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Volume 14, February

J. Risk Financial Manag., Volume 14, Issue 3 (March 2021) – 51 articles

Cover Story (view full-size image): This paper investigates the impacts of pandemic uncertainty on Foreign Direct Investment (FDI) using the new World Pandemic Uncertainty Index based on a sample of 142 economies and sub-samples (incomes and regions) from 1996 to 2019. Using the two-step system, the Generalised Method of Moments estimation of linear dynamic panel-data model, the results suggest that pandemic uncertainty highly affects international firms’ behaviour, which subsequently leads to a decline in FDI. Furthermore, FDI is more sensitive to pandemic shocks in emerging economies and the Asia-Pacific region than in any other economies or regions. Our findings suggest that measures to support foreign investors, such as trade agreements and economic clusters, should be implemented for economic recovery towards sustainable development. View this paper.
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Open AccessArticle
On the Moderating Effects of Country Governance on the Relationships between Corporate Governance and Firm Performance
J. Risk Financial Manag. 2021, 14(3), 140; https://doi.org/10.3390/jrfm14030140 - 23 Mar 2021
Viewed by 315
Abstract
This study further empirically examines the influence of board independence on financial performance by using the world’s top 1000 firms. CEO duality and the percentage of independent directors are used as the indicators of board independence. Moreover, this study re-addresses the findings in [...] Read more.
This study further empirically examines the influence of board independence on financial performance by using the world’s top 1000 firms. CEO duality and the percentage of independent directors are used as the indicators of board independence. Moreover, this study re-addresses the findings in the literature by giving supplement in theory and conducting tests for the influence of board independence on firm performance as well as the moderating effects of country governance, focusing on regulatory quality and rule of law, with multi-level modeling, a more sophisticated statistical approach. Four hypotheses, based on agency theory and compensation theory, were developed. The results indicated that CEO duality and the percentage of independent directors exerted, respectively, negative and positive influence on Return on Assets (ROA), a firm performance indicator. Furthermore, regulatory quality and the rule of law positively moderated the negative effects of the former and negatively moderated the positive effects of the latter. Some practical implications were discussed based on the results obtained. Full article
(This article belongs to the Section Economics and Finance)
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Open AccessArticle
How Can Enterprise Risk Management Help in Evaluating the Operational Risks for a Telecommunications Company?
J. Risk Financial Manag. 2021, 14(3), 139; https://doi.org/10.3390/jrfm14030139 - 23 Mar 2021
Viewed by 295
Abstract
Operational risk is defined as the potential losses resulting from events caused by inadequate or failed processes, people, equipment, and systems or from external events. One of the most important challenges for the management of the company is to improve its results through [...] Read more.
Operational risk is defined as the potential losses resulting from events caused by inadequate or failed processes, people, equipment, and systems or from external events. One of the most important challenges for the management of the company is to improve its results through its operational risk identification and evaluation. Most of Enterprise Risk Management (ERM) scholarship has roots in the finance/risk management and insurance (RMI) discipline, mainly in the banking sector. This study proposes an innovative operational risk assessment methodology (OpRAM), to evaluate operational risks focused on telecommunications companies (TELCOs), on the basis of an operational risk self-assessment (OpRSA) process and method. The OpRSA process evaluates operational risks through a quantitative analysis of estimates which inputs are the economic impact and the probability of occurrence of events. The OpRSA method is the “engine” for calculating the economic risk impact, applying actuarial techniques, which allow estimation of unexpected losses and expected losses distributions in a TELCO. The results of the analyzed business unit in the field work were compared with standardized ratings (acceptable, manageable, critical, or catastrophic), and contrasted against the company’s managers, proving that the OpRSA framework is a reliable and useful management tool for the business, and leading to more research in other sectors where operational risk management is key for the company success. Full article
(This article belongs to the Section Risk)
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Open AccessArticle
Credit Risk Model Based on Central Bank Credit Registry Data
J. Risk Financial Manag. 2021, 14(3), 138; https://doi.org/10.3390/jrfm14030138 - 23 Mar 2021
Viewed by 319
Abstract
Data science and machine-learning techniques help banks to optimize enterprise operations, enhance risk analyses and gain competitive advantage. There is a vast amount of research in credit risk, but to our knowledge, none of them uses credit registry as a data source to [...] Read more.
Data science and machine-learning techniques help banks to optimize enterprise operations, enhance risk analyses and gain competitive advantage. There is a vast amount of research in credit risk, but to our knowledge, none of them uses credit registry as a data source to model the probability of default for individual clients. The goal of this paper is to evaluate different machine-learning models to create accurate model for credit risk assessment using the data from the real credit registry dataset of the Central Bank of Republic of North Macedonia. We strongly believe that the model developed in this research will be an additional source of valuable information to commercial banks, by leveraging historical data for all the population of the country in all the commercial banks. Thus, in this research, we compare five machine-learning models to classify credit risk data, i.e., logistic regression, decision tree, random forest, support vector machines (SVM) and neural network. We evaluate the five models using different machine-learning metrics, and we propose a model based on credit registry data from the central bank with detailed methodology that can predict the credit risk based on credit history of the population in the country. Our results show that the best accuracy is achieved by using decision tree performing on imbalanced data with and without scaling, followed by random forest and linear regression. Full article
(This article belongs to the Special Issue Financial Optimization and Risk Management)
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Open AccessArticle
Potato Importance for Development Focusing on Prices
J. Risk Financial Manag. 2021, 14(3), 137; https://doi.org/10.3390/jrfm14030137 - 23 Mar 2021
Viewed by 339
Abstract
This paper studies potato prices and consumption in the progress of economic development. Potato status tends to evolve from a luxury to a normal and, lastly, to an inferior good. In the developed world, where the potato thrived and became a food for [...] Read more.
