Integrated Risk Management and the Role of the Risk Manager

ABSTRACT: Although the transferring of a firm's pure risk historically has been conducted through the insurance and reinsurance markets, risk managers of large corporations are reportedly becoming more sophisticated with regard to their risk financing strategies. This increased sophistication has come in the form of greater use of techniques such as captives, finite risk insurance, financial reinsurance, and risk retention groups. The purpose of this study is to assess the characteristics and extent of integrated risk management. Using survey data, we evaluate several aspects of risk management integration, including (1) the extent to which risk managers are involved in managing both pure and financial risks facing their firms, (2) the nonoperational types of risks handled by risk managers and the techniques being used to handle a broader set of risks, and (3) the effect that factors such as the size of the firm, the firm's industry, and the background and training of the risk manager has on participation in integrated risk management activities.     

Tighter Option Bounds from Multiple Exercise Prices

Optionbounds are determined by state discount factors limited by prices of a riskless bond and the underlying asset. Usually the asset has at least two market-traded options for each maturity, further limiting the factors. Tighter bounds result from incorporating the prices of all existing options of the same maturity. The tightened bounds are particularly applicable to appraising the consistency of all options trading on a single underlying security, notably index options. Constructed examples indicate a potential improvement of eighty percent in bound width; index data reveals a lower reduction, but extensive arbitrage opportunities from violations of the tighter bounds. This revised version was published online in November 2006 with corrections to the Cover Date.     

Entry, exit and trading profits: A look at the trading strategies of a proprietary trading team

We examine the behavior of a 15 strong proprietary stock trading team and show how consistent intraday trading profits were generated. The team, who worked for a large US direct access trading firm, executed over 96 thousand trades in 3 months in 2000. Profitable intraday trading occurred in an anonymous dealer capacity, on both long and short positions, especially when volume and price volatility were higher. The traders rapidly entered long (short) positions when the number of dealers and size become greater on the bid (offer) side of the spread. Profits were taken early against the trend.     

Whole vs. shared ownership of foreign affiliates

This paper studies why multinational firms often share ownership of a foreign affiliate with a local partner even in the absence of government restrictions on ownership. We show that shared ownership may arise, if (i) the partner owns assets that are potentially important for the investment project, and (ii) the value of these assets is private information. In this context shared ownership acts as a screening device. Our model predicts that the multinational's ownership share is increasing in its productivity, with the most productive multinationals choosing not to rely on a foreign partner at all. This prediction is shown to be consistent with data on the ownership choices of Japanese multinationals.     

DO INSTITUTIONS MITIGATE THE RISK OF NATURAL RESOURCE CONFLICTS?

The resource curse, as manifested by an increased likelihood of conflict over rents, can be mitigated by institutions. Lei and Michaels find that discoveries of “giant” oil fields increase the likelihood of violent conflict, but they find no evidence that democratic institutions mitigate this risk. We test whether institutions mitigate the resource curse by reducing the risk of natural resource conflicts. Our results indicate that high quality economic institutions reduce the likelihood of territorial (separatist) conflicts following natural resource rent windfalls. Highly autocratic and highly democratic institutions also reduce the likelihood of territorial conflict after natural resource rent windfalls. (JEL Q34, O13, P48, D74)     

Risk of major amputation or death among patients with critical limb ischemia initially treated with endovascular intervention,surgical bypass,minor amputation,or conservative management

Aims: Patients with critical limb ischemia (CLI) have an increased risk of major amputation. The initial treatment approach for CLI may significantly impact the subsequent risk of major amputation or death. The objective of this study was to describe the initial treatment approaches of patients with CLI and the limb outcomes associated with each approach.

Methods: Data from MarketScan Commercial and Medicare Supplemental Databases from January 2006–December 2014 was utilized. Cohorts of CLI patients were defined as follows: (1) peripheral vascular intervention (PVI); (2) peripheral vascular surgery (PVS); (3) minor amputation without concomitant PVI or PVS (MinAMP); and (4) Patients without PVI, PVS, or MinAMP (conservative therapy). The odds of major amputation or inpatient death were estimated using the Cox proportional hazards model. For those patients requiring a major amputation, the incremental expenditures per member per month (PMPM) were estimated using a gamma log-link model.

Results: Conservative therapy was associated with significantly higher odds of major amputation or inpatient death compared to patients who underwent minor amputation (1.59-times), PVI (2.08-times), or PVS (2.12-times). Patients treated with an initial strategy of minor amputation also had higher odds of major amputation or inpatient death compared to PVS (1.31-times) or PVI (1.33-times). The estimated incremental expenditures PMPM for patients with a major amputation was $5,165.

Conclusions: Revascularization reduces the risk of a major amputation or inpatient death for patients with CLI when compared to conservative therapy. Major amputation is also associated with significantly higher healthcare expenditures.     

The choice of market entry mode: Greenfield investment,M&A and joint venture

Multinationals may enter a host market by different modes of foreign direct investment (FDI). This paper examines the choice of FDI mode, and shows that the profitability of greenfield investment influences this choice not only directly, but also indirectly since it determines the outside option of potential acquisition targets and joint venture partners. In particular, even if greenfield investment is a viable option, the multinational may prefer a joint venture to M&A, and M&A to greenfield investment, provided that M&A and joint venture both involve sufficiently low fixed costs. The reason is that the profitability of greenfield investment both reduces the acquisition price in the case of M&A, and gives local firms an incentive to agree to a joint venture.     

Smart fund managers? Stupid money?

Abstract .  We develop a model of mutual fund manager investment decisions near the end of quarters. We show that when investors reward better performing funds with higher cash flows, near quarter-ends a mutual fund manager has an incentive to distort new investment toward stocks in which his fund holds a large existing position. The short-term price impact of these trades increase the fund's reported returns. Higher returns are rewarded by greater subsequent fund inflows which, in turn, allow for more investment distortion the next quarter. Because the price impact of trades is short term, each subsequent quarter begins with a larger return deficit. Eventually, the deficit cannot be overcome. Thus, our model leads to the empirically observed short-run persistence and long-run reversal in fund performance. In doing so, our model provides a consistent explanation of many other seemingly contradictory empirical features of mutual fund performance.