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Int. J. Financial Stud., Volume 7, Issue 3 (September 2019)

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Open AccessArticle
The Assessment of Financial Literacy: New Evidence from Europe
Int. J. Financial Stud. 2019, 7(3), 54; https://doi.org/10.3390/ijfs7030054 - 19 Sep 2019
Viewed by 261
Abstract
The hypothesis that people with more financial literacy make better financial decisions and show positive financial behaviors is crucial for more than one stakeholder. A weak connection between financial literacy and financial behaviors jeopardizes the opportunity to invest in financial education and to [...] Read more.
The hypothesis that people with more financial literacy make better financial decisions and show positive financial behaviors is crucial for more than one stakeholder. A weak connection between financial literacy and financial behaviors jeopardizes the opportunity to invest in financial education and to develop a consumer protection framework based on the chance to develop aware and responsible financial consumers. This study uses data from different countries (Germany, France, Italy, Sweden, the UK), using surveys devised and fielded specifically to measure financial literacy and in order to assess if the availability of a broad set of items on financial literacy allows to develop new measures of financial literacy to better understand the relationship between financial literacy and financial behaviors. The well-established Lusardi–Mitchell questions are compared with measures that differ in terms of number of items (the “50-items” index), range of topics (the “5-specific” index), or selection process of the items (the “unbiased” index). Results support the hypothesis that the Lusardi–Mitchell questions remain a good measure in a first-step analysis, but a deeper understanding of the connection between financial literacy and financial behaviors benefits from the measures proposed in the study, that should be considered as additional assessment tools in financial literacy research. Full article
(This article belongs to the Special Issue Personal Finance)
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Open AccessArticle
Importance of Subjective Financial Knowledge and Perceived Credit Score in Payday Loan Use
Int. J. Financial Stud. 2019, 7(3), 53; https://doi.org/10.3390/ijfs7030053 - 17 Sep 2019
Viewed by 270
Abstract
This study examined the factors associated with consumers’ decisions to use payday loans. Using a sample of 24,201 respondents from the 2015 National Financial Capability Study (NFCS), structural equation modeling was used to analyze the relationships among the variables. The results indicated that [...] Read more.
This study examined the factors associated with consumers’ decisions to use payday loans. Using a sample of 24,201 respondents from the 2015 National Financial Capability Study (NFCS), structural equation modeling was used to analyze the relationships among the variables. The results indicated that payday loan use was associated with a series of consumers’ socio-psychological factors, including financial knowledge, perceived credit score, credit-card payment problems, and having emergency funds. The findings suggested that, to improve borrowing decisions and industry practices, discussions about consumers’ payday loan use and its underlying repayment problems should encompass policy intervention and institutional attention, rather than focusing on behavioral modification at the individual level alone. Full article
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Open AccessArticle
Currency Market Efficiency Revisited: Evidence from Korea
Int. J. Financial Stud. 2019, 7(3), 52; https://doi.org/10.3390/ijfs7030052 - 16 Sep 2019
Viewed by 390
Abstract
This study aims to test the efficiency of the Korean foreign exchange market and examine its determinants through several well-established methodologies based on the forward rate unbiasedness hypothesis and covered interest rate parity. The empirical findings indicate that the currency market and its [...] Read more.
This study aims to test the efficiency of the Korean foreign exchange market and examine its determinants through several well-established methodologies based on the forward rate unbiasedness hypothesis and covered interest rate parity. The empirical findings indicate that the currency market and its related derivatives markets seem to be inefficient during the 2006–2016 period, but have improved considerably after the 2008 global financial crisis. Further, as the main culprits of market inefficiency, we stress the presence of risk premia in the international financial market and the role of central bank intervention. Full article
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Open AccessArticle
Long-Range Behaviour and Correlation in DFA and DCCA Analysis of Cryptocurrencies
Int. J. Financial Stud. 2019, 7(3), 51; https://doi.org/10.3390/ijfs7030051 - 15 Sep 2019
Viewed by 289
Abstract
In recent years, increasing attention has been devoted to cryptocurrencies, owing to their great development and valorization. In this study, we propose to analyse four of the major cryptocurrencies, based on their market capitalization and data availability: Bitcoin, Ethereum, Ripple, and Litecoin. We [...] Read more.
