Risk Management for Equity Portfolios of Japanese Banks

Akira Ieda and Toshikazu Ohba
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Akira Ieda: Bank of Japan
Toshikazu Ohba: Nippon Life Insurance Co

Monetary and Economic Studies, 1999, vol. 17, issue 2, 91-117

Abstract: 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.

JEL-codes: G11 G21 (search for similar items in EconPapers)
Date: 1999
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ime:imemes:v:17:y:1999:i:2:p:91-117

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