This paper studies potato prices and consumption in the progress of economic development. Potato status tends to evolve from a luxury to a normal and, lastly, to an inferior good. In the developed world, where the potato thrived and became a food for the poor, prices of the inferior potato attract little interest due to general welfare, which further complicates discerning economic effects by computation. Contrarily, in many developing countries, due to supply constraints the potato is a relative expensive, non-staple, normal good, with little social significance. Whereas it is a common misconception that tastes in developing countries differ from advanced economies, low incomes, together with relatively high potato prices, present a real and obvious hindrance to wider potato use among the poor in the underdeveloped world. Local regressions on FAO data reveal empirical advantages favoring potato price system research in developing countries, more likely yielding predictable, statistically significant, unbiased results. Correct policies could increase potato importance in developing countries and stimulate sustainable and pro-poor growth where consumers receive affordable potatoes, while also producer incentives for greater productivity improve. Furthermore, potato-led research presents widening potential into also understanding general social structures of underdevelopment as similar factors explain both cross-border incomes and potato prices. Full article
(This article belongs to the Special Issue Financial and Panel Data Econometrics)
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Open AccessArticle
Quanto Pricing beyond Black–Scholes
J. Risk Financial Manag. 2021, 14(3), 136; https://doi.org/10.3390/jrfm14030136 - 23 Mar 2021
Viewed by 259
Abstract
Since their introduction, quanto options have steadily gained popularity. Matching Black–Scholes-type pricing models and, more recently, a fat-tailed, normal tempered stable variant have been established. The objective here is to empirically assess the adequacy of quanto-option pricing models. The validation of quanto-pricing models [...] Read more.
Since their introduction, quanto options have steadily gained popularity. Matching Black–Scholes-type pricing models and, more recently, a fat-tailed, normal tempered stable variant have been established. The objective here is to empirically assess the adequacy of quanto-option pricing models. The validation of quanto-pricing models has been a challenge so far, due to the lack of comprehensive data records of exchange-traded quanto transactions. To overcome this, we make use of exchange-traded structured products. After deriving prices for composite options in the existing modeling framework, we propose a new calibration procedure, carry out extensive analyses of parameter stability and assess the goodness of fit for plain vanilla and exotic double-barrier options. Full article
(This article belongs to the Special Issue Structured Financial Products and Derivatives)
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Open AccessArticle
Impact of Financial Support on Textile Enterprises’ Development
J. Risk Financial Manag. 2021, 14(3), 135; https://doi.org/10.3390/jrfm14030135 - 22 Mar 2021
Viewed by 351
Abstract
The purpose of this study is to determine the mutual influence of financial security on the textile enterprises development level. The proposed methodological approach is based on the formation of an integrated financial security indicator and its regression model. The study is based [...] Read more.
The purpose of this study is to determine the mutual influence of financial security on the textile enterprises development level. The proposed methodological approach is based on the formation of an integrated financial security indicator and its regression model. The study is based on 16 textile enterprises in the European Union. Integral indicators on capital structure, current financing sufficiency and financial efficiency of the investigated enterprises have been defined according to the rapid diagnostics of financial provision of the textile enterprises. The state of financial support for the studied companies’ development has been evaluated. It has been established that the development of textile enterprises depends to a large extent on their financial support as a whole. The change in the development level of companies depends substantially on the change in the integrated indicator of their financial provision. In particular, textile enterprises’ development is significantly affected by the capital structure and the predominance of equity in it, as well as current financing. The financial efficiency factors taken into account do not have a significant impact on the development of textile enterprises. This study proposes a financial security model, developed by partial integrated indicators. It enables visual comparison, collation of the capital structure state, current financing and financial efficiency of the studied enterprises with optimal value. Full article
(This article belongs to the Special Issue Frontiers in Quantitative Finance)
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Open AccessArticle
Well-Being Impact on Banking Systems
J. Risk Financial Manag. 2021, 14(3), 134; https://doi.org/10.3390/jrfm14030134 - 21 Mar 2021
Viewed by 303
Abstract
The present research focuses on the influence of the well-being indicators, more specifically, the indicators reflecting the life quality on the banking systems evolution from the EU member states. The study offers a unique approach to comparing the two country groups: the eurozone [...] Read more.
The present research focuses on the influence of the well-being indicators, more specifically, the indicators reflecting the life quality on the banking systems evolution from the EU member states. The study offers a unique approach to comparing the two country groups: the eurozone countries and the EU noneuro countries during the 2008–2019 period. The model is estimated with the help of the OLS method by using panel data. The study aims to identify which life quality indicators significantly influence the EU member states’ banking systems evolution and develop models dividing the countries into two groups. Our conclusions show that, among all the determinant factors analysed in this study, household consumption and internet users strongly influence all EU countries’ banking systems. Full article
(This article belongs to the Collection Banking and the Economy II)
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Open AccessArticle
Does Risk Disclosure Matter for Trade Credit?
J. Risk Financial Manag. 2021, 14(3), 133; https://doi.org/10.3390/jrfm14030133 - 20 Mar 2021
Viewed by 782
Abstract
In this paper, we examine the impact of risk disclosure practices on trade credit. We hypothesize that risk information could reduce information opacity that arises between companies and their suppliers. We collected annual reports for Tunisian listed companies for the period 2008–2013. This [...] Read more.