In recent years, increasing attention has been devoted to cryptocurrencies, owing to their great development and valorization. In this study, we propose to analyse four of the major cryptocurrencies, based on their market capitalization and data availability: Bitcoin, Ethereum, Ripple, and Litecoin. We apply detrended fluctuation analysis (the regular one and with a sliding windows approach) and detrended cross-correlation analysis and the respective correlation coefficient. We find that Bitcoin and Ripple seem to behave as efficient financial assets, while Ethereum and Litecoin present some evidence of persistence. When correlating Bitcoin with the other cryptocurrencies under analysis, we find that for short time scales, all the cryptocurrencies have statistically significant correlations with Bitcoin, although Ripple has the highest correlations. For higher time scales, Ripple is the only cryptocurrency with significant correlation. Full article
(This article belongs to the Special Issue Econophysics Applications to Financial Markets)
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Open AccessArticle
Does Corporate Governance Influence Leverage Structure in Bangladesh?
Int. J. Financial Stud. 2019, 7(3), 50; https://doi.org/10.3390/ijfs7030050 - 13 Sep 2019
Viewed by 448
Abstract
This paper examines the regulation of corporate governance on leverage structure decision-making in Bangladesh from 2003 to 2017. Appropriate panel methods are employed to control the problems of serial correlation, heteroskedasticity, and the cross-sectional nature of manufacturing companies. The study finds that corporate [...] Read more.
This paper examines the regulation of corporate governance on leverage structure decision-making in Bangladesh from 2003 to 2017. Appropriate panel methods are employed to control the problems of serial correlation, heteroskedasticity, and the cross-sectional nature of manufacturing companies. The study finds that corporate governance attributes such as board size, managerial ownership, and duality are the dominant factors for leverage decision-making. The results also indicate that control variables such as firm size and profitability have an influential role on leverage decision-making in Bangladesh. Our findings substantiate the idea that political and family connections to corporate governance structure greatly influence the leverage decision-making of corporate firms in Bangladesh. Full article
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Open AccessArticle
Political Connections and Stock Price Crash Risk: Empirical Evidence from the Fall of Suharto
Int. J. Financial Stud. 2019, 7(3), 49; https://doi.org/10.3390/ijfs7030049 - 11 Sep 2019
Viewed by 282
Abstract
This study examines the relationship between firm-level political connections and stock price crash risk in Indonesia. It employs the difference-in-difference design to deal with the self-selection bias issue regarding the choice of the firms to become a politically connected firm. We use the [...] Read more.
This study examines the relationship between firm-level political connections and stock price crash risk in Indonesia. It employs the difference-in-difference design to deal with the self-selection bias issue regarding the choice of the firms to become a politically connected firm. We use the sudden resignation of the former President of Indonesia, Suharto, to show that politically connected firms are associated with lower stock price crash risk and that the risk for these politically connected firms increased after Suharto resigned. Furthermore, we found evidence that these negative associations are more pronounced in firms with more complex firm structures. Full article
Open AccessArticle
Selectivity and Market Timing Ability of Fund Managers: Comparative Analysis of Islamic and Conventional HSBC Saudi Mutual Funds
Int. J. Financial Stud. 2019, 7(3), 48; https://doi.org/10.3390/ijfs7030048 - 03 Sep 2019
Viewed by 260
Abstract
This paper empirically compares the market timing, the stock selection and the performance persistence of Islamic and conventional HSBC Saudi mutual funds by using monthly returns from April 2011 to December 2018. The data was grouped into five portfolios based on geographical investment [...] Read more.
This paper empirically compares the market timing, the stock selection and the performance persistence of Islamic and conventional HSBC Saudi mutual funds by using monthly returns from April 2011 to December 2018. The data was grouped into five portfolios based on geographical investment basis (locally, Arab, internationally) and Sharia compliance (Islamic and conventional). The empirical results indicate that Islamic funds underperformed conventional funds internationally but not locally. Findings suggest that the market selectivity skills of managers in the Islamic funds are better than the conventional funds. In addition, only the managers of Saudi conventional funds investing internationally have a good market timing skills, thus, they are able to beat the market index by predicting its movements and buying and selling accordingly. Furthermore, this study gives a brief idea about the performance persistence of HSBC Saudi funds. The results confirm existence of the persistence performance when the funds do not apply Sharia law and when they are instead focused internationally. Full article
Open AccessArticle
Why So Serious about Foreign Capital?
