms of financial efficiency. Second, several methodologies of estimating efficient portfolios were evaluated, under the perspective of a global long-term investor, incorporating estimation risk and evaluating the effect of credit risk in the model selection. The results support the use of the Michaud (1998) resampling methodology as it offers better results in terms of financial efficiency, allocation stability and diversification. Using the Michaud approach, the efficient surface frontier is defined and generated.

Article Price : Rs.50

Performance Evaluation of Indian Commercial Banks in the Prompt Corrective Action Framework: An Assurance Region Approach

-- Ram Pratap Sinha

After the onset of banking sector reform in India, the Reserve Bank of India initiated a system of Prompt Corrective Action (PCA) with various trigger points and mandatory and discretionary responses by the supervising authority on a real time basis. The PCA framework relies on three major indicators of banking sector performance: Net Non Performing Asset (NPA), Capital-To-Risk-Weighted Assets Ratio (CRAR) and Return on Assets (ROA). The present paper seeks to combine the ratio approach adopted by the Reserve Bank of India with the Assurance Region based measure of technical efficiency to find out a composite Data Envelopment Analysis (DEA) based efficiency indicator of 28 observed commercial banks for 2002-03 to 2004-05. The results show that the observed private sector commercial banks have higher mean technical efficiency score compared to those of the public sector commercial banks. Out of the 28 observed commercial banks considered for the study, six were found to be efficient. A study of the technical efficiency scores across ownership groups reveal that the observed private sector banks have higher mean technical efficiency scores compared to their public sector counterparts. Finally, most of the observed commercial banks exhibit decreasing returns to scale for the period under observation.

Article Price : Rs.50

Return and Risk Analysis of Indian Information Technology Sector Stocks

-- R Prabahar, J Dhinakaran and Punithavathy Pandian

The Indian capital market has been witnessing an unprecedented growth with the back of soaring Sensex and also the magnificent performance of India Inc. Stock market has become the most desirable investment option for both the Indian and foreign investors. Return and risk are inseparable in most of the investments, and it is important to determine how much risk is appropriate to attain the required rate of return from investing in any stock under consideration. In this paper, an attempt has been made to study the return and risk element of investing in the shares of Indian Information Technology Industry. The Information Technology industry stocks constitute around 14% of Nifty, and play a vital role in the movement of the market indices. India is now emerging as a major credible information technology outsourcing center creating huge opportunities as well as challenges to the investors. Although the stock markets are positive towards the IT stocks, they are also affected by the national and international events. The average daily returns of the six companies studied in this paper were lower than the daily mean return of the indices. The volatilities of the stock returns over the study period were much higher than that of the indices. The b values of the securities show that except CMC and Moser Baer, the other four securities were very aggressive. The unsystematic risks of the IT stocks were much higher than the systematic risk.

Article Price : Rs.50

Impact of Futures on Spillovers in the UK Stock Market

-- Athanasios Koulakiotis, Constantinos Katrakilidis, Dionysios Chionis and Nicholas Papasyriopoulos

This paper used La Porta et al. (1998) capital market regulatory classification to analyze the impact of information contained in various futures contracts on volatility spillovers between markets. In particular, the paper analyzed the spillover effects between foreign cross-listings in tougher, similar and more lax regulatory environments with respect to the relevant domestic indices (FTSE100) and also with the home portfolios of cross-listed equities in the UK. It was found that futures variables had a significant impact on volatility spillovers between markets.

Article Price : Rs.50

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Automated Teller Machines (ATMs): The Changing Face of Banking in India

Bank Management
Information and communication technology has changed the way in which banks provide services to its customers. These days the customers are able to perform their routine banking transactions without even entering the bank premises. ATM is one such development in recent years, which provides remote banking services all over the world, including India. This paper analyzes the development of this self-service banking in India based on the secondary data.

The Information and Communication Technology (ICT) is playing a very important role in the progress and advancement in almost all walks of life. The deregulated environment has provided an opportunity to restructure the means and methods of delivery of services in many areas, including the banking sector. The ICT has been a focused issue in the past two decades in Indian banking. In fact, ICTs are enabling the banks to change the way in which they are functioning. Improved customer service has become very important for the very survival and growth of banking sector in the reforms era. The technological advancements, deregulations, and intense competition due to the entry of private sector and foreign banks have altered the face of banking from one of mere intermediation to one of provider of quick, efficient and customer-friendly services. With the introduction and adoption of ICT in the banking sector, the customers are fast moving away from the traditional branch banking system to the convenient and comfort of virtual banking. The most important virtual banking services are phone banking, mobile banking, Internet banking and ATM banking. These electronic channels have enhanced the delivery of banking services accurately and efficiently to the customers. The ATMs are an important part of a bank’s alternative channel to reach the customers, to showcase products and services and to create brand awareness. This is reflected in the increase in the number of ATMs all over the world. ATM is one of the most widely used remote banking services all over the world, including India. This paper analyzes the growth of ATMs of different bank groups in India.
International Scenario

If ATMs are largely available over geographically dispersed areas, the benefit from using an ATM will increase as customers will be able to access their bank accounts from any geographic location. This would imply that the value of an ATM network increases with the number of available ATM locations, and the value of a bank network to a customer will be determined in part by the final network size of the banking system. The statistical information on the growth of branches and ATM network in select countries.

Indian Scenario

The financial services industry in India has witnessed a phenomenal growth, diversification and specialization since the initiation of financial sector reforms in 1991. Greater customer orientation is the only way to retain customer loyalty and withstand competition in the liberalized world. In a market-driven strategy of development, customer preference is of paramount importance in any economy. Gone are the days when customers used to come to the doorsteps of banks. Now the banks are required to chase the customers; only those banks which are customercentric and extremely focused on the needs of their clients can succeed in their business today.

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