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Volume 13, January

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J. Risk Financial Manag., Volume 13, Issue 2 (February 2020) – 16 articles

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Open AccessArticle
A Principal Component-Guided Sparse Regression Approach for the Determination of Bitcoin Returns
J. Risk Financial Manag. 2020, 13(2), 33; https://doi.org/10.3390/jrfm13020033 - 13 Feb 2020
Viewed by 192
Abstract
We examine the significance of fourty-one potential covariates of bitcoin returns for the period 2010–2018 (2872 daily observations). The recently introduced principal component-guided sparse regression is employed. We reveal that economic policy uncertainty and stock market volatility are among the most important variables [...] Read more.
We examine the significance of fourty-one potential covariates of bitcoin returns for the period 2010–2018 (2872 daily observations). The recently introduced principal component-guided sparse regression is employed. We reveal that economic policy uncertainty and stock market volatility are among the most important variables for bitcoin. We also trace strong evidence of bubbly bitcoin behavior in the 2017–2018 period. Full article
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Open AccessEditorial
Extreme Values and Financial Risk
J. Risk Financial Manag. 2020, 13(2), 32; https://doi.org/10.3390/jrfm13020032 - 11 Feb 2020
Viewed by 109
Abstract
Since the 2008 financial crisis, modelling of the extreme values of financial risk has become
important [...] Full article
(This article belongs to the Special Issue Extreme Values and Financial Risk) Printed Edition available
Open AccessArticle
Pricing Defaulted Italian Mortgages
J. Risk Financial Manag. 2020, 13(2), 31; https://doi.org/10.3390/jrfm13020031 - 10 Feb 2020
Viewed by 105
Abstract
Our paper forecasts the expected recovery rates of defaulted Italian mortgage loans backed by either residential or commercial real estate. We apply an exponential Ornstein–Uhlenbeck process to model the price dynamics at the provincial and regional level, and two haircut models to estimate [...] Read more.
Our paper forecasts the expected recovery rates of defaulted Italian mortgage loans backed by either residential or commercial real estate. We apply an exponential Ornstein–Uhlenbeck process to model the price dynamics at the provincial and regional level, and two haircut models to estimate the liquidation value. Compared to our findings, rating agencies such as Moody’s, which use geometric Brownian motion to model the price dynamics, paint a rosier picture with higher recovery rates. As a consequence, non-performing mortgage loans held by Italian banks might be overvalued. Full article
(This article belongs to the Special Issue Real Estate Economics and Finance)
Open AccessArticle
How Do Corporate Social Responsibility and Corporate Governance Affect Stock Price Crash Risk?
J. Risk Financial Manag. 2020, 13(2), 30; https://doi.org/10.3390/jrfm13020030 - 07 Feb 2020
Viewed by 325
Abstract
We investigate the impact of corporate social responsibility (CSR) and corporate governance on stock price crash risk in manufacturing sector of India and Pakistan. We collect data of nine years from 2010 to 2018 from DataStream of 353 manufacturing firms. We apply the [...] Read more.
We investigate the impact of corporate social responsibility (CSR) and corporate governance on stock price crash risk in manufacturing sector of India and Pakistan. We collect data of nine years from 2010 to 2018 from DataStream of 353 manufacturing firms. We apply the Generalized Method of Moments (GMM) to the analysis of the data. We find that when firms actively engage in CSR activities, they lead to reduced stock price crash risk. We further find that managerial ownership has a significant positive impact on stock price crash risk, while board size and CEO duality show a significant and negative impact on stock price crash risk. Full article
(This article belongs to the Special Issue Green and Sustainable Finance)
Open AccessArticle
Exploring Compliance of AAOIFI Shariah Standard on Ijarah Financing: Analysis on the Practices of Islamic Banks in Malaysia
J. Risk Financial Manag. 2020, 13(2), 29; https://doi.org/10.3390/jrfm13020029 - 05 Feb 2020
Viewed by 119
Abstract
This paper aims to explore whether the practices of Ijarah financing by Islamic banks in Malaysia are in line with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Shariah Standard No: (9) on Ijarah financing. Semi- structured interviews based on open-ended [...] Read more.
