Journal of Risk and Financial Management

579 KiB

Open AccessArticle

by David E. Allen, Michael McAleer and Marcel Scharth

J. Risk Financial Manag. 2014, 7(2), 80-109; https://doi.org/10.3390/jrfm7020080 - 25 Jun 2014

Cited by 2 | Viewed by 5090

In this paper, we document that realized variation measures constructed from high-frequency returns reveal a large degree of volatility risk in stock and index returns, where we characterize volatility risk by the extent to which forecasting errors in realized volatility are substantive. Even [...] Read more.

In this paper, we document that realized variation measures constructed from high-frequency returns reveal a large degree of volatility risk in stock and index returns, where we characterize volatility risk by the extent to which forecasting errors in realized volatility are substantive. Even though returns standardized by ex post quadratic variation measures are nearly Gaussian, this unpredictability brings considerably more uncertainty to the empirically relevant ex ante distribution of returns. Explicitly modeling this volatility risk is fundamental. We propose a dually asymmetric realized volatility model, which incorporates the fact that realized volatility series are systematically more volatile in high volatility periods. Returns in this framework display time varying volatility, skewness and kurtosis. We provide a detailed account of the empirical advantages of the model using data on the S&P 500 index and eight other indexes and stocks. Full article

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779 KiB

Open AccessArticle

Refining Our Understanding of Beta through Quantile Regressions

by Allen B. Atkins and Pin T. Ng

J. Risk Financial Manag. 2014, 7(2), 67-79; https://doi.org/10.3390/jrfm7020067 - 21 May 2014

Cited by 6 | Viewed by 6354

Abstract

The Capital Asset Pricing Model (CAPM) has been a key theory in financial economics since the 1960s. One of its main contributions is to attempt to identify how the risk of a particular stock is related to the risk of the overall stock [...] Read more.

The Capital Asset Pricing Model (CAPM) has been a key theory in financial economics since the 1960s. One of its main contributions is to attempt to identify how the risk of a particular stock is related to the risk of the overall stock market using the risk measure Beta. If the relationship between an individual stock’s returns and the returns of the market exhibit heteroskedasticity, then the estimates of Beta for different quantiles of the relationship can be quite different. The behavioral ideas first proposed by Kahneman and Tversky (1979), which they called prospect theory, postulate that: (i) people exhibit “loss-aversion” in a gain frame; and (ii) people exhibit “risk-seeking” in a loss frame. If this is true, people could prefer lower Beta stocks after they have experienced a gain and higher Beta stocks after they have experienced a loss. Stocks that exhibit converging heteroskedasticity (22.2% of our sample) should be preferred by investors, and stocks that exhibit diverging heteroskedasticity (12.6% of our sample) should not be preferred. Investors may be able to benefit by choosing portfolios that are more closely aligned with their preferences. Full article

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2519 KiB

Open AccessArticle

International Diversification Versus Domestic Diversification: Mean-Variance Portfolio Optimization and Stochastic Dominance Approaches

by Fathi Abid, Pui Lam Leung, Mourad Mroua and Wing Keung Wong

J. Risk Financial Manag. 2014, 7(2), 45-66; https://doi.org/10.3390/jrfm7020045 - 08 May 2014

Cited by 30 | Viewed by 9632

Abstract

This paper applies the mean-variance portfolio optimization (PO) approach and the stochastic dominance (SD) test to examine preferences for international diversification versus domestic diversification from American investors’ viewpoints. Our PO results imply that the domestic diversification strategy dominates the international diversification strategy at [...] Read more.

This paper applies the mean-variance portfolio optimization (PO) approach and the stochastic dominance (SD) test to examine preferences for international diversification versus domestic diversification from American investors’ viewpoints. Our PO results imply that the domestic diversification strategy dominates the international diversification strategy at a lower risk level and the reverse is true at a higher risk level. Our SD analysis shows that there is no arbitrage opportunity between international and domestic stock markets; domestically diversified portfolios with smaller risk dominate internationally diversified portfolios with larger risk and vice versa; and at the same risk level, there is no difference between the domestically and internationally diversified portfolios. Nonetheless, we cannot find any domestically diversified portfolios that stochastically dominate all internationally diversified portfolios, but we find some internationally diversified portfolios with small risk that dominate all the domestically diversified portfolios. Full article

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421 KiB

Open AccessArticle

Remuneration Committee, Board Independence and Top Executive Compensation

by Chii-Shyan Kuo and Shih-Ti Yu

J. Risk Financial Manag. 2014, 7(2), 28-44; https://doi.org/10.3390/jrfm7020028 - 15 Apr 2014

Cited by 4 | Viewed by 7444

Abstract

In this study, we examine whether the levels and structures of top executive compensation vary discernibly with different levels of board independence. We also examine how the newly mandated adoption of the remuneration committee (RC) in Taiwan affects the board independence-executive pay relation. [...] Read more.

In this study, we examine whether the levels and structures of top executive compensation vary discernibly with different levels of board independence. We also examine how the newly mandated adoption of the remuneration committee (RC) in Taiwan affects the board independence-executive pay relation. The mandatory establishment of RC for Taiwanese public firms, starting in 2011, is intended to strengthen the reasonableness and effectiveness of the executive compensation structure; thus, it is timely and of interest for practitioners and regulators to understand whether the establishment of RCs can effectively discipline top executive compensation policies. We first find that CEOs of firms that do not appoint independent directors have greater levels of annual pay than is the case for firms that have appointed independent directors, after controlling for the effect of CEO pay determinants. Second, we find that CEO pay for early RC adopters is more closely related to firm performance. Third, we find that the establishing of RCs may decrease CEO pay and enhance the pay-performance association, in particular for firms that have not appointed independent directors; however, this effect is not found to be statistically significant. Full article

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J. Risk Financial Manag., Volume 7, Issue 2 (June 2014) – 4 articles , Pages 28-109

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