Metodologia de valoracion de riesgos: implementacion del gap de duraciones en portafolios corporativos con el fin de reducir el riesgo sistemico.
| Autor | Manco Lopez, Oscar |
| Cargo | Research article - Ensayo |
Risk assessment methodology: implementation of duration gap in corporate portfolios in order to reduce the systemic risk
Metodologia de avaliacao de risco: implementacao do gap de duracoes em portfolios corporativos, a fim de reduzir o risco sistemico
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Introduction
In recent years, Enterprise Risk Management (ERM) has been focused on identifying and addressing both internal and external risk factors in order to ensure business continuity in competitive markets. Conversely, quantification of economic impacts has focused on measuring how risk factors affect the different components of financial statements through key risk indicators (Hjortso, 2016). Traditionally, the economic impacts of risk factors in the profitability of the organization are measured over financial variables such as net earnings, cash flow or capital indicators, as Earnings at Risk (EaR), the Cash Flow at Risk (CFAR) and Capital at Risk (CaR), respectively, as mentioned by different authors (Albuquerque, Eichenbaum, Rebelo, & Luo, 2016). However, these impacts can be measured over different financial indicators, such as earnings before interest, taxes, depreciation and amortization (EBITDA), return on invested capital (ROIC), return on equity (ROE), return on capital employed (ROCE), among others (Copeland, Koller, & Murrin, 2000).
In the last two decades, the development and implementation of ERM systems in companies has been important in the progress of management theory (Power, 2008). Conversely, the quantification of the financial effects of external and business risk factors continues to be under development because of the great variety of possibilities. By definition, key risk indicators (KRI) try to measure the risk economic impact in a horizon of time with a probability level as an extension of the concept of Value at Risk (VaR) proposed by JPMorgan in 1994 (Power, 2008).
Traditionally, KRI indicators has two limitations. First, EaR and CFAR do not consider the future development of the value of net assets and liabilities sensitive to the external risk factors and not subject to administration management. They concentrate the analysis on company income statements. Second, CaR focuses on measuring capital adequacy to cover adverse events; however, even if it is possible to isolate the contributions of the active and passive capital positions, it leaves aside the effects of these variations considering mature and evolving positions scenarios which is a process in the medium or long term. It means there are missing elements in the traditional administration process.
Regarding the management and the value of the net assets of operation, the principle of creating value indicates that the return of used resources must exceed the cost of financing sources via liabilities and own funds (Knop, de Castro Riesco, & Fernandez, 2006; Neftci, 2008; Smithson, Smith, & Wilford, 1989), which means that the management must undertake a resources optimization process in order to achieve this goal (identifying and optimizing value drivers such as earnings growth, improving operating margins, finding more efficient use of assets and strengthening management). In turn, the value of available resources or assets are sensitive to changes in certain factors such as the discount rate, the projection parameters and market conditions, which in some cases escape administrative control. Consequently, one of the principal objectives of this research is to provide tools in order to maintain the equity value that means compliance of the financial goal.
From an accounting approach, historical data can represent the balance between assets and sources of funding (liabilities and equity) (Narayana & Mahadeva, 2016). However, from a financial point of view, there is a temporal imbalance between the times when the investments are made and the period when the financial obligations are engaged. This leads to a loss of value over time and net assets deterioration. Hence, the importance of equally recognizing of risks arising both from the balance sheet and the income statement as Copeland et al. (2000) and Dumrauf (2013) signaled.
While financial theory has made significant progress in asset management, there are still concerns associated with how to model the evolution of net assets and liabilities of the company and quantify their effects on capital (Vyadrova, 2015). This paper shows how to include in business valuations risk factors that do not depend on management, such as changes in interest rates and their impact on the social capital of the company (Duffie & Garleanu, 2001; Kanchu & Kumar, 2013). The principal objective of this paper is the inclusion of new indicators in the financial evaluation. Considering the theory and new research, we propose new tools for measuring the risk, from financial innovation. Additionally, the results derivative from the research considers the applications in a real company applying the methodology of case study, in order to test the built model.
Methodologically speaking, we are using the mix of quantification between fixed income risk and considerations from corporate finance methods, which makes it a hybrid applied in corporate portfolios. This paper is structured as follows. In the first section a classical risk management approach is presented where we consider the levels in the balance structure, and briefly define the theoretical concepts applied in corporate portfolios, even depicting the existing of asymmetries between market portfolios and corporate assets. The second section is dedicated to the model proposal and the new contribution. The third section considers the application of the model in a real scenario using information from an energy trader. Finally, the last section presents the conclusions and future proposal works.
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Theoretical framework
In financial institutions, Management of Assets and Liabilities (MAL) (figure 1) serves to control and balance the deposits and loans of the bank. This process is known as immunization of portfolios (Bierwag, 1987), where it uses different strategies framed into the concept of duration and convexity (Beck, Goldreyer, & D'Antonio, 2000; Bierwag & Kaufman, 1985). In this process, the affected positions by changes in interest rates are identified, and ongoing monitoring is done by integrating all areas or lines of business, meaning loan portfolio, commercial lines, mortgage, consumer, small and medium enterprises, corporate and so on. But the problem is that there are no applications in companies different from banks.
Furthermore, acquisitions are considered sources associated with the issuance of securities, short-term loans, reserve, savings accounts, checking accounts, deposits, among others (Martinez Abascal & Guasch Ruiz, 2002). The review of both active and passive positions is consolidated in operational terms. It is then aligned based on the risk profile that the financial institution wants to assume. Nevertheless, in many institutions, risk management tasks sometimes deviate from this goal by concentrating their efforts on quantifying other menaces as the risks of credit or market, disregarding risk tolerance factors and alignment of positions action plans of the institution as Grable (2000) described in his research. That is why we are probing the possibility of improving the measures of corporate risk, because the advances have focused on the financial sector.
The market risk losses can be quantified in function of the change of interest rates by applying the VaR models (Jorion, 1991; Knop et al., 2006). When this concept is applied to the entity as a whole, the financial statements include the exposure risk measures associated with earnings, EBITDA, cash flow or capital of the company (Neftci, 2008), but usually the balance sheet is not considered as a financial statement. Moreover, the only indicator related to the balance sheet is the CaR: it...
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