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J. Risk Financial Manag., Volume 12, Issue 2 (June 2019)

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Open AccessArticle
Book-To-Market Decomposition, Net Share Issuance, and the Cross Section of Global Stock Returns
J. Risk Financial Manag. 2019, 12(2), 90; https://doi.org/10.3390/jrfm12020090 (registering DOI)
Received: 28 April 2019 / Revised: 18 May 2019 / Accepted: 20 May 2019 / Published: 22 May 2019
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Abstract
This paper provides global evidence supporting the hypothesis that expected return models are enhanced by the inclusion of variables that describe the evolution of book-to-market—changes in book value, changes in price, and net share issues. This conclusion is supported using data representing North [...] Read more.
This paper provides global evidence supporting the hypothesis that expected return models are enhanced by the inclusion of variables that describe the evolution of book-to-market—changes in book value, changes in price, and net share issues. This conclusion is supported using data representing North America, Europe, Japan, and Asia. Results are highly consistent across all global regions and hold for small and big market capitalization subsets as well as in different subperiods. Variables measured over the past twelve months are more relevant than variables measured over the past thirty-six months, demonstrating that recent news is more important than old news. Full article
(This article belongs to the Special Issue International Financial Markets)
Open AccessArticle
Credit Scoring in SME Asset-Backed Securities: An Italian Case Study
J. Risk Financial Manag. 2019, 12(2), 89; https://doi.org/10.3390/jrfm12020089
Received: 31 March 2019 / Revised: 12 May 2019 / Accepted: 13 May 2019 / Published: 17 May 2019
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Abstract
We investigate the default probability, recovery rates and loss distribution of a portfolio of securitised loans granted to Italian small and medium enterprises (SMEs). To this end, we use loan level data information provided by the European DataWarehouse platform and employ a logistic [...] Read more.
We investigate the default probability, recovery rates and loss distribution of a portfolio of securitised loans granted to Italian small and medium enterprises (SMEs). To this end, we use loan level data information provided by the European DataWarehouse platform and employ a logistic regression to estimate the company default probability. We include loan-level default probabilities and recovery rates to estimate the loss distribution of the underlying assets. We find that bank securitised loans are less risky, compared to the average bank lending to small and medium enterprises. Full article
(This article belongs to the Special Issue Risk Analysis and Portfolio Modelling)
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Open AccessArticle
Threshold Stochastic Conditional Duration Model for Financial Transaction Data
J. Risk Financial Manag. 2019, 12(2), 88; https://doi.org/10.3390/jrfm12020088
Received: 15 April 2019 / Revised: 5 May 2019 / Accepted: 8 May 2019 / Published: 14 May 2019
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Abstract
This paper proposes a variant of a threshold stochastic conditional duration (TSCD) model for financial data at the transaction level. It assumes that the innovations of the duration process follow a threshold distribution with a positive support. In addition, it also assumes that [...] Read more.
This paper proposes a variant of a threshold stochastic conditional duration (TSCD) model for financial data at the transaction level. It assumes that the innovations of the duration process follow a threshold distribution with a positive support. In addition, it also assumes that the latent first-order autoregressive process of the log conditional durations switches between two regimes. The regimes are determined by the levels of the observed durations and the TSCD model is specified to be self-excited. A novel Markov-Chain Monte Carlo method (MCMC) is developed for parameter estimation of the model. For model discrimination, we employ deviance information criteria, which does not depend on the number of model parameters directly. Duration forecasting is constructed by using an auxiliary particle filter based on the fitted models. Simulation studies demonstrate that the proposed TSCD model and MCMC method work well in terms of parameter estimation and duration forecasting. Lastly, the proposed model and method are applied to two classic data sets that have been studied in the literature, namely IBM and Boeing transaction data. Full article
(This article belongs to the Special Issue Financial Econometrics)
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Open AccessArticle
A Cointegration of the Exchange Rate and Macroeconomic Fundamentals: The Case of the Indonesian Rupiah vis-á-vis Currencies of Primary Trade Partners
J. Risk Financial Manag. 2019, 12(2), 87; https://doi.org/10.3390/jrfm12020087
Received: 28 February 2019 / Revised: 21 April 2019 / Accepted: 25 April 2019 / Published: 13 May 2019
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Abstract
Since the appearance of persistent research finding a disconnection between the exchange rate and its macroeconomic fundamentals, the empirical debate has not stopped. Studies employ various methods to explain the presence of the exchange rate disconnect puzzle, including applying models to the case [...] Read more.
Since the appearance of persistent research finding a disconnection between the exchange rate and its macroeconomic fundamentals, the empirical debate has not stopped. Studies employ various methods to explain the presence of the exchange rate disconnect puzzle, including applying models to the case of emerging market economies. However, the exchange rate has different determinants in some countries. To revisit this puzzle in an emerging market currency, we analyzed the cointegration of the exchange rate of the Indonesian Rupiah vis-á-vis currencies of primary trade partners and its macroeconomic fundamentals. The empirical results based on Autoregressive Distributed Lag (ARDL) and Nonlinear Autoregressive Distributed Lag (NARDL) models show that the fundamental variables consistently drive the exchange rate. The trade surplus as an extended nonlinear variable revealed high feedback to the exchange rate volatility in the long-run. Full article
(This article belongs to the Special Issue Currency Crisis)
Open AccessFeature PaperArticle
Secondary Market Liquidity and Primary Market Pricing of Corporate Bonds
J. Risk Financial Manag. 2019, 12(2), 86; https://doi.org/10.3390/jrfm12020086
Received: 14 February 2019 / Revised: 24 April 2019 / Accepted: 3 May 2019 / Published: 13 May 2019
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Abstract
This paper studies the link between secondary market liquidity for a corporate bond and the bond’s yield spread at issuance. Using ex-ante measures of expected liquidity at the time of issuance, based on the characteristics of the underwriting syndicate, we find an economically [...] Read more.