In this paper, we examine the impact of risk disclosure practices on trade credit. We hypothesize that risk information could reduce information opacity that arises between companies and their suppliers. We collected annual reports for Tunisian listed companies for the period 2008–2013. This gives us 146 firm-year observations. We find that risk disclosure has a positive impact on the level of trade credit. Our paper offers a new empirical evidence on the role of risk disclosure in reducing information asymmetry and increase companies’ access to short-term external funds. Our study provides managerial implications for firms, suppliers, and regulatory authorities. Full article
(This article belongs to the Special Issue Risk and Financial Consequences)
Open AccessArticle
IPO’s Long-Run Performance: Hot Market versus Earnings Management
J. Risk Financial Manag. 2021, 14(3), 132; https://doi.org/10.3390/jrfm14030132 - 20 Mar 2021
Viewed by 358
Abstract
One of the IPO-related anomalies that have been well-discussed in the finance literature is the IPO’s long-running underperformance. Two of the major explanations of that phenomenon are: “Hot market” and earnings management. This study investigates the relative importance of these two explanations to [...] Read more.
One of the IPO-related anomalies that have been well-discussed in the finance literature is the IPO’s long-running underperformance. Two of the major explanations of that phenomenon are: “Hot market” and earnings management. This study investigates the relative importance of these two explanations to the IPO’s long-run underperformance. Our results show that although both hot market and earnings management play a role in explaining IPO’s long-run performance in their own rights, earnings management no longer exhibits significant explanatory power when the IPOs are issued in the cold market. While the IPOs that are issued in the hot market still tend to underperform in the long run even if the firms do not engage in earnings management. Our findings are consistent with the literature related to the information asymmetry in IPO market. And, because the information asymmetry is more severe in hot market condition, IPOs issued in hot market tend to exhibit poorer returns than those issued in cold market. Full article
Open AccessArticle
The Relationship between Governance Quality and the Cost of Equity Capital in Italian Listed Firms: An Update
J. Risk Financial Manag. 2021, 14(3), 131; https://doi.org/10.3390/jrfm14030131 - 20 Mar 2021
Viewed by 307
Abstract
This paper investigates the relationship between corporate governance quality and the cost of equity capital, intended as the discount rate the market applies to a firm’s expected future cash flows to evaluate the current share price. Using data from the Italian listed corporations [...] Read more.
This paper investigates the relationship between corporate governance quality and the cost of equity capital, intended as the discount rate the market applies to a firm’s expected future cash flows to evaluate the current share price. Using data from the Italian listed corporations in 2018, this paper combines several attributes like board independence, board size, the existence of the internal audit, and CEO duality incorporated in a corporate governance quality index. Our results do not provide evidence of a statistically significant relationship between the corporate governance score and the firm’s equity capital cost. A possible explanation is that in recent years a greater homogeneity, and a generalized increase in corporate governance quality standards, has been observed in the Italian framework with worse companies that closed the gap with those with higher performances. Hence, lower variability in the corporate governance index results in a not significant effect of a composite index on reducing the cost of equity capital. Full article
(This article belongs to the Special Issue Corporate Governance, Accountability and Disclosure)
Open AccessArticle
Pricing Perpetual American Put Options with Asset-Dependent Discounting
J. Risk Financial Manag. 2021, 14(3), 130; https://doi.org/10.3390/jrfm14030130 - 20 Mar 2021
Viewed by 264
Abstract
The main objective of this paper is to present an algorithm of pricing perpetual American put options with asset-dependent discounting. The value function of such an instrument can be described as VAPutω(s)=supτTEs[e0τω(Sw)dw(KSτ)+], where T is a family of stopping times, ω is a discount function and E is an expectation taken with respect to a martingale measure. Moreover, we assume that the asset price process St is a geometric Lévy process with negative exponential jumps, i.e., St=seζt+σBti=1NtYi. The asset-dependent discounting is reflected in the ω function, so this approach is a generalisation of the classic case when ω is constant. It turns out that under certain conditions on the ω function, the value function VAPutω(s) is convex and can be represented in a closed form. We provide an option pricing algorithm in this scenario and we present exact calculations for the particular choices of ω such that VAPutω(s) takes a simplified form. Full article
(This article belongs to the Special Issue Stochastic Control and Optimization with Financial Applications)
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Open AccessArticle
Crisis and the Role of Money in the Real and Financial Economies—An Innovative Approach to Monetary Stimulus
J. Risk Financial Manag. 2021, 14(3), 129; https://doi.org/10.3390/jrfm14030129 - 20 Mar 2021
Viewed by 516
Abstract
‘Financial crisis’ is sometimes regarded as synonymous with ‘economic crisis’, but this is an oversimplification and risks missing the feedback loops between the financial and real economies. In this paper, the role of money is revisited in the context of distinguishing the real [...] Read more.
