Marco Wilkens

Interest Rate Risk Rewards in Stock Returns of Financial Corporations: Evidence from Germany

The interest rate sensitivity of stock returns of financial and non-financial corporations is a well-known phenomenon. However, only little is known about the part of total stock returns that is attributable to the compensation an investor receives for being exposed to interest rate risk when investing in equity securities. We pursue here a benchmark portfolio approach, constructing benchmark portfolios having the same interest rate risk exposure as a particular stock. By studying the time series of returns of these asset-specific benchmarks, we find: i) Regardless of the industry considered, the interest rate risk benchmarks of German corporations have mostly earned a significantly positive reward. ii) Returns of interest rate risk benchmarks of financial institutions exceeded significantly those of non-financial corporations. iii) An investor willing to bear nothing but the average interest rate risk of German financial institutions would have earned a mean return of about or even exceeding 70% of the corresponding total stock returns. iv) Returns of the interest rate risk benchmarks of the German insurance sector were significantly higher than those of German banks, which seems to contradict conventional market wisdom that insurances hedge interest rate risks.

The performance of investment grade corporate bond funds: evidence from the European market

This paper examines the risk-adjusted performance of mutual funds offered in Germany which exclusively invest in the ‘rather new’ capital market segment of euro-denominated investment grade corporate bonds. The funds are evaluated employing a single-index model and several multi-index and asset-class-factor models. In contrast to earlier studies dealing with (government) bond funds, we account for the specific risk and return characteristics of investment grade corporate bonds and use both rating-based indices and maturity-based indices, respectively, in our multi-factor models. In line with earlier studies, we find evidence that corporate bond funds, on average, under-perform the benchmark portfolios. Moreover, there is not a single fund exhibiting a significantly positive performance. These results are robust to the different models. Finally, we examine the driving factors behind fund performance. As well as examining the influence of several fund characteristics, particularly fund age, asset value under management and management fee, we investigate the impact of investment style on the funds’ risk-adjusted performance. We find indications that funds showing lower exposure to BBB-rated bonds, older funds, and funds charging lower fees attain higher risk-adjusted performance.

The Sharpe ratio's market climate bias: Theoretical and empirical evidence from US equity mutual funds

This article analyses the impact of market climates on the Sharpe ratios (SRs) of funds. On the basis of a common factor model, we derive analytically how market climates impact the SR – taking into account the abilities of fund managers. This applies especially to the mean of the market returns during the evaluation period: The performance of funds with relatively high unsystematic risk is biased upwards in outstandingly negative market climates, and vice versa. Our empirical study of US equity mutual funds supports these theoretical insights. We show that the SR of poorly diversified funds is biased upwards in bear markets, and vice versa. Subsequently, we confirm that actual fund SRs depend on especially the mean excess returns of the market. Thus, the SR does not provide a meaningful assessment of fund performance, especially in extraordinary times. We therefore suggest using the ‘normalised’ Sharpe ratio in future empirical research, in order to avoid the bias of SRs and rankings due to market climate.

Quantifying the Interest Rate Risk of Banks: Assumptions Do Matter

This paper analyses the robustness of the standardised framework proposed by the Basel Committee on Banking Supervision (2004b) to quantify the interest rate risk of banks. We generalise this framework and study the change in the estimated level of interest rate risk if the strict assumptions of the standardised framework are violated. Using data on the German universal banking system, we find that estimates of the interest rate risk are very sensitive to the frameworks assumptions. We conclude that the results obtained using the standardised framework in its current specification should be treated with caution when used for supervisory and risk management purposes.

Zur Relevanz von Sharpe Ratio und Treynor Ratio: Ein investorspezifisches Performancemaß

I. Einleitung Zweidimensionale Performancemaße wie die Sharpe Ratio und die Treynor Ratio werden von der Praxis regelmäßig herangezogen, um zum Beispiel ... wie im Folgenden ... die Leistung von Investmentfonds zu beurteilen. Umso erstaunlicher ist, dass es kaum wissenschaftlich fundierte Aussagen zu der Frage gibt, welche Performancemaße ein Anleger ... ausgehend von einem konkreten Entscheidungsproblem ... zur Beurteilung der Performance und zur Auswahl von Fonds nutzen sollte. Eher pauschal erfolgt regelmäßig die Empfehlung, Maße auf der Basis des Gesamtrisikos heranzuziehen, sofern der Großteil des Vermögens eines Anlegers in nur einen Fonds investiert werden soll (bzw. investiert wurde). Hingegen sei es besser, sich an Maßen auf der Basis des systematischen Risikos zu orientieren, sofern ein relativ geringer Teil des Vermögens in einen Fonds zu investieren ist. Diese Tendenzaussagen sind zwar richtig, helfen dem Anleger bei der Auswahlentscheidung aber in der Regel kaum. Bisher fehlt die ökonomische Begründung traditioneller Performancemaße in praktisch relevanten Entscheidungssituationen.

Duration-Adjusted Bond Fund Performance

We uncover a previously neglected mechanical bias in bond fund performance due to the use of benchmarks with non-matching durations. We show that the duration bias is caused by the non-linear reaction of bonds with different durations to interest rate changes. We find empirically that the usual use of a broad bond index in previous research leads to a significant overestimation of average bond fund performance and to spurious findings of performance persistence. The key takeaway of our research is thus, that bond fund performance should be duration-adjusted by choosing for each fund the benchmark index which best matches its duration.We uncover a previously neglected mechanical bias in bond fund performance due to the use of benchmarks with non-matching durations. We show that the duration bias is caused by the non-linear reaction of bonds with different durations to interest rate changes. We find empirically that the usual use of a broad bond index in previous research leads to a significant overestimation of average bond fund performance and to spurious findings of performance persistence. The key takeaway of our research is thus, that bond fund performance should be duration-adjusted by choosing for each fund the benchmark index which best matches its duration.

Value-at-Risk — Eine anwendungsorientierte Darstellung zentraler Methoden und Techniken des modernen Risikomanagements

Der Beitrag liefert einen Uberblick uber Ausgestaltungsformen des Value-at-Risk-Ansatzes zur Quantifizierung finanzieller Marktrisiken. Einleitend wird der Value-at-Risk (VaR) definiert und sein Aussagegehalt an einem einfachen Zahlenbeispiel veranschaulicht. Nach einer kurzen Beschreibung der wichtigsten Methoden der VaR-Ermittlung wird die zentrale Frage behandelt, wie Volatilitaten als Input fur VaR-Modelle geschatzt werden konnen. Dabei zeigt sich, das exponentiell gewichtete gleitende Durchschnitte und GARCH-Modelle geeignet sind, uber die Zeit veranderliche Varianzen und Kovarianzen zu erfassen. Im Anschlus wird ausfuhrlich auf Mapping-Verfahren eingegangen, indem die Uberfuhrung der gangigen Finanztitel auf sogenannte Risiko-oder Standardmarktfaktoren erlautert wird. Neben klassischen Zinstiteln, Aktien und Devisenpositionen werden die grundlegenden Derivate wie Futures und Optionen betrachtet. Der Beitrag schliest mit einer kurzen Beurteilung des VaR-Ansatzes und einem Ausblick auf Weiterentwicklungen.

Looking Beyond Banks’ Average Interest Rate Risk: Determinants of High Exposures

This paper studies the magnitude and determinants of interest rate risk (IRR) of listed U.S. bank holding companies. As our first contribution, we test whether banks avoid exposures to IRR as prescribed in classic bank hedging literature. To do so, we use a state space model and Kalman filter techniques to estimate time-series of interest rate betas from bank stock returns. While the interest rate exposures of banks average close to zero, we find that individual banks at times exhibit high and significant exposures to interest rate risk. As our second contribution, we relate these high betas to lagged bank characteristics from accounting data, applying logit regressions and unconditional quantile regressions. We find that high exposures are partly systemic and comove with bank characteristics like size or leverage. This has implications for the monitoring of interest rate risk by regulators and investors as well as for the ongoing debates on the appropriate capitalization of banks.

Estimating the Interest Rate Risk of Banks Using Time Series of Accounting-Based Data

This paper proposes a new method of estimating the interest rate risk of banks from the perspective of bank outsiders. The key innovation is the inclusion of time series of accounting-based data instead of using only the latest available reports to estimate the maturity structure of banks. Using regulatory accounting-based data, we estimate the model for more than 1,000 German universal banks and compare the results with a unique data set of bank-internal quantified interest rate risk. We find evidence that our model yields a significantly better fit of banks’ internally quantified interest rate risk than standard approaches that rely on one-point-in-time data.

Fristentransformation als Lösungsansatz für das Ertragsproblem von Banken

„Um unsere angespannte Ertragssituation auf Grund des Strukturwandels im Bankgewerbe in den Griff zu bekommen, mussen wir mehr denn je die Ertrags-potenziale der Fristentransforrnation ausschopfen.“ — So oder so ahnlich lauten haufig geauserte Statements des Managements vieler Kreditinstitute. Ungeachtet der verbundenen Messproblematik stellt der Ergebnisbeitrag aus der Fristentrans-formation bisher einen nicht unwesentlichen Teil des Gesamtergebnisses vieler Banken dar. Die zentrale Frage dieses Beitrags ist daher, ob und inwieweit eine Ausweitung der Fristentransforrnation zumindest einen Teil des Ertragsproblems der Banken losen kann. Oder sollten Banken kunftig gar auf die Fristentransformation verzichten?