Credit migration matrices are cardinal inputs to many risk management applications. Their accurate estimation is therefore critical. We explore three approaches, cohort and two variants of duration—time homogeneous and non-homogeneous—and the resulting differences, both statistically through...

Is there something special, with respect to risk and capital, about a financial conglomerate that combines banking, insurance and potentially other financial and non-financial activities? To what degree is the risk of the whole less than the sum of its parts? This paper seeks to address these...

Central to the ongoing development of practical financial risk management methods is recognition of the fact that asset return volatility is often forecastable. Although there is no single horizon relevant for financial risk management, most would agree that in many situations the relevant...

Credit migration or transition matrices, which characterize the expected changes in credit quality of obligors, are cardinal inputs to applications such as asset pricing and risk management. We propose a new metric for comparing these matrices (a mobility index) by first subtracting the identity...

Recent literature has trumpeted the claim that extreme value theory (EVT) holds promise for accurate estimation of extreme quantiles and tail probabilities of financial asset returns, and hence holds promise for advances in the management of extreme financial risks. Our view, based on a...

The turmoil in the capital markets in 1997 and 1998 has highlighted the need for systematic stress testing of banks' portfolios, including both their trading and lending books. We propose that underlying macroeconomic volatility is a key part of a useful conceptual framework for stress testing...

Financial institutions such as banks are ultimately exposed to macroeconomic fluctuations I the countries to which they have exposure, the most acute example being commercial lending to companies whose fortunes fluctuate with aggregate demand. This risk management need for financial institutions...

Market risk management under normal conditions traditionally has focussed on the distribution of portfolio value changes resulting from moves in the mid-price. Hence the market risk is really in a "pure" form: risk in an idealized market with no "friction" in obtaining the fair price. However,...

We examine the question of deposit insurance through the lens of risk management by addressing three key issues: 1) how big should the fund be; 2) how should coverage be priced; and 3) who pays in the event of loss. We propose a risk-based premium system that is explicitly based on the loss...

The New Basel Accord for bank capital regulation is designed to better align regulatory capital to the underlying risks by encouraging better and more systematic risk management practices, especially in the area of credit risk. We provide an overview of the objectives, analytical foundations and...