Risks

12 pages, 732 KiB

Open AccessFeature PaperArticle

A Basic Asymptotic Test for Value-at-Risk Subadditivity

by Marius Hofert

Risks 2024, 12(12), 199; https://doi.org/10.3390/risks12120199 - 10 Dec 2024

An asymptotic hypothesis test for value-at-risk subadditivity is introduced and studied. The test is derived based on an equivalent formulation of the value-at-risk subadditivity inequality in terms of the distribution of the underlying risks’ sum. Its size is considered mathematically, and its power [...] Read more.

An asymptotic hypothesis test for value-at-risk subadditivity is introduced and studied. The test is derived based on an equivalent formulation of the value-at-risk subadditivity inequality in terms of the distribution of the underlying risks’ sum. Its size is considered mathematically, and its power and p-value are studied empirically for different dependence structures, strength of dependence, marginal distributions, sample sizes, number of risks and value-at-risk confidence levels. Full article

(This article belongs to the Special Issue Applied Financial and Actuarial Risk Analytics)

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15 pages, 430 KiB

Open AccessArticle

The Role of Green Credit in Bank Profitability and Stability: A Case Study on Green Banking in Indonesia

by Sutrisno Sutrisno, Agus Widarjono and Abdul Hakim

Risks 2024, 12(12), 198; https://doi.org/10.3390/risks12120198 - 10 Dec 2024

Abstract

Green credits are one of the alternative bank loans to the traditional sector. In addition, this green credit supports sustainability and environmental issues. This paper analyzes the influence of green credits on bank profits and stability in Indonesia. This study analyzed banks in [...] Read more.

Green credits are one