‘Financial crisis’ is sometimes regarded as synonymous with ‘economic crisis’, but this is an oversimplification and risks missing the feedback loops between the financial and real economies. In this paper, the role of money is revisited in the context of distinguishing the real economy from the financial economy. A theoretical framework is developed to explain how endogenous (bank credit) and central bank exogenous (quantitative easing, QE) money creation feed into the real and financial economies. It looks at how the velocity of monetary circulation varies between the two economies and across asset types within the financial economy. Monetary transmission mechanisms are set into a framework that helps explain how QE stimulus risks combining asset price bubbles with poor growth in the real economy. The real economy transmission mechanism of ‘helicopter money’ is given context, enabling an assessment of the efficacy of both the QE and helicopter money policy routes. Finally, we present a new type of monetary transmission, ‘Smart Helicopter Money’, to deliver monetary stimulus to innovators, SMEs and high-growth firms via both complementary currencies and a modified form of QE in order to achieve proportionally greater impact on the real economy. Full article
(This article belongs to the Special Issue Monetary Plurality and Crisis)
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Open AccessArticle
Estimating the Growth Effects of 2004 Eastern Enlargement of the European Union
J. Risk Financial Manag. 2021, 14(3), 128; https://doi.org/10.3390/jrfm14030128 - 20 Mar 2021
Viewed by 311
Abstract
In this paper, we study the growth effects of the 2004 Eastern enlargement of the European Union (EU) using the synthetic control method. We estimate that this EU enlargement had an immediate but modest positive impact on the economic growth of the EU-8 [...] Read more.
In this paper, we study the growth effects of the 2004 Eastern enlargement of the European Union (EU) using the synthetic control method. We estimate that this EU enlargement had an immediate but modest positive impact on the economic growth of the EU-8 countries in the first few years following their EU accession. The positive impact of the EU enlargement became more apparent from 2007 when the new EU member states were admitted into the Schengen zone. As a result, the gross domestic product (GDP) per capita difference between the actual and synthetic EU-8 continued to grow towards the end of the sample period. We found that over the entire 2004–2012 period, GDP per capita of the EU-8 was increased by about 2313 USD per year on average relative to the synthetic EU-8. The growth rate of the GDP per capita in the actual EU-8 for the same period was 2.7% larger than the synthetic EU-8. Full article
(This article belongs to the Special Issue European Market Integration and the Economic Development)
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Open AccessArticle
Financial Crises, Macroeconomic Variables, and Long-Run Risk: An Econometric Analysis of Stock Returns Correlations (2000 to 2019)
J. Risk Financial Manag. 2021, 14(3), 127; https://doi.org/10.3390/jrfm14030127 - 17 Mar 2021
Viewed by 403
Abstract
This paper focuses on four major aggregate stock price indexes (SP 500, Stock Europe 600, Nikkei 225, Shanghai Composite) and two “safe-haven” assets (Gold, Swiss Franc), and explores their return co-movements during the last two decades. Significant contagion effects on stock markets are [...] Read more.
This paper focuses on four major aggregate stock price indexes (SP 500, Stock Europe 600, Nikkei 225, Shanghai Composite) and two “safe-haven” assets (Gold, Swiss Franc), and explores their return co-movements during the last two decades. Significant contagion effects on stock markets are documented during almost all financial crises; moreover, in line with the recent literature, the defensive role of gold and the Swiss Franc in asset portfolios is highlighted. Focusing on a new set of macroeconomic and financial series, a significant impact of these variables on stock returns correlations is found, notably in the case of the world equity risk premium. Finally, long-run risks are detected in all asset portfolios including the Chinese stock market index. Overall, this empirical evidence is of interest for researchers, financial risk managers and policy makers. Full article
(This article belongs to the Special Issue Co-movement of International Financial Markets)
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Open AccessArticle
Towards Full-Fledged Inflation Targeting Monetary Policy Regime in Mauritius
J. Risk Financial Manag. 2021, 14(3), 126; https://doi.org/10.3390/jrfm14030126 - 17 Mar 2021
Viewed by 359
Abstract
An increasing number of emerging and developing countries have adopted or are transitioning towards full-fledged inflation targeting (FFIT) as the main monetary policy framework to anchor inflation. In this paper, we explore the FFIT regime as a means for Mauritius to achieve stable [...] Read more.
An increasing number of emerging and developing countries have adopted or are transitioning towards full-fledged inflation targeting (FFIT) as the main monetary policy framework to anchor inflation. In this paper, we explore the FFIT regime as a means for Mauritius to achieve stable inflation, anchor inflationary expectations and establish credibility in committing monetary policy towards price stability as its primary goal. This paper reviews and highlights issues experienced with the current monetary policy framework and the challenges in transitioning towards FFIT. Given that forecasting is central to FFIT, we develop a practical model-based forecasting and policy analysis system (FPAS) to support transition to FFIT, taking into account structural features and shocks that are specific to the Mauritius economy. Full article
(This article belongs to the Special Issue Advances in Banking and Finance)
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Open AccessArticle
Role of International Trade Competitive Advantage and Corporate Governance Quality in Predicting Equity Returns: Static and Conditional Model Proposals for an Emerging Market
J. Risk Financial Manag. 2021, 14(3), 125; https://doi.org/10.3390/jrfm14030125 - 16 Mar 2021
Viewed by 691
Abstract
This paper aims to develop some static and conditional (dynamic) models to predict portfolio returns in the Borsa Istanbul (BIST) that are calibrated to combine the capital asset-pricing model (CAPM) and corporate governance quality. In our conditional model proposals, both the traditional CAPM [...] Read more.