Int. J. Financial Stud. 2019, 7(3), 47; https://doi.org/10.3390/ijfs7030047 - 02 Sep 2019
Viewed by 233
Abstract
This study examines the cost and benefits of capital inflow in emerging economies and delineates equity and debt to examine the nature and trends of capital inflows in Brazil, Russia, India, China, South Africa (BRICS), East Asia and Sub-Saharan Africa since their economic [...] Read more.
This study examines the cost and benefits of capital inflow in emerging economies and delineates equity and debt to examine the nature and trends of capital inflows in Brazil, Russia, India, China, South Africa (BRICS), East Asia and Sub-Saharan Africa since their economic reforms. We adopt a two-step process to address endogeneity and to tease out the causal effect of capital flow on economic growth and vice versa. First, we run the panel Granger causality test to examine the precedence of causality between per capita GDP growth, Foreign Direct Investment (FDI) inflows, portfolio inflows and the real effective exchange rate. We follow this test with a fixed-effect panel regression model to test for the magnitude of causality between the variables. The study finds the presence of a strong causality between FDI equity flows and a weak and lagged causality between short term capital flows and economic growth. In the short-run, there is bi-directional causality in growth and equity flows. In the longer run, the effects of equity fade away, but the effect of sustained debt kicks in. Among other results, an average currency appreciation for one-year causes equity inflow and causes GDP growth for two years. Full article
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Open AccessArticle
Foreign Direct Investment Dynamic Performance with Low-Carbon Influence: A Provincial Comparative Application in China
Int. J. Financial Stud. 2019, 7(3), 46; https://doi.org/10.3390/ijfs7030046 - 30 Aug 2019
Viewed by 278
Abstract
Cross-border capital flows have been a major force driving economic globalization. Foreign direct investment (FDI) plays a decisive role in seeking out market technology brands and enhancing the global competitiveness among international inflows. With the requirement of economic development, this paper focused on [...] Read more.
Cross-border capital flows have been a major force driving economic globalization. Foreign direct investment (FDI) plays a decisive role in seeking out market technology brands and enhancing the global competitiveness among international inflows. With the requirement of economic development, this paper focused on a performance evaluation of FDI in China. However, because of the planned transformation to a market economy in China, FDI has been promoted with a regional cascade structure. Similar to the development track of the Chinese economy, it is necessary to evaluate FDI quality more than purely quantity from a provincial point of view. Therefore, this paper evaluated the Chinese provincial FDI total factor productivity using the dynamic Malmquist model. In contrast to traditional evaluations, this paper focused on inter-temporal influence in FDI performance evaluation. To understand the inter-temporal effects, physical capital stock was defined as a dynamic variable in FDI sustainability performance. Additionally, with the pressure to reduce emissions, energy consumption was also considered during the evaluation. The empirical results revealed that the dynamic variable is the bottleneck in FDI performance for most Chinese provinces. It is only efficient in a few municipalities and provinces, such as Shanghai and Guangdong. Additionally, energy conservation was more efficient in the performance evaluation of eastern regions in China. Full article
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Open AccessArticle
Performance of Fish Farms in Vietnam–Does Financial Access Help Improve Their Cost Efficiency?
Int. J. Financial Stud. 2019, 7(3), 45; https://doi.org/10.3390/ijfs7030045 - 26 Aug 2019
Viewed by 335
Abstract
For a common small- to medium-sized fish farm in an agricultural-based economy, monitoring costs is very important, since financial constraints are always a problem for these farmers. This will be thus easier if the farmers can get access to external funds. This paper [...] Read more.
For a common small- to medium-sized fish farm in an agricultural-based economy, monitoring costs is very important, since financial constraints are always a problem for these farmers. This will be thus easier if the farmers can get access to external funds. This paper used data envelopment analysis (DEA) to examine the technical efficiency, cost efficiency and allocative efficiency of 639 fish farms in the Red River Delta (RRD) in Vietnam in 2018 to see how fish farmers control their costs and if financial access can really help in this matter. We found that these fish farms were very inefficient, meaning that they did not succeed in monitoring and allocating their costs and resources. Among the factors that could improve their efficiency, we found that developing the rural banking system to provide more financial access for RRD fish farms is an important solution. Full article
Open AccessFeature PaperArticle
Risk Management of Pension Fund: A Model for Salary Evolution
Int. J. Financial Stud. 2019, 7(3), 44; https://doi.org/10.3390/ijfs7030044 - 20 Aug 2019
Viewed by 377
Abstract
In this paper, we propose a semi-Markov chain to model the salary levels of participants in
a pension scheme. The aim of the models is to understand the evolution in time of the salary of active
workers in order to implement it in [...] Read more.
