Diversification and value-at-risk

A pervasive and puzzling feature of banks’ Value-at-Risk (VaR) is its abnormally high level, which leads to excessive regulatory capital. A possible explanation for the tendency of commercial banks to overstate their VaR is that they incompletely account for the diversification effect among broad risk categories (e.g., equity, interest rate, commodity, credit spread, and foreign exchange). By underestimating the diversification effect, bank’s proprietary VaR models produce overly prudent market risk assessments. In this paper, we examine empirically the validity of this hypothesis using actual VaR data from major US commercial banks. In contrast to the VaR diversification hypothesis, we find that US banks show no sign of systematic underestimation of the diversification effect. In particular, diversification effects used by banks is very close to (and quite often larger than) our empirical diversification estimates. A direct implication of this finding is that individual VaRs for each broad risk category, just like aggregate VaRs, are biased risk assessments.

The level and quality of Value-at-Risk disclosure by commercial banks

In this paper we study both the level of Value-at-Risk (VaR) disclosure and the accuracy of the disclosed VaR figures for a sample of US and international commercial banks. To measure the level of VaR disclosures, we develop a VaR Disclosure Index that captures many different facets of market risk disclosure. Using panel data over the period 1996–2005, we find an overall upward trend in the quantity of information released to the public. We also find that Historical Simulation is by far the most popular VaR method. We assess the accuracy of VaR figures by studying the number of VaR exceedances and whether actual daily VaRs contain information about the volatility of subsequent trading revenues. Unlike the level of VaR disclosure, the quality of VaR disclosure shows no sign of improvement over time. We find that VaR computed using Historical Simulation contains very little information about future volatility.

Stakes and motivation in tournaments : playing when there is nothing to play for but pride

Tournaments are an effective means of incentivising participants to ensure an optimal level of effort. However, situations can occur in tournaments where the final outcome of a given competitor does not depend on his/her future performance. Specifically, we study these specific situations in a data set of the group stages of European football club competitions from 1992 to 2009. We identify situations where teams are already sure to finish either first or last at the penultimate stage in the group. We show that such situations affect team performance in the last match, typically decreasing the performance of a team sure to finish first and increasing the performance of a team sure to finish last. The first finding is in line with the economic predictions yet provides interesting implications, namely that the schedule of the match order plays a significant role in the overall performance of the team. The second, counter-intuitive, finding is not well accommodated into the existing economics framework and thus we discuss two alternative explanations, one based on social pressure and the other on pride.

Urban maze : A typological investigation in porous morphology and dynamic pedestrian networks

Mixed use typologies and pedestrian networks are two strategies commonly applied in design of the contemporary city. These approaches, aimed towards the creation of a more sustainalble urban environment, have their roots in the traditional, pre-industrial towns; they characterize urban form, articulating the tension between privaate and public realms through a series of typological variations as well as stimulating commercial activity in the city centre. Arcades, loggias and verandas are just some of the elements which can mediate this tension. Historically they have defined physical and social spaces with particular character; in the contemporary city these features are applied to deform the urban form and create a porous, dynamic morphology. This paper, comparing case studies from Italy, Japan and Australia, investigates how the design of the transition zone can define hybrid pedestrian networks, where a clear distinction between the public and private realms is no longer applicable. Pedestrians use the city in a dynamic way, combining trajectories on the public street with ones on the fringe or inside of the private built environment. In some cases, cities offer different pedestrian network possibilities at different times, as the commercial precints are subject to variations in accessibility across various timeframes. These walkable systems have an impact on the urban form and identity of places, redefining typologies and requiring an in depth analysis through plan, section and elevation diagrams.