Special Issue "Risk and Financial Consequences"

A special issue of Journal of Risk and Financial Management (ISSN 1911-8074). This special issue belongs to the section "Risk".

Deadline for manuscript submissions: 31 January 2022.

Special Issue Editor

Prof. Dr. George Halkos
E-Mail Website
Guest Editor
Laboratory of Operations Research, Department of Economics, University of Thessaly, 28hs Octovriou 78, 383 33 Volos, Greece
Interests: applied statistics and econometrics; simulations of economic modelling; environmental economics; applied micro-economic with emphasis in welfare economics; air pollution; game theory; mathematical models (non-linear programming)
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Special Issue Information

Dear Colleagues,

Risk is a term that exists in everyone’s life, not only when an unexpected event occurs but in any decision someone has to make. Among those studying or working in the financial sector, there is a well-spread knowledge regarding the rational investor’s preferences. Regardless of the business sector they will choose to invest in, investors’ main goal is to maximize their profits. For that reason, investors are characterized in literature as “risk averters”. Hedging and portfolio diversification may appear to be efficient in reducing the potential loss of an investment. Great attention has been drawn to the advantages of portfolio diversification, while researchers have mentioned the ability of transferring the risk of investment through hedging, underlying that the size of the optimal hedging ratio is one of the main determinants used by decision makers apart from the cash position of the corporation. However, there are some cases which cannot be predicted. Society, which includes nature’s actions and human activities, is characterized by vulnerability and rapid changes. Nature acts independently, and a common example of that independence is tectonic plate movement. Thus, natural actions that cannot be predicted may cause significant losses, both economic and life-related. Economic losses can be due to many factors, such as the partial or total destruction of homes or business premises that will lead to reduced, if not zero, productivity. In the case of businesses, reduced productivity may affect investors’ perceptions, causing fluctuations in the share price or even volatility in the board of directors. Although disasters are associated with risk, investors tend to have a different perspective depending on the source of the disaster. More specifically, if a country is facing a natural disaster, where no one can be blamed, the foreign investors who may hold this country’s bonds will continue to trust the country due to the “innocence” of the country. On the other hand, when a firm causes a technological disaster, such as a nuclear power plant explosion, investors, if this corporation is publicly traded, will “punish” the firm by selling its shares at any price to avoid a bigger loss. Even if we exclude the case of an industrial accident, a possible excess pollution caused through production may lead to adverse publicity for the corporation. Another important issue that may have an impact on investors’ psychology can be political strategies or actions, announcements as well as extreme behaviors, such as terrorist attacks. Those cases not only increase the risk of the citizens of the regions facing those political scenarios but also that on the markets and affecting investors’ decisions. With these in mind, managing risk is an important executive responsibility for corporations and governments. Reputations which may take decades to build can be destroyed in hours or even seconds through decisions, announcements or accidents. Corporate social responsibility (CSR) is an “instrument” that has the potential to reduce these risks. Moreover, shareholders and investors, through socially responsible investing (SRI), tend to use their capital to encourage behaviors they consider responsible. In addition, due to the great attention on climate change globally, eco-friendly investments are made in an attempt to reduce pollution and the general environmental impact. Apart from the CSR strategies that corporations may follow, ISO and IMAS certifications owned by firms appear to create a more reliable environment between corporates, clients, and possible investors due to the fulfillment of the required international standards.

Prof. Dr. George Halkos
Guest Editor

Manuscript Submission Information

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Submitted manuscripts should not have been published previously, nor be under consideration for publication elsewhere (except conference proceedings papers). All manuscripts are thoroughly refereed through a single-blind peer-review process. A guide for authors and other relevant information for submission of manuscripts is available on the Instructions for Authors page. Journal of Risk and Financial Management is an international peer-reviewed open access monthly journal published by MDPI.

Please visit the Instructions for Authors page before submitting a manuscript. The Article Processing Charge (APC) for publication in this open access journal is 1200 CHF (Swiss Francs). Submitted papers should be well formatted and use good English. Authors may use MDPI's English editing service prior to publication or during author revisions.

