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SESSION IV-2 : RISK MANAGEMENT (18/12/2008 à 16h00)

Are French Individual Investors reluctant to realize their losses?

Auteurs : BOOLEL-GUNESH Shaneera; BROIHANNE M-H.; MERLI M. (LARGE, Louis Pasteur University)

Intervenants : BOOLEL-GUNESH Shaneera (LARGE, Louis Pasteur University)

We analyze the presence of the disposition effect for 90 244 French individual investors based on a large brokerage account database between 1999 and 2006. Main results show that French investors demonstrate a strong preference for realizing their winning stocks rather than their losing ones. However, the fiscal impact in France appears to be moderate relative to the one observed in other countries. Moreover, results indicate that the behavioral bias is not eliminated for sophisticated individual investors (higher trading activity or international diversification). Finally and more originally, based on French account specificities; we demonstrate that the change of “tax account type” does not imply any change in investors’ behaviour.

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Fund Flows, Performance, Managerial Career Concerns, and Risk-Taking

Auteurs : HU Ping (Wachovia Corporation); R. KALE Jayant & SUBRAMANIAN Ajay (University of Georgia); Marco PAGANI (University of San José)

Intervenants : Marco PAGANI (University of San José)

We develop a framework in which we simultaneously model the interactions among investors, fund companies (represented by fund advisors), and managers. In this framework, we show that the interplay between a manager's incentives arising from her compensation structure and career concerns leads to a non-monotonic (approximately U-shaped) relation between her risk choices and prior performance relative to her peers. We empirically analyze the risk-taking behavior of a large sample of fund managers and find significant support for the predicted U-shaped relative risk-prior performance relation. Reputation concerns and employment risk plays a crucial role in driving the non-monotonic relation; significant out performers (under performers) are less (more) likely to be fired in the future, and are also more likely to increase relative risk. We also show empirical support for the additional testable implications of the theory that link determinants of the fund flow-performance relation and managerial career concern to risk-taking behavior. Funds with higher expense ratios have less convex fund flow-performance relations and less convex U-shaped relative risk-prior performance relations. Funds with younger managers, who face greater employment risk, have more convex U-shaped relative risk-prior performance relations.

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Top-Down versus Bottom-Up Approaches in Risk Management

Auteurs : GRUNDKE Peter (University of Osnabruck)

Intervenants : GRUNDKE Peter (University of Osnabruck)

Banks and other financial institutions face the necessity to merge the economic capital for credit risk, market risk, operational risk and other risk types to one overall economic capital number to assess their capital adequacy in relation to their risk profile. Beside just adding the economic capital numbers or assuming multivariate normality, the top-down and the bottom-up approach have been emerged recently as more sophisticated methods for solving this problem. In the top-down approach, copula functions are employed for linking the marginal distributions of profit and losses resulting from different risks. In contrast, in the bottom-up approach, different risk types are modelled and measured simultaneously in one common framework. Thus, there is no need for a later aggregation of risk-specific economic capital numbers. In this paper, these two approaches are compared with respect to their ability to predict loss distributions correctly. We find that the top-down approach can underestimate the true risk measures for lower investment grade issuers. The accuracy of the marginal loss distributions, the employed copula function, and the loss definitions have an impact on the performance of the top-down approach. Unfortunately, given limited access to times series data of market and credit risk loss returns, it is rather difficult to decide which copula function an adequate modelling approach for reality is.

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Hedging (Co)Variance Risk with Variance Swaps

Auteurs : DA FONSECA José (ESI Léonard de Vinci); GRASSELLI Martino (Universita degli Studi di Padova); IELPO Florian

Intervenants : IELPO Florian (Centre d'Economie de la Sorbonne)

In this paper we introduce a new criterion in order to measure the variance and covariance risks in financial markets. Unlike past literature, we quantify the (co)variance risk by comparing the spread between the initial wealths required to obtain the same final utility in an incomplete and completed market case. We provide explicit solutions for both cases in a stochastic correlation framework where the market is completed by introducing volatility products, namely Variance Swaps. Using real data on major indexes, we find that this criterion provides a better measure of the market risks with respect to the (misleading) traditional approach based on the hedging demand.

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