This paper aims to develop some static and conditional (dynamic) models to predict portfolio returns in the Borsa Istanbul (BIST) that are calibrated to combine the capital asset-pricing model (CAPM) and corporate governance quality. In our conditional model proposals, both the traditional CAPM (beta) coefficient and model constant are allowed to vary on a binary basis with any degradation or improvement in the country’s international trade competitiveness, and meanwhile a new variable is added to the models to represent the portfolio’s sensitivity to excess returns on the governance portfolio (BIST Governance) over the market. Some robust and Bayesian linear models have been derived using the monthly capital gains between December 2009 and December 2019 of four leading index portfolios. A crude measure is then introduced that we think can be used in assessing governance quality of portfolios. This is called governance quality score (GQS). Our robust regression findings suggest both superiority of conditional models assuming varying beta coefficients over static model proposals and significant impact of corporate governance quality on portfolio returns. The Bayesian model proposals, however, exhibited robust findings that favor the static model with fixed beta estimates and were lacking in supporting significance of corporate governance quality. Full article
(This article belongs to the Collection Feature Papers on Applied Economics and Finance)
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Open AccessArticle
Do Investors Value Environmental Corporate Policies? Evidence from the Australian Market
J. Risk Financial Manag. 2021, 14(3), 124; https://doi.org/10.3390/jrfm14030124 - 16 Mar 2021
Viewed by 291
Abstract
In this paper, we explore the relationship between a firm’s environmental policies and their risk-adjusted stock returns, using a sample of stock exchange-listed Australian firms over the period of 2010–2018. We observed a positive and statistically significant relationship suggesting that a firm’s environmental [...] Read more.
In this paper, we explore the relationship between a firm’s environmental policies and their risk-adjusted stock returns, using a sample of stock exchange-listed Australian firms over the period of 2010–2018. We observed a positive and statistically significant relationship suggesting that a firm’s environmental policies partially explain their stock performance. Moreover, we found that investors in the Australian market significantly value a companies’ efforts to reduce emissions, and that this primarily drives the investors’ observed reaction to a firm’s social corporate policies. Next, we formed portfolios and observed that portfolios formed on high environmental, social, and governance (ESG) Environmental Pillar scores consistently outperformed those formed on low-ESG Environmental Pillar scores. Overall, our results lend support to the notion that investors in the Australian market value information about a firm’s social policies. Full article
(This article belongs to the Special Issue Green, Sustainable and Solidary Bonds)
Open AccessArticle
Do IFRS Promote Transparency? Evidence from the Bankruptcy Prediction of Privately Held Swedish and Norwegian Companies
J. Risk Financial Manag. 2021, 14(3), 123; https://doi.org/10.3390/jrfm14030123 - 15 Mar 2021
Viewed by 373
Abstract
The purpose of our paper is to investigate whether any differences between International Financial Reporting Standards (IFRS) and local Generally Accepted Accounting Principles (GAAP) impact the transparency of financial reporting of non-listed companies through bankruptcy prediction. This contributes to extant research that has [...] Read more.
The purpose of our paper is to investigate whether any differences between International Financial Reporting Standards (IFRS) and local Generally Accepted Accounting Principles (GAAP) impact the transparency of financial reporting of non-listed companies through bankruptcy prediction. This contributes to extant research that has focused on the effects of IFRS adoption in the context of listed companies. For our investigation, we used logistic regression, well-established accounting-based predictors, and a sample of financial statements from privately held Swedish companies using IFRS, and Norwegian companies using Norwegian GAAP. The results indicate that financial statements made under IFRS may be better suited for bankruptcy prediction than those made under Norwegian GAAP. Our findings suggest that the use of IFRS could aid in increasing the informativeness of financial reports by promoting transparency and prevent managers of firms facing insolvency from engaging in creative accounting practices. Our results should, however, be applied with caution, as they may be due to the differences in characteristics across firms that are not captured by our research design. We leave this issue open to future research. Full article
(This article belongs to the Section Banking and Finance)
Open AccessArticle
The Regime-Switching Behaviour of Exchange Rates and Frontier Stock Market Prices in Sub-Saharan Africa
J. Risk Financial Manag. 2021, 14(3), 122; https://doi.org/10.3390/jrfm14030122 - 15 Mar 2021
Viewed by 265
Abstract
Frontier markets have become increasingly investible, providing diversification opportunities; however, there is very little research (with conflicting results) on the relationship between Foreign Exchange (FX) and frontier stock markets. Understanding this relationship is important for both international investor and policymakers. The Markov-switching Vector [...] Read more.
Frontier markets have become increasingly investible, providing diversification opportunities; however, there is very little research (with conflicting results) on the relationship between Foreign Exchange (FX) and frontier stock markets. Understanding this relationship is important for both international investor and policymakers. The Markov-switching Vector Auto Regressive (VAR) model is used to examine the relationship between FX and frontier stock markets. There are two distinct regimes in both the frontier stock market and the FX market: a low-volatility and a high-volatility regime. In contrast with emerging markets characterised by “high volatility/low return”, frontier stock markets provide high (positive) returns in the high-volatility regime. The high-volatility regime is less persistent than the low-volatility regime, contrary to conventional wisdom. The Markov Switching VAR model indicates that the relationship between the FX market and the stock market is regime-dependent. Changes in the stock market have a significant impact on the FX market during both normal (calm) and crisis (turbulent) periods. However, the reverse effect is weak or nonexistent. The stock-oriented model is the prevalent model for Sub-Saharan African (SSA) countries. Irrespective of the regime, there is no relationship between the stock market and the FX market in Cote d’Ivoire. Our results are robust in model selection and degree of comovement. Full article
(This article belongs to the Special Issue Market Anomalies in Emerging and Frontier Markets)
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Open AccessArticle
Digital Transformation of Public-Private Partnership Tools
J. Risk Financial Manag. 2021, 14(3), 121; https://doi.org/10.3390/jrfm14030121 - 13 Mar 2021
Viewed by 431
Abstract
The need for modern infrastructure as a prerequisite for sustainable development, poverty alleviation, and improvement of the quality of life of the population is a global problem that requires searching for and attracting large amounts of long-term investments. The presence of this problem [...] Read more.
