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Risks, Volume 12, Issue 5 (May 2024) – 11 articles

Cover Story (view full-size image): This study addresses market concentration and diversification strategies using relative entropy. It introduces entropic value at risk (EVaR) and relativistic value at risk (RLVaR) and evaluates entropy-based criteria in portfolio selection of both classic and crypto assets. The key finding indicates that entropy measures effectively identify optimal portfolios, particularly in scenarios of heightened risk and increased concentration, crucial for mitigating negative net performances during low returns or high turnover. Due to its unfavourable risk profile, Bitcoin does not offer sufficient hedging and may increase the risk of short-term losses. View this paper
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16 pages, 725 KiB  
Article
Cyber Risk in Insurance: A Quantum Modeling
by Claude Lefèvre, Muhsin Tamturk, Sergey Utev and Marco Carenzo
Risks 2024, 12(5), 83; https://doi.org/10.3390/risks12050083 - 20 May 2024
Viewed by 565
Abstract
In this research, we consider cyber risk in insurance using a quantum approach, with a focus on the differences between reported cyber claims and the number of cyber attacks that caused them. Unlike the traditional probabilistic approach, quantum modeling makes it possible to [...] Read more.
In this research, we consider cyber risk in insurance using a quantum approach, with a focus on the differences between reported cyber claims and the number of cyber attacks that caused them. Unlike the traditional probabilistic approach, quantum modeling makes it possible to deal with non-commutative event paths. We investigate the classification of cyber claims according to different cyber risk behaviors to enable more precise analysis and management of cyber risks. Additionally, we examine how historical cyber claims can be utilized through the application of copula functions for dependent insurance claims. We also discuss classification, likelihood estimation, and risk-loss calculation within the context of dependent insurance claim data. Full article
(This article belongs to the Special Issue Advancements in Actuarial Mathematics and Risk Theory)
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21 pages, 5564 KiB  
Article
Bitcoin Volatility and Intrinsic Time Using Double-Subordinated Lévy Processes
by Abootaleb Shirvani, Stefan Mittnik, William Brent Lindquist and Svetlozar Rachev
Risks 2024, 12(5), 82; https://doi.org/10.3390/risks12050082 - 20 May 2024
Viewed by 419
Abstract
We propose a doubly subordinated Lévy process, the normal double inverse Gaussian (NDIG), to model the time series properties of the cryptocurrency bitcoin. By using two subordinated processes, NDIG captures both the skew and fat-tailed properties of, as well as the intrinsic time [...] Read more.
We propose a doubly subordinated Lévy process, the normal double inverse Gaussian (NDIG), to model the time series properties of the cryptocurrency bitcoin. By using two subordinated processes, NDIG captures both the skew and fat-tailed properties of, as well as the intrinsic time driving, bitcoin returns and gives rise to an arbitrage-free option pricing model. In this framework, we derive two bitcoin volatility measures. The first combines NDIG option pricing with the Chicago Board Options Exchange VIX model to compute an implied volatility; the second uses the volatility of the unit time increment of the NDIG model. Both volatility measures are compared to the volatility based on the historical standard deviation. With appropriate linear scaling, the NDIG process perfectly captures the observed in-sample volatility. Full article
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23 pages, 515 KiB  
Article
Board Characteristics and Bank Stock Performance: Empirical Evidence from the MENA Region
by Antoine B. Awad, Robert Gharios, Bashar Abu Khalaf and Lena A. Seissian
Risks 2024, 12(5), 81; https://doi.org/10.3390/risks12050081 - 14 May 2024
Viewed by 999
Abstract
This study examined the relationship between the board characteristics and stock performance of commercial banks. Our analysis is based on a sample of 65 banks across 10 MENA countries and their quantitative data extracted between 2013 and 2022. This research employed pooled OLS, [...] Read more.
This study examined the relationship between the board characteristics and stock performance of commercial banks. Our analysis is based on a sample of 65 banks across 10 MENA countries and their quantitative data extracted between 2013 and 2022. This research employed pooled OLS, and fixed and random effect regression to confirm the association between board size, board independence, number of board meetings, and CEO duality with stock performance measured by the bank’s share price and market-to-book ratio. Further, several control variables were utilized such as the bank’s capital adequacy, profitability, and size. The empirical findings reveal that board independence positively affects the bank stock performance while the board size shows a negative relationship. This suggests that banks with fewer board members and high independence levels have their shares outperforming others. However, we found that having frequent board meetings per year and separate roles for the CEO and chairman have no impact on bank stock performance. Moreover, the findings indicate that the bank’s capital adequacy, size, and profitability have a positive effect on the stock performance. To test the robustness of our analysis, we implemented a one-limit Tobit model, which enables lower-bound censoring, and obtained similar findings thus confirming our hypotheses. From a practical perspective, our findings highlight the importance of the board size and the directors’ independence to MENA regulators and policymakers in an effort to implement an effective corporate governance system. Specifically, MENA banks are advised to decrease the number of board members, and this should reduce the number of annual board meetings which, in turn, should maximize performance. Full article
26 pages, 1557 KiB  
Article
Trading Activity in the Corporate Bond Market: A SAD Tale of Macro-Announcements and Behavioral Seasonality?