Keywords

  • unexpected events
  • risk
  • uncertainty
  • CSR
  • panel data analysis
  • applied econometrics
  • applied statistics
  • hedging
  • risk of investment

Published Papers (13 papers)

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Research

Article
The Effects of ERM Adoption on European Insurance Firms Performance and Risks
J. Risk Financial Manag. 2021, 14(11), 554; https://doi.org/10.3390/jrfm14110554 - 16 Nov 2021
Viewed by 427
Abstract
We investigate the effects of adopting enterprise risk management (ERM) on the performance and risks of European publicly listed insurance firms. Using a dataset for 24 years, we report new results which show that ERM adopters realize significant ERM premiums after controlling for [...] Read more.
We investigate the effects of adopting enterprise risk management (ERM) on the performance and risks of European publicly listed insurance firms. Using a dataset for 24 years, we report new results which show that ERM adopters realize significant ERM premiums after controlling for other covariates and endogeneity. Several firm characteristics such as size, opacity, and the choice of external monitoring agents such as auditors are significant determinants of adopting ERM. We fill a gap in the literature by assessing the impact of adopting ERM on firm risks and report new findings for our sample, which show that ERM adopters effectively reduce firm total and systematic risks and, to a greater extent, idiosyncratic risk. Firm-level variables such as size, leverage, dividend payments events, and diversification impact firm total risk. Insurers use corporate events such as dividend payments to signal information about reducing risk. Industry and international diversification reduce firm total risk and idiosyncratic risk, respectively. Full article
(This article belongs to the Special Issue Risk and Financial Consequences)
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Article
Return Based Risk Measures for Non-Normally Distributed Returns: An Alternative Modelling Approach
J. Risk Financial Manag. 2021, 14(11), 540; https://doi.org/10.3390/jrfm14110540 - 10 Nov 2021
Viewed by 285
Abstract
Developments in the world of finance have led the authors to assess the adequacy of using the normal distribution assumptions alone in measuring risk. Cushioning against risk has always created a plethora of complexities and challenges; hence, this paper attempts to analyse statistical [...] Read more.
Developments in the world of finance have led the authors to assess the adequacy of using the normal distribution assumptions alone in measuring risk. Cushioning against risk has always created a plethora of complexities and challenges; hence, this paper attempts to analyse statistical properties of various risk measures in a not normal distribution and provide a financial blueprint on how to manage risk. It is assumed that using old assumptions of normality alone in a distribution is not as accurate, which has led to the use of models that do not give accurate risk measures. Our empirical design of study firstly examined an overview of the use of returns in measuring risk and an assessment of the current financial environment. As an alternative to conventional measures, our paper employs a mosaic of risk techniques in order to ascertain the fact that there is no one universal risk measure. The next step involved looking at the current risk proxy measures adopted, such as the Gaussian-based, value at risk (VaR) measure. Furthermore, the authors analysed multiple alternative approaches that do not take into account the normality assumption, such as other variations of VaR, as well as econometric models that can be used in risk measurement and forecasting. Value at risk (VaR) is a widely used measure of financial risk, which provides a way of quantifying and managing the risk of a portfolio. Arguably, VaR represents the most important tool for evaluating market risk as one of the several threats to the global financial system. Upon carrying out an extensive literature review, a data set was applied which was composed of three main asset classes: bonds, equities and hedge funds. The first part was to determine to what extent returns are not normally distributed. After testing the hypothesis, it was found that the majority of returns are not normally distributed but instead exhibit skewness and kurtosis greater or less than three. The study then applied various VaR methods to measure risk in order to determine the most efficient ones. Different timelines were used to carry out stressed value at risks, and it was seen that during periods of crisis, the volatility of asset returns was higher. The other steps that followed examined the relationship of the variables, correlation tests and time series analysis conducted and led to the forecasting of the returns. It was noted that these methods could not be used in isolation. We adopted the use of a mosaic of all the methods from the VaR measures, which included studying the behaviour and relation of assets with each other. Furthermore, we also examined the environment as a whole, then applied forecasting models to accurately value returns; this gave a much more accurate and relevant risk measure as compared to the initial assumption of normality. Full article
