sensitivity analysis of var and expected shortfall for portfolios under netting agreements in this paper we characterize explicitly the first derivative of the value at risk and the expected shortfall with respect to portfolio allocations when netting between positions exists as a particular case we examine a simple gaussian example in order to illustrate the impact of netting agreements in credit risk management collateral issues are also dealt with for practical purposes we further provide nonparametric estimators for sensitivities and derive their asymptotic distributions an empirical application on a typical banking portfolio is finally provided

on the accuracy of the mean variance approximation for futures markets abstract simple approximate fomulae for the volume and gains from futures trading are derived using the mean variance model the errors involved are exactly quantified and shown to be negligible for the futures price and welfare gains though potentially larger for volumes

a comparative analysis of current credit risk models the new bis 1998 capital requirements for market risks allows banks to use internal models to assess regulatory capital related to both general market risk and credit risk for their trading book this paper reviews the current proposed industry sponsored credit value at risk methodologies first the credit migration approach as proposed by jp morgan with creditmetrics is based on the probability of moving from one credit quality to another including default within a given time horizon second the option pricing or structural approach as initiated by kmv and which is based on the asset value model originally proposed by merton merton r 1974 journal of finance 28 449 470 in this model the default process is endogenous and relates to the capital structure of the firm default occurs when the value of the firm s assets falls below some critical level third the actuarial approach as proposed by credit suisse financial products csfp with creditrisk and which only focuses on default default for individual bonds or loans is assumed to follow an exogenous poisson process finally mckinsey proposes creditportfolioview which is a discrete time multi period model where default probabilities are conditional on the macro variables like unemployment the level of interest rates the growth rate in the economy which to a large extent drive the credit cycle in the economy 2000 elsevier science b v all rights reserved

value at risk versus expected shortfall a practical perspective value at risk var has become a standard risk measure for financial risk management however many authors claim that there are several conceptual problems with var among these problems an important one is that var disregards any loss beyond the var level we call this problem the tail risk in this paper we illustrate how the tail risk of var can cause serious problems in certain cases cases in which expected shortfall can serve more aptly in its place we discuss two cases concentrated credit portfolio and foreign exchange rates under market stress we show that expected shortfall requires a larger sample size than var to provide the same level of accuracy 2004 elsevier b v all rights reserved

coherent risk measures under filtered historical simulation abstract recent studies have strongly criticised conventional var models for not providing a coherent risk measure acerbi provides the intuition for an entire family of coherent measures of risk known as spectral risk measures spectral measures of risk a coherent representation of subjective risk aversion journal of banking and finance 26 7 2002 1505 1518 in this study we illustrate how the filtered historical simulation barone adesi g bourgoin f giannopoulos k 1998 don t look back risk 11 100 104 barone adesi giannopoulos k vosper l 1999 var without correlations for non linear portfolios journal of futures markets 19 583 602 can provide an improved methodology for calculating the expected shortfall thereafter we prove that these new risk measures are spectral and are coherent as well following acerbi furthermore we provide the statistical error formula that allows to calculate the error for our model

wealth distribution and output fluctuations we explore the link between wealth inequality and output fluctuations in a general two sector neoclassical growth model with endogenous labor and heterogeneous agents when agents have homogeneous crra preferences and individual wealth is pareto distributed a sufficiently large rise in the gini index typically leads to an increase in endogenous fluctuations of output for general economies we show that under plausible conditions on the fundamentals wealth inequality is still a destabilizing factor

cyclical correlations credit contagion and portfolio losses abstract we model aggregate credit losses on large portfolios of financial positions contracted with firms subject to both cyclical default correlation and direct default contagion processes cyclical correlation is due to the dependence of firms on common economic factors contagion is associated with the local interaction of firms with their business partners we provide an explicit normal approximation of the distribution of portfolio losses we quantify the relation between the variability of global economic fundamentals strength of local firm interaction and the fluctuation of losses we find that cyclical oscillations in fundamentals dominate average losses while local interaction causes additional fluctuations of losses around their average the strength of the contagion induced loss variability depends on the complexity of the business partner network