The need for modern infrastructure as a prerequisite for sustainable development, poverty alleviation, and improvement of the quality of life of the population is a global problem that requires searching for and attracting large amounts of long-term investments. The presence of this problem in recent decades has led to the increasing implementation of complex and costly infrastructure projects through the public-private partnership (PPP) mechanism with high potential for attracting investment. This mechanism, in conditions of limited financial opportunities, allows one to combine the financial resources of the public and private parties for the implementation of major infrastructure projects. The limited use of existing tools at different stages of PPP projects and the increasing need for additional resources make it necessary to consider the possibility of using digital tools that complement traditional ones. For this purpose, the authors analyze existing financing tools, revealing their advantages and disadvantages, and identify and justify the possibility of using digital tools in the implementation of PPP projects. However, digitalization includes not only financing tools but also the development of infrastructure, including digital platforms needed to conduct such operations in the digital environment. As a result, a combined financing toolkit can be formed for each phase of project realization, including traditional and digital tools. The results of this study will become a basis for revealing the directions of the digital transformation of the PPP mechanism. Full article
(This article belongs to the Special Issue FinTech and the Future of Finance)
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Open AccessArticle
Machine Learning and Financial Literacy: An Exploration of Factors Influencing Financial Knowledge in Italy
J. Risk Financial Manag. 2021, 14(3), 120; https://doi.org/10.3390/jrfm14030120 - 13 Mar 2021
Viewed by 790
Abstract
In recent years, machine learning techniques have assumed an increasingly central role in many areas of research, from computer science to medicine, including finance. In the current study, we applied it to financial literacy to test its accuracy, compared to a standard parametric [...] Read more.
In recent years, machine learning techniques have assumed an increasingly central role in many areas of research, from computer science to medicine, including finance. In the current study, we applied it to financial literacy to test its accuracy, compared to a standard parametric model, in the estimation of the main determinants of financial knowledge. Using recent data on financial literacy and inclusion among Italian adults, we empirically tested how tree-based machine learning methods, such as decision trees, random, forest and gradient boosting techniques, can be a valuable complement to standard models (generalized linear models) for the identification of the groups in the population in most need of improving their financial knowledge. Full article
(This article belongs to the Special Issue Financial Literacy and Financial Inclusion)
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Open AccessArticle
Machine Learning in Futures Markets
J. Risk Financial Manag. 2021, 14(3), 119; https://doi.org/10.3390/jrfm14030119 - 13 Mar 2021
Viewed by 458
Abstract
In this paper, we demonstrate how a well-established machine learning-based statistical arbitrage strategy can be successfully transferred from equity to futures markets. First, we preprocess futures time series comprised of front months to render them suitable for our returns-based trading framework and compile [...] Read more.
In this paper, we demonstrate how a well-established machine learning-based statistical arbitrage strategy can be successfully transferred from equity to futures markets. First, we preprocess futures time series comprised of front months to render them suitable for our returns-based trading framework and compile a data set comprised of 60 futures covering nearly 10 trading years. Next, we train several machine learning models to predict whether the h-day-ahead return of each future out- or underperforms the corresponding cross-sectional median return. Finally, we enter long/short positions for the top/flop-k futures for a duration of h days and assess the financial performance of the resulting portfolio in an out-of-sample testing period. Thereby, we find the machine learning models to yield statistically significant out-of-sample break-even transaction costs of 6.3 bp—a clear challenge to the semi-strong form of market efficiency. Finally, we discuss sources of profitability and the robustness of our findings. Full article
(This article belongs to the Special Issue Frontiers in Quantitative Finance)
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Open AccessArticle
Empowering Financial Education by Banks—Social Media as a Modern Channel
J. Risk Financial Manag. 2021, 14(3), 118; https://doi.org/10.3390/jrfm14030118 - 12 Mar 2021
Viewed by 321
Abstract
Financial literacy is extremely important, both from the perspective of the financial well-being of individuals and the stability of the financial market and the whole economy. The more financially literate a bank’s customers are, the more frequently and consciously they use financial products [...] Read more.
Financial literacy is extremely important, both from the perspective of the financial well-being of individuals and the stability of the financial market and the whole economy. The more financially literate a bank’s customers are, the more frequently and consciously they use financial products and services. Thus, banks are potentially significant stakeholders in the financial education process. Considering that social media have become the leading channel for communication and relationship building, especially regarding young clients, this channel should also be used by banks to increase financial literacy. The aim of this paper is to assess banks’ involvement in financial education activities through social media. We assume that banks use social media as a modern and attractive channel for improving financial education among social media users. The empirical analysis was conducted using several data sources, including non-financial statements and a unique self-collected dataset that describes the specifics of the most popular social media platforms (like Facebook, Twitter, YouTube, Instagram, GoldenLine, and LinkedIn) in the activities of commercial and cooperative banks in Poland between 2010 and 2019. Descriptive statistical methods and cluster analysis were used. The results show that educational activities provided by banks in Poland differ for each social media channel. Additionally, although financial education topics have become more popular among content published by banks, there is a huge disproportion between cooperative and commercial banks. Generally, banks that are more active on social media (mostly commercial banks) also pay more attention to the financial education context. Full article
(This article belongs to the Special Issue Financial Literacy and Financial Inclusion)
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Open AccessArticle
Financing Growth through Remittances and Foreign Direct Investment: Evidences from Balkan Countries
J. Risk Financial Manag. 2021, 14(3), 117; https://doi.org/10.3390/jrfm14030117 - 11 Mar 2021
Viewed by 381
Abstract
The ultimate goal of central banks, worldwide, is to promote the foundations for sustainable economic growth. In the case of developing economies, in particular, such objective requires time, huge efforts, attention, and plenty of resources in order to be accomplished to the fullest [...] Read more.