This paper aims to explore whether the practices of Ijarah financing by Islamic banks in Malaysia are in line with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Shariah Standard No: (9) on Ijarah financing. Semi- structured interviews based on open-ended questionnaires were conducted, recorded verbatim, and transcribed for content analysis. Our study revealed flaws in the contemporary practice of Ijarah financing and indicated that it was slightly out of line with the AAOIFI Shariah standard. The study will not only help the Islamic banking industry of Malaysia to reduce, if not eliminate the gap between the practices of Bank Negara Malaysia (BNM) and AAOIFI Shariah standards pertaining to Ijarah financing but also create novel literature due to the fact that, no study has been undertaken to date, which analyzes the practices of Ijarah financing by Malaysian Islamic banks in the light of the AAOIFI Shariah standards. Full article
(This article belongs to the Special Issue Islamic Finance)
Open AccessArticle
Banking Finance Experts Consensus on Compliance in US Bank Holding Companies: An e-Delphi Study
J. Risk Financial Manag. 2020, 13(2), 28; https://doi.org/10.3390/jrfm13020028 - 05 Feb 2020
Viewed by 148
Abstract
Compliance measures emphasized in the Dodd-Frank Bill 2010, Section 165 is a response to the 2008 financial crisis, that requires large banks to maintain a minimum capital ratio. The Federal Reserve Bank (Fed) regulates capital of Bank Holding Companies (BHC) through compliance Supervisory [...] Read more.
Compliance measures emphasized in the Dodd-Frank Bill 2010, Section 165 is a response to the 2008 financial crisis, that requires large banks to maintain a minimum capital ratio. The Federal Reserve Bank (Fed) regulates capital of Bank Holding Companies (BHC) through compliance Supervisory Capital Assessment Program (SCAP) 2009 and Comprehensive Capital Adequacy Review (CCAR) 2011 annual stress test of capital. The Fed imposed a minimum capital ratio of 8% that has derailed the risk management objective of capital adequacy, as bank managers are forced to take on more risk to meet the capital ratio. This study concerns senior manager practices that can be effective in meeting compliance requirements posed by the Fed for BHCs. Through a qualitative e-Delphi study, 10 banking finance experts were convened to build consensus on senior manager’s practices that can be effective in meeting compliance requirements. Data were collected from three electronic questionnaires submitted through Qualtrics. Data were analyzed using theoretical triangulation, coding, and thematic analysis. Four important considerations were identified that could bolster compliance measures effectiveness: (a) emphasis placed on understanding regulatory consultant compliance, (b) maintenance of effective and independent compliance align to organizational objectives, (c) clear definition of data source for compliance analytics. These considerations of compliance practices may help senior bank managers reduce risky behaviors and investments that cause significant bank losses. Full article
(This article belongs to the Section Banking and Finance)
Open AccessArticle
The Distribution of Cross Sectional Momentum Returns When Underlying Asset Returns Are Student’s t Distributed
J. Risk Financial Manag. 2020, 13(2), 27; https://doi.org/10.3390/jrfm13020027 - 05 Feb 2020
Viewed by 94
Abstract
In Kwon and Satchell (2018), a theoretical framework was introduced to investigate the
distributional properties of the cross-sectional momentum returns under the assumption that the
vector of asset returns over the ranking and holding periods were multivariate normal. In this
paper, the framework [...] Read more.
In Kwon and Satchell (2018), a theoretical framework was introduced to investigate the
distributional properties of the cross-sectional momentum returns under the assumption that the
vector of asset returns over the ranking and holding periods were multivariate normal. In this
paper, the framework is extended to derive the corresponding results when the asset returns are
multivariate Student’s t. In particular, we derive the probability density function and the moments of
the cross-sectional momentum returns and examine in detail the special case of two underlying assets
to demonstrate that many of the salient features reported in the empirical literature are consistent
with the theoretical implications. Full article
(This article belongs to the Special Issue Modern Portfolio Theory)
Open AccessArticle
The Impact of Economic Freedom on Economic Growth? New European Dynamic Panel Evidence
J. Risk Financial Manag. 2020, 13(2), 26; https://doi.org/10.3390/jrfm13020026 - 04 Feb 2020
Viewed by 203
Abstract
This paper analyzes the impact of economic freedom along with traditional economic factors on economic growth for a panel of European countries. The growth of the gross domestic product was observed over a twenty-year time period on a sample of 43 developing and [...] Read more.
This paper analyzes the impact of economic freedom along with traditional economic factors on economic growth for a panel of European countries. The growth of the gross domestic product was observed over a twenty-year time period on a sample of 43 developing and developed countries. Based on a robust dynamic panel setting, we conclude that increases in economic freedom as expressed by the Index of Economic Freedom/Heritage Foundation (but not its levels) are related to economic growth. The EU membership status either had no effect or it curbed the effect of the economic freedom on growth. We also find that the subprime economic crisis of 2008–2009 exerted a negative impact on the growth of European economies. Full article
(This article belongs to the collection Feature Papers in Applied Economics and Finance)
Open AccessArticle
Corporate Green Bond Issuances: An International Evidence
J. Risk Financial Manag. 2020, 13(2), 25; https://doi.org/10.3390/jrfm13020025 - 04 Feb 2020
Viewed by 149
Abstract
: Using an international sample of corporate Green bond issuances over the recent period, this paper highlights the potential consequences of the issuance of a Green bond on the issuer’s financial performance. Starting with a first sample of 2079 Green bond issuances of [...] Read more.
