Elizaveta Sizova

Banking, Risk Management, Financial Regulation, Financial Markets, Corporate Finance

Strategic Risk Modeling by Banks: Evidence from Inside the Black Box (with Mike Mariathasan and Ouarda Merrouche)

Revise & Resubmit in The Review of Corporate Finance Studies

Regulators condition bank capital on risk but struggle to measure risk accurately. Capital requirements thus rely on inputs from banks’ internal risk models and banks have discretion over modeling choices. Using novel hand-collected data we find systematic differences in reported risk for the chosen simulation method, holding period and historical data size. Hence, modeling choices can be a significant channel of underreporting of risk. Consistent with this presumption we find that less-capitalized banks tend to choose less conservative methods. Moreover, banks using a softer simulation method display higher actual market risk while reporting lower market risk to the regulator.

Rebalancing of Currency Hedging and the Impact on Exchange Rates (with Olav Syrstad and Ingebjørg Hansen Sævareid)

We study how currency-hedged investments by non-bank financial institutions (NBFIs) affect exchange rates. When foreign investment values change, NBFIs rebalance their currency hedges, creating systematic FX flows. Using transaction-level data from Norwegian NBFIs, we show that negative portfolio returns trigger domestic currency sales. High-frequency event studies reveal immediate price impacts of 0.2% per 1 billion NOK forward flow. During high volatility, impacts triple. Our findings identify mechanical rebalancing as a key exchange rate driver, particularly relevant for economies with large currency-hedged foreign investments.

Norges Bank Governor's Speech

Currency Mismatch on Bank Balance Sheets and Exchange Rates (with Aleksei Oskolkov and Marcos Sorá)