The ultimate goal of central banks, worldwide, is to promote the foundations for sustainable economic growth. In the case of developing economies, in particular, such objective requires time, huge efforts, attention, and plenty of resources in order to be accomplished to the fullest degree. This paper thoroughly investigates key factors affecting Balkan countries’ economic development (as measured by gross domestic product (GDP) growth), focusing especially on the impact of remittances. The analysis was done over an 18-year time interval (2000–2017) and builds on 144 observations. The data figures were retrieved from the World Bank database while two dummies were created to test the impact of the last financial crisis (2008–2012). Econometric tools were employed to carry out a broad analysis on the interdependencies that exist and, in particular, to determine the role of remittance income on growth. The vector auto regressive model was estimated using EViews software, and was used to come up with relevant insights. Empirical findings suggest the following: population growth, remittances, and labor force participation are insignificant factors for sustainable growth. On the other hand, previous levels of GDP, trade, and foreign direct investments (FDIs) appear to be relevant for the predictor. This research provides up-to-date conclusions, which can be considered during the decision-making process of central banks, as well as by government policymakers. Full article
Open AccessCommunication
Towards a New Form of Undemocratic Capitalism: Introducing Macro-Equity to Finance Development Post COVID-19 Crisis
J. Risk Financial Manag. 2021, 14(3), 116; https://doi.org/10.3390/jrfm14030116 - 11 Mar 2021
Viewed by 558
Abstract
Sustainable Development Goal 16 talks about Peace, Justice, and Strong Institutions, and goal 10 talks about reducing inequality. A major problem exposed by the COVID-19 crisis is that public deficits seem to be the normal state in the business cycle’s booms and downturns, [...] Read more.
Sustainable Development Goal 16 talks about Peace, Justice, and Strong Institutions, and goal 10 talks about reducing inequality. A major problem exposed by the COVID-19 crisis is that public deficits seem to be the normal state in the business cycle’s booms and downturns, limiting capacity for emergencies. Corporate capitalism has an incentive to perpetuate deficits to increase growth, provide risk-free interest income to financial institutions, and to increase inequalities and economic injustice. To counter this problem, the purpose of this communication is to suggest that countries need to issue equity capital, which we term macro-equity. This macro-equity will give dividends to its shareholders in times of public surplus and issue new shares in times of public deficits. The communication is written as a mind experiment, debating the issues that may arise. This proposal raises many questions of an ethical and moral nature that will lead to passionate debate. The use of macro-equity will reduce countries’ stress, created by high public debt. With appropriate incentives, it may create an entrepreneurial mindset in political leaders that may even reduce corruption and promote redistribution. The moral and ethical issues need to be weighed against the street violence in the absence of any change. Full article
(This article belongs to the Collection Feature Papers on Applied Economics and Finance)
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Open AccessArticle
Plato as a Game Theorist towards an International Trade Policy
J. Risk Financial Manag. 2021, 14(3), 115; https://doi.org/10.3390/jrfm14030115 - 10 Mar 2021
Viewed by 344
Abstract
In the beginning of the second book of his Politeia (Republic) Plato in passage 2.358e–359a–c raises the issue of the administration of justice as a means of motivating people to behave fairly regarding their relationships and when cooperating with each other because, at [...] Read more.
In the beginning of the second book of his Politeia (Republic) Plato in passage 2.358e–359a–c raises the issue of the administration of justice as a means of motivating people to behave fairly regarding their relationships and when cooperating with each other because, at the end, this is mutually beneficial for all of them. We argue that this particular passage could be seen as a part of a wider process of evolution and development of the institutions of the ancient Athenian economy during the Classical period (508–322 BCE) and could be interpreted through modern theoretical concepts, and more particularly, game theory. Plato argued that there are two players, each with two identical strategies, to treat the other justly or unjustly. In the beginning, each player chooses the “unjust” strategy, trying to cheat the other. In this context, which could be seen as a prisoner’s dilemma situation, both end with the worst possible outcome, that is, deceiving each other and this has severe financial consequences for both of them. Realizing this, in a repeated game situation, with increasing information on the outcome and on each other, they choose the “just” strategy so achieving the best outcome and transforming the game in a cooperative one. We analyze this, formulating a dynamic game which is related to international commercial transactions, after explaining how such a situation could really arise in Classical Athens. We argue that this is the optimal scenario for both parties because it minimizes the risk of deceiving each other and creates harmony while performing financial transactions. Full article
(This article belongs to the Special Issue Risk and Financial Consequences)
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Open AccessArticle
Dynamic Responses of Standard and Poor’s Regional Bank Index to the U.S. Fear Index, VIX
J. Risk Financial Manag. 2021, 14(3), 114; https://doi.org/10.3390/jrfm14030114 - 10 Mar 2021
Viewed by 343
Abstract
This study examines the reaction of the Standard and Poor’s Regional Bank Index (SPRB) to the U.S. equity market fear index (i.e., the Chicago Board of Trade Volatility Index [VIX]). The VIX is designed to perform as a leading indicator of the volatility [...] Read more.
