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Risks, Volume 9, Issue 8 (August 2021) – 12 articles

Cover Story (view full-size image): The rapid spread of COVID-19 favored the transmission of shocks among energy commodities, emphasizing the importance of developing accurate analytic models to quantify related risks. The aim of this paper is to assess the effects of the pandemic on energy commodity markets. The authors estimate daily volatility and correlations beteeen energy commodities relying on a multivariate time series model with a mixed-frequency approach that exploits the information about the number of weekly deaths caused by COVID-19. The analysis provides a useful tool for risk managers and decision makers to understand the effects of the pandemic on the spillovers in energy markets. View this paper
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Article
Determinants Affecting Profitability of State-Owned Commercial Banks: Case Study of China
Risks 2021, 9(8), 150; https://doi.org/10.3390/risks9080150 - 20 Aug 2021
Cited by 1 | Viewed by 1073
Abstract
The study examines the relationship between internal determinants, external determinants and the profitability of state-owned commercial banks. We use pooled regression, fixed effect, and random effect models on the case of the top five Chinese state-owned commercial banks from 2007 to 2019. The [...] Read more.
The study examines the relationship between internal determinants, external determinants and the profitability of state-owned commercial banks. We use pooled regression, fixed effect, and random effect models on the case of the top five Chinese state-owned commercial banks from 2007 to 2019. The results show that internal factors, measured by size, credit quality, and liquidity, significantly positively influence banks’ profitability. State-owned banks that have larger sizes, higher credit quality, and higher liquidity have accordingly higher profitability than other banks. On the contrary, the external factor, measured by the natural logarithm of GDP, negatively influences banks’ profitability. The decrease in GDP leads to higher profitability of state-owned commercial banks in China. Our results provide insight into the profitability of state-owned commercial banks, considering the latest changes in the Chinese banking industry. Full article
Article
Investors’ Trading Activity and Information Asymmetry: Evidence from the Romanian Stock Market
Risks 2021, 9(8), 149; https://doi.org/10.3390/risks9080149 - 19 Aug 2021
Cited by 1 | Viewed by 725
Abstract
This paper examines the problem of information asymmetry between foreign, local, institutional and individual investors on the Bucharest Stock Exchange (BVB) for the period 2004–2011. Using monthly returns for individual companies listed on BVB, stock market indices during the seven years period, as [...] Read more.
This paper examines the problem of information asymmetry between foreign, local, institutional and individual investors on the Bucharest Stock Exchange (BVB) for the period 2004–2011. Using monthly returns for individual companies listed on BVB, stock market indices during the seven years period, as well as aggregate data on foreign and domestic investors (both institutional and individual) sales and purchases on the Romanian stock market, this research intends to provide an answer to the following question: Are foreign investors better informed than the domestic ones and continually achieve higher rates of return on the Romanian stock market? We compare the information advantage of the different investors’ categories by separating the stock in our data sample into two categories, namely blue-chips stocks (mostly stocks that are part of the BET index, and also containing one international stock, Erste Bank), and “regular” stocks. Subsequently, we study the explanatory power for stock returns of potential impact factors, which reflect the monthly net position of four groups of investors on the Romanian Stock market (Purchases-Sales) by employing multivariate regression models and a five variable VAR system. Ultimately, we are interested in whether investors in one particular category are consistently net buyers just before stock returns increase and are net sellers before stock returns decrease, thus suggesting they have an information advantage as compared to the domestic ones. Our aim is to provide robust empirical evidence on the nature of investors’ information asymmetry by utilising a unique data set and directly assessing relevant inter-relationships. Full article
Article
Risk Mutualization in Central Clearing: An Answer to the Cross-Guarantee Phenomenon from the Financial Stability Viewpoint
Risks 2021, 9(8), 148; https://doi.org/10.3390/risks9080148 - 19 Aug 2021
Cited by 1 | Viewed by 582
Abstract
Central counterparties’ (CCPs) role is to take over the counterparty risk during trading. To fulfill its role, a CCP needs to operate a multi-level guarantee system that can absorb losses of clearing members’ defaults. Our main question is how the size of the [...] Read more.