by James J. Forest, Ben S. Branch and Brian T. Berry
Risks 2024, 12(5), 80; https://doi.org/10.3390/risks12050080 - 14 May 2024
Viewed by 778
Abstract
This study investigates the determinants of trading activity in the U.S. corporate bond market, focusing on the effects of Seasonal Affective Disorder (SAD) and macroeconomic announcements. Employing the General-to-Specific (Gets) Autometrics methodology, we identify distinct behavioral responses between retail and institutional investors to [...] Read more.
This study investigates the determinants of trading activity in the U.S. corporate bond market, focusing on the effects of Seasonal Affective Disorder (SAD) and macroeconomic announcements. Employing the General-to-Specific (Gets) Autometrics methodology, we identify distinct behavioral responses between retail and institutional investors to SAD, noting a significant impact on retail trading volumes but not on institutional trading or bond returns. This discovery extends the understanding of behavioral finance within the context of bond markets, diverging from established findings in equity and Treasury markets. Additionally, our analysis delineates the influence of macroeconomic announcements on trading activities, offering new insights into the market’s reaction to economic news. This study’s findings contribute to the broader literature on market microstructure and behavioral finance, providing empirical evidence on the interplay between psychological factors and macroeconomic information flow within corporate bond markets. By addressing these specific aspects with rigorous econometric techniques, our research enhances the comprehension of trading dynamics in less transparent markets, offering valuable perspectives for academics, investors, risk managers, and policymakers. Full article
(This article belongs to the Special Issue Risk Analysis in Financial Crisis and Stock Market)
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19 pages, 512 KiB  
Article
Non-Differentiable Loss Function Optimization and Interaction Effect Discovery in Insurance Pricing Using the Genetic Algorithm
by Robin Van Oirbeek, Félix Vandervorst, Thomas Bury, Gireg Willame, Christopher Grumiau and Tim Verdonck
Risks 2024, 12(5), 79; https://doi.org/10.3390/risks12050079 - 14 May 2024
Viewed by 804
Abstract
Insurance pricing is the process of determining the premiums that policyholders pay in exchange for insurance coverage. In order to estimate premiums, actuaries use statistical based methods, assessing various factors such as the probability of certain events occurring (like accidents or damages), where [...] Read more.
Insurance pricing is the process of determining the premiums that policyholders pay in exchange for insurance coverage. In order to estimate premiums, actuaries use statistical based methods, assessing various factors such as the probability of certain events occurring (like accidents or damages), where the Generalized Linear Models (GLMs) are the industry standard method. Traditional GLM approaches face limitations due to non-differentiable loss functions and expansive variable spaces, including both main and interaction terms. In this study, we address the challenge of selecting relevant variables for GLMs used in non-life insurance pricing both for frequency or severity analyses, amidst an increasing volume of data and variables. We propose a novel application of the Genetic Algorithm (GA) to efficiently identify pertinent main and interaction effects in GLMs, even in scenarios with a high variable count and diverse loss functions. Our approach uniquely aligns GLM predictions with those of black box machine learning models, enhancing their interpretability and reliability. Using a publicly available non-life motor data set, we demonstrate the GA’s effectiveness by comparing its selected GLM with a Gradient Boosted Machine (GBM) model. The results show a strong consistency between the main and interaction terms identified by GA for the GLM and those revealed in the GBM analysis, highlighting the potential of our method to refine and improve pricing models in the insurance sector. Full article
(This article belongs to the Special Issue Statistical Applications to Insurance and Risk)
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26 pages, 882 KiB  
Article
Exploring Entropy-Based Portfolio Strategies: Empirical Analysis and Cryptocurrency Impact
by Nicolò Giunta, Giuseppe Orlando, Alessandra Carleo and Jacopo Maria Ricci
Risks 2024, 12(5), 78; https://doi.org/10.3390/risks12050078 - 11 May 2024
Viewed by 654
Abstract
This study addresses market concentration among major corporations, highlighting the utility of relative entropy for understanding diversification strategies. It introduces entropic value at risk (EVaR) as a coherent risk measure, which is an upper bound to the conditional value at risk (CVaR), and [...] Read more.
