readings Flashcards
lecture 1 core
Nocco and Stulz, 2006
corps can manage risks in two fundamentally different ways:
one risk at a time, on a compartmentalised and decentralised basis all risks viewed together within coordinated strategic framework - ERM.
people through org need to understand how it can create value. must be bought into by all levels of org.
effectiveness of ERM cannot be judged on eliminating risk, extreme negative outcomes are still a possibility. to evaluate, board and CEO must attempt to determine how well company’s risk is understood and managed.
lecture 2 core
Stulz, 2008
when determining risk appetite of org, general approach is to weigh benefits of inc risk taking against costs, and aim for point where marginal benefits = marginal costs.
the 5 types of risk mgment failure are therefore:
1. failure to use appropriate risk metrics
2. mismeasurement of known risks
3. failure to take known risks into account
4. failure in communicating risks to top mgment
5. failure in monitoring and managing risks
extending horizons of risk mgment model valuable for two reasons - first, financial crises can involve abrupt withdrawal of liquidity from markets. absence of liquidity means firms stuck with positions they didn’t expect to hold. second, during crisis period companies will repeatedly experience losses that exceed daily VaRs, substantially weakening their own capital positions. even firms whose trading guided mainly by daily VaR should consider complementing it with longer term measures.
lecture 3 core
Thakor, 2020
use of blockchain along with other tech advancement intended to:
lower search costs of matching transacting parties, achieve economies of scale in gathering and using large data, achieve cheaper and more secure information transmission, reduce verification costs
insurtech - connected devices in homes gather big data that insurance companies can use to calculate risk more precisely and more dynamically.
It is quite likely that blockchain tech assisted smart contracts will fundamentally alter financial contracting, with changes induced at both the intensive and extensive margins.
lec 4 core
Bartram, Brown and Fehle (2009)
paper analyses FX, IR and CP (commodity price) derivatives held by 7,319 companies in 50 countries. total sample covers roughly 80% of global market capitalisation of nonfinancial firms.
after controlling for access to derivatives, firm-level characteristics are more important determinants than country-level.
We interpret unambiguously inconsistent results as evidence that because of the endogenous nature of the decision to use derivatives, the commonly utilised techniques for examining theoretical motivations for risk mgment are unlikely to provide clear conclusions.
lec 5 core
Zalewska (2014)
emergence of large scale businesses with complex organisational forms may have significantly increased opaqueness within corps, resulting in greater informational asymmetry between investors and mgment, highlighting agency problem.
efforts towards reducing asymmetry should be directed towards ex ante rather than ex post monitoring. creating conditions for effective ex ante monitoring seems to have moved to top of agenda in numerous countries. solutions developed in one country not always generalisable.
politicians commonly get actively involved in debates on what is good/bad corp gov, but their time horizons are notoriously different from those of other policy makers. direct political intervention often results in introduction of draconian laws that throw out baby with the bathwater. - like SOX and EU regs on banker bonuses.
partial reversal of some of the SOX’s requirements by the dodd-frank act suggests initial act was a potential overreaction of the authorities.
lec 7 core
Doherty (1997)
new cat instruments often explained in terms of need to provide direct access to capital markets to supplement limited capacity of reinsurance markets. – some catastrophes modelled to have potential to wipe out 25% or more of entire industry’s net worth. however monetary losses of this size would hardly cause a ripple in capital markets. losses actually amount to less than 1 s.d. of daily trading volume.
major benefit of defining the option on the index is that it controls moral hazard. the primary insurer that is able to practice ex ante or ex post mitigation will receive much of the benefit in form of reduced claims.
the gain from indexing is that it ameliorates the moral hazard problem. can also used modelled payoffs based on an independent modelling firm’s projections of losses.
lec 8 core
Jia, Adams and Buckle (2011)
property insurance can potentially enhance a firm’s product–market position and thereby add value for shareholders and protect the interests of other stakeholders
insurance contracts could in an ex ante sense help discipline managers to invest in cash-flow-generating assets in order to maintain premium payment obligations
insurance can encourage corporate managers to act not in a collusive way but rather act aggressively with their rivals (e.g. by increasing output and/or lowering prices). In competitive markets property insurance could, under the
shareholder maximisation objective function, enhance rather than mitigate managerial risk-taking via aggressive price reducing/output increasing behaviour.
lec 9 core
Giambona, Graham and Harvey (2017)
1161 survey respondents, majority of respondents coming from North America and the rest from Europe and Asia. looks at micro, macro and external political risk.
54% of participants believe political risk has increased, whereas only 8% believe it has decreased.
Firms with risk averse executives and relatively worse agency issues are about 40% more likely to avoid investing in politically risky countries.