commodity price stabilization in imperfect or cartelized markets most studies of commodity price stabilization assume that all agents behave competitively however many commodities suitable for stockpiling are produced by countries with a significant share of the world market and commodity agreements themselves often result in cartelization of the market the paper explores the consequences of market power for the choice of storage rule and the degree of price stabilization it finds that with linear demand dominant producers choose more stable prices than under perfect competition and price stability increases with their market share with constant elastic demand the competitive degree of price stabilization is achieved

quantifying market risk with value at risk or expected shortfall consequences for capital requirements and model risk the basel committee on banking supervision recently proposed fundamental changes in the regulatory treatment of financial institutions trading book positions among others a replacement of value at risk 0 99 by expected shortfall 0 975 for the quantification of market risk is recommended while this increases capital requirements for heavy tailed risks its consequences for model risk related to the estimation process have not been explored hence the aim of this paper is to analyze how both risk measures react to different sources of model risk in order to better understand the impact of the intended change in risk measures our results show that the expected shortfall 0 975 is more sensitive towards regulatory arbitrage and parameter misspecification we find that this is based on a trade off between a model s ability to better capture the heavy tailed behavior of risks and a higher vulnerability to model risk these new aspects should be taken into account in the regulatory decision for expected shortfall 0 975

pricing distribution and the supply of storage abstract the belgian nitrogen fertilizer cartel announces each year a price schedule which is enforced during the coming twelve months these prices are resale prices to final users and reflect changes in costs of storage a game theoretic model is set up to rationalize this behavior for the case of instantaneous final demands and a large number of distributors habit formation in final demand is then shown to lead to even more flexible prices while transferability over time is seen to favor more rigid prices it is finally suggested that vertical integration into a competitive distribution sector can be profitable because it restores the possibility of intertemporal price discrimination

an economic capital model integrating credit and interest rate risk in the banking book banks often measure credit and interest rate risk in the banking book separately and then add the risk measures to determine economic capital this approach misses complex interactions between the two risk types we develop a framework where these risks are analysed jointly since banking book positions are generally not marked to market our model is based on book value accounting our simulations show that interactions matter and that ignoring them leads to risk overstatement the magnitude of the errors depends on the structure of the balance sheet and on the repricing characteristics of assets and liabilities

which are the sifis a component expected shortfall approach to systemic risk abstract this paper proposes a component approach to systemic risk which allows to decompose the risk of the aggregate financial system measured by expected shortfall while accounting for the firm characteristics developed by analogy with the component value at risk concept our new systemic risk measure called component es presents several advantages it is a hybrid measure which combines the too interconnected to fail and the too big to fail logics ces relies only on publicly available daily data and encompasses the popular marginal es measure ces can be used to assess the contribution of a firm to systemic risk at a precise date but also to forecast its contribution over a certain period the empirical application verifies the ability of ces to identify the most systemically risky firms during the 2007 2009 financial crisis we show that our measure identifies the institutions labeled as sifis by the financial stability board

income risk borrowing constraints and portfolio choice economic theory suggests that uninsurable income risk and the expectation of future borrowing constraints can reduce the share of risky assets in a household s portfolio if the utility function exhibits decreasing absolute risk aversion and decreasing prudence an individual will reduce his exposure to rate of return risks when confronted with other independent risks if there are transaction costs the expectation of future borrowing constraints should induce individuals to keep a lower proportion of their wealth in the form of illiquid and risky assets the authors find support for these propositions in a cross section of italian households copyright 1996 by american economic association

