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This paper provides an objective approach based on available market information capable of reducing subjectivity, inherently present in the process of expected loss provisioning under the IFRS 9.

This paper develops the two-step methodology. Calibrating the Credit Default Swap (CDS)-implied default probabilities to the through-the-cycle default frequencies provides average weights of default component in the spread for each forward term. Then, the impairment provisions are calculated for a sample of investment grade and high yield obligors by distilling their pure default-risk term-structures from the respective term-structures of spreads. This research demonstrates how to estimate credit impairment allowances compliant with IFRS 9 framework.

This study finds that for both investment grade and high yield exposures, the weights of default component in the credit spreads always remain inferior to 33%. The research's outcomes contrast with several previous results stating that the default risk premium accounts at least for 40% of CDS spreads. The proposed methodology is applied to calculate IFRS 9 compliant provisions for a sample of investment grade and high yield obligors.

Many issuers are not covered by individual Bloomberg valuation curves. However, the way to overcome this limitation is proposed.

The proposed approach offers a clue for a better alignment of accounting practices, financial regulation and credit risk management, using expected loss metrics across diverse silos inside organizations. It encourages adopting the proposed methodology, illustrating its application to a set of bond exposures.

No previous research addresses impairment provisioning employing Bloomberg valuation curves. The study fills this gap.

This chapter reassesses the economics of interest rate risk management in light of the global financial crisis by developing a derivative-based integrated treatment of interest rate and credit risk interrelation. The decade-long historical data on credit default swap spreads and interest rate swap rates are used as proxy measures for credit risk and interest rate risk, respectively. An elasticity of interest rate risk and credit risk, considered a function of the business cycle phases, maturity of instruments, economic sector, creditworthiness, and other macroeconomic parameters, is investigated for optimizing economic capital. This chapter sheds light on how financial institutions may address hedge strategies against downside risks implementing the proposed derivative-based integrated treatment of interest rate and credit risk assessment allowing for optimization of interest rate swap contracts. The developed framework of integrated interest rate and credit risk management is of special importance for emerging markets heavily dependent on foreign capital as it potentially allows emerging market banks to improve risk management practices in terms of capital adequacy and Basel III rules. Analyzing diversification versus compounding effects, it allows enhancing financial stability through jointly optimizing Pillar 1 and Pillar 2 economic capital.

The purpose of this paper is to outline a pricing formula for the valuation of catastrophic (CAT) bonds as applied to multiple trigger drought risks in Kenya.

The valuation model is designed around the multiple triggers of the Mexican Catastrophe bonds, but the valuation model is based on Jarrow’s (2010) closed form CAT Bond Pricing model. The authors outline the model structure, the multiple tranches with rainfall triggers, and simulate the model using Monte Carlo methods. Data input was synthesized from historical rainfall data in Kenya’s Moyale region as well as prevailing LIBOR and rates and conventional coupons.

The authors compute the valuation model using Monte Carlo techniques. The authors found the pricing method to be robust and consistent under various parameter settings including trigger levels, time after launch, recovery rates, coupon spreads, and zero coupon curves. For example the higher the trigger rates, the lower will be the bond price at issue. With 50 percent recovery the CAT bond at issue would be around $702 with a high triggers and 976 with low triggers, but the valuation changes with parameters.

As far as the authors know the use of multiple trigger CAT bonds has been very limited in practice. The valuation formula and methods outlined in this paper show how CAT bonds can be effectively designed to address CAT covariate risks in developing agricultural economies.

This paper examines CAT bonds to investigate multi-trigger rainfall risks in Kenya. The paper shows how CAT bonds can be designed to meet specific and CAT risks. Using Jarrow’s (2010) closed form solution this paper is one of the first to apply it to the macro-management of agricultural risks.

This chapter aims to find an optimal way to hedge foreign exchange exposures on three main currency pairs being the EURUSD, EURGBP and EURJPY. Furthermore, it analyses the risk level of each portfolio together with its kurtosis level. This chapter also looks into the relationship between the EURUSD portfolios and the VIX level.

This study is based on a back-testing analysis over a period of seven years starting in January 2007 and ending in December 2014. Two main Foreign Exchange Premium-Free strategies were structured using the Bloomberg Terminal. These were the ‘At-Expiry Forward Extra’ and the ‘Window Forward Extra’. Portfolios were created using FX options strategies, FX spot and FX forwards. The EURUSD portfolios were also analysed and compared with the VIX level in order to see whether volatility has a direct effect on the outcome of the strategies. The statistical significance of the difference between returns of portfolios was analysed using a paired sample t-test. Finally, the histogram and distribution curve of each portfolio were created and plotted in order to provide a more visual analysis of returns.