Central counterparties’ (CCPs) role is to take over the counterparty risk during trading. To fulfill its role, a CCP needs to operate a multi-level guarantee system that can absorb losses of clearing members’ defaults. Our main question is how the size of the guarantee system changes and how the cross-guarantee undertaking changes between clearing members and markets if the CCP merges the guarantee systems of different markets. This question is essential from a financial stability perspective since the size and the structure of the guarantee system will affect the loss-absorbing capacity of a CCP. We used Monte Carlo simulation to simulate a 30 year time-series for three different products, which gave us the basis for the value-at-risk-based margin calculation and the stress-test-based default fund calculation. Results show that merging the guarantee systems will always decrease the total value of the guarantees because the margin will decrease, which cannot be offset by the increase in the default fund size. We conclude that it is not optimal from the financial stability perspective to merge the guarantee systems. However, if the CCP wants to provide cheaper services, or if the clearing members are willing to cross-guarantee each other, merging is more suitable. Full article
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Article
Transformations of Telegraph Processes and Their Financial Applications
Risks 2021, 9(8), 147; https://doi.org/10.3390/risks9080147 - 17 Aug 2021
Cited by 1 | Viewed by 753
Abstract
In this paper, we consider non-linear transformations of classical telegraph process. The main results consist of deriving a general partial differential Equation (PDE) for the probability density (pdf) of the transformed telegraph process, and then presenting the limiting PDE under Kac’s conditions, which [...] Read more.
In this paper, we consider non-linear transformations of classical telegraph process. The main results consist of deriving a general partial differential Equation (PDE) for the probability density (pdf) of the transformed telegraph process, and then presenting the limiting PDE under Kac’s conditions, which may be interpreted as the equation for a diffusion process on a circle. This general case includes, for example, classical cases, such as limiting diffusion and geometric Brownian motion under some specifications of non-linear transformations (i.e., linear, exponential, etc.). We also give three applications of non-linear transformed telegraph process in finance: (1) application of classical telegraph process in the case of balance, (2) application of classical telegraph process in the case of dis-balance, and (3) application of asymmetric telegraph process. For these three cases, we present European call and put option prices. The novelty of the paper consists of new results for non-linear transformed classical telegraph process, new models for stock prices based on transformed telegraph process, and new applications of these models to option pricing. Full article
(This article belongs to the Special Issue Stochastic Modelling in Financial Mathematics)
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Article
Earnings Management, Related Party Transactions and Corporate Performance: The Moderating Role of Internal Control
Risks 2021, 9(8), 146; https://doi.org/10.3390/risks9080146 - 17 Aug 2021
Cited by 7 | Viewed by 1601
Abstract
The primary purpose of this study is to investigate the impacts of earnings management (EM) and related party transactions (RPTs) on corporate financial performance in an emerging market, Iran. This paper also aims to examine the moderating role of internal control weakness (ICW) [...] Read more.
The primary purpose of this study is to investigate the impacts of earnings management (EM) and related party transactions (RPTs) on corporate financial performance in an emerging market, Iran. This paper also aims to examine the moderating role of internal control weakness (ICW) in the relationship between them. The study sample includes 108 Iranian manufacturing companies listed on the Tehran Stock Exchange (TSE) between 2013 and 2018, and panel data with random effects are used to test the hypotheses. When an accounting-based measure called ROA is defined as a proxy for corporate performance, the results show that there is a negative association between real earnings management (REM) and corporate financial situation, while accrual-based earnings management (AEM) and firm value are correlated positively. However, when Tobin’s Q index is defined as a proxy for corporate performance, we do not find any significant association between them. Consistent with the tunneling hypothesis or agency theory, our findings confirm RPTs damage corporate value (ROA and Tobin’s Q) because managers probably consider it a mechanism to exploit enterprise resources owing to existing conflictual interests. Moreover, purchase-related party transactions lead to lower ROA, whereas sale-related party transactions and Tobin’s Q are correlated negatively. Moreover, weak internal control has a positive moderating influence on the linkage between AEM and Tobin’s Q index. Finally, we provide robust evidence that there is a positive association between sale growth and institutional owners with ROA and Tobin’s Q, although financial leverage and mergers and acquisitions (M&A) have a destructive effect on corporate value. Full article
(This article belongs to the Special Issue Financial Risk Management in SMEs)
Article
Influence of Financial Variables on the Development of Rural Communes of Eastern Poland in 2009–2018
Risks 2021, 9(8), 145; https://doi.org/10.3390/risks9080145 - 12 Aug 2021
Cited by 2 | Viewed by 739
Abstract
Communes are a place of both economic activity and creation development. They have autonomy in making decisions in the fields of financial, human, and material resources. This research was carried out with the use of a synthetic measure. The aim was to show [...] Read more.
