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The dissertation proposes three approaches for financial risk management. In the first topic, we investigate the stock return and risk of financial holding companies via Markov regime-switching model. The model reduces the disadvantage of traditional linear model, which disregard information of another regime if there exist structural change during the estimation periods. The empirical result shows that all financial holding companies have different stock risk between state 0 and state 1. Moreover, stock risks of all financial holding companies are significant lower after listing. That is, financial holding companies have diversification benefits after listing.
In the second topic, we gauge the credit risk of guarantee issue in a bills finance company in Taiwan by a market-based model. Since bills finance companies engage in short-term loans, we renew the contract that can extend short-term loans to mid-and long-term loans. We find that the recovery rate, different industries and business cycle have significant impact on the credit risk of the bills finance company.
In the third topic, we relax the assumption of Jarrow, Lando and Turnbull (1997), and propose an elaborate model to gauge the credit risk of Taiwanese bank loans. The empirical result indicates that the credit risk is heavily reliant on the recovery rate. Therefore, collateral value check procedure is very important, which has been found in previous topic. On the other hand, we find that the credit risk management is indifferent between banks participated in financial holding companies and others. That is, banks do not have better credit risk management if take part in financial holding companies. In conclusion, we expect approaches of the dissertation will be helpful for Taiwan’s financial institutions to rise to the challenge of financial risk in the future.

Contents

1. Introduction 1
2. Gauging stock return and risk of Taiwan’s financial holding companies by Markov regime-switching model 5
2.1 Introduction……………………………………………………………………..5
2.2 Model Specification ……………………………………………………………8
2.2.1 Market model……………………………………………………………..8
2.2.2 Markov regime-switching model…………………………………………9
2.3 Empirical Results……………………………………………………………...13
2.3.1 Data……………………………………………………………………...13
2.3.2 Unit root test……………………………………………………………..14
2.3.3 SUR estimation………………………………………………………….19
2.3.4 Estimation and test results of Markov regime-switching model………..19
2.4 The Well-specified Test of Model……………………………………………..33
2.5 Conclusions……………………………………………………………………35
3. Gauging the credit risk of guarantee issues in Taiwanese bills finance company by market-based approach 38
3.1 Introduction……………………………………………………………………38
3.2 Model Specification…………………………………………………………...44
3.2.1 One-period model………………………………………………………..45
3.2.2 Multi-period model……………………………………………………...46
3.3 Data……………………………………………………………………………48
3.4 Empirical Results……………………………………………………………...49
3.4.1 The probability of default and loss given default with the recovery rate as a constant parameter……………………………………………………….49
3.4.2 Loss given default with the recovery rate as a variable parameter……….51
3.4.3 The probability of default for different industries………………………..53
3.4.4 Business cycle and the probability of default…………………………….55
3.5 Robustness Test………………………………………………………………..57
3.6 Conclusions……………………………………………………………………58
4. Gauging the credit risk of bank loans in Taiwan: an empirical investigation using the Markov chain model 60
4.1 Introduction……………………………………………………………………60
4.2 Model Specification…………………………………………………………...65
4.3 Data……………………………………………………………………………70
4.4 Empirical Results……………………………………………………………...72
4.4.1 The default probability……………………………………………………72
4.4.2 Loss given default with the recovery rate as a constant parameter……….75
4.4.3 Loss given default with the recovery rate as a variable parameter……….78
4.4.4 The probability of default of banks belong to financial and non-financial holding companies……………………………………………………….80
4.5 Conclusions……………………………………………………………………84
Reference 110

References
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Athanassakos, G. and P. Carayannopoulos (2001), “An empirical analysis of the relationship of bond yield spreads and macro-economic factors,” Applied Financial Economics, 11, 197-207.
Basel Committee on Banking Supervision (2004), “International convergence of capital measurement and capital standards: a revised framework,” Bank for International Settlement.
Belkin, B., Suchower, S. and L. R. Forest (1998), “A one-parameter representation of credit risk and transition matrices,” JP Morgan CreditMetrics