1,721,027 research outputs found
A Macro Stress Test Model of Credit Risk for the Brazilian Banking Sector
Get PDFThis paper proposes a model to conduct macro stress test of credit risk for the banking system based on scenario analysis. We employ an original bank level data set with disaggregated credit loans for business and consumer loans. The results corroborate the presence of a strong procyclical behavior of credit quality, and show a robust negative relationship between (the logistic transformation of) NPLs and GDP growth, with a lag response up to three quarters. The models also indicate substantial variations in the cyclical behavior of NPLs across credit types. Stress tests suggest that the banking system is well prepared to absorb the credit losses associated with a set of distressed macroeconomic scenarios without threatening financial stability.
A New Proposal for Collection and Generation of Information on Financial Institutions' Risk: the case of derivatives
Get PDFThis article aims at providing a new alternative for the collection of information on risks taken by financial institutions, which enables the calculation of risk tools usually used in risk management, such as VaR and stress tests. This approach should help risk managers, off-site supervision and academics in assessing the potential risks in financial institutions principally due to derivatives positions. The basic idea, for linear financial instruments, like the traditionally used by the management risk systems, is to reduce positions in risk factors and then mapping by vertices. For the nonlinear financial instruments all of the positions in different types of options – European, Americans, exotic, etc.– are represented as plain vanilla European options or replicated by portfolios of plain vanilla European options. The methodology was applied to Brazil, within the worst scenarios during the period from 1994 to 2004, and the paper demonstrates that the proposed approach captured the risks satisfactorily in the analyzed portfolios, including the risk existent in the strategies involving options, given an accepted error margin. This approach could be useful for regulators, risk managers; financial institutions and risk management modeling as it can be used as an input in general risk management models.
Forecasting Exchange Rate Density using Parametric Models: The Case of Brazil
Get PDFThis paper employs a recently developed parametric technique to obtain density forecasts for the Brazilian exchange rate, using the exchange rate options market. Empirical results suggest that the option market contains useful information about future exchange rate density. These results suggests that density forecasts using options markets may add value for portfolio and risk management, and may be useful for financial regulators to assess financial stability.
Price Rigidity in Brazil: Evidence from CPI Micro Data
Get PDFIn this paper, I investigate the patterns of price adjustments in Brazil. I derive the main stylized facts describing the behavior of price setters directly from a large data set of the CPI price quotes spanning approximately ten years until 2006. I find that on average prices remain unchanged for 2.7 to 3.8 months, exhibiting, however, a large degree of product and sector heterogeneity. Data on the frequency and sign of price changes show that there is a strong symmetry between price increase and decrease. Conversely, as expected under a positive inflation environment, the magnitude of positive price changes compensates this effect. I also provide some insights on the determinants of the patterns of price adjustment. The average duration of price spells decreased when the economy was hit by a confidence shock before 2002 presidential elections. The inflation rate of 5.9 % in 2000, jumped to 7.7% in 2001 and hiked to 12.6 % in 2002. Results suggest that substantial disturbances to average inflation imposed a high enough cost of not adjusting prices and triggered more frequent price reviews.
Linking Financial and Macroeconomic Factors to Credit Risk Indicators of Brazilian Banks
Get PDFThis study constructs a set of credit risk indicators for 39 Brazilian banks, using the Merton framework and balance sheet information on the banks’ total assets and liabilities. Despite the simplifying assumptions, the methodology captures well several stylized facts in the recent history of Brazil. In particular, it identifies deterioration in the credit risk indicators of the banking sector, following the crisis in the early 2000s. The risk indicators were regressed against a number of macro-financial variables at both individual and systemic level, showing that an increase in the system EDF, interest rates, and CDS spreads will lead to a deterioration of the individual expected default probability.
Determinants of Bank Efficiency: the case of Brazil
Get PDFThis paper analyzes the efficiency of the Brazilian banking sector over the post-privatization period of 2000-2007. We employ a Bayesian stochastic frontier approach, which provides exact efficiency estimates and confidence intervals and thus, allows an accurate comparison across institutions and bank groups. The results suggest that large banks are the most cost and profit efficient, supporting the concentration process observed in recent years. Foreign banks have achieved a good performance through either the establishment of new affiliates and the acquisition of local banks. The remaining public banks have had improvements in cost efficiency, but are relatively profit inefficient. Finally, we observe a positive impact of capitalization on efficiency.
Forecasting the Yield Curve for the Euro Region
Get PDFThis paper compares the forecast precision of the Functional Signal plus Noise (FSN), the Dynamic Nelson-Siegel (DL), and a random walk model. The empirical results suggest that both outperform the random walk at short horizons (one-month) and that the the FSN model outperforms the DL at the one-month forecasting horizon. The conclusions provided in this paper are important for policy makers, fixed income portfolio managers, financial institutions and academics.
The Dynamic Relationship between Stock Prices and Exchange Rates: evidence for Brazil
Get PDFThis paper studies the dynamic relationship between stock prices and exchange rates in the Brazilian economy. We use recently developed unit root and cointegration tests, which allow endogenous breaks, to test for a long run relationship between these variables. We performed linear, and nonlinear causality tests after considering both volatility and linear dependence. We found that there is no long-run relationship, but there is linear Granger causality from stock prices to exchange rates, in line with the portfolio approach: stock prices lead exchange rates with a negative correlation. Furthermore, we found evidence of nonlinear Granger causality from exchange rates to stock prices, in line with the traditional approach: exchange rates lead stock prices. We believe these findings have practical applications for international investors
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