(This article belongs to the Special Issue Risk and Financial Consequences)
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Article
Managing Financial Risks while Performing International Commercial Transactions. Intertemporal Lessons from Athens in Classical Times
J. Risk Financial Manag. 2021, 14(11), 509; https://doi.org/10.3390/jrfm14110509 - 22 Oct 2021
Viewed by 303
Abstract
In this paper, we mainly focus on two institutional aspects that are related to financial risk, that is, profiteering and the use of non-fraudulent coins when performing financial transactions. We argue that these two prerequisites were important for the success of the commercially [...] Read more.
In this paper, we mainly focus on two institutional aspects that are related to financial risk, that is, profiteering and the use of non-fraudulent coins when performing financial transactions. We argue that these two prerequisites were important for the success of the commercially oriented economy of the Athenian state in comparison with its allies in the East Mediterranean during the classical period. In particular, we briefly explain the structure of the Athenian economy, and then we focus on the agoranomoi and the dokimastai, the two main financial institutions related to (i) measures against profiteering and (ii) ensuring the purity of the currency when performing commercial transactions. Then, following a game theoretical approach, we provide a fictional example as to how the two institutions functioned in practice. Our findings confirm that these institutions were crucial in reducing financial risk when performing international commercial transactions, since they provided symmetrical information on the quality and purity of the currencies circulating in the Athenian economy. In the case of the Athenian state, we further convey that measures against profiteering and the use of unadulterated currency comprise intertemporal axioms, in the sense that their importance is not merely a phenomenon of modern times, but rather, on the contrary, one that dates back to much earlier times. Full article
(This article belongs to the Special Issue Risk and Financial Consequences)
Article
Utility Indifference Option Pricing Model with a Non-Constant Risk-Aversion under Transaction Costs and Its Numerical Approximation
J. Risk Financial Manag. 2021, 14(9), 399; https://doi.org/10.3390/jrfm14090399 - 25 Aug 2021
Viewed by 315
Abstract
Our goal is to analyze the system of Hamilton-Jacobi-Bellman equations arising in derivative securities pricing models. The European style of an option price is constructed as a difference of the certainty equivalents to the value functions solving the system of HJB equations. We [...] Read more.
Our goal is to analyze the system of Hamilton-Jacobi-Bellman equations arising in derivative securities pricing models. The European style of an option price is constructed as a difference of the certainty equivalents to the value functions solving the system of HJB equations. We introduce the transformation method for solving the penalized nonlinear partial differential equation. The transformed equation involves possibly non-constant the risk aversion function containing the negative ratio between the second and first derivatives of the utility function. Using comparison principles we derive useful bounds on the option price. We also propose a finite difference numerical discretization scheme with some computational examples. Full article
(This article belongs to the Special Issue Risk and Financial Consequences)
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Article
Market Liquidity and Its Dimensions: Linking the Liquidity Dimensions to Sentiment Analysis through Microblogging Data
J. Risk Financial Manag. 2021, 14(9), 394; https://doi.org/10.3390/jrfm14090394 - 24 Aug 2021
Viewed by 444
Abstract
Market liquidity has an immediate impact on the execution of transactions in financial markets. Informed counterparty risk is often priced into market liquidity. This study investigates whether microblogging data, as a non-financial information tool, is priced along with market liquidity dimensions. The analysis [...] Read more.
Market liquidity has an immediate impact on the execution of transactions in financial markets. Informed counterparty risk is often priced into market liquidity. This study investigates whether microblogging data, as a non-financial information tool, is priced along with market liquidity dimensions. The analysis is based on the Australian Securities Exchange (ASX), and from the results, we conclude that microblogging content in pessimistic periods has a higher impact on liquidity and its dimensions. On a daily basis, pessimistic investor sentiments lead to higher trading costs, illiquidity, a larger price dispersion and a lower trading volume. Full article
(This article belongs to the Special Issue Risk and Financial Consequences)
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Article
Benchmarking—A Way of Finding Risk Factors in Business Performance
J. Risk Financial Manag. 2021, 14(5), 221; https://doi.org/10.3390/jrfm14050221 - 14 May 2021
Viewed by 616
Abstract
The purpose of this study was to emphasize that the Data Envelopment Analysis (DEA) method is an important benchmarking tool which provides necessary information for improving business performance. To fulfil the abovementioned goal, we used a sample of 48 Slovak companies involved in [...] Read more.