Communes are a place of both economic activity and creation development. They have autonomy in making decisions in the fields of financial, human, and material resources. This research was carried out with the use of a synthetic measure. The aim was to show the impact of financial variables on the development process of rural communes in eastern Poland. The data were collected in spatial terms for 484 rural communes from the region of eastern Poland. The choice of variables was conditioned by the availability of GUS data for the period 2009–2018. The distribution of the evaluation of the development and financial situation of rural communes in eastern Poland was spatially polarized. The reason for the low impact of financial conditions on the development of rural communes in eastern Poland is their dependence on income transferred from the state budget. This stiffens and at the same time stabilizes the financial economy, making it relatively insensitive to the influence of other factors. Low independence can be a significant barrier to future local development. Finance and the economy are intertwined. Actions taken with respect to these must be based on analyses that facilitate making the right decisions. Full article
(This article belongs to the Special Issue Risk and Multifaceted Failures in Business Operations)
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Article
Multivariate Analysis of Energy Commodities during the COVID-19 Pandemic: Evidence from a Mixed-Frequency Approach
Risks 2021, 9(8), 144; https://doi.org/10.3390/risks9080144 - 11 Aug 2021
Cited by 1 | Viewed by 1237
Abstract
This paper shows the effects of the COVID-19 pandemic on energy markets. We estimate daily volatilities and correlations among energy commodities relying on a mixed-frequency approach that exploits information from the number of weekly deaths related to COVID-19 in the United States. The [...] Read more.
This paper shows the effects of the COVID-19 pandemic on energy markets. We estimate daily volatilities and correlations among energy commodities relying on a mixed-frequency approach that exploits information from the number of weekly deaths related to COVID-19 in the United States. The mixed-frequency approach takes advantage of the MIxing-Data Sampling (MIDAS) methods. We compare our results to those obtained by employing two well-known models that do not account for the COVID-19 low-frequency variable, namely the Dynamic EquiCorrelation (DECO) and corrected Dynamic Conditional Correlation (cDCC). Moreover, we consider four possible specifications of the volatility: GARCH, GJR, GARCH-MIDAS, and Double-Asymmetric GARCH-MIDAS. The empirical results show that our approach is statistically superior to other models and represents a valuable methodology that can be used for risk managers, investors, and policy makers to assess the effects of the pandemic on spillovers effects in energy markets. Full article
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Article
Management of Distribution Risks and Digital Transformation of Insurance Distribution—A Regulatory Gap in the IDD
Risks 2021, 9(8), 143; https://doi.org/10.3390/risks9080143 - 02 Aug 2021
Cited by 1 | Viewed by 1393
Abstract
The Insurance Distribution Directive (IDD) aims to regulate insurance distribution in the EU regardless of distribution channels and means. Although new technologies affect insurance distribution, the IDD does not explicitly regulate this digital transformation. Insurers and intermediaries must comply with detailed business conduct [...] Read more.
The Insurance Distribution Directive (IDD) aims to regulate insurance distribution in the EU regardless of distribution channels and means. Although new technologies affect insurance distribution, the IDD does not explicitly regulate this digital transformation. Insurers and intermediaries must comply with detailed business conduct rules that aim to counteract distribution risks. However, the IDD exempts ancillary insurance intermediaries from its scope when they meet certain conditions. The article highlights the regulatory framework on insurance, requiring insurers and intermediaries to address distribution risks, and analyses how this exemption affects the management of distribution risks in online distribution from a legal perspective. The focus on online distribution depends on the scale such distribution can achieve. The consideration of the scale allows for challenging the political choice behind the exemption of ancillary insurance intermediaries, which consists of the principle of proportionality. A regulatory proposal to counteract these adverse effects is to remove the exemption from the IDD rules for ancillary intermediaries in online distribution. Such a proposal is compliant with the principle of technological neutrality and is in line with the new legislative proposals in the Digital Services Act and Digital Markets Act. Full article
(This article belongs to the Special Issue The Risk Landscape within FinTech and InsurTech Business Models)
Article
The Efficiency of the Polish Zloty Exchange Rate Market: The Uncovered Interest Parity and Fractal Analysis Approaches
Risks 2021, 9(8), 142; https://doi.org/10.3390/risks9080142 - 01 Aug 2021
Viewed by 1025
Abstract
The study of the effectiveness of the currency market is one of the most important research problems in the field of finance. The paper aims to assess the efficiency of the Polish zloty exchange rate market. We test the market efficiency by applying [...] Read more.