This study examines the reaction of the Standard and Poor’s Regional Bank Index (SPRB) to the U.S. equity market fear index (i.e., the Chicago Board of Trade Volatility Index [VIX]). The VIX is designed to perform as a leading indicator of the volatility in equity markets. However, practitioners observe many periods of divergence between the VIX and S&P 500. Our paper examines the daily data for the period of 2009 through 2019. We show that once the effects of consumer confidence and capacity utilization are accounted for, there is a negative association between the VIX and regional bank performance. Full article
(This article belongs to the Special Issue Applied Financial Econometrics)
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Open AccessArticle
Risk Management Practices and Firm Performance with a Mediating Role of Business Model Innovation. Observations from Jordan
J. Risk Financial Manag. 2021, 14(3), 113; https://doi.org/10.3390/jrfm14030113 - 09 Mar 2021
Viewed by 352
Abstract
This study focused on scrutinizing the influence of Enterprises Risk Management (ERM) on firm performance with a mediating role of Business Model Innovation (BMI). For the purpose, data from 228 Jordanian firms was collected and analyzed. The results indicated that the ERM practices [...] Read more.
This study focused on scrutinizing the influence of Enterprises Risk Management (ERM) on firm performance with a mediating role of Business Model Innovation (BMI). For the purpose, data from 228 Jordanian firms was collected and analyzed. The results indicated that the ERM practices have a significant influence on BMI and financial firm’s performance. The BMI significantly contributed to the financial and nonfinancial performance, whereas it displayed insignificant effects regarding environmental performance. The BMI fully mediated the relationship between ERM practices and financial performance, where a partial mediating effect was observed for the path between ERM practices and nonfinancial performance, while showed no mediating role between the ERM practices and environmental performance. Economies of countries like Jordan are hereby urged to implement the formal ERM practices and to financially educate their top management teams to apply the BMI to gain first-rate performance. This study also encourages the researchers from other countries to extend this model to their economies to unleash useful insights. Full article
(This article belongs to the Special Issue Enterprise Risk Management)
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Open AccessArticle
Spillovers of Stock Markets among the BRICS: New Evidence in Time and Frequency Domains before the Outbreak of COVID-19 Pandemic
by
J. Risk Financial Manag. 2021, 14(3), 112; https://doi.org/10.3390/jrfm14030112 - 08 Mar 2021
Viewed by 401
Abstract
We attempted to comprehensively decode the connectedness among the abbreviation of five emerging market countries (BRICS) stock markets between 1 August 2002 and 31 December 2019 not only in time domain but also in frequency domain. A continuously varying spillover index based on [...] Read more.
We attempted to comprehensively decode the connectedness among the abbreviation of five emerging market countries (BRICS) stock markets between 1 August 2002 and 31 December 2019 not only in time domain but also in frequency domain. A continuously varying spillover index based on forecasting error variance decomposition within a generalized abbreviation of vector-autoregression (VAR) framework was computed. With the help of spectral representation, heterogeneous frequency responses to shocks were separated into frequency-specific spillovers in five different frequency bands to reveal differentiated linkages among BRICS markets. Rolling sample analyses were introduced to allow for multiple changes during the sample period. It is found that return spillovers dominated by the high frequency band (within 1 week) part declined with the drop of frequencies, while volatility spillovers dominated by the low frequency band (above 1 quarter) part grew with the decline in frequencies; the dynamics of spillovers were influenced by crucial systematic risk events, and some similarities implied in the spillover dynamics in different frequency bands were found. From the perspective of identifying systematic risk sources, China’s stock market and Russia’s stock market, respectively, played an influential role for return spillover and volatility spillover across BRICS markets. Full article
(This article belongs to the Section Mathematics and Finance)
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Open AccessArticle
A Holistic Perspective on Bank Performance Using Regulation, Profitability, and Risk-Taking with a View on Ownership Concentration
J. Risk Financial Manag. 2021, 14(3), 111; https://doi.org/10.3390/jrfm14030111 - 08 Mar 2021
Viewed by 340
Abstract
There is a lack of a holistic perspective on bank performance. This study proposes a multidimensional (three-pronged) approach encompassing regulation, profitability, and nonperforming assets (NPAs) and their interactions as a measure of the performance of a bank. Moreover, the impact of equity holdings [...] Read more.
There is a lack of a holistic perspective on bank performance. This study proposes a multidimensional (three-pronged) approach encompassing regulation, profitability, and nonperforming assets (NPAs) and their interactions as a measure of the performance of a bank. Moreover, the impact of equity holdings of promoters, institutional investors, and retail investors on the proposed three-pronged approach of the bank performance are also explored. Values of the concerned variables were gathered from 2016 to 2019. The dynamic panel data method was applied to empirically test the proposed model. The main findings supported the premises of the proposed approach to bank performance. Furthermore, various ownership classes provided mixed results for their impact on bank performance. Unfavorable roles of promoters and institutional investors and an indifferent role of the retail investors group were startling outcomes of the study. Successful empirical endorsement of the proposed approach for bank performance provides a fresh perspective and has varied policy- and managerial-level implications. The findings regarding various shareholder groups (ownership classes) can be a catalyst to set the policy for ownership distribution in banks, as well as shareholder protection and activism, which are conspicuously absent in India. Full article
(This article belongs to the Special Issue The Future of Banking Risk and Regulation)
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