Quantitative Financial Risk Management

Investment funds in China started in 1991. After 20 years of development, the mutual fund industry is now offering a rich product line for investors. At present, individual investors hold about 90% of the mutual fund with more than 90,000,000 fund accounts. Mutual fund purchasing has become the preferred way of managing money for urban residents in China. This paper study on risk assessment methods of investment fund. An empirical analysis of the selected 15 mutual funds in China is performed with testing models of VaR, Semi-Parameter VaR and GARCH-VaR. After testing of these models, these selected funds demonstrated some of characteristics of China funds. As to risk assessment methods, we find that Semi-Parameter VaR is relatively simple in calculation but the resulting confidence interval is too wide for practical application. Comparatively GARCH-VaR is found to be more rational and precise. GARCH-VaR method has better precision than conventional performance index.

In order to analyze the impact of asset price shocks on the banking system, this paper develops a macro stress-testing framework to assess liquidity risk, credit risk and market risk. Firstly, using the Monte Carlo method to simulate market risk path generated by the financial asset price shocks; secondly, using Morton model to analyze the linkage between market and default risks of banks, while the linkage between default risk and deposit outflows is estimated econometrically; Contagion risk is also incorporated through banks’ linkage in the interbank and capital markets. Finally, the framework is applied to a group of banks in China, based on publicly available data as at the end of 2009. Its test results show that: the liquidity risk of the bank system is very low, the probability of no bank default is 99.32%, and the entire bank system is stable.

The option risk management model is a method to measure the finance risk and management market risk. Based on the contrast research on this option hedge ratio under the traditional minimum variance risk management model. This article has analyzed CVaR the minimum option hedging optimization model. And it explains its difference with minimum variance model. It also provides a reference for the hedgers on the option hedge’s study.

In this paper, we combined with the option pricing theory of financial mathematics on the basis of actuarial theory to research the fair premium of endowment life insurance dividends. Taking advantage of the application of the Ito’s Formula of option pricing theory, construct a risk neutral investment portfolio with the Vasicek single factor term structure of interest rate model. And then making use of the \( \Delta \)-hedging ideas to get the stochastic differential equations of the fair premium of the insurance contract.

With the rapid development of insurance markets, the setting of premium became an important issue. Financial option is an important tool in the financial markets, and the B-S Option Pricing Model, which is risk-neutral pricing model, is based on strict assumptions to calculate the price of the call option. Utilizing the connection between European call option and European put option of risk-free assets, we observe that European put option formula can be obtained by the value of European call option with the same validity and contract price. Insurance and financial options have many similarities, which is actually a kind of put options. Give some assumptions, the B-S Option Pricing Model is applied to term life insurance, and we can summarize the problems that the B-S Option Pricing Model is not suitable to set premium through comparison with insurance actuarial method.

Although there are extensive research on ASEAN+3 discovering the synchronization of economic patterns including exchange rate management policies in the region, the research on the pattern of trade policies in banking sector is still limited. In this paper, we evaluate the trade barriers in banking and its evolution over time using three sequential survey data from World Bank as well as other international organizations. It was found that there exists salient dispersions in trade restriction policies and the dispersion remains over time. There is no trend toward more liberalization in the sector either.

This paper investigates the relationship between corporate board governance and risk taking in China’s capital markets. Using a sample of Chinese listed firms from the period 2000 to 2005, the results suggest that board size and the ownership of board have negative effect on corporate risk taking. The results also suggest that the effect of the ownership of board on risk taking is stronger for non state-controlled listed firms than state-controlled listed firms.

This article uses the Svensson model to develop the term structure of interest rate in China’s interbank bond market, and then analyzes the variation of the term structure of interest rate through principal components analysis and sensitivity analysis. The results show the term structure can be explained by the four principal components rather than three principal components compared with foreign developer market. The first principal component seems different than the parallel shift factor of the yield curve usually found in foreign studies and the fourth factor has a significant impact on the term structure especially the spot rate within 1 or 2 years. The difference of the risk factors exhibits a distinctive feature of China’s interbank bond market.

Negative returns affect much more greatly on volatility than positive volatility because of existence of market panic, and stock volatility decreases because of terms of redemption and protection. We propose GARCH models with thresholds to describe volatility and establish the pricing formula of convertible bonds. In the study of convertible bonds, the issuing date of convertible bonds is an important variable. Because structural changes will happen to the return on assets before and after the converting. We find a method to identify structural change-point by applying CUSUM algorithm. In the study of redemption policy, the average stock price meeting the redemption conditions is calculated and is taken as the redemption condition.

This paper presents the concept of ‘Sentiment Capital Asset Cognitive Price’. Based on the results of previous researches and BSV model’s research method, this paper establishes a type of sentiment capital asset cognitive price model, and obtains the analytic expression of the sentiment capital asset cognitive price. An empirical test for this model is given ultimately. The evidence from China’s stock market proves the significant effect of sentiment on the market.