The purpose of this study was to emphasize that the Data Envelopment Analysis (DEA) method is an important benchmarking tool which provides necessary information for improving business performance. To fulfil the abovementioned goal, we used a sample of 48 Slovak companies involved in the field of heat supply. As their position in the economic and social environment of the country is essential, considerable attention should be paid to improving their performance. In addition to the DEA method, we applied the Best Value Method (BVM). We found that DEA is a highly important benchmarking tool, as it provides benchmarks for units that have problems with performance and helps us to reveal risk performance factors. The DEA method also allows us to determine target values of indicators. The originality of this paper is in its comparison of the results of the BVM and the DEA methods. Full article
(This article belongs to the Special Issue Risk and Financial Consequences)
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Article
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 1305
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)
Article
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 582
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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Article
Risk Perception, Accounting, and Resilience in Public Sector Organizations: A Case Study Analysis
J. Risk Financial Manag. 2021, 14(1), 4; https://doi.org/10.3390/jrfm14010004 - 24 Dec 2020
Cited by 1 | Viewed by 1005
Abstract
There are various factors that can affect an organization’s ability to overcome a crisis and the uncertainties that arise thereafter. Little is known about the process of organizational resilience and the factors that can help or prevent it. In this paper, we analyzed [...] Read more.
There are various factors that can affect an organization’s ability to overcome a crisis and the uncertainties that arise thereafter. Little is known about the process of organizational resilience and the factors that can help or prevent it. In this paper, we analyzed how public sector organizations build resilience/traits of risks awareness, and in doing that, we derived some elements that could affect the process of resilience. In particular, drawing on the conceptual framework proposed by Mallak we analyzed an in-depth case study in a public sector organization (PSO) identifying some contextual dimensions implicated in the process of building resilience. In our analysis, we identified two main elements that affect resilience: Risk perception and the use of accounting. Results shown how risk perception is perceived as a trigger, while accounting is considered as an enforcer in the process of building resilience capacity. The results also show the way accounting is implicated in the management of austerity programs and supporting the creation of a resilient public sector organization. In our case, the risk has become an opportunity for change. In the face of these budget cuts, management began refocusing the company’s mission from infrastructure maintenance to providing services with a market-based logic. Full article
(This article belongs to the Special Issue Risk and Financial Consequences)
Article
CoCDaR and mCoCDaR: New Approach for Measurement of Systemic Risk Contributions
J. Risk Financial Manag. 2020, 13(11), 270; https://doi.org/10.3390/jrfm13110270 - 03 Nov 2020
Viewed by 710
Abstract
Systemic risk is the risk that the distress of one or more institutions trigger a collapse of the entire financial system. We extend CoVaR (value-at-risk conditioned on an institution) and CoCVaR (conditional value-at-risk conditioned on an institution) systemic risk contribution measures and propose [...] Read more.
Systemic risk is the risk that the distress of one or more institutions trigger a collapse of the entire financial system. We extend CoVaR (value-at-risk conditioned on an institution) and CoCVaR (conditional value-at-risk conditioned on an institution) systemic risk contribution measures and propose a new CoCDaR (conditional drawdown-at-risk conditioned on an institution) measure based on drawdowns. This new measure accounts for consecutive negative returns of a security, while CoVaR and CoCVaR combine together negative returns from different time periods. For instance, ten 2% consecutive losses resulting in 20% drawdown will be noticed by CoCDaR, while CoVaR and CoCVaR are not sensitive to relatively small one period losses. The proposed measure provides insights for systemic risks under extreme stresses related to drawdowns. CoCDaR and its multivariate version, mCoCDaR, estimate an impact on big cumulative losses of the entire financial system caused by an individual firm’s distress. It can be used for ranking individual systemic risk contributions of financial institutions (banks). CoCDaR and mCoCDaR are computed with CVaR regression of drawdowns. Moreover, mCoCDaR can be used to estimate drawdowns of a security as a function of some other factors. For instance, we show how to perform fund drawdown style classification depending on drawdowns of indices. Case study results, data, and codes are posted on the web. Full article
