Controlling risks to ensure financial stability and reducing volatility

Abstract

The 11th International Risk Management Conference was held at the University of Paris‐Dauphine and the EM LYON Business School (Paris Campus) in June 2018. The conference theme “1968–2018: From Z‐Score to Contemporary Risk Management, 50 Years of Risk Measurement and Management” was selected as a means to showcase the many ways that financial risk measurement has evolved and impacted financial risk management in banks and corporations as well as the tools used by asset managers and market regulators. The four papers included in this special issue of the Journal of International Financial Management and Accounting focus on a wide range of issues: How small differences in credit ratings effect the speed of adjustment in corporate leverage, the impact of using soft variables to assess default probabilities in European corporations, a new approach to measuring a company's intrinsic risk, and the effectiveness of short sale circuit breaker rules to limit stock price volatility. Our Foreword highlights the main findings of these papers and offers our assessment of the lessons they provide for financial managers and policymakers.

Die Hard: Probability of Default and Soft Information

“…We hope that, with the aim of optimizing credit risk estimation and subsequent capital allocation (Gabbi and Levich 2019), the revision of internal models (Basel IV) will also further refine the credit risk estimation on the basis of our findings.…”

Credit Risk Migration and Economic Cycles

“…Transaction costs include imperfect foresights, bounded rationality and their economic consequences. The Mover-Stayers approach helps to reduce the rough calculation of historical movements of borrowers' rating and, consequently, the efficacy of their allocative process, and the expected industry stability with a better capital absorption (Gabbi and Levich 2019). It remains to be analyzed how MS behave in shock phases.…”