Complex Valued Risk Diversification

Risk diversification is one of the dominant concerns for portfolio managers. Various portfolio constructions have been proposed to minimize the risk of the portfolio under some constrains including expected returns. We propose a portfolio construction method that incorporates the complex valued principal component analysis into the risk diversification portfolio construction. The proposed method is verified to outperform the conventional risk parity and risk diversification portfolio constructions

Measures of Systemic Risk

Systemic risk refers to the risk that the financial system is susceptible to failures due to the characteristics of the system itself. The tremendous cost of systemic risk requires the design and implementation of tools for the efficient macroprudential regulation of financial institutions. The current paper proposes a novel approach to measuring systemic risk. Key to our construction is a rigorous derivation of systemic risk measures from the structure of the underlying system and the objectives of a financial regulator. The suggested systemic risk measures express systemic risk in terms of capital endowments of the financial firms. Their definition requires two ingredients: a cash flow or value model that assigns to the capital allocations of the entities in the system a relevant stochastic outcome; and an acceptability criterion, i.e. a set of random outcomes that are acceptable to a regulatory authority. Systemic risk is measured by the set of allocations of additional capital that lead to acceptable outcomes. We explain the conceptual framework and the definition of systemic risk measures, provide an algorithm for their computation, and illustrate their application in numerical case studies. Many systemic risk measures in the literature can be viewed as the minimal amount of capital that is needed to make the system acceptable after aggregating individual risks, hence quantify the costs of a bail-out. In contrast, our approach emphasizes operational systemic risk measures that include both ex post bailout costs as well as ex ante capital requirements and may be used to prevent systemic crises.Comment: 35 pages, 11 figure

What is the best risk measure in practice? A comparison of standard measures

Expected Shortfall (ES) has been widely accepted as a risk measure that is conceptually superior to Value-at-Risk (VaR). At the same time, however, it has been criticised for issues relating to backtesting. In particular, ES has been found not to be elicitable which means that backtesting for ES is less straightforward than, e.g., backtesting for VaR. Expectiles have been suggested as potentially better alternatives to both ES and VaR. In this paper, we revisit commonly accepted desirable properties of risk measures like coherence, comonotonic additivity, robustness and elicitability. We check VaR, ES and Expectiles with regard to whether or not they enjoy these properties, with particular emphasis on Expectiles. We also consider their impact on capital allocation, an important issue in risk management. We find that, despite the caveats that apply to the estimation and backtesting of ES, it can be considered a good risk measure. As a consequence, there is no sufficient evidence to justify an all-inclusive replacement of ES by Expectiles in applications. For backtesting ES, we propose an empirical approach that consists in replacing ES by a set of four quantiles, which should allow to make use of backtesting methods for VaR. Keywords: Backtesting; capital allocation; coherence; diversification; elicitability; expected shortfall; expectile; forecasts; probability integral transform (PIT); risk measure; risk management; robustness; value-at-riskComment: 27 pages, 1 tabl

Diversification Preferences in the Theory of Choice

Diversification represents the idea of choosing variety over uniformity. Within the theory of choice, desirability of diversification is axiomatized as preference for a convex combination of choices that are equivalently ranked. This corresponds to the notion of risk aversion when one assumes the von-Neumann-Morgenstern expected utility model, but the equivalence fails to hold in other models. This paper studies axiomatizations of the concept of diversification and their relationship to the related notions of risk aversion and convex preferences within different choice theoretic models. Implications of these notions on portfolio choice are discussed. We cover model-independent diversification preferences, preferences within models of choice under risk, including expected utility theory and the more general rank-dependent expected utility theory, as well as models of choice under uncertainty axiomatized via Choquet expected utility theory. Remarks on interpretations of diversification preferences within models of behavioral choice are given in the conclusion

Farmers, farm workers and work-related stress

This research explores the ways in which stress affects farming communities, how this has changed in recent years, and the degree to which work-related aspects of stress may be assuaged by support interventions. A qualitative case study research approach was employed to address these issues, involving 60 interviews in five locations across England and Wales.In examining farming stress, a distinction is made between its intrinsic, extrinsic and workrelated dimensions. Whileinterviewees tended to associate day-to-day worries and acute stress with farming’s intrinsic demands (such as disease and adverse weather conditions), external causes of tension (such as competition and regulation), together with worries about finances and family, were associated with more sustained anxieties. By contrast, work-related aspects of farming stress, such as workload issues and farming practices, involved a combination of physical and mental health effects.Notably, work-related and extrinsic dimensions of stress have increased in recent years in relation to organisational and policy shifts, price fluctuations, mounting paperwork demands, workload intensification, and changes in agricultural regulation. These have prompted an escalation in the aspects of their work that farming communities feel powerless to control, and represent a major area for policy intervention. Principal farmers displayed the most visible manifestations of stress, linked at once to the intrinsic, extrinsic and workrelated dimensions of their work. By contrast, family farm workers and labourers often lacked autonomy over the way they worked, and work-related aspects of stress concerning workload and organisation made up a greater part of their experience. Increased paperwork demands emerged as a major cause of stress among interviewees, particularly forfarmers and their wives, who struggled to balance these with traditional farming priorities. Differences between farmswere also influential in explaining stress. Livestock farming embodied intrinsic pressures relating to stock crises and the unpredictability of animals, but more recently has come under intense economic pressure, prompting a rationalisation of working practices. Arable farmers found the organisation of activities, such as harvesting and planting, in a context of reduced and increasingly contractual workforces particularly challenging. Mixed farmers faced the dual stresses of balancing work activities with conflicting timetables, and the paperwork demands of a complex portfolio of farming. Smaller farms were struggled with intensified workloads, while larger enterprises had to comply with the demands of more inspection regimes.Support agencies need to overcome the stigma attached to asking for help among farming communities and offer a rangeof responsive and proactive services. Locally based support was more likely to be used and trusted, although concernsabout client confidentiality might deter those most in need from seeking help. Where existing local networks wereestablished, there was a strong argument for providers to plug into these and work towards publicising their efforts to ensure that support is provided most effectively. Critically, support must be multidimensional, reflecting the wide range of stressors and their impacts among farming communities

The Financialization of the Property Sector: the Case of the Swiss Pension Trusts (1994-2005)

About 15% of the fortune of the Swiss pension funds has been invested in real estate from 1994 to 2002. Pension trusts have two possibilities in their investment policy, either owning and being responsible for the buildings directly or buying shares in investment vehicules whose localization is mainly in Zurich. In the first case, pension trusts behave as contractors and investors at the same time, which requires staff and moreover knowledge of the real estate markets. Investments which are done at a regional scope and concern chiefly rental apartment buildings are evaluated inside the pension trusts. In the second case, pension trusts are only investors and investments are evaluated through market criterias such as yield, risk/ diversification and liquidity. Basically only the main urban regions of the country are considered for real estate investments that also concern chiefly rental apartment buildings in this case. The change of territorial scale doesn't seem to reduce the risk of real estate investments and the question of the expected yield can be of relevant.