Category Archives: Risk Management

An investigation of market concentration and financial stability in property-liability insurance industry

Jeungbo Shim
Journal of risk and insurance,Vol. 84, Issue 2, Pages: 567-597.

The article investigates whether the market concentration is associated with an insurer’s financial stability in the US property-liability insurance industry over the period 1992-2010. We employ two-stage least squares techniques with instrumental variables to address likely endogeneity problems. The results show that higher market concentration is associated with lower financial stability of insurance firms, consistent with the “concentration-fragility” view. Our results indicate that firm-specific characteristics including firm size, …
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CEO Inside Debt and Risk Taking: Evidence From Property-Liability Insurance Firms

Andreas Milidonis, Takeshi Nishikawa, Jeungbo Shim
Journal of Risk and Insurance,In Press

We examine the incentive effects of CEO inside debt holdings (pensions and deferred compensation) on risk taking using the sample of US publicly traded property-liability insurers. To represent managerial risk taking, we employ value at risk (VaR) and expected shortfall (ES), which capture extreme movements in the lower tail of insurer stock return distribution. We also estimate firm default risk, equity volatilities, and insurance-related risk as alternative measures of risk taking. We document that inside debt …
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Dependency between Risks and the Insurer’s Economic Capital: A Copula-based GARCH Model

Jeungbo Shim, Seung-Hwan Lee
Asia-Pacific Journal of Risk and Insurance,Vol. 11, Issue 1,

Copulas can be a useful tool to capture heavy-tailed dependence between risks in estimating economic capital. This paper provides a procedure of combining copula with GARCH model to construct a multivariate distribution. The copula-based GARCH model using a skewed student’s t-distribution controls for the issues of skewness, heavy tails, volatility clustering and conditional dependencies contained in the financial time series data. Using the sample of US property liability insurance industry, we perform Monte Carlo …
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Does Diversification Drive Down Risk-adjusted Returns? A Quantile Regression Approach

Jeungbo Shim
Asia-Pacific Journal of Risk and Insurance,Vol. 11, Issue 2,

This study examines diversification-performance relationship in the US property-liability insurance industry over the period of 1996-2010. Unlike prior studies that rely on the conditional mean estimation method, we employ quantile regression, which captures the heterogeneous effects of diversification on conditional return distribution. The results show that diversification does not necessarily drive down risk-adjusted returns and its effects vary along return distribution. We find that there is a diversification discount for firms in the …
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A new test procedure for the choice of dependence structure in risk measurement: application to the US and UK stock market indices

Jeungbo Shim, Eun-Joo Lee, Seung-Hwan Lee
Applied Economics,Vol. 48, Issue 15, Pages: 1382-1389.

The choice of an appropriate dependence structure in modelling multivariate risks is an important issue because different tail structure embedded in copula leads to a different capital requirement for the institution. We present how to select a well-specified dependence structure to given application data. Using a simple simulation technique, we develop a statistical test to assess the adequacy of a specific dependence structure. We examine the sensitivity of risk estimates to the choice of copulas using the S&P 500 and …
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Bank capital buffer and portfolio risk: The influence of business cycle and revenue diversification

Jeungbo Shim
Journal of Banking & Finance,Vol. 37, Issue 3, Pages: 761-772.

The relationship between macroeconomic developments and bank capital buffer and portfolio risk adjustments is relevant to assess the efficacy of newly created countercyclical buffer requirements. Using the US bank holding company data over the period 1992: Q1-2011: Q3, we find a negative relationship between the business cycle and capital buffer. Our results offer some support for the Basel III agreements that countercyclical capital buffer in the banking sector is necessary to help the performance of the real economy during …
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Efficiency changes around mergers in the US property-liability insurance industry: a data envelopment analysis

Jeungbo Shim
The Journal of Business and Economic Studies,Vol. 17, Issue 2, Pages: 77.

This paper investigated the relationship between mergers & acquisitions (M & A) and efficiency change in the US property-liability insurance industry for the years 1990-2004. The cost, revenue, pure technical, scale, and allocative efficiency were estimated using data envelopment analysis (DEA). The empirical results revealed that acquirers’ overall cost and revenue efficiency declined following M & As. This finding implied that M & A has the potential to create inefficiencies, perhaps due to scale diseconomies and post- …
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Mergers & acquisitions, diversification and performance in the US property-liability insurance industry

Jeungbo Shim
Journal of Financial Services Research,Vol. 39, Issue 3, Pages: 119-144.

This paper examines the relationship between mergers & acquisitions (M & As), diversification and financial performance in the US property-liability insurance industry over the period 1989-2004. The risk-adjusted return on assets (ROA), return on equity (ROE), Z-score and total risk measured by earnings volatility are considered as a relevant indicator of performance. We find that acquirers’ financial performance decreases and earnings volatility increases during the gestation period after the M & As perhaps due to increased frictional …
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Capital-based regulation, portfolio risk and capital determination: Empirical evidence from the US property-liability insurers

Jeungbo Shim
Journal of Banking & Finance,Vol. 34, Issue 10, Pages: 2450-2461.

This paper examines the impact of capital-based regulation on the insurer’s risk and capital adjustments in the US property-liability insurance industry. We conduct the three-stage least squares (3SLS) procedure to estimate a simultaneous equations model. The key finding is that undercapitalized insurers increase capital to avoid regulatory costs and take more risks to generate higher returns. We also investigate firm characteristics that determine the insurer’s capital structure. The results indicate that insurers appear to rely heavily on …
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A Versatile Copula and Its Application to Risk Measures

Jeungbo Shim, Eun-Joo Lee, Seung-Hwan Lee
International Journal of Business and Economics,Vol. 9, Issue 3, Pages: 213.

This paper proposes a copula that has versatile properties. We apply grouped t and versatile t copulas to estimate Value at Risk and expected shortfall using a sample of firms in the US property-liability insurance industry. We perform goodness-of-fit tests to assess the adequacy of the copula models selected. We find that a versatile copula is effective in estimating dependence structures of non-homogeneous multivariate risks.[PUBLICATION ABSTRACT]
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