The estimation and decomposition of value-at-risk for non-normal portfolio returns

Value-at-risk (VaR) is a widely used measure for evaluating the market risk of a trading portfolio. This article presents the g-and-h method for estimating the VaR of a portfolio with non-normal returns, and adds to the usefulness of VaR as a risk management tool by decomposing the portfolio into individual VaRs to estimate the contribution of the individual components toward the overall VaR. While the VaR decomposition is algebraically simple under the assumption of normality, that is not the case under non-normality which is the property exhibited by most financial returns. We show that, by using the g-and-h VaR method, the decomposition analysis under non-normality can be performed with the same degree of intuitiveness and ease as for the analytical methods based on the assumption of normality. First published online: 16 Jan 201

Modelling Retail Deposit Spreads in the UK

Models that are based on mean-variance analysis seek portfolio weights to minimise the variance of the portfolio for a given level of return. The portfolio variance is measured using a covariance matrix that represents the volatility and correlation of asset returns. However these matrices are notoriously difficult to estimate and ad hoc methods often need to be applied to limit or smooth the mean-variance efficient allocations that are recommended by the model. Moreover the mean-variance criterion has nothing to ensure that tracking errors are stationary. Although the portfolios will be efficient, the tracking errors will in all probability be random walks. Therefore the replicating portfolio can drift very far from the benchmark unless it is frequently re-balanced. Deposits, yield Cruves, Stochastic Interest Rates

Market microstructure: an analysis of bank-specific factors in the retail CD pricing

Economic theory suggests that in a competitive market, prices tend to converge. This article examines the prices of small-denomination (<$100,000) certificates of deposit (CDs) offered by commercial banks in 50 major US cities. Owing to information provided by internet websites, the markets for CDs have become increasingly competitive in recent years. Nevertheless, we found large variations in CD rates and yields among the banks in major US cities, and across cities. To date, research regarding small denomination retail CDs has focused on the relationship between the rates and market-common or macroeconomic factors. Our study is unique in that the primary focus is to identify bank-specific variables explaining significant variations in retail CD yields, thereby enabling more effective revenue management in a broad sense. We find very strong evidence that asset size, the cost of funding earning assets, and the ratio of non-interest-bearing deposits to total deposits are the factors characterising those differences. Taken together, it suggests that the large banks with higher cost of funding and lower non-interest-bearing deposit ratio would be willing to pay the higher prices on their retail CDs, indicating that liquidity would play a prime role in pricing retail CDs.bank-specific factors; CD yields; microstructure; revenue management; retail pricing; CD pricing; certificates of deposit; commercial banking; USA; United States; liquidity.

An analysis of the impacts of corporate governance on the financial performance of the Chinese banks

This study examines the cross-sectional relation between corporate governance and corporate performance of the sample of 12 Chinese banks over the 2003-2006 periods. Taking other influential factors into account, such as the capital adequacy ratio and the firm size, this study investigates the influence of state ownership and outside directors on bank performance, measured by return on equity and non-performing loans ratio. The two ratios are chosen to evaluate the financial performance of a bank in terms of its profitability and the soundness of its operating revenue management. The results suggest that there is a strong relationship between corporate governance and bank performance. More specifically, the fraction of shares owned by the state has significant and negative effects on bank performance and the proportion of outside directors on the board of directors has positive effects on bank performance.corporate governance; NPL ratio; non-performing loans ratio; outside directors; ownership structure; ROE; return on equity; revenue management; financial performance; Chinese banks; China; banking; bank performance; capital adequacy ratio; firm size; state ownership.

The financial performance of retailers owning credit card banks

Some retailers and other firms expecting to improve their operating performance have established Credit Card Banks (CCBs) as a revenue management tool to handle their proprietary credit card receivables, as well as those from Visa and MasterCard. The expected improvement in performance has to come primarily from increasing sales revenue with the retailers' own private-label credit cards, from interest income and from reducing the amount of credit card receivables and the cost of financing them. We test the differences in corporate performance, primarily measured by the Economic Value Added (EVA), and the efficiency of the accounts receivable management, between firms with and without CCBs. We find no significant improvement in their performance. In addition, we document that retailers with CCBs have longer average collection periods and relatively more receivables than those without CCBs, and that there is no difference in the revenue growth rate between the two groups of retailers.accounts receivable; corporate performance; credit card banks; EVA; revenue management; economic value added; retailers; financial performance.