New regulatory frameworks designed to comply with the Kyoto protocol have been developed with the aim of decreasing global greenhouse gas emissions over both short and long time periods. Incentives must be established to encourage the transition to a clean energy economy. Emissions taxes represent a “price” incentive for this transition, but economists agree this approach is suboptimal. Instead, the “quantity” instrument provided by cap-and-trade markets are superior from an economic point of view. This chapter summarizes the current state of world cap-and-trade schemes as well as recent literature devoted to quantitative pricing and hedging tools for these markets.

In this paper, we investigate how investors who face both equity risk and credit risk would optimally allocate her wealth among the following securities: a defaultable bond, a stock and a bank account. We model the defaultable bond price through a reduced-form approach and solve the dynamics of its price. Using stochastic control methods, we obtain a closed-form solution to this optimal problem. From the solution it is clear that the optimal strategy of the defaultable bond is not a continuous function because of jump risk. The post-default optimal strategy for defaultable bond is zero, and the pre-default optimal strategy for defaultable bond depends on the credit spreads, the default intensity and the investment horizon.

In this paper, the specific data about some Chinese major listed commercial banks, combined with our country’s macroeconomic variables factors, were used to analyze the influence of these factors on the credit risk of commercial banks by mixed effects model. According to our analysis, we arrived at the conclusions: the credit risk of commercial bank is not only influenced by the bank itself, but also significantly affected by the others macroeconomic factors; mixed effect model can explain the differences and changes of the inter-bank credit risk. In the end of the paper, we pointed out: commercial banks should be reasonable to adjust the region and magnitude of credit and decentralize loads in the time, so as to effectively avoid the feasible serious consequences leaded by economic cycle, which could guarantee their revenue in effect, improve ability of withstanding risks, and enhance competitiveness.

Based on the credit risk measurement of a variety of technical and historical review, this paper focuses on the KMV model. The authors select a wide range of sample data and calculate one by one, and use the results to analyze the applicability of the model in China from the perspective of micro level and macro level. It is cited that the model can be used to distinguish different risks of business, and the model results can be associated with indicators of corporate credit risk, and the macroeconomic data also be used to validate the model. It is concluded that the model can be used to distinguish different credit risks of China’s Listed Companies, also cited to match with China's current credit rating system. A useful suggestion is put forward that Chinese government should strengthen to supervise China's credit risk and create a fair and transparent credit market for every companies.

As the important factor that our country’s sustained economic growth relies on in future, the consumer credit will play an important role in the stage of the economic transition. However, because of many uncertain factors in the macroeconomic environment, the development situation of the consumer credit is not optimistic. Therefore this paper empirically analyses the influences of the macroeconomic factors on the consumer credit, after studying the present situation of our country’s consumer finance development, thus pertinently puts forward some related suggestions.

We examine wealth effects of the creditor in mergers with data of Chinese listed companies. The previous method is highly dependent on the bond price so that it is not feasible in undeveloped markets like China. To overcome this problem, we develop a new method based on option pricing approach. Our findings show that creditors of the ST can obtain significant wealth effects in the merger, while creditors of the healthy obtain negative wealth effects. We argue the reasons can be ascribed to the agency conflictions and information asymmetry between the primary creditor and the new controlling shareholder.

The relationship between the energy consumption (EC) and the economy growth of China during the period of 1981 to 2008 was studied with the application of co-integration approaches base on H-P filtration. The results show that a stationary positive relationship between the total energy consumption and gross domestic product (GDP) exists, and the main reason of the rising energy consumption is the continuous growing of GDP. The characteristic of common trends and volatilities between the energy consumption and the economy growth was obtained after H-P filtration. From the view of trend components, a long-term equilibrium relation between the two sides was clearly proved, which explains that the growth of China’s energy consumption is inevitable in a considerable period. However, it was found that in a long-term, the growth of GDP doesn’t necessarily depend on the large input of energy. The economy cycle will profoundly affect the energy cycle components, and the both sides will be linked more closely in the future. However, different energy consumption cycles have a little different influencing factors. For example, in the period of 1997 to 2004, with the rapid development of economy in China the energy consumption cycle had a greater volatility under the influence of both energy structure and industry structure. Therefore, the transitions of economy development model need to be accelerated and the measures of energy-saving and cost-reducing need to be developed.

