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An Alternative Model of Risk in Non-financial Companies Applied to the Brazilian Pulp and Paper Industry

Author

Listed:
  • Hsia Hua Sheng

    (FGV-EAESP)

  • Cristiane Karcher

    (IME-USP)

  • Paulo Hubert Jr.

Abstract

Earnings at Risk (EaR) is a financial risk measure that can be applied to non-financial companies, similarly to Cash Flow at Risk (CFaR). It is based on a relation that can be quantified using a multiple linear regression model, where the dependent variable is the change on the company's results and the independent variables are changes in distinct risk factors. The presence of correlation between explanatory factors (multicollinearity) in this kind of model may cause problems when calculating EaR and CFaR. In this paper, we indicate some possible consequences of these problems when calculating EaR, and propose a method to solve it based on Principal Component Analysis technique. To test the model, we choose the Brazilian agriculture-business industry, more specifically the paper and pulp sectors. We will show that, on the absence of significant correlation between variables, the proposed model has equivalent performance to usual multiple linear regression models. We find evidence that when correlation appears, the model here proposed yields more accurate and reliable forecasts.

Suggested Citation

  • Hsia Hua Sheng & Cristiane Karcher & Paulo Hubert Jr., 2009. "An Alternative Model of Risk in Non-financial Companies Applied to the Brazilian Pulp and Paper Industry," Brazilian Review of Finance, Brazilian Society of Finance, vol. 7(3), pages 347-360.
    • Handle: RePEc:brf:journl:v:7:y:2009:i:3:p:347-360
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    References listed on IDEAS

    as
    1. Perobelli, Fernanda Finotti Cordeiro & Securato, José Roberto, 2005. "Modelo para medição do fluxo de caixa em risco: aplicação a distribuidoras de energia elétrica," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 45(4), October.
    2. Jeremy C. Stein & Stephen E. Usher & Daniel LaGattuta & Jeff Youngen, 2001. "A Comparables Approach To Measuring Cashflow‐At‐Risk For Non‐Financial Firms," Journal of Applied Corporate Finance, Morgan Stanley, vol. 13(4), pages 100-109, January.
    3. Andrén, Niclas & Jankensgård, Håkan & Oxelheim, Lars, 2005. "Exposure-based Cash-Flow-at-Risk under Macroeconomic Uncertainty," Working Paper Series 635, Research Institute of Industrial Economics.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    risk management; PCR model; international finance; earning at risk.;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M16 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - International Business Administration

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