Risk Management for Equity Portfolios of Japanese Banks
This paper verifies the impact of equity portfolio on bank management, underscoring the importance of managing the risks involved and suggesting "management of sensitivity to equity price risk" as a risk management technique that takes into account the correlation between equity price risk and credit risk. To do this, the paper focuses on the high correlation between "expected default probability estimated by the option-approach (Merton method)" using equity price information and " spread over Libor" observed in the bond market. This is used to calculate sensitivity (delta and vega) to changes in the equity price and its volatility. According to calculations for a sample portfolio, these two sensitivities have a degree of utility in measuring the distribution of risk exposure and in using equity price index futures and options as hedges. In the hedging of vega risk (which tends to reflect credit risk) in particular, long put positions in equity price index options are shown to be potentially effective.
Volume (Year): 17 (1999)
Issue (Month): 2 (August)
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- Robert A. Jarrow & Stuart M. Turnbull, 2008.
"Pricing Derivatives on Financial Securities Subject to Credit Risk,"
World Scientific Book Chapters,
in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409
World Scientific Publishing Co. Pte. Ltd..
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- Merton, Robert C, 1974.
"On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,"
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- Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997.
"A Markov Model for the Term Structure of Credit Risk Spreads,"
Review of Financial Studies,
Society for Financial Studies, vol. 10(2), pages 481-523.
- Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453 World Scientific Publishing Co. Pte. Ltd..
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