commodity agreements and commodity markets lessons from tin in what follows we study the history of the tin market over the period i982 5 important questions this exercise will help to answer are was the collapse of the tin market a failure of the buffer stock operation and was it inevitable was the activity of the buffer stock a commodity market manipulation was there a deficiency in the drafting of the tin agreement was there a failure of commodity market regulation more generally while it has long been recognised that stabilisation schemes are vulnerable to speculative attacks the interconection between buffer stock managements and futures markets has not been explored in this sense our historical analysis will

dynamic hours of work functions for husbands wives and single females hours of work equations are derived from the constrained maximization of a utility function that is not separable over time and that varies with a household s demographic structure these equations are fitted to observations on wage rates nonlabor income and other variables for husbands wives and unmarried women the dependence of each household s current work and consumption behavior upon its work and consumption behavior in the past is examined closely and different interpretations of the relationship are confronted with the data

in defense of inequality this is a perfect time to discuss inequality after a period of three decades when wage inequality among men in the united states grew to approximate pre world war ii levels measured inequality apparently has stabilized and may in fact be decreasing claudia goldin and robert a margo 1992 it is therefore a good time to assess the changes to compare the gains and losses i choose this topic not to offend but because i believe inequality is an economic good that has received too much bad press i also think you will agree that it is a good which like any other can be scarce or overly abundant i am neither trying to praise nor defend poverty and i hope it is understood that the link between wages and income is not especially close particularly at lower incomes where nonemployment dominates wages play many roles in our economy along with time worked they determine labor income but they also signal relative scarcity and abundance and with malleable skills wages provide incentives to render the services that are most highly valued further we all buy and sell labor either directly or indirectly as labor is embodied in products to reverse one of the themes of milton friedman s introductory theory class one man s poison can be another s meat together with rising relative wages the post 1950 increase in the job market employment of women is one of our major accomplishments but it is an accomplishment that has been fueled in part by the low wages earned by those the census classifies as private household workers childcare workers workers in laundries and cleaning establishments food service workers etc as the population ages the prospect of increasing dependence on personal assistance looms for the most part personal assistants and aides earn low wages wages that extend the services we can afford friedman s actual observation is however that one man s meat is not necessarily another s poison friedman 1976 the relatively high wages earned by physicians scientists and university professors have attracted many immigrants to the united states would we be better off if they had not immigrated we could in fact reduce wage inequality by simply proscribing immigration because the wage distribution of immigrants is u shaped relative to that of natives see j p smith and b edmonston 1997 p 180 table 5 4 my guess is that most economists faced with such an option would respond by directing attention to the services immigrants provide my objective is to examine the recent period of increasing wage inequality with an eye toward the positive i describe some of the changes that have occurred speculate about the causes and wrap up with illustrations of consequences i contend that growing inequality has created opportunities that have been exploited by many and that the gains are not restricted to the traditional elite moreover when we have adopted policies to mitigate the downside of increasing inequality which is falling real wages in the lower parts of the distribution a surprising number of individuals have also capitalized on those opportunities in ways that are not productive before turning to the data i want to make a few general observations department of economics texas a m university college station tx 77843 4228 i am indebted to martin gritsch for assistance in extracting the data and to barbara charlton for secretarial support i am also indebted to participants in the ucla rand labor workshop and especially to janet currie and james p smith for comments and suggestions on an earlier draft i have drawn heavily on my previous work much of it in collaboration with kevin m murphy

risk aversion and rising wage inequality abstract we propose a model in which as incomes grow workers become less risk averse and move from fixed wage contracts to variable pay this can explain the recent increase in wage dispersion between groups within groups and over the lifecycle

cartels storage and the suppression of futures markets abstract the main demand for futures markets is to hedge storage without which futures markets may collapse the paper proves that a risk neutral cartel would benefit from suppressing a futures market and if it suffered no cost disadvantage would find it profitable to monopolize storage unhedged this might cause the futures markets to collapse but if not and the cartel had sufficient market share it might find it profitable to undertake excessive storage and price stabilization to undermine the futures market the ensuing rise in average price would harm consumers