This study addresses market concentration among major corporations, highlighting the utility of relative entropy for understanding diversification strategies. It introduces entropic value at risk (EVaR) as a coherent risk measure, which is an upper bound to the conditional value at risk (CVaR), and explores its generalization, relativistic value at risk (RLVaR), rooted in Kaniadakis entropy. Through extensive empirical analysis on both developed (i.e., S&P 500 and Euro Stoxx 50) and developing markets (i.e., BIST 100 and Bovespa), the study evaluates entropy-based criteria in portfolio selection, investigates model behavior across different market types, and assesses the impact of cryptocurrency introduction on portfolio performance and diversification. The key finding indicates that entropy measures effectively identify optimal portfolios, particularly in scenarios of heightened risk and increased concentration, crucial for mitigating negative net performances during low returns or high turnover. Bitcoin is primarily used for diversification and performance enhancement in the BIST 100 index, while its allocation in other markets remains minimal or non-existent, confirming the extreme concentration observed in stock markets dominated by a few leading stocks. Full article
(This article belongs to the Special Issue Portfolio Theory, Financial Risk Analysis and Applications)
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12 pages, 1560 KiB  
Article
Uncertainty Reduction in Operational Risk Management Process
by Guy Burstein and Inon Zuckerman
Risks 2024, 12(5), 77; https://doi.org/10.3390/risks12050077 - 11 May 2024
Viewed by 696
Abstract
This paper proposes a new framework to reduce the variance and uncertainty in the risk assessment process. Today, this process is susceptible to background noise from sources of human factor biases and erroneous measurements. Our new framework consists of deconstructing the likelihood of [...] Read more.
This paper proposes a new framework to reduce the variance and uncertainty in the risk assessment process. Today, this process is susceptible to background noise from sources of human factor biases and erroneous measurements. Our new framework consists of deconstructing the likelihood of failure function into its sub-factor and then reconstructing it in a formula that can reduce the variance and biases of a human auditor judgment. We tested our new framework on both a questionnaire study and a simulation of the risk assessment process, and the improvement in reducing the variance is significant. Full article
(This article belongs to the Special Issue Financial Analysis, Corporate Finance and Risk Management)
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20 pages, 1091 KiB  
Article
Test of Volatile Behaviors with the Asymmetric Stochastic Volatility Model: An Implementation on Nasdaq-100
by Elchin Suleymanov, Magsud Gubadli and Ulvi Yagubov
Risks 2024, 12(5), 76; https://doi.org/10.3390/risks12050076 - 3 May 2024
Viewed by 1108
Abstract
The present study aimed to investigate the presence of asymmetric stochastic volatility and leverage effects within the Nasdaq-100 index. This index is widely regarded as an important indicator for investors. We focused on the nine leading stocks within the index, which are highly [...] Read more.
The present study aimed to investigate the presence of asymmetric stochastic volatility and leverage effects within the Nasdaq-100 index. This index is widely regarded as an important indicator for investors. We focused on the nine leading stocks within the index, which are highly popular and hold significant weight in the investment world. These stocks are Netflix, PayPal, Google, Intel, Microsoft, Amazon, Tesla, Apple, and Meta. The study covered the period between 3 January 2017 and 30 January 2023, and we employed the EViews and WinBUGS applications to conduct the analysis. We began by calculating the logarithmic difference to obtain the return series. We then performed a sample test with 100,000 iterations, excluding the first 10,000 samples to eliminate the initial bias of the coefficients. This left us with 90,000 samples for analysis. Using the results of the asymmetric stochastic volatility model, we evaluated both the Nasdaq-100 index as a whole and the volatility persistence, predictability, and correlation levels of individual stocks. This allowed us to evaluate the ability of individual stocks to represent the characteristics of the Nasdaq-100 index. Our findings revealed a dense clustering of volatility, both for the Nasdaq-100 index and the nine individual stocks. We observed that this volatility is continuous but has a predictable impact on variability. Moreover, apart from Intel, all the stocks in the model exhibited both leverage effects and the presence of asymmetric relationships, as did the Nasdaq-100 index. Overall, our results show that the characteristics of stocks in the model are like the volatility characteristic of the Nasdaq-100 index and can represent it. Full article
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16 pages, 3320 KiB  
Article
Analyzing the Influence of Risk Models and Investor Risk-Aversion Disparity on Portfolio Selection in Community Solar Projects: A Comparative Case Study
by Mahmoud Shakouri, Chukwuma Nnaji, Saeed Banihashemi and Khoung Le Nguyen
Risks 2024, 12(5), 75; https://doi.org/10.3390/risks12050075 - 30 Apr 2024
Viewed by 658
Abstract
This study examines the impact of risk models and investors’ risk aversion on the selection of community solar portfolios. Various risk models to account for the volatility in the electrical power output of community solar, namely variance (Var), SemiVariance (SemiVar), mean absolute deviation [...] Read more.