In this paper, we propose a semi-Markov chain to model the salary levels of participants in
a pension scheme. The aim of the models is to understand the evolution in time of the salary of active
workers in order to implement it in the construction of the actuarial technical balance sheet. It is
worth mentioning that the level of the contributions in a pension scheme is directly proportional to
the incomes of the active workers; in almost all cases, it is a percentage of the worker’s incomes. As a
consequence, an adequate modeling of the salary evolution is essential for the determination of the
contributions paid to the fund and thus for the determination of the fund’s sustainability, especially
currently, when all jobs and salaries are subject to changes due to digitalization, ICT, innovation, etc.
The model is applied to a large dataset of a real compulsory Italian pension scheme of the first pillar.
The semi-Markovian hypothesis is tested, and the advantages with respect to Markov chain models
are assessed. Full article
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Open AccessArticle
The Determinants of FDI in Sub-Saharan Economies: A Study of Data from 1990–2017
Int. J. Financial Stud. 2019, 7(3), 43; https://doi.org/10.3390/ijfs7030043 - 12 Aug 2019
Viewed by 1089
Abstract
Foreign Direct Investment (FDI) can bring in much needed capital, particularly to developing countries, help improve manufacturing and trade sectors, bring in more efficient technologies, increase local production and exports, create jobs and develop local skills, and bring about improvements in infrastructure and [...] Read more.
Foreign Direct Investment (FDI) can bring in much needed capital, particularly to developing countries, help improve manufacturing and trade sectors, bring in more efficient technologies, increase local production and exports, create jobs and develop local skills, and bring about improvements in infrastructure and overall be a contributor to sustainable economic growth. With all these desirable features, it becomes relevant to ascertain the factors which attract FDI to an economy or a group of adjacent economies. This paper explores the determinants of FDI in ten sub-Saharan economies: Liberia, Sierra Leone, Ivory Coast, Ghana, Nigeria, Mali, Mauritania, Niger, Cameroun, and Senegal. After an extensive literature review of theories and empirical research, using a set of cross-sectional data over the period 1990–2017, two econometric models are estimated with FDI/GDP (the ratio of Foreign Direct Investment to Gross Domestic Product) as the dependent variable, and with inflation, exchange rate changes, openness, economy size (GDP), income levels (GNI/capita (Gross National Income) per capita), and infrastructure as the independent variables. Over the period, higher inflows of FDI in relation to GDP appear to be have been attracted to the markets with better infrastructure, smaller markets, and lower income levels, with higher openness and depreciation in the exchange rate, though the coefficients of the last two variables are not significant. These results show the type of FDI attracted to investments in this region and are evaluated from theoretical and practical viewpoints. FDI is an important source of finance for developing economies. On average, between 2013 and 2017, FDI accounted for 39 percent of external finance for developing economies. Policy guidelines are formulated for the enhancement of FDI inflows and further economic development in this region. Such a study of this region has not been made in the recent past. Full article
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Open AccessArticle
What Are Investors Afraid of? Finding the Big Bad Wolf
Int. J. Financial Stud. 2019, 7(3), 42; https://doi.org/10.3390/ijfs7030042 - 29 Jul 2019
Viewed by 500
Abstract
The aim of financial institutions and regulators is to find an effective way to measure the risk profile of different segments of investors. Both economists and psychologists developed several methodologies to elicit and assess individual risk attitude, but these are not perfect and [...] Read more.
The aim of financial institutions and regulators is to find an effective way to measure the risk profile of different segments of investors. Both economists and psychologists developed several methodologies to elicit and assess individual risk attitude, but these are not perfect and show several drawbacks when used in practice. Thanks to a unique database of around 15,000 investors, this paper combines survey-based evidence with revealed preferences based upon observed asset allocation. This paper confirms some results known in the literature like the gender and age differences in risk-taking. Moreover, the behavioral clustering approach used for the analysis is useful in an inferential framework. The segments built starting from the questionnaire permit to “forecast” the individual risk attitude that is described by the individual choices in terms of asset allocation. Loss aversion per se is a relevant variable in explaining financial risk-taking. Full article
(This article belongs to the Special Issue Personal Finance)
Open AccessArticle
A Comprehensive Study of Project Risks in Road Transportation Networks under CPEC
Int. J. Financial Stud. 2019, 7(3), 41; https://doi.org/10.3390/ijfs7030041 - 26 Jul 2019
Viewed by 466
Abstract
The China–Pakistan economic corridor (CPEC) is a collection of different ongoing projects including transportation, infrastructure, the Gwadar seaport, oil pipeline, and internet connection zone projects. The Chinese government has adopted a development strategy for infrastructure growth and investment in Pakistani and Asian territories [...] Read more.