var and expected shortfall in portfolios of dependent credit risks conceptual and practical insights in the first part of this paper we address the non coherence of value at risk var as a risk measure in the context of portfolio credit risk and highlight some problems which follow from this theoretical deficiency in particular a realistic demonstration of the non subadditivity of var is given and the possibly nonsensical consequences of var based portfolio optimisation are shown the second part of the paper discusses var and expected shortfall estimation for large balanced credit portfolios all standard industry models creditmetrics kmv creditrisk are presented as bernoulli mixture models to facilitate their direct comparison for homogeneous groups it is shown that measures of tail risk for the loss distribution may be approximated in large portfolios by analysing the tail of the mixture distribution in the bernoulli representation an example is given showing that for portfolios of lower quality choice of model has some impact on measures of extreme risk 2002 elsevier science b v all rights reserved

the spirit of capitalism and stock market prices in existing theory wealth is no more valuable than its implied consumption rewards in reality investors acquire wealth not just for its implied consumption but for the resulting social status max m weber 1958 refers to this desire for wealth as the spirit of capitalism the authors examine both analytically and empirically implications of weber s hypothesis for consumption savings and stock prices when investors care about relative social status propensity to consume and risk taking behavior will depend on social standards and stock prices will be volatile the spirit of capitalism seems to be a driving force behind stock market volatility and economic growth copyright 1996 by american economic association

the diffusion of computers and the distribution of wages abstract when the costs are decreasing workers adopt technology at the point where the costs equal the increased productivity output per worker increases immediately while productivity benefits increase only gradually if costs continue to fall as a result workers in computer adopting labor market groups experience an immediate fall in wages due to increased supply on the other hand adopting workers experience wage increases with some delay this model explains why increased computer use does not immediately lead to higher wage inequality more specifically the results of the model are shown to be consistent with the question why within group wage inequality among skilled workers as a result of computer technology adoption in the united states increased in the 1970s while between group wage inequality and within group wage inequality among the unskilled did not start to increase until the 1980s the model also predicts that the more compressed german wage structure leads to a lagged diffusion of computer technology along with smaller changes in wage inequality our empirical analysis suggests that this is consistent with the actual developments in germany since the 1980s finally the theoretical predictions seem to be of the right magnitude to explain the empirical quantities observed in the data

credit contagion and aggregate losses abstract credit contagion refers to the propagation of economic distress from one firm to another this article proposes a reduced form model for these contagion phenomena assuming they are due to the local interaction of firms in a business partner network we study aggregate credit losses on large portfolios of financial positions contracted with firms subject to credit contagion in particular we provide an explicit gaussian approximation of the distribution of portfolio losses this enables us to quantify the relation between the volatility of losses and the determinants of credit contagion we find that contagion processes have typically a second order effect on portfolio losses they induce additional fluctuations of losses around their averages whose size depends on the number of business partners of the firms

decision making with expected shortfall and spectral risk measures the problem of comparative risk aversion abstract we analyze spectral risk measures with respect to comparative risk aversion following arrow 1965 and pratt 1964 for deterministic wealth and ross 1981 for stochastic wealth we argue that the arrow pratt concept per se well matches with economic intuition in standard financial decision problems such as willingness to pay for insurance and simple portfolio problems different from the literature we find that the widely applied spectral arrow pratt measure is not a consistent measure of arrow pratt risk aversion instead the difference between the antiderivatives of the corresponding risk spectra is valid within the framework of ross we show that the popular subclasses of expected shortfall and exponential and power spectral risk measures cannot be completely ordered with respect to ross risk aversion thus for all these subclasses the concept of ross risk aversion is not generally compatible with arrow pratt risk aversion but induces counter intuitive comparative statics of its own compatibility can be achieved if asset returns are jointly normally distributed the general lesson is that these restrictions have to be considered before spectral risk measures can be applied for the purpose of optimal decision making and regulatory issues