This study examines the impact of risk models and investors’ risk aversion on the selection of community solar portfolios. Various risk models to account for the volatility in the electrical power output of community solar, namely variance (Var), SemiVariance (SemiVar), mean absolute deviation (MAD), and conditional value at risk (CVaR), were considered. A statistical model based on modern portfolio theory was employed to simulate investors’ risk aversion in the context of community solar portfolio selection. The results of this study showed that the choice of risk model that aligns with investors’ risk-aversion level plays a key role in realizing more return and safeguarding against volatility in power generation. In particular, the findings of this research revealed that the CVaR model provides higher returns at the cost of greater volatility in power generation compared to other risk models. In contrast, the MAD model offered a better tradeoff between risk and return, which can appeal more to risk-averse investors. Based on the simulation results, a new approach was proposed for optimizing the portfolio selection process for investors with divergent risk-aversion levels by averaging the utility functions of investors and identifying the most probable outcome. Full article
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21 pages, 2473 KiB  
Review
Economic Fraud and Associated Risks: An Integrated Bibliometric Analysis Approach
by Kamer-Ainur Aivaz, Iulia Oana Florea and Ionela Munteanu
Risks 2024, 12(5), 74; https://doi.org/10.3390/risks12050074 - 30 Apr 2024
Viewed by 830
Abstract
This study offers a comprehensive insight into the realms of economic fraud and risk management, underscoring the necessity of adaptability to evolving technologies and shifts in financial market dynamics. Through the application of bibliometric methodologies, this study meticulously maps the relevant literature, delineating [...] Read more.
This study offers a comprehensive insight into the realms of economic fraud and risk management, underscoring the necessity of adaptability to evolving technologies and shifts in financial market dynamics. Through the application of bibliometric methodologies, this study meticulously maps the relevant literature, delineating influential works, notable authors, collaborative networks, and emerging trends. It reviews key research contributions within the field, alongside reputable journals and institutions engaged in academic research. The examination highlights the logical, conceptual, and social interconnections that define the landscape of economic fraud and associated risks, elucidating how these findings inform the understanding, mitigating, and combating of the risk of fraud. Our bibliometric analysis methodology is grounded in the utilization of the Scopus database, employing rigorous filtering and extraction processes to obtain a substantial corpus of pertinent articles. Through a fusion of performance analysis and science mapping, our investigation elucidates central themes and visually represents the interrelationships between studies. Our research outcomes underscore the frequency of paper publications across diverse regions, with particular emphasis on the predominant scientific output from the US and China. Additionally, trends in academic citations are identified, indicative of the significant impact of papers on academic research and the formulation of public policies. By means of bibliometric analysis, this study not only consolidates existing knowledge but also catalyzes the exploration of future research trajectories, emphasizing the imperative of addressing these issues with heightened scientific rigor. Full article
(This article belongs to the Special Issue Risk Analysis in Financial Crisis and Stock Market)
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20 pages, 2629 KiB  
Article
Estimation and Prediction of Commodity Returns Using Long Memory Volatility Models
by Kisswell Basira, Lawrence Dhliwayo, Knowledge Chinhamu, Retius Chifurira and Florence Matarise
Risks 2024, 12(5), 73; https://doi.org/10.3390/risks12050073 - 23 Apr 2024
Viewed by 953
Abstract
Modelling the volatility of commodity prices and creating more reliable models for estimating and forecasting commodity price returns are crucial. The body of research on statistical models that can fully reflect the empirical characteristics of commodity price returns is lacking. The main aim [...] Read more.
Modelling the volatility of commodity prices and creating more reliable models for estimating and forecasting commodity price returns are crucial. The body of research on statistical models that can fully reflect the empirical characteristics of commodity price returns is lacking. The main aim of this research was to develop a modelling framework that could be used to accurately estimate and forecast commodity price returns by combining long memory models with heavy-tailed distributions. This study employed dual hybrid long-memory generalised autoregressive conditionally heteroscedasticity (GARCH) models with heavy-tailed innovations, namely, the Student-t distribution (StD), skewed-Student-t distribution (SStD), and the generalised error distribution (GED). Based on the smallest forecasting metrics values for mean absolute error (MAE) and mean squared error (MSE) values, the best performing LM-GARCH-type model for lithium is the ARFIMA (1, o, 1)-FIAPARCH (1, ξ, 1) with normal innovations. For tobacco, the best model is ARFIMA (1, o, 1)-FIGARCH (1, ξ, 1) with SStD innovations. The robust performing model for gold is the ARFIMA (1, o, 1)-FIGARCH (1, ξ, 1)-GED model. The best performing forecasting model for crude oil and cotton returns are the FIAPARCH 1,ξ, 1SStD model and HYGARCH 1,ξ, 1StD model, respectively. The results obtained from this study would be beneficial to those concerned with financial market modelling techniques, such as derivative pricing, risk management, asset allocation, and valuation. Full article
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