: Using an international sample of corporate Green bond issuances over the recent period, this paper highlights the potential consequences of the issuance of a Green bond on the issuer’s financial performance. Starting with a first sample of 2079 Green bond issuances of 190 unique issuers from 2009 to 2018, we investigate only corporate green bond issuances. Our final sample contains 475 green bonds issued by 145 unique firms. We find that the market reacts negatively to the announcement of green bond issuances. In particular, results show that the stock market reacts on the day of the green bond announcement date and the day after, and that the cumulative abnormal return is between −0.5% and −0.2%, depending on the asset pricing model (CAPM, the 3-factor Fama and French models, and the 4-factor Carhart models). This effect is mainly noticeable at the first Green Bond issuance and in developed markets. Our results provide evidence that the investors react in the same manner for Green bonds as for conventional or convertible bonds. This evidence suggests that green debt offerings convey unfavorable information about the issuing firms. Full article
(This article belongs to the Special Issue Green and Sustainable Finance)
Open AccessArticle
Optimal Contracting of Pension Incentive: Evidence of Currency Risk Management in Multinational Companies
J. Risk Financial Manag. 2020, 13(2), 24; https://doi.org/10.3390/jrfm13020024 - 03 Feb 2020
Viewed by 184
Abstract
Using a large sample of multinational companies (MNCs), this paper intends to explore whether executives’ pension incentives will function as a mechanism of optimal contracting in motivating firm risk management. We find that granting more pension to executives is significantly related to the [...] Read more.
Using a large sample of multinational companies (MNCs), this paper intends to explore whether executives’ pension incentives will function as a mechanism of optimal contracting in motivating firm risk management. We find that granting more pension to executives is significantly related to the higher likelihood and intensity of currency hedging strategies in MNCs. This suggests that pension incentive should promote executives to more actively manage firms’ risk. Such a positive relationship is robust to endogeneity and is more prominent in firms with strong shareholder power. We further explore the contribution of currency hedging induced by pension incentives to shareholder value. Supporting the hypothesis of optimal contracting, our results indicate that pension incentives play an important role in reconciling managerial risk preference and shareholder value creation. Full article
(This article belongs to the Special Issue Corporate Finance)
Open AccessArticle
A Gated Recurrent Unit Approach to Bitcoin Price Prediction
J. Risk Financial Manag. 2020, 13(2), 23; https://doi.org/10.3390/jrfm13020023 - 03 Feb 2020
Viewed by 197
Abstract
In today’s era of big data, deep learning and artificial intelligence have formed the backbone for cryptocurrency portfolio optimization. Researchers have investigated various state of the art machine learning models to predict Bitcoin price and volatility. Machine learning models like recurrent neural network [...] Read more.
In today’s era of big data, deep learning and artificial intelligence have formed the backbone for cryptocurrency portfolio optimization. Researchers have investigated various state of the art machine learning models to predict Bitcoin price and volatility. Machine learning models like recurrent neural network (RNN) and long short-term memory (LSTM) have been shown to perform better than traditional time series models in cryptocurrency price prediction. However, very few studies have applied sequence models with robust feature engineering to predict future pricing. In this study, we investigate a framework with a set of advanced machine learning forecasting methods with a fixed set of exogenous and endogenous factors to predict daily Bitcoin prices. We study and compare different approaches using the root mean squared error (RMSE). Experimental results show that the gated recurring unit (GRU) model with recurrent dropout performs better than popular existing models. We also show that simple trading strategies, when implemented with our proposed GRU model and with proper learning, can lead to financial gain. Full article
(This article belongs to the Special Issue Machine Learning Applications in Finance)
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Open AccessEditorial
Risk Management Analysis for Novel Coronavirus in Wuhan, China
J. Risk Financial Manag. 2020, 13(2), 22; https://doi.org/10.3390/jrfm13020022 (registering DOI) - 03 Feb 2020
Viewed by 1009
Abstract
Recently, a novel coronavirus pneumonia (2019–nCoV) outbreak occurred in Wuhan, China, rapidly spreading first to the whole country, and then globally, causing widespread concern. From the perspectives of early warning and identification of risk, risk monitoring, and analysis, as well as risk management [...] Read more.
