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Issue: Volume 12/Number 4, Summer 2010
Comment
LETTER FROM THE EDITOR-IN-CHIEF
Signs of the financial crisis that began in 2007 appear to point to a near recovery, but the lessons of the crisis are still being learned. How should risk be measured? Although a consensus may have been reached through the Basel accords, it is mostly because of the immediate need for a practical measure. Work continues to be done in developing and estimating alternatives to the widely used value-at-risk (VaR) measure. This issue contains two articles in this respect, with one that deals with capital adequacy and the other with the estimation of an alternative measure to VaR, namely expected s ...
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Issue: Volume 12/Number 4, Summer 2010
Research Papers
Rating targeting and dynamic economic capital
The standard one-period economic capital model for credit risk has been shown to fall short of explaining the capital levels of large banks, given the usual AA confidence level for banks' solvency. Missing risk factors have been the commonly accepted explanation for this puzzle. We study an alternative explanation that complements the missing risk factor theory; a more dynamic capitalization model motivated by banks' rating targeting behavior, as evidenced in Jackson et al (2002), among others. Our model can be seen as a bottom-up alternative to Nocco and Stulz (2006)'s approach to the modelin ... 
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Issue: Volume 12/Number 4, Summer 2010
Research Papers
Kernel quantile based estimation of expected shortfall
Since its proposal as an alternative risk measure to value-at-risk (VaR), expected shortfall (ES) has attracted a great deal of attention in financial risk management, primarily owing to its coherent properties. Recently, there has been an upsurge of research on the estimation of ES from a nonparametric perspective. The focus of this paper is on a few kernel-based ES estimators, including jackknife-based bias-correction estimators that have theoretically been documented to reduce bias. Bias reduction is particularly effective in reducing the tail estimation bias as well as the consequential bi ...
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Issue: Volume 12/Number 4, Summer 2010
Research Papers
Realized hedge ratio properties, performance and implications for risk management: evidence from the Spanish IBEX 35 spot and futures markets
This paper analyzes the properties and performance of daily realized futures hedge ratios. Using five-minute data from the Spanish IBEX 35 equity spot and futures market, realized variances, covariances and hedge ratios are constructed. The realized variances and covariances exhibit long memory dependency that is consistent with extant research on other markets, while the realized hedge ratios do not exhibit this property. To measure performance, we compared a hedged portfolio based on the realized hedge ratio with hedged portfolios constructed using a constant regression-based hedge ratio, a ...
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Issue: Volume 12/Number 4, Summer 2010
Research Papers
Optimal portfolio choice using the maximum Sharpe ratio
This paper analyzes the properties and performance of daily realized futures hedge ratios. Using five-minute data from the Spanish IBEX 35 equity spot and futures market, realized variances, covariances and hedge ratios are constructed. The realized variances and covariances exhibit long memory dependency that is consistent with extant research on other markets, while the realized hedge ratios do not exhibit this property. To measure performance, we compared a hedged portfolio based on the realized hedge ratio with hedged portfolios constructed using a constant regression-based hedge ratio, a ...
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