This paper studies the link between secondary market liquidity for a corporate bond and the bond’s yield spread at issuance. Using ex-ante measures of expected liquidity at the time of issuance, based on the characteristics of the underwriting syndicate, we find an economically large impact of liquidity on yield spreads. We estimate that a 10% increase in expected liquidity implies a decrease in the yield spread at issuance of between 8% and 14%. Our results suggest that liquidity has an important effect on firms’ cost of capital, and they contribute to the literature which examines the impact of liquidity on asset prices. Full article
(This article belongs to the Special Issue Corporate Debt)
Open AccessArticle
Optimism in Financial Markets: Stock Market Returns and Investor Sentiments
J. Risk Financial Manag. 2019, 12(2), 85; https://doi.org/10.3390/jrfm12020085
Received: 8 April 2019 / Revised: 30 April 2019 / Accepted: 7 May 2019 / Published: 13 May 2019
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Abstract
This paper investigates how investor sentiment affects stock market returns and evaluates the predictability power of sentiment indices on U.S. and EU stock market returns. As regards the American example, evidence shows that investor sentiment indices have an economic and statistical predictability power [...] Read more.
This paper investigates how investor sentiment affects stock market returns and evaluates the predictability power of sentiment indices on U.S. and EU stock market returns. As regards the American example, evidence shows that investor sentiment indices have an economic and statistical predictability power on stock market returns. Concerning the European market instead, investigation provides weak results. Moreover, comparing the two markets, where investor sentiment of U.S. market tries to predict the European stock market returns, and vice versa, the analyses indicate a spillover effect from the U.S. to Europe. Full article
(This article belongs to the Special Issue Bayesian Econometrics)
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Open AccessArticle
Should Vietnamese Banks Need More Equity? Evidence on Risk-Return Trade-Off in Dynamic Models of Banking
J. Risk Financial Manag. 2019, 12(2), 84; https://doi.org/10.3390/jrfm12020084
Received: 19 April 2019 / Revised: 9 May 2019 / Accepted: 11 May 2019 / Published: 13 May 2019
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Abstract
This study employs generalized method of moments (GMM) for dynamic panel data models to deal with the nature of banking behaviour, aiming at investigating the impact of bank equity on the risk and return of Vietnamese commercial banks during the period of 2006–2017. [...] Read more.
This study employs generalized method of moments (GMM) for dynamic panel data models to deal with the nature of banking behaviour, aiming at investigating the impact of bank equity on the risk and return of Vietnamese commercial banks during the period of 2006–2017. The study finds that increasing bank equity is not always the best strategy to be accompanied by absolute benefits, increasing returns and reducing risks for banks but is a trade-off instead. More precisely, banks with larger capital buffers tend to take less risk but are less profitable. In addition, the study also finds a non-linear relationship revealing that bank risk mitigates the effect of bank equity on profitability. Most estimations show strong robustness checked by some alternative techniques. Based on the findings, the study provides some important policy implications to improve the performance of the banking system in Vietnam as well as in other emerging countries. Full article
(This article belongs to the Section Banking and Finance)
Open AccessArticle
Multi-Period Investment Strategies under Cumulative Prospect Theory
J. Risk Financial Manag. 2019, 12(2), 83; https://doi.org/10.3390/jrfm12020083
Received: 10 April 2019 / Revised: 1 May 2019 / Accepted: 5 May 2019 / Published: 11 May 2019
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Abstract
In this article, inspired by Shi et al., we investigate the optimal portfolio selection with one risk-free asset and one risky asset in a multiple period setting under the cumulative prospect theory (CPT) risk criterion. Compared with their study, our novelty is that [...] Read more.
In this article, inspired by Shi et al., we investigate the optimal portfolio selection with one risk-free asset and one risky asset in a multiple period setting under the cumulative prospect theory (CPT) risk criterion. Compared with their study, our novelty is that we consider a stochastic benchmark and portfolio constraints. By performing a numerical analysis, we test the sensitivity of the optimal CPT investment strategies to different model parameters. Full article
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Open AccessArticle
The Effect of Diversification under Different Ownership Structures and Economic Conditions: Evidence from the Great Recession
J. Risk Financial Manag. 2019, 12(2), 82; https://doi.org/10.3390/jrfm12020082
Received: 3 April 2019 / Revised: 1 May 2019 / Accepted: 1 May 2019 / Published: 10 May 2019
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Abstract
The effect of corporate diversification on firm performance has been extensively documented in the literature. In the general finance literature, Kuppuswamy and Villalonga (2015) studied the diversification effect during the 2007–2009 financial crisis and found that diversification adds value in the presence of [...] Read more.