This paper assessment and forecast the risk of Chinese listed companies in 2009–2010 on bayesian network classification model and risk forecasting index system. The result shows that listed companies are all have certain level financial and operating risk in 2009: 11.62% have high financial risk and 21.76% have high operating risk. Looked from the industry distribution, electricity, gas and water production and supply, electronics, real estate, metallurgy, agriculture, forestry, animal husbandry and fishery, pharmaceuticals, biological and comprehensive industries have higher financial risk. Mining, electronics, real estate, textile, clothing and fur Industry, transportation, storage, metallurgy, agriculture, forestry, animal husbandry and fishery, wholesale, retail and comprehensive industries have higher operating risk. Listed companies in 2010 also have certain level financial and operating risk: 12.37% of them have higher financial risk and 18.44% have higher operating risk. electricity, gas and water production and supply, electronics, real estate, metallurgy, agriculture, forestry, animal husbandry, fishery, pharmaceuticals, biological, wholesale and retail, food and beverage and comprehensive industries have higher financial risk. Mining, electronics, real estate, mechanicals, equipment and instrument, metallurgy, wholesale and retail, servicing and comprehensive industries have higher operating risk.

With the environmental deterioration, there are increasing environmental risks for enterprises, which may bear a tremendous responsibility for environmental liabilities. Based on the basic principles and techniques of environment risk assessment and management for enterprise, from the perspective of environmental whole process management, combining with assessment techniques and management procedures of environmental risk, and analysis framework of environmental damage total cost, this paper proposes the prevention and control methodology of environmental liabilities in enterprise, namely, The prevention method includes environmental materials and environmental liability insurance; The whole process control method includes Ecological Design and ISO14000 environmental management framework; The post-management method includes hazardous waste recycling and management and damage coordination and management of sudden environmental incidents. These methods can provide a good reference for the control of environmental risk, prevention of environmental liabilities in enterprise.

Supply Chains have significantly increased in size and complexity due to supplier, producer and customer globalization. The quest for business efficiency has resulted in the current paradigm of lean organizations, exposing high vulnerability to disruptions and uncertainties. Supply Chain Risk Management (SCRM) has surfaced as a high potential field to foster business sustainability, flexibility and resilience. The Petroleum Supply Chain (PSC), a highly automated, investment intensive, and financial risk prone industry sees keen interest in uncertainty mitigation. The current paper develops a hierarchical SCRM framework and presents a classified review of the extant SCRM literature. The investigation then focuses on the petroleum supply chain risk management (PSC-RM), reviews the PSC and the process industry developments, develops a hierarchical RM methodology, identifying research directions and financial offerings for the PSC-RM implementation.

Supply risk management (SRM) is on the rise as firms face increased risks due to outsourcing and an increasingly dynamic and complex business environment. Besides, supply chain risks and resulting disruptions are not only related to temporarily enhanced cost, but may endanger the existence of a firm. Many firms from different industries intensified their efforts in SRM during the economic crises. But so far – also because of the difficulty to assess the success of risk management approaches – a process standard for SRM has not yet been defined. Hence, different approaches for SRM in terms of scope, resource intensity and formalization exist, bringing different maturity levels of SRM systems to the light. In this paper, we contribute to prior research by illustrating a SRM process model. Based on this model we explore the status-quo of best practices across different industries. Based on insights from multiple case studies we elaborate on best practices and the maturity level of SRM processes. The eight identified SRM processes can be clustered into strategic, core and enabling processes. We investigate the supply risk strategy process, the four core practices of risk identification, risk assessment, risk treatment and risk monitoring as well as the three enabling processes establishment of risk guidelines and procedures, IT integration and employee training for supply risk management. Providing an overview over the significant spread of SRM processes proficiency we offer guidance to purchasing executives who seek to develop their SRM towards greater maturity.

Enterprise Risk Management has come to the forefront as an essential device for assessing business threats, opportunities, and their impact on the creation of value. In this context, this chapter attempted to propose an operational ERM frame-work, the “Spring” model, which is specifically aimed to support the transition of ERM from the governance sphere to the operational units.

The overall risk of economic performance of China was evaluated through the establishment of risk index of economic operations in this paper. The results show that China’s overall risk status is running a “risk concern” level in 2010 and 2011. Excessive bank credit and the value shrink of huge foreign exchange reserves will be the main risk factor in 2010, however, in addition to these factors, asset bubbles and rising inflation pressures will be the other factors in 2011. To promote the economic development in the next two years, China should gradually withdraw from loose monetary policy and take appropriate fiscal policy to eliminate the side effects of policies response to the crisis. And other measures such as interest rate adjustment and inflation expectations leading should be taken to prevent the breeding of asset price bubbles and increasing of inflation risk.

One of the aftermaths of the financial crisis is the search for a good measure to quantify systemic risk, i.e. the negative spillover effects that an individual institution or an industry sector might have on others or even the financial system as a whole. In a general setting, we introduce a measure for the systemic risk contribution of individual institutions which embeds different approaches made so far in the literature. Our approach ensures that the contributions to systemic risk of the individual institutions add up to the aggregate systemic risk and thus allows for supervisors to identify systemically important financial institutions and to set adequate capital requirements. To apply the proposed method, we give examples of how a market distress can be identified and show how the contribution to systemic risk changed along the financial crisis.