The China–Pakistan economic corridor (CPEC) is a collection of different ongoing projects including transportation, infrastructure, the Gwadar seaport, oil pipeline, and internet connection zone projects. The Chinese government has adopted a development strategy for infrastructure growth and investment in Pakistani and Asian territories through the CPEC project. Transportation is considered the backbone of the CPEC. In addition to the CPEC project is the linked “belt and road initiative” (BRI) project, which aims to enhance regional connectivity and is a harbinger of the future in Asia, as well as in European countries. However, uncertain situations, such as a lack of proper planning, security, and political stability, hinder the growth and development of infrastructure. Three corridors of the CPEC road transportation network, namely, the eastern, the western, and future central alignment, have been examined through a master supposition group using the Delphi technique, which has never been applied to the road transportation network in the CPEC plan. The review is designed to draw master conclusions and demonstrate an outcome for round one and two in the present work. Round one and two investigate the impact of stakeholder support, politicians’ roles, terrorism, security situations, poverty, and economic crises. Using the Delphi technique within the host country hinders the construction of the road network. The results obtained through the appraisal have justified the present potential endeavor. Full article
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Open AccessArticle
Liquidity Creation and Bank Performance of Syrian Banks before and during the Syrian War
Int. J. Financial Stud. 2019, 7(3), 40; https://doi.org/10.3390/ijfs7030040 - 12 Jul 2019
Viewed by 512
Abstract
This paper estimates the amount of liquidity created by Syrian banks between 2004 and 2016, and further investigates the effect of liquidity creation on bank performance, controlling for a set of bank-level, industry-level, and macroeconomic variables. The findings show bank liquidity creation improved [...] Read more.
This paper estimates the amount of liquidity created by Syrian banks between 2004 and 2016, and further investigates the effect of liquidity creation on bank performance, controlling for a set of bank-level, industry-level, and macroeconomic variables. The findings show bank liquidity creation improved during the pre-war period and showed positive figures, but started to decline sharply during wartime. The results also show a negative relationship between liquidity creation and bank profitability (return on assets) during wartime; however, this relationship was insignificant before the war. Finally, this study conducted robustness checks to confirm its findings. Full article
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Open AccessArticle
Forecasting Term Structure of Interest Rates in Japan
Int. J. Financial Stud. 2019, 7(3), 39; https://doi.org/10.3390/ijfs7030039 - 08 Jul 2019
Viewed by 514
Abstract
In this paper, we examined and compared the forecast performances of the dynamic Nelson–Siegel (DNS), dynamic Nelson–Siegel–Svensson (DNSS), and arbitrage-free Nelson–Siegel (AFNS) models after the financial crisis period. The best model for the forecast performance is the DNSS model in the middle and [...] Read more.
In this paper, we examined and compared the forecast performances of the dynamic Nelson–Siegel (DNS), dynamic Nelson–Siegel–Svensson (DNSS), and arbitrage-free Nelson–Siegel (AFNS) models after the financial crisis period. The best model for the forecast performance is the DNSS model in the middle and long periods. The AFNS is inferior to the DNS model for long-period forecasting. In U.S. bond markets, AFNS is shown to be superior to DNS in the U.S. However, for Japanese data, there is no evidence that the AFNS is superior to the DNS model in the long forecast horizon. Full article
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Open AccessFeature PaperArticle
Does Death Anxiety Moderate the Adequacy of Retirement Savings? Empirical Evidence from 40-Plus Clients of Spanish Financial Advisory Firms
Int. J. Financial Stud. 2019, 7(3), 38; https://doi.org/10.3390/ijfs7030038 - 08 Jul 2019
Viewed by 505
Abstract
This three-wave study analyses the mediating role of financial behavior in the relationship between financial goals and retirement saving adequacy, and the moderating role of Death anxiety. The participants in the study (N = 276) were 40-plus Spanish clients of financial advisory firms. [...] Read more.