The effect of corporate diversification on firm performance has been extensively documented in the literature. In the general finance literature, Kuppuswamy and Villalonga (2015) studied the diversification effect during the 2007–2009 financial crisis and found that diversification adds value in the presence of external financing constraints. Motivated by this finding, we investigate whether a similar effect applies to insurance firms and we develop hypotheses for their different ownership structures (stock vs. mutual insurers; and group vs. non-group affiliated insurers). Using a sample of property-liability insurers over a period of 2004 to 2013, we find that the effect of diversification on performance is contingent on ownership structures and economic conditions. The diversification effect for stock insurers and insurers affiliated with a group is not significantly affected by economic conditions. However, the diversification effect for mutual insurers and non-affiliated insurers is reversed during the financial crisis. More specifically, diversified firms with these kinds of ownership structures perform better than focused firms during normal economic conditions, but their performance was significantly worse during the financial crisis. Our results are robust to alternative measures of performance and diversification, and to corrections for endogeneity. Our study contributes to the diversification literature by showing how the effect of diversification varies with ownership structure under different economic conditions and the results shed light on the specific circumstances in which diversification can improve or reduce performance. Full article
(This article belongs to the Special Issue Financial Crises, Macroeconomic Management, and Financial Regulation)
Open AccessArticle
Adaptive Market Hypothesis: Evidence from the Vietnamese Stock Market
J. Risk Financial Manag. 2019, 12(2), 81; https://doi.org/10.3390/jrfm12020081
Received: 30 March 2019 / Revised: 1 May 2019 / Accepted: 5 May 2019 / Published: 8 May 2019
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Abstract
This paper aims to test the adaptive market hypothesis in the two main Vietnamese stock exchanges, namely Ho Chi Minh City Stock Exchange (HSX) and Hanoi Stock Exchange (HNX), by measuring the relationship between current stock returns and historical stock returns. In particular, [...] Read more.
This paper aims to test the adaptive market hypothesis in the two main Vietnamese stock exchanges, namely Ho Chi Minh City Stock Exchange (HSX) and Hanoi Stock Exchange (HNX), by measuring the relationship between current stock returns and historical stock returns. In particular, the tests employed are the automatic variance ratio test (“AVR”), the automatic portmanteau test (“AP”), the generalized spectral test (“GS”), and the time-varying autoregressive (TV-AR) approach. The empirical results validate the adaptive market hypothesis in the Vietnamese stock market. Furthermore, the results suggest that the evolution of HSX has served as an important factor of the adaptive market hypothesis. Full article
(This article belongs to the Special Issue Entrepreneurial Finance at the Dawn of Industry 4.0)
Open AccessArticle
Money as an Institution: Rule versus Evolved Practice? Analysis of Multiple Currencies in Argentina
J. Risk Financial Manag. 2019, 12(2), 80; https://doi.org/10.3390/jrfm12020080
Received: 6 March 2019 / Revised: 24 April 2019 / Accepted: 28 April 2019 / Published: 8 May 2019
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Abstract
Monetary policies and adjustments during a financial crisis depend on policy-makers’ conceptions on what money is and how it works. There is sufficient consensus among scholars that money is an institution created within the economic system and is in line with other institutions [...] Read more.
Monetary policies and adjustments during a financial crisis depend on policy-makers’ conceptions on what money is and how it works. There is sufficient consensus among scholars that money is an institution created within the economic system and is in line with other institutions that regulate economic action. However, there are different understandings of what institutions are and how they operate, and these understandings imply differences in terms of monetary enforcement, resilience, responsiveness and stability. This paper discusses the two main approaches that conceptualise institutions as rules and as practices presenting an empirically informed discussion of money as an institution drawing on these insights. It grounds the analysis on the empirical case of Argentina as a monetary laboratory and the plurality of currencies that circulate in its economy. The study argues that while the official currency of Argentina corresponds to the institutions as rules approach, the adoption of the U.S. dollar into a bimonetary economy evolved as equilibrium. In between, the massive community currency systems that rose and declined during the economic meltdown between 1998 and 2002 were a hybrid institution that combined rules and practice. All three of them show various degrees of resilience and stability. Full article
(This article belongs to the Special Issue Currency Crisis)
Open AccessArticle
Do Diamond Stocks Shine Brighter than Diamonds?
J. Risk Financial Manag. 2019, 12(2), 79; https://doi.org/10.3390/jrfm12020079
Received: 28 February 2019 / Revised: 22 April 2019 / Accepted: 24 April 2019 / Published: 3 May 2019
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Abstract
This paper addresses two practical investment questions: Is investing in the diamond equity market a more feasible and liquid alternative to investing in diamonds? Additionally, is diamond equity affected by polished diamond prices? We assemble an original database of diamond mining stock prices [...] Read more.
This paper addresses two practical investment questions: Is investing in the diamond equity market a more feasible and liquid alternative to investing in diamonds? Additionally, is diamond equity affected by polished diamond prices? We assemble an original database of diamond mining stock prices traded on main stock exchanges in order to assess their relationship with diamond prices. Our results show that the market of diamond-mining stocks does not represent a valid investment alternative to the diamond commodity. Diamond equity returns are not driven by diamond price dynamics but rather by local market stock indices. Full article
(This article belongs to the Special Issue Alternative Assets and Cryptocurrencies)
Open AccessArticle
Carry Cost Rate Regimes and Futures Hedge Ratio Variation
J. Risk Financial Manag. 2019, 12(2), 78; https://doi.org/10.3390/jrfm12020078
Received: 19 March 2019 / Revised: 29 April 2019 / Accepted: 30 April 2019 / Published: 3 May 2019
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Abstract
This paper tests whether the traditional futures hedge ratio (hT) and the carry cost rate futures hedge ratio (hc) vary in accordance with the Sercu and Wu (2000) and Leistikow et al. (2019) “hc” theory. It does [...] Read more.