Recently, a novel coronavirus pneumonia (2019–nCoV) outbreak occurred in Wuhan, China, rapidly spreading first to the whole country, and then globally, causing widespread concern. From the perspectives of early warning and identification of risk, risk monitoring, and analysis, as well as risk management and handling, we propose corresponding solutions and recommendations, which include institutional cooperation, and to inform national and international policy-makers. Full article
(This article belongs to the Special Issue COVID-19’s Risk Management and Its Impact on the Economy)
Open AccessArticle
How to Explain when the ES is Lower than One? A Bayesian Nonlinear Mixed-Effects Approach
J. Risk Financial Manag. 2020, 13(2), 21; https://doi.org/10.3390/jrfm13020021 - 01 Feb 2020
Viewed by 312
Abstract
Most studies in Vietnam use the Cobb-Douglas production function and its modifications for economic analysis. Extremely rigid presumptions are a main weak point of this functional form, particularly if the elasticity of factor substitution (ES) is equal to one, which hides the role [...] Read more.
Most studies in Vietnam use the Cobb-Douglas production function and its modifications for economic analysis. Extremely rigid presumptions are a main weak point of this functional form, particularly if the elasticity of factor substitution (ES) is equal to one, which hides the role of the ES for economic growth. The CES (constant elasticity of substitution) production function with more flexible presumptions, concretely its ES, is not unitary, and has been used more and more widely in economic investigations. So, this study is conducted to estimate the average ES through the specification of an aggregate CES function for the Vietnamese nonfinancial enterprises. By performing Bayesian nonlinear mixed-effects regression via Random-walk Metropolis Hastings (MH) algorithm, based on the data set of the listed nonfinancial enterprises of Vietnam, the author found that the CES function estimated for the researched enterprises has an ES lower than one, i.e., capital and labor are complimentary. This finding shows that Vietnamese nonfinancial enterprises can confront a downward trend of output growth. Full article
(This article belongs to the Special Issue Bayesian Econometrics)
Open AccessArticle
Credit Spreads, Business Conditions, and Expected Corporate Bond Returns
J. Risk Financial Manag. 2020, 13(2), 20; https://doi.org/10.3390/jrfm13020020 - 21 Jan 2020
Viewed by 224
Abstract
Using an aggregate credit spread index, we find that it has substantial predictive power for corporate bond returns over short and long horizons. The return predictability is economically and statistically significant and robust to various controls. The credit spread index and its components [...] Read more.
Using an aggregate credit spread index, we find that it has substantial predictive power for corporate bond returns over short and long horizons. The return predictability is economically and statistically significant and robust to various controls. The credit spread index and its components have more predictive power for bond returns than conventional default and term spreads. When decomposing the credit spread index into investment- and speculative-grade components, the latter has more predictive power for future bond returns. The source of the index’s predictive power is from its ability to forecast future economic conditions. Full article
(This article belongs to the Special Issue Corporate Debt)
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Open AccessArticle
The Equity Curve and Its Relation to Future Stock Returns
J. Risk Financial Manag. 2020, 13(2), 19; https://doi.org/10.3390/jrfm13020019 (registering DOI) - 21 Jan 2020
Viewed by 154
Abstract
Using option prices, a new method for estimating the term structure of expected stock returns (equity curve) is proposed. We analyse how the equity curve relates to future stock returns and obtain three main results. First, a higher level of the equity curve [...] Read more.
Using option prices, a new method for estimating the term structure of expected stock returns (equity curve) is proposed. We analyse how the equity curve relates to future stock returns and obtain three main results. First, a higher level of the equity curve is associated with higher future stock returns. Second, a positive slope is followed by future realized returns which are lower in the short term (1 month) than in the long term (1 quarter or 1 year). Third, a steeper slope (either positive or negative) is associated with a larger absolute difference between short-term and long-term returns. Therefore, the equity curve is consistent with theoretical predictions. We also analyse an investment strategy that uses the slope of the equity curve to determine the allocation to stocks. This strategy earns an outperformance of up to 200 basis points per annum. Full article
(This article belongs to the Special Issue Modern Portfolio Theory)
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Open AccessEditorial
Editorial Statement for Mathematical Finance
J. Risk Financial Manag. 2020, 13(2), 18; https://doi.org/10.3390/jrfm13020018 (registering DOI) - 21 Jan 2020
Viewed by 122
Abstract
Mathematics plays a vital role in many areas of finance and provides the theories and tools that have been widely used in all areas of finance. In this editorial, we tell authors the ideas on what types of papers we will accept for [...] Read more.
Mathematics plays a vital role in many areas of finance and provides the theories and tools that have been widely used in all areas of finance. In this editorial, we tell authors the ideas on what types of papers we will accept for publication in the area of mathematical finance. We will discuss some well-cited papers of mathematical finance. Full article
(This article belongs to the Special Issue Mathematical Finance with Applications)
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