This three-wave study analyses the mediating role of financial behavior in the relationship between financial goals and retirement saving adequacy, and the moderating role of Death anxiety. The participants in the study (N = 276) were 40-plus Spanish clients of financial advisory firms. The results show that the relationship between financial goals and retirement saving adequacy is, in fact, mediated by financial behavior. We also found that death anxiety moderates the financial behavior-retirement saving adequacy relationship. The theoretical and practical implications of the study for design are discussed at the end of the paper. Full article
(This article belongs to the Special Issue Personal Finance)
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Open AccessArticle
Empowering Women through Microcredit in Bangladesh: An Empirical Study
Int. J. Financial Stud. 2019, 7(3), 37; https://doi.org/10.3390/ijfs7030037 - 01 Jul 2019
Viewed by 560
Abstract
The present study was carried out to identify the determinants of microcredit accessibility by rural women households and its impact on rural women empowerment in Bangladesh. A face-to-face survey was conducted during 2018, interviewing 300 women households in two locations in Bangladesh. Descriptive [...] Read more.
The present study was carried out to identify the determinants of microcredit accessibility by rural women households and its impact on rural women empowerment in Bangladesh. A face-to-face survey was conducted during 2018, interviewing 300 women households in two locations in Bangladesh. Descriptive statistics and econometric modeling were used to achieve the objectives. The results of the study showed that the higher annual income inversely related with the accessibility to the microcredit program, whereas family size (P < 0.05) was positive and significantly influenced the accessibility to the microcredit program. The empirical results indicate that borrowers of microcredit have greater control over their own savings. The regression outcome also exposes that microcredit has a positive and significant impact on enhancing participation in household decision making process and women’s legal awareness. The study suggested that microcredit providers in Bangladesh should be encouraged to review their program planning and redesign loan products by putting more emphasis on higher income group women. Full article
Open AccessArticle
Impact of CSR-Relevant News on Stock Prices of Companies Listed in the Austrian Traded Index (ATX)
Int. J. Financial Stud. 2019, 7(3), 36; https://doi.org/10.3390/ijfs7030036 - 28 Jun 2019
Viewed by 514
Abstract
This paper examines the short-term influence of CSR-relevant news on the enterprise value in the form of respective shareholder value, which is represented by the corresponding stock price. This effect is measured using an event study applied to companies in the “Austrian Traded [...] Read more.
This paper examines the short-term influence of CSR-relevant news on the enterprise value in the form of respective shareholder value, which is represented by the corresponding stock price. This effect is measured using an event study applied to companies in the “Austrian Traded Index” (ATX). Subsequently, the results of the study show that CSR-relevant news in the financial portal finanzen.net trigger statistically significant abnormal returns and average cumulated abnormal returns within a period of five days. Based on these research results, it is stated that CSR-relevant news has a significant impact on the shareholder value of a company represented by its stock price. The hypotheses defined on the basis of the previously conducted studies on this topic were only partially confirmed. In particular, the negative effects of negative CSR-relevant news are insufficiently shown. Based on these findings, it can be deduced that the effects of the news are reinforced by the CSR relevance, although media presence due to the publications is a factor to be explored. Full article
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Open AccessArticle
Pricing Basket Weather Derivatives on Rainfall and Temperature Processes
Int. J. Financial Stud. 2019, 7(3), 35; https://doi.org/10.3390/ijfs7030035 - 27 Jun 2019
Viewed by 454
Abstract
This paper follows an incomplete market pricing approach to analyze the evaluation of weather derivatives and the viability of a weather derivatives market in terms of hedging. A utility indifference method is developed for the specification of indifference prices for the seller and [...] Read more.
This paper follows an incomplete market pricing approach to analyze the evaluation of weather derivatives and the viability of a weather derivatives market in terms of hedging. A utility indifference method is developed for the specification of indifference prices for the seller and buyer of a basket of weather derivatives written on rainfall and temperature. The agent’s risk preference is described by an exponential utility function and the prices are derived by dynamic programming principles and corresponding Hamilton Jacobi-Bellman equations from the stochastic optimal control problems. It is found the indifference measure is equal to the physical measure as there is no correlation between the capital market and weather. The fair price of the derivative should be greater than the seller’s indifference price and less than the buyer’s indifference price for market viability and no arbitrage opportunities. Full article
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