The Complexities of Financial Risk Management and Systemic Risks

Risk-management systems in financial institutions have come under increasing scrutiny in light of the current financial crisis, resulting in calls for improvements and an increased role for regulators. Yet such objectives miss the intricacy at the heart of the risk-management process. This article outlines the complexity inherent in any modern risk-management system, which arises because there are shortcuts in the theoretical models that risk managers need to be aware of, as well as the difficulties in sensible calibration of model parameters. The author suggests that prudential regulation of such systems should focus on failures within the financial firm and in the market interactions between firms and reviews possible strategies that can improve the performance of risk management and microprudential regulatory practice.

Management Model For University Cooperation At Universidad Técnica De Manabí, Ecuador

In researching a management model for university cooperation at the Universidad Técnica de Manabí, with its components, phases, stages, input, and output information as well as the premises of its practical application, thereby achieving qualitative and quantitative changes proposed in the conception of university cooperation for sustainable development. The model for the management of cooperation, the assumptions of the model and the components are exposed, and a map with universities that are currently on the network and the issues raised in the strategy, setting out the results at national and International levels

Comovements of Different Asset Classes During Market Stress

This paper assesses the linkages between the most important U.S.financial asset classes (stocks, bonds, T-bills and gold) during periods of financial turmoil. Our results have potentially important implications for strategic asset allocation and pension fund management. We use multivariate extreme value theory to estimate the exposure of one asset class to extreme movements in the other asset classes. By applying structural break tests to those measures we study to what extent linkages in extreme asset returns and volatilities are changing over time. Univariate results andch bivariate comovement results exhib significant breaks in the 1970s and 1980s corresponding to the turbulent times of e.g. the oil shocks, Volcker's presidency of the Fed or the stock market crash of 1987.Flight to quality, financial market distress, extreme value theory

Reconfiguring Household Management in Times of Discontinuity as an Open System: The Case of Agro-food Chains

The file attached to this record is the author's final peer reviewed version. The Publisher's final version can be found by following the DOI link.This article is based upon a heterodox approach to economics that rejects the oversimplification made by closed economic models and the mainstream concept of ‘externality.’ This approach re-imagines economics as a holistic evaluation of resources versus human needs, which requires judgement based on understanding of the complexity generated by the dynamic relations between different systems. One re-imagining of the economic model is as a holistic and systemic evaluation of agri-food systems’ sustainability that was performed through the multi-dimensional Governance Assessment Matrix Exercise (GAME). This is based on the five capitals model of sustainability, and the translation of qualitative evaluations into quantitative scores. This is based on the triangulation of big data from a variety of sources. To represent quantitative interactions, this article proposes a provisional translation of GAME’s qualitative evaluation into a quantitative form through the identification of measurement units that can reflect the different capital dimensions. For instance, a post-normal, ecological accounting method, Emergy is proposed to evaluate the natural capital. The revised GAME re-imagines economics not as the ‘dismal science,’ but as one that has potential leverage for positive, adaptive and sustainable ecosystemic analyses and global ‘household’ management. This article proposes an explicit recognition of economics nested within the social spheres of human and social capital which are in turn nested within the ecological capital upon which all life rests and is truly the bottom line. In this article, the authors make reference to an on-line retailer of local food and drink to illustrate the methods for evaluation of the five capitals model

Banks’ risk endogenous to strategic management choices

Use of variability of profits and other accounting-based ratios in order to estimate a firm's risk of insolvency is a well-established concept in management and economics. We argue that these measures fail to approximate the true level of risk accurately because managers consider other strategic choices and goals when making risky decisions. Instead, we propose an econometric model that incorporates current and past strategic choices to estimate risk from the profit function. Specifically, we extend the well-established multiplicative error model to allow for the endogeneity of the uncertainty component. We demonstrate the power of the model using a large sample of US banks and show that our estimates predict the accelerated bank risk that led to the subprime crisis in 2007. Our measure of risk also predicts the probability of bank default both in the period of the default but also well in advance of this default and before conventional measures of bank risk

A Network Model of Financial System Resilience

We examine the role of macroeconomic fluctuations, asset market liquidity, and network structure in determining contagion and aggregate losses in a financial system. Systemic instability is explored in a financial network comprising three distinct, but interconnected, sets of agents – domestic banks, international financial institutions, and firms. Calibrating the model to advanced country banking sector data, we obtain sensible aggregate loss distributions which are bimodal in nature. We demonstrate how systemic crises may occur and analyze how our results are influenced by firesale externalities and the feedback effects from curtailed lending in the macroeconomy. We also illustrate the resilience of our model financial system to stress scenarios with sharply rising corporate default rates and falling asset prices.Contagion, Financial crises, Network models, Systemic risk

How to Develop Strategic Management Competency: Reconsidering the Learning Goals and Knowledge Requirements of the Core Strategy Course

The dominance of theory-based approaches to strategy teaching has not displaced the need for core courses in strategic management to cultivate broader management skills. Yet, limited attention has been given to explicating, first, why we need to teach these skills, second, which skills we need to teach, and third how they can to be developed in the classroom. To help answer these three questions we need to understand the linkages between theory-based and skills-based approaches to strategy teaching. We begin with the proposition that the purpose of the core strategic management is to develop the strategic management competency of our students. We then adopt a systematic approach to identifying the why, what, and how components of strategic management competency. We show why analytical tools need to be complemented by judgment, insight, intuition, creativity, and social and communicative skills. We outline what these skills are and where they come from. Finally, we derive implications for how we should design and deliver of the core strategic management course

Incentivizing Resilience in Financial Networks

When banks extend loans to each other, they generate a negative externality in the form of systemic risk. They create a network of interbank exposures by which they expose other banks to potential insolvency cascades. In this paper, we show how a regulator can use information about the financial network to devise a transaction-specific tax based on a network centrality measure that captures systemic importance. Since different transactions have different impact on creating systemic risk, they are taxed differently. We call this tax a Systemic Risk Tax (SRT). We use an equilibrium concept inspired by the matching markets literature to show analytically that this SRT induces a unique equilibrium matching of lenders and borrowers that is systemic-risk efficient, i.e. it minimizes systemic risk given a certain transaction volume. On the other hand, we show that without this SRT multiple equilibrium matchings exist, which are generally inefficient. This allows the regulator to effectively stimulate a `rewiring' of the equilibrium interbank network so as to make it more resilient to insolvency cascades, without sacrificing transaction volume. Moreover, we show that a standard financial transaction tax (e.g. a Tobin-like tax) has no impact on reshaping the equilibrium financial network because it taxes all transactions indiscriminately. A Tobin-like tax is indeed shown to have a limited effect on reducing systemic risk while it decreases transaction volume.Comment: 38 pages, 9 figure

VaR-implied tail-correlation matrices : [Version October 2013]

Empirical evidence suggests that asset returns correlate more strongly in bear markets than conventional correlation estimates imply. We propose a method for determining complete tail correlation matrices based on Value-at-Risk (VaR) estimates. We demonstrate how to obtain more efficient tail-correlation estimates by use of overidentification strategies and how to guarantee positive semidefiniteness, a property required for valid risk aggregation and Markowitz{type portfolio optimization. An empirical application to a 30-asset universe illustrates the practical applicability and relevance of the approach in portfolio management