It was found that the optimal strategies in all cases were the FX option strategies. The portfolios’ risk was analysed and indicated that optimal portfolios do not necessarily derive the lowest risk. It was also found that with a high VIX level, the forward contract was the most beneficial whilst the option strategy benefited from a low VIX level. When testing for statistical significance between returns of different portfolios, in most cases, the difference in returns between portfolios resulted to be statistically insignificant. Although some similarities were noticed in distribution curves, these differed from the normal distribution. When analysing the kurtosis levels, it is found that such levels differed from that of a normal distribution which has a kurtosis level of 3. Interpretation of such histograms, distribution curves and the kurtosis analysis was explained.

The purpose of this paper is to trace the evolution of the Archway Investment Fund (AIF) at Bryant University from its founding in 2005 as a portfolio focused exclusively on US equities to a multi-asset program that incorporates US equities, non-US equities, equity ETFs, REITs, individual bonds, fixed income ETFs and options. It also describes the explicit introduction of environmental, social and governance (ESG) considerations into the investment process.

The paper follows a case study approach.

The paper describes the programmatic changes that accompanied this evolution in these areas: finance department curriculum innovations; the investment guidelines and constraints that govern the AIF; the investment process utilized; the oversight and governance process; and the reporting, presentation, and publicity initiatives that keep critical constituencies (university administration, faculty, alumni and students) informed and engaged in this program to sustain its success.

The vast majority of student-managed funds are equity funds focused on individual stock selection. The AIF is a multi-asset fund with separate equity and fixed income sub-portfolios that explicitly incorporates ESG factors into the security selection process.

This paper presents the first known non‐proprietary empirical examination of the relationship between Commercial Mortgage Backed Security (CMBS) pricing. CMBS prices are examined as a function of the “moneyness” of the default option, the age of the security, the interest rate, interest rate volatility, property price volatility, amortization features and yield curve slope utilizing a proprietary data set of monthly prices on 40 CMBS securities. We find that though the senior tranche CMBS in the sample are effectively immune from default loss per se, they are not immune from early return of principal and resulting duration shift implied by increasing default probabilities. Thus, they behave very much like residential mortgage backed securities in that discount security prices are positively related to explanatory variables associated with potential shifts in duration. As a result, senior tranche CMBS prices increase with explanatoryd factors that raise the likelihood of default such as property volatility and loan to value ratio whereas CMBS prices decrease with variables that lower default probability such as amortization. These empirical results fit well with existing theoretical models of multi‐tranche CMBS pricing and models of commercial mortgage default and suggest that senior tranche CMBS may embody elements of risk that justify their seemingly rich spreads to similar duration corporate securities.

Solvency-II is the current regulatory framework of insurance companies in the European Union. Under this standard, European Insurance and Occupational Pension Authority (EIOPA), as a regulatory board, has established that the Smith–Wilson (SW) model can be used as the model to estimate interest rate curve. This paper aims to analyze whether this model adjusts to the market curve better than Nelson–Siegel (NS) and whether the values set for the parameters are adequate.

This empirical study analyzes whether the SW interest rate curve shows lower root mean squared errors than the NS curve for a sample of daily prices of Spanish Government bonds between 2014 and 2019.

The results indicate that NS adjusts the market data better, the parameters recommended by the EIOPA correspond to the maximum values observed in the sample period and the current recommended curve for insurance companies underestimates company operations.

This paper verifies that the criterion of the last liquid point does not allow for selecting an optimal sample to adjust the curve and criteria based on prices without arbitrage opportunities are more appropriate.

Student Managed Funds (SMFs) are extremely popular investment programs at many colleges and universities that provide their students with experiential learning opportunities to manage real money. However, the size, scope and specific features of these SMFs differ substantially. The purpose of this paper is to deliberate about a panel discussion on several important SMF issues that took place at the Southern Finance Association conference in November, 2016.

The panel includes one moderator and four panelists, all of whom serve as SMF faculty directors at their respective schools.

The panelists’ answers show that almost no two SMFs are created the same, supervised the same way by different faculty directors or managed the same way by their respective students.

The panelists provide insight about their respective SMFs and offer advice on how to create SMFs and how to supervise students managing SMFs in a more effective manner.

The purpose of this paper is to determine the impact of corporate investments in corporate social responsibility (CSR), measured by the environmental, social and government (ESG) rating, on the market valuation of a firm's stocks and to explain the regional differences in the degree of this influence.

The empirical study uses linear and non-linear panel regression models for a panel sample of 951 firms listed in Asia, North America and Europe operating in innovative industries.

The CSR score was found to be significant in terms of stock excess return on the regional level. However, this finding cannot be extrapolated to the global scale. ESG rating is priced by the European and North American markets negatively, while in the Asian market, it is positive. This penalty (negative influence) is greater than the reward for one point increase in ESG rating.

The results of this empirical study could be used by firms' managers to adjust strategies aimed at stock value growth and by investors to select an investment strategy to maximize return.

The impact of investments in CSR on stock excess return over a defined benchmark is assessed. The study reveals regional differences in the impact of CSR investment using a sample of Asian, European and North American firms. The authors apply a more advanced lagged CSR performance (d.ESG) assessment based on the methodology of Zhang and Rajagopalan (2010).