2015/12/31 by A. K. M. Azhar, Azhar, A. K. M., Vincent B.Y. Gan +5
Business, Management and Accounting · Economics, Econometrics and Finance · #Complex Systems and Time Series Analysis #Credit Risk and Financial Regulations #FOS: Economics and business #Financial Distress and Bankruptcy Prediction #Financial Markets and Investment Strategies #Private Equity and Venture Capital #Risk Management (q-fin.RM)
paper · pdf · doi:10.48550/arxiv.1512.09280
openalex publication_date 2015/12/31 · openalex created_date 2021/02/01 · openalex updated_date 2026/07/28
This paper reviews the economic and theoretical foundations of insolvency\nrisk measurement and capital adequacy rules. The proposed new measure of\ninsolvency risk is constructed by disentangling assets, debt and equity at the\nmicro-prudential firm level. This new risk index is the Firm Insolvency Risk\nIndex (FIRI) which is symmetrical, proportional and scale invariant. We\ndemonstrate that the balance sheet can be shown to evolve with a fractal\npattern. As such we construct a fractal index that can measure the risk of\nassets. This index can differentiate between the similarity and dissimilarity\nin asset risk, and it will also possess the properties of being self-similar\nand invariant to firm characteristics that make up its asset composition hence\ninvariant to all types of risk derived from assets. Self-similarity and scale\ninvariance across the cross section allows direct comparison of degrees of risk\nin assets. This is by comparing the risk dissimilarity of assets. Being\nnaturally bounded to its highest upper bound, (0,2], the fractal index is able\nto serve like a risk thermometer. We assign geometric probabilities of\ninsolvency P (equity is equal or less than 0 conditional on debt being greater\nthan 0).\n