(This article belongs to the Special Issue Risk and Financial Consequences)
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Article
The Implications of Derisking: The Case of Malta, a Small EU State
J. Risk Financial Manag. 2020, 13(9), 216; https://doi.org/10.3390/jrfm13090216 - 18 Sep 2020
Cited by 3 | Viewed by 745
Abstract
In this study, we explore the emerging derisking phenomenon by identifying and analysing the main factors that are affected by, and the implications of, the derisking process by focusing on the key drivers and implications of derisking specific to Malta. To do this, [...] Read more.
In this study, we explore the emerging derisking phenomenon by identifying and analysing the main factors that are affected by, and the implications of, the derisking process by focusing on the key drivers and implications of derisking specific to Malta. To do this, we carried out 32 interviews with individuals who have a good or excellent level of expertise in derisking and administered a survey, completed by 296 participants who were filtered to ensure their level of expertise, resulting in 285 valid participant surveys. In total, between the interviews and the survey, we had 317 valid participants. Findings showed that to maximise the effectiveness of derisking, one needs to find the right balance of adequately managing risks without extinguishing business needs. This implies a need for the regulations to be balanced and proportionate. This study is a relevant contributor to future derisking to be conducted in Malta and serves as a benchmark for further studies. Moreover, this research project accentuates the need for increased awareness, knowledge and expertise of derisking in Malta. Consequently, the provision of education to professionals is important so that such professionals are able to keep abreast with all the latest developments regarding derisking and AML/CFT (antimoney laundering and combatting the financing of terrorism). Full article
(This article belongs to the Special Issue Risk and Financial Consequences)
Article
Risk-Sharing and the Creation of Systemic Risk
J. Risk Financial Manag. 2020, 13(8), 183; https://doi.org/10.3390/jrfm13080183 - 17 Aug 2020
Viewed by 830
Abstract
We address the paradox that financial innovations aimed at risk-sharing appear to have made the world riskier. Financial innovations facilitate hedging idiosyncratic risks among agents; however, aggregate risks can be hedged only with liquid assets. When risk-sharing is primitive, agents self-hedge and hold [...] Read more.
We address the paradox that financial innovations aimed at risk-sharing appear to have made the world riskier. Financial innovations facilitate hedging idiosyncratic risks among agents; however, aggregate risks can be hedged only with liquid assets. When risk-sharing is primitive, agents self-hedge and hold more liquid assets; this buffers aggregate risks, resulting in few correlated failures compared to when there is greater risk sharing. We apply this insight to build a model of a clearinghouse to show that as risk-sharing improves, aggregate liquidity falls but correlated failures rise. Public liquidity injections, for example, in the form of a lender-of-last-resort can reduce this systemic risk ex post, but induce lower ex-ante levels of private liquidity, which can in turn aggravate welfare costs from such injections. Full article
(This article belongs to the Special Issue Risk and Financial Consequences)
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Article
Is Investors’ Psychology Affected Due to a Potential Unexpected Environmental Disaster?
J. Risk Financial Manag. 2020, 13(7), 151; https://doi.org/10.3390/jrfm13070151 - 12 Jul 2020
Cited by 1 | Viewed by 991
Abstract
The purpose of this paper is to approach the way investors perceive the risk associated with unexpected environmental disasters. For that reason, we examine certain types of natural and technological disasters, also known as “na-tech”. Based on the existing relevant literature and historical [...] Read more.
The purpose of this paper is to approach the way investors perceive the risk associated with unexpected environmental disasters. For that reason, we examine certain types of natural and technological disasters, also known as “na-tech”. Based on the existing relevant literature and historical sources, the most common types of such disasters are geophysical and industrial environmental disasters. After providing evidence of the historical evolution of the na-tech events and a brief description of the events included in the sample, we estimate the systematic risk of assets connected to these events. The goal is to capture possible abnormalities as well as to observe investors’ psychology of risk after the occurrence of an unexpected event. Finally, we examine whether macroeconomic factors may affect those abnormalities. The empirical findings indicate that the cases we examined did not cause significant cumulative abnormal returns. Moreover, some events caused an increase in systematic risk while surprisingly some others reduced risk, showing that investors tend to support a country and/or corporation due to their reputation. Full article
(This article belongs to the Special Issue Risk and Financial Consequences)
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