The study of the effectiveness of the currency market is one of the most important research problems in the field of finance. The paper aims to assess the efficiency of the Polish zloty exchange rate market. We test the market efficiency by applying two independent approaches, one based on the Uncovered Interest Parity theory, and another based on the fractal analysis of exchange rates series. The research results show that the Uncovered Interest Parity holds only on the USD/PLN market. For EUR/PLN, JPY/PLN, CHF/PLN, MXN/PLN and TRY/PLN, the Uncovered Interest Parity hypothesis is rejected and implies the existence of the forward premium anomaly and market inefficiency. The estimated Hurst coefficient provides insight into the long-range dependence of exchange rates. The MXN/PLN, TRY/PLN and EUR/PLN exchange rates exhibit anti-persistent behaviours suggesting mean-reverting characteristics. For JPY/PLN and CHF/PLN, a high value of the Hurst exponent indicates long memory in the time series. Only for USD/PLN, we achieve the Hurst exponent closest to 0.5, which implies market efficiency. The research results obtained based on the UIP hypothesis and fractal analysis are consistent. The study reveals that the market efficiency hypothesis holds only for the most tradable Polish zloty currency pair, i.e., USD/PLN. Full article
(This article belongs to the Special Issue Quantitative Methods in Economics and Finance Ⅱ)
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Article
Mean-Reverting 4/2 Principal Components Model. Financial Applications
Risks 2021, 9(8), 141; https://doi.org/10.3390/risks9080141 - 27 Jul 2021
Cited by 1 | Viewed by 796
Abstract
In this paper, we propose a new multivariate mean-reverting model incorporating state-of-the art 4/2 stochastic volatility and a convenient principal component stochastic volatility (PCSV) decomposition for the stochastic covariance. We find a quasi closed-form characteristic function and propose analytic approximations, which aid in [...] Read more.
In this paper, we propose a new multivariate mean-reverting model incorporating state-of-the art 4/2 stochastic volatility and a convenient principal component stochastic volatility (PCSV) decomposition for the stochastic covariance. We find a quasi closed-form characteristic function and propose analytic approximations, which aid in the pricing of derivatives and calculation of risk measures. Parameters are estimated on three bivariate series, using a two-stage methodology involving method of moments and least squares. Moreover, a scaling factor is added for extra degrees of freedom to match data features. As an application, we consider investment strategies for a portfolio with two risky assets and a risk-free cash account. We calculate value-at-risk (VaR) values at a 95% risk level using both simulation-based and distribution-based methods. A comparison of these VaR values supports the effectiveness of our approximations and the potential for higher dimensions. Full article
(This article belongs to the Special Issue Risks: Feature Papers 2021)
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Article
Eliciting Risk Preferences Experimentally versus Using a General Risk Question. Does Financial Literacy Bridge the Gap?
Risks 2021, 9(8), 140; https://doi.org/10.3390/risks9080140 - 27 Jul 2021
Viewed by 1010
Abstract
The study investigates the stability of financial risk preference choices elicited from subjects by way of two methods, namely: experimentally elicited incentivized revealed risk preferences (IRRP) and (self-reported) perceived willingness to take a financial risk (PWTFR). The research further examines whether financial literacy [...] Read more.
The study investigates the stability of financial risk preference choices elicited from subjects by way of two methods, namely: experimentally elicited incentivized revealed risk preferences (IRRP) and (self-reported) perceived willingness to take a financial risk (PWTFR). The research further examines whether financial literacy (a human capital aspect) helps in reducing the gap between IRRP and PWTFR choices made by subjects. A total of 193 university students (where 53% were female) participated in the study. The subjects completed IRRP choices from four multiple price list (MPL) risk preference tasks and a financial literacy questionnaire. There is a tendency to anchor at extremes of risk-seeking behavior when subjects self-report their PWTFR choices. A paired t-test analysis of the two methods shows that the average responses from the two methods are significantly different. A random effect (RE) panel regression shows that an increase in financial literacy narrows the gap between IRRP and PWTFR choices. The study’s findings show that responses by subjects from a PWTFR general risk question (GRQ) and IRRP experiment are unstable and inconsistent. What people say in a survey does not always translate into what they do when faced with a risk preference choice dilemma. Financial literacy helps individuals to predict their risk attitudes more precisely. Full article
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Editorial
Special Issue “Interplay between Financial and Actuarial Mathematics”
Risks 2021, 9(8), 139; https://doi.org/10.3390/risks9080139 - 26 Jul 2021
Viewed by 883
Abstract
The Special Issue aims to highlight the interaction between actuarial and financial mathematics, which, due to the recent low interest rates and implications of COVID-19, requires an interlace between actuarial and financial methods, along with control theory, machine learning, mortality models, option pricing, [...] Read more.
The Special Issue aims to highlight the interaction between actuarial and financial mathematics, which, due to the recent low interest rates and implications of COVID-19, requires an interlace between actuarial and financial methods, along with control theory, machine learning, mortality models, option pricing, hedging, unit-linked contracts and drawdown analysis, among others [...] Full article
(This article belongs to the Special Issue Interplay between Financial and Actuarial Mathematics)
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