This paper tests whether the traditional futures hedge ratio (hT) and the carry cost rate futures hedge ratio (hc) vary in accordance with the Sercu and Wu (2000) and Leistikow et al. (2019) “hc” theory. It does so, both within and across high and low spot asset carry cost rate (c) regimes. The high and low c regimes are specified by asset across time and across currency denominations. The findings are consistent with the theory. Within and across c regimes, hT is inefficient and hc is biased. Across c regimes, hc’s Bias Adjustment Multiplier (BAM) does not vary significantly. Even though hc’s bias-adjusted variant’s BAM is restricted to old data that is from a different c regime, the hedging performance of hc and its bias-adjusted variant (=hc × BAM), are superior to that for hT. Variation in c may account for the hT variation noted in the literature and variation in c should be incorporated into ex ante hedge ratios. Full article
(This article belongs to the collection Empirical Asset Pricing)
Open AccessArticle
Dynamic Expectation Theory: Insights for Market Participants
J. Risk Financial Manag. 2019, 12(2), 77; https://doi.org/10.3390/jrfm12020077
Received: 1 April 2019 / Revised: 22 April 2019 / Accepted: 25 April 2019 / Published: 1 May 2019
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Abstract
This paper develops a new methodology in order to study the role of dynamic expectations. Neither reference-point theories nor feedback models are sufficient to describe human expectations in a dynamic market environment. We use an interdisciplinary approach and demonstrate that expectations of non-learning [...] Read more.
This paper develops a new methodology in order to study the role of dynamic expectations. Neither reference-point theories nor feedback models are sufficient to describe human expectations in a dynamic market environment. We use an interdisciplinary approach and demonstrate that expectations of non-learning agents are time-invariant and isotropic. On the contrary, learning enhances expectations. We uncover the “yardstick of expectations” in order to assess the impact of market developments on expectations. For the first time in the literature, we reveal new insights about the motion of dynamic expectations. Finally, the model is suitable for an AI approach and has major implications on the behaviour of market participants. Full article
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Open AccessArticle
Equalizing Seasonal Time Series Using Artificial Neural Networks in Predicting the Euro–Yuan Exchange Rate
J. Risk Financial Manag. 2019, 12(2), 76; https://doi.org/10.3390/jrfm12020076
Received: 30 March 2019 / Revised: 26 April 2019 / Accepted: 26 April 2019 / Published: 30 April 2019
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Abstract
The exchange rate is one of the most monitored economic variables reflecting the state of the economy in the long run, while affecting it significantly in the short run. However, prediction of the exchange rate is very complicated. In this contribution, for the [...] Read more.
The exchange rate is one of the most monitored economic variables reflecting the state of the economy in the long run, while affecting it significantly in the short run. However, prediction of the exchange rate is very complicated. In this contribution, for the purposes of predicting the exchange rate, artificial neural networks are used, which have brought quality and valuable results in a number of research programs. This contribution aims to propose a methodology for considering seasonal fluctuations in equalizing time series by means of artificial neural networks on the example of Euro and Chinese Yuan. For the analysis, data on the exchange rate of these currencies per period longer than 9 years are used (3303 input data in total). Regression by means of neural networks is carried out. There are two network sets generated, of which the second one focuses on the seasonal fluctuations. Before the experiment, it had seemed that there was no reason to include categorical variables in the calculation. The result, however, indicated that additional variables in the form of year, month, day in the month, and day in the week, in which the value was measured, have brought higher accuracy and order in equalizing of the time series. Full article
(This article belongs to the Special Issue Analysis of Global Financial Markets)
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Open AccessArticle
Simulation of the Grondona System of Conditional Currency Convertibility Based on Primary Commodities, Considered as a Means to Resist Currency Crises
J. Risk Financial Manag. 2019, 12(2), 75; https://doi.org/10.3390/jrfm12020075
Received: 28 February 2019 / Revised: 13 April 2019 / Accepted: 22 April 2019 / Published: 29 April 2019
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Abstract
Currency crises are a significant feature of the present-day world economy, in which financial transactions are many times larger than monetary flows in the “real economy”, so that defending a currency’s exchange-rate is a major challenge for the governments of countries which may [...] Read more.
Currency crises are a significant feature of the present-day world economy, in which financial transactions are many times larger than monetary flows in the “real economy”, so that defending a currency’s exchange-rate is a major challenge for the governments of countries which may be smaller than a single large corporation. It is made even more difficult due to the United States government and its agents openly using economic pressures to try to force other countries to obey its orders, even including regime change. Guaranteed convertibility of a currency, such as maintaining a gold standard, can in principle help to stabilise its value, but this has been absent since the end of US dollar convertibility in 1971. The Grondona system of conditional currency convertibility was not planned as a counter-measure for currency crises. However the simulation of its operation demonstrated in this paper shows clearly how its automatic counter-cyclical stock-holding in response to movements in commodity prices—and so to exchange-rate movements that alter domestic commodity prices—causes monetary flows that would resist large exchange-rate movements (among other effects), and thereby tend to ameliorate a currency crisis. Moreover, it would achieve this without the need for international negotiations, agreements or other geopolitical trade-offs. Full article
(This article belongs to the Special Issue Currency Crisis)
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Open AccessArticle
Quasi-Maximum Likelihood Estimation for Long Memory Stock Transaction Data—Under Conditional Heteroskedasticity Framework
J. Risk Financial Manag. 2019, 12(2), 74; https://doi.org/10.3390/jrfm12020074
Received: 15 March 2019 / Revised: 17 April 2019 / Accepted: 25 April 2019 / Published: 27 April 2019
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Abstract
This paper introduces Quasi-Maximum Likelihood Estimation for Long Memory Stock Transaction Data of unknown underlying distribution. The moments with conditional heteroscedasticity have been discussed. In a Monte Carlo experiment, it was found that the QML estimator performs as well as CLS and FGLS [...] Read more.
This paper introduces Quasi-Maximum Likelihood Estimation for Long Memory Stock Transaction Data of unknown underlying distribution. The moments with conditional heteroscedasticity have been discussed. In a Monte Carlo experiment, it was found that the QML estimator performs as well as CLS and FGLS in terms of eliminating serial correlations, but the estimator can be sensitive to start value. Hence, two-stage QML has been suggested. In empirical estimation on two stock transaction data for Ericsson and AstraZeneca, the 2SQML turns out relatively more efficient than CLS and FGLS. The empirical results suggest that both of the series have long memory properties that imply that the impact of macroeconomic news or rumors in one point of time has a persistence impact on future transactions. Full article
(This article belongs to the Special Issue Analysis of Global Financial Markets)
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Open AccessArticle
Managerial Self-Attribution Bias and Banks’ Future Performance: Evidence from Emerging Economies
J. Risk Financial Manag. 2019, 12(2), 73; https://doi.org/10.3390/jrfm12020073
Received: 16 March 2019 / Revised: 19 April 2019 / Accepted: 22 April 2019 / Published: 25 April 2019
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Abstract
The objective of the study was to predict the future performance of banks based on the contextual information provided in annual reports. The European Central Bank has observed that performance prediction models in earlier studies mainly rely on quantitative financial data, which are [...] Read more.
The objective of the study was to predict the future performance of banks based on the contextual information provided in annual reports. The European Central Bank has observed that performance prediction models in earlier studies mainly rely on quantitative financial data, which are insufficient for the comprehensive assessment of banks’ performance. There is a need to incorporate the qualitative information along with numerical data for better prediction. In this context, this study employed the attribution theory for understanding the contextual information of behavioral biases of management towards the expected outcomes. The sample consisted of 58 banks of 16 emerging economies, and the period covered from 2007–2015. Unsupervised hierarchical clustering was performed to identify the latent groups of banks within the data. For performance prediction, system GMM was employed, because it helped to deal with the endogeneity and heterogeneity problems. The results of the study were consistent with the attribution theory that management took credit for favorable expected outcomes and distanced from bad outcomes. An important policy implication of the study is that the prevalence of self-attribution bias of management in annual reports provides an additional source of information for the regulators to identify the banks at risks and take preventive measures to avoid the expected cost of failure. It can also help investors, and gives analysts a better tool for a comprehensive analysis of the profitability of prospective investments. Full article
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Open AccessArticle
Nonparametric Approach to Evaluation of Economic and Social Development in the EU28 Member States by DEA Efficiency
J. Risk Financial Manag. 2019, 12(2), 72; https://doi.org/10.3390/jrfm12020072
Received: 27 March 2019 / Revised: 20 April 2019 / Accepted: 22 April 2019 / Published: 24 April 2019
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Abstract
Data envelopment analysis (DEA) methodology is used in this study for a comparison of the dynamic efficiency of European countries over the last decade. Moreover, efficiency analysis is used to determine where resources are distributed efficiently and/or were used efficiently/inefficiently under factors of [...] Read more.
Data envelopment analysis (DEA) methodology is used in this study for a comparison of the dynamic efficiency of European countries over the last decade. Moreover, efficiency analysis is used to determine where resources are distributed efficiently and/or were used efficiently/inefficiently under factors of competitiveness extracted from factor analysis. DEA measures numerical grades of the efficiency of economic processes within evaluated countries and, therefore, it becomes a suitable tool for setting an efficient/inefficient position of each country. Most importantly, the DEA technique is applied to all (28) European Union (EU) countries to evaluate their technical and technological efficiency within the selected factors of competitiveness based on country competitiveness index in the 2000–2017 reference period. The main aim of the paper is to measure efficiency changes over the reference period and to analyze the level of productivity in individual countries based on the Malmquist productivity index (MPI). Empirical results confirm significant disparities among European countries and selected periods 2000–2007, 2008–2011, and 2012–2017. Finally, the study offers a comprehensive comparison and discussion of results obtained by MPI that indicate the EU countries in which policy-making authorities should aim to stimulate national development and provide more quality of life to the EU citizens. Full article
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Open AccessArticle
Does Managerial Power Increase Selective Hedging? Evidence from the Oil and Gas Industry
J. Risk Financial Manag. 2019, 12(2), 71; https://doi.org/10.3390/jrfm12020071
Received: 5 March 2019 / Revised: 10 April 2019 / Accepted: 15 April 2019 / Published: 24 April 2019
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Abstract
This study examines the managerial power-hypothesis of selective hedging, which holds that selective hedging is observed more frequently in companies where managers have greater latitude to execute hedging proposals without serious scrutiny or questioning. The hypothesis is tested using hand-collected data on corporate [...] Read more.
This study examines the managerial power-hypothesis of selective hedging, which holds that selective hedging is observed more frequently in companies where managers have greater latitude to execute hedging proposals without serious scrutiny or questioning. The hypothesis is tested using hand-collected data on corporate governance and derivative positions from the oil and gas industry. The results support the view that managerial power increases selective hedging. The main governance dimension associated with selective hedging is the extent of inside ownership. Firms with high inside ownership have excessive variability in their derivative portfolios, were more prone to opportunistic behavior following the great rise in the oil price in the mid-2000s, and have lower realized cash flow from hedging. Full article
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Open AccessArticle
Defined Contribution Pension Plans: Who Has Seen the Risk?
J. Risk Financial Manag. 2019, 12(2), 70; https://doi.org/10.3390/jrfm12020070
Received: 20 February 2019 / Revised: 17 April 2019 / Accepted: 18 April 2019 / Published: 24 April 2019
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Abstract
The trend towards eliminating defined benefit (DB) pension plans in favour of defined contribution (DC) plans implies that increasing numbers of pension plan participants will bear the risk that final realized portfolio values may be insufficient to fund desired retirement cash flows. We [...] Read more.
The trend towards eliminating defined benefit (DB) pension plans in favour of defined contribution (DC) plans implies that increasing numbers of pension plan participants will bear the risk that final realized portfolio values may be insufficient to fund desired retirement cash flows. We compare the outcomes of various asset allocation strategies for a typical DC plan investor. The strategies considered include constant proportion, linear glide path, and optimal dynamic (multi-period) time consistent quadratic shortfall approaches. The last of these is based on a double exponential jump diffusion model. We determine the parameters of the model using monthly US data over a 90-year sample period. We carry out tests in a synthetic market which is based on the same jump diffusion model and also using bootstrap resampling of historical data. The probability that portfolio values at retirement will be insufficient to provide adequate retirement incomes is relatively high, unless DC investors adopt optimal allocation strategies and raise typical contribution rates. This suggests there is a looming crisis in DC plans, which requires educating DC plan holders in terms of realistic expectations, required contributions, and optimal asset allocation strategies. Full article
(This article belongs to the Special Issue Computational Finance)
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Open AccessArticle
Arbitrage Free Approximations to Candidate Volatility Surface Quotations
J. Risk Financial Manag. 2019, 12(2), 69; https://doi.org/10.3390/jrfm12020069
Received: 19 February 2019 / Revised: 6 April 2019 / Accepted: 10 April 2019 / Published: 21 April 2019
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Abstract
It is argued that the growth in the breadth of option strikes traded after the financial crisis of 2008 poses difficulties for the use of Fourier inversion methodologies in volatility surface calibration. Continuous time Markov chain approximations are proposed as an alternative. They [...] Read more.
It is argued that the growth in the breadth of option strikes traded after the financial crisis of 2008 poses difficulties for the use of Fourier inversion methodologies in volatility surface calibration. Continuous time Markov chain approximations are proposed as an alternative. They are shown to be adequate, competitive, and stable though slow for the moment. Further research can be devoted to speed enhancements. The Markov chain approximation is general and not constrained to processes with independent increments. Calibrations are illustrated for data on 2695 options across 28 maturities for S P Y as at 8 February 2018. Full article
(This article belongs to the Special Issue Option Pricing)
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Open AccessArticle
The Impact of Algorithmic Trading in a Simulated Asset Market
J. Risk Financial Manag. 2019, 12(2), 68; https://doi.org/10.3390/jrfm12020068
Received: 13 March 2019 / Revised: 12 April 2019 / Accepted: 17 April 2019 / Published: 20 April 2019
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Abstract
In this work we simulate algorithmic trading (AT) in asset markets to clarify its impact. Our markets consist of human and algorithmic counterparts of traders that trade based on technical and fundamental analysis, and statistical arbitrage strategies. Our specific contributions are: (1) directly [...] Read more.
In this work we simulate algorithmic trading (AT) in asset markets to clarify its impact. Our markets consist of human and algorithmic counterparts of traders that trade based on technical and fundamental analysis, and statistical arbitrage strategies. Our specific contributions are: (1) directly analyze AT behavior to connect AT trading strategies to specific outcomes in the market; (2) measure the impact of AT on market quality; and (3) test the sensitivity of our findings to variations in market conditions and possible future events of interest. Examples of such variations and future events are the level of market uncertainty and the degree of algorithmic versus human trading. Our results show that liquidity increases initially as AT rises to about 10% share of the market; beyond this point, liquidity increases only marginally. Statistical arbitrage appears to lead to significant deviation from fundamentals. Our results can facilitate market oversight and provide hypotheses for future empirical work charting the path for developing countries where AT is still at a nascent stage. Full article
(This article belongs to the Special Issue Computational Finance)
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Open AccessReview
A Survey on Efficiency and Profitable Trading Opportunities in Cryptocurrency Markets
J. Risk Financial Manag. 2019, 12(2), 67; https://doi.org/10.3390/jrfm12020067
Received: 2 April 2019 / Revised: 14 April 2019 / Accepted: 15 April 2019 / Published: 18 April 2019
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Abstract
This study conducts a systematic survey on whether the pricing behavior of cryptocurrencies is predictable. Thus, the Efficient Market Hypothesis is rejected and speculation is feasible via trading. We center interest on the Rescaled Range (R/S) and Detrended Fluctuation Analysis (DFA) as well [...] Read more.
This study conducts a systematic survey on whether the pricing behavior of cryptocurrencies is predictable. Thus, the Efficient Market Hypothesis is rejected and speculation is feasible via trading. We center interest on the Rescaled Range (R/S) and Detrended Fluctuation Analysis (DFA) as well as other relevant methodologies of testing long memory in returns and volatility. It is found that the majority of academic papers provides evidence for inefficiency of Bitcoin and other digital currencies of primary importance. Nevertheless, large steps towards efficiency in cryptocurrencies have been traced during the last years. This can lead to less profitable trading strategies for speculators. Full article
(This article belongs to the Special Issue Blockchain and Cryptocurrencies)
Open AccessConcept Paper
What They Did Not Tell You about Algebraic (Non-) Existence, Mathematical (IR-)Regularity and (Non-) Asymptotic Properties of the Full BEKK Dynamic Conditional Covariance Model
J. Risk Financial Manag. 2019, 12(2), 66; https://doi.org/10.3390/jrfm12020066
Received: 11 March 2019 / Revised: 10 April 2019 / Accepted: 14 April 2019 / Published: 16 April 2019
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Abstract
Persistently high negative covariances between risky assets and hedging instruments are intended to mitigate against risk and subsequent financial losses. In the event of having more than one hedging instrument, multivariate covariances need to be calculated. Optimal hedge ratios are unlikely to remain [...] Read more.
Persistently high negative covariances between risky assets and hedging instruments are intended to mitigate against risk and subsequent financial losses. In the event of having more than one hedging instrument, multivariate covariances need to be calculated. Optimal hedge ratios are unlikely to remain constant using high frequency data, so it is essential to specify dynamic covariance models. These values can either be determined analytically or numerically on the basis of highly advanced computer simulations. Analytical developments are occasionally promulgated for multivariate conditional volatility models. The primary purpose of the paper is to analyze purported analytical developments for the most widely-used multivariate dynamic conditional covariance model to have been developed to date, namely the Full BEKK model, named for Baba, Engle, Kraft and Kroner. Dynamic models are not straightforward (or even possible) to translate in terms of the algebraic existence, underlying stochastic processes, specification, mathematical regularity conditions, and asymptotic properties of consistency and asymptotic normality, or the lack thereof. The paper presents a critical analysis, discussion, evaluation and presentation of caveats relating to the Full BEKK model, and an emphasis on the numerous dos and don’ts in implementing the Full BEKK and related non-Diagonal BEKK models, such as Triangular BEKK and Hadamard BEKK, in practice. Full article
(This article belongs to the collection Feature Papers from Journal Editorial Board)
Open AccessArticle
Value-at-Risk and Models of Dependence in the U.S. Federal Crop Insurance Program
J. Risk Financial Manag. 2019, 12(2), 65; https://doi.org/10.3390/jrfm12020065
Received: 29 March 2019 / Revised: 11 April 2019 / Accepted: 15 April 2019 / Published: 16 April 2019
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Abstract
The federal crop insurance program covered more than 110 billion dollars in total liability in 2018. The program consists of policies across a wide range of crops, plans, and locations. Weather and other latent variables induce dependence among components of the portfolio. Computing [...] Read more.
The federal crop insurance program covered more than 110 billion dollars in total liability in 2018. The program consists of policies across a wide range of crops, plans, and locations. Weather and other latent variables induce dependence among components of the portfolio. Computing value-at-risk (VaR) is important because the Standard Reinsurance Agreement (SRA) allows for a portion of the risk to be transferred to the federal government. Further, the international reinsurance industry is extensively involved in risk sharing arrangements with U.S. crop insurers. VaR is an important measure of the risk of an insurance portfolio. In this context, VaR is typically expressed in terms of probable maximum loss (PML) or as a return period, whereby a loss of certain magnitude is expected to return within a given period of time. Determining bounds on VaR is complicated by the non-homogeneous nature of crop insurance portfolios. We consider several different scenarios for the marginal distributions of losses and provide sharp bounds on VaR using a rearrangement algorithm. Our results are related to alternative measures of portfolio risks based on multivariate distribution functions and alternative copula specifications. Full article
(This article belongs to the Special Issue Risk Analysis and Portfolio Modelling)
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Open AccessArticle
Smoothed Maximum Score Estimation of Discrete Duration Models
J. Risk Financial Manag. 2019, 12(2), 64; https://doi.org/10.3390/jrfm12020064
Received: 7 March 2019 / Revised: 8 April 2019 / Accepted: 9 April 2019 / Published: 15 April 2019
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Abstract
This paper extends Horowitz’s smoothed maximum score estimator to discrete-time duration models. The estimator’s consistency and asymptotic distribution are derived. Monte Carlo simulations using various data generating processes with varying error distributions and shapes of the hazard rate are conducted to examine the [...] Read more.
This paper extends Horowitz’s smoothed maximum score estimator to discrete-time duration models. The estimator’s consistency and asymptotic distribution are derived. Monte Carlo simulations using various data generating processes with varying error distributions and shapes of the hazard rate are conducted to examine the finite sample properties of the estimator. The bias-corrected estimator performs reasonably well for the models considered with moderately-sized samples. Full article
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Open AccessArticle
The Effects of the Financing Facilitation Act after the Global Financial Crisis: Has the Easing of Repayment Conditions Revived Underperforming Firms?
