The last decade has seen an increase in the number of hedge funds and availability of hedge fund data both on individual hedge funds and on hedge fund indexes. Unlike mutual funds, hedge funds engage in dynamic strategies, use leverage, take concentrated bets and have non-linear payoffs. Colossal losses for hedge funds in Fixed Income strategy in 1998, Long/Short Equity and Global Macro strategies in 2002 and recent losses in Convertible Bond Arbitrage strategy are all attributed to different reasons and risk exposures. Therefore, it is important to understand and model time-varying risk exposures for various strategies and obtain reliable estimates for predicted exposures of hedge fund returns to various market risk factors in different market environments.
Hedge fund strategies greatly differ from each other and have different risk exposures. Fung and Hsieh (2001) analyzed a trend following" strategy and Mitchell and Pulvino (2001) studied a risk arbitrage" strategy. Both studies find the risk return characteristics of the hedge fund strategies to be nonlinear and stress the importance of taking into account option-like features while analyzing hedge funds. Moreover, Agarwal and Naik (2004) show that the non-linear option-like payoffs called also Asset-Based Style Factors (ABS-Factors introduced by Fung and Hsieh (2002a))are not restricted just to these two strategies, but are an integral part of payoffs of various hedge fund strategies.
Until recently, research on banking crises was inspired mostly by the experiences of the 19th and early 20th century. In particular, the field was dominated by studies of the Great Depression, when numerous and catastrophic bank failures occurred around the world. Beginning in the 1990s, a resurgence of banking crises provided new impetus and new materials to researchers, and a rapidly growing literature is studying the causes and consequences of bank fragility in contemporary economies. This paper surveys this work and tries to highlight directions for future research.
Credit risk forecasting is one of the leading topics in modern finance, as the bank regulation has made increasing use of external and internal credit ratings. One of the most important examples is the package of rules for determining the required capital for the market risk in the trading book, issued by the Basel Committee on Banking Supervision.
The discussion process that led to the June 1999 BSBS proposal for a revised international accord follow this trend on importance growing attached to the credit scoring process, culminating in a more prominent proposed role for credit ratings in the determination of overall capital for banking institution, but the problems that the regulators and practioners are facing are not few.