J. Risk Financial Manag. 2019, 12(2), 63; https://doi.org/10.3390/jrfm12020063
Received: 26 January 2019 / Revised: 31 March 2019 / Accepted: 10 April 2019 / Published: 15 April 2019
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Abstract
After the global financial crisis, the Japanese government enacted the Financing Facilitation Act in 2009 to help small and medium-sized enterprises (SMEs) that had fallen into unprofitable conditions. Under this law, when troubled debtors asked financial institutions to ease repayment conditions (e.g., extend [...] Read more.
After the global financial crisis, the Japanese government enacted the Financing Facilitation Act in 2009 to help small and medium-sized enterprises (SMEs) that had fallen into unprofitable conditions. Under this law, when troubled debtors asked financial institutions to ease repayment conditions (e.g., extend repayment periods or bring down interest rates), the institution would have the obligation to meet such needs as best as possible. Afterward, the changing of loan conditions began to be utilized often in Japan as a means for supporting underperforming companies. Although many countries employed various countermeasures against the global financial crisis, the Financing Facilitation Act was unique to Japan. However, there is criticism that it did not become an opportunity for companies to substantially reform their businesses, and that there was a moral hazard on the company’s side. This paper analyses whether the easing of repayment conditions revived underperforming firms and who were likely to recover, by using the “Financial Field Study After the End of the Financing Facilitation Act”, carried out by the Research Institute of Economy, Trade and Industry (RIETI) in Oct 2014. We found that the act was successful in that about 60% of companies whose loan conditions were changed recovered their performance after the loan condition changed, and the attitude that financial institutions had towards support was an important factor in whether performance recovered or not. In sum, the act might be effectual when financial institutions properly support firms, although previous studies tend to emphasize its problems. Full article
(This article belongs to the Special Issue Financial Crises, Macroeconomic Management, and Financial Regulation)
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Open AccessArticle
Determinants of Vietnamese Listed Firm Performance: Competition, Wage, CEO, Firm Size, Age, and International Trade
J. Risk Financial Manag. 2019, 12(2), 62; https://doi.org/10.3390/jrfm12020062
Received: 17 March 2019 / Revised: 4 April 2019 / Accepted: 9 April 2019 / Published: 11 April 2019
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Abstract
This study investigates the relationship between firms’ competition, wage, CEOs’ characteristics, and firm performance (measured by net income per employee, return on assets (ROA) and return on equity (ROE)) of Vietnam’s 693 listed firms in 2015 using both the ordinary-least-square (OLS) and quantile [...] Read more.
This study investigates the relationship between firms’ competition, wage, CEOs’ characteristics, and firm performance (measured by net income per employee, return on assets (ROA) and return on equity (ROE)) of Vietnam’s 693 listed firms in 2015 using both the ordinary-least-square (OLS) and quantile regression methods. Triangulating the results coming from the analysis of three different measures of firm performance, this study consistently confirms that the sex of CEOs and chairman turns out to be insignificant in explaining firm performance and there is a negative association between capital intensity and firm performance. For financial firms, the age of a firm and average wage per employee are negatively associated with all types of firm performance. The quantile regression method shows that the age of a firm is negatively correlated with its net income per employee for small firms, while it is insignificant for medium-sized firms. Meanwhile, firm size is positively associated with firm performance. These results indicate Vietnam’s business activities are still concentrating on low labor cost, labor intensive, and low-tech production, thus, policies that promote innovation and high-tech applications should be encouraged. Full article
(This article belongs to the Special Issue Entrepreneurial Finance at the Dawn of Industry 4.0)
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Open AccessConcept Paper
What They Did Not Tell You about Algebraic (Non-) Existence, Mathematical (IR-)Regularity, and (Non-) Asymptotic Properties of the Dynamic Conditional Correlation (DCC) Model
J. Risk Financial Manag. 2019, 12(2), 61; https://doi.org/10.3390/jrfm12020061
Received: 11 March 2019 / Revised: 1 April 2019 / Accepted: 5 April 2019 / Published: 9 April 2019
Cited by 2 | Viewed by 218 | PDF Full-text (256 KB) | HTML Full-text | XML Full-text
Abstract
In order to hedge efficiently, persistently high negative covariances or, equivalently, correlations, between risky assets and the hedging instruments are intended to mitigate against financial risk and subsequent losses. If there is more than one hedging instrument, multivariate covariances and correlations have to [...] Read more.
In order to hedge efficiently, persistently high negative covariances or, equivalently, correlations, between risky assets and the hedging instruments are intended to mitigate against financial risk and subsequent losses. If there is more than one hedging instrument, multivariate covariances and correlations have to be calculated. As optimal hedge ratios are unlikely to remain constant using high frequency data, it is essential to specify dynamic time-varying models of covariances and correlations. These values can either be determined analytically or numerically on the basis of highly advanced computer simulations. Analytical developments are occasionally promulgated for multivariate conditional volatility models. The primary purpose of this paper is to analyze purported analytical developments for the only multivariate dynamic conditional correlation model to have been developed to date, namely the widely used Dynamic Conditional Correlation (DCC) model. Dynamic models are not straightforward (or even possible) to translate in terms of the algebraic existence, underlying stochastic processes, specification, mathematical regularity conditions, and asymptotic properties of consistency and asymptotic normality, or the lack thereof. This paper presents a critical analysis, discussion, evaluation, and presentation of caveats relating to the DCC model, with an emphasis on the numerous dos and don’ts in implementing the DCC model, as well as a related model, in practice. Full article
(This article belongs to the collection Feature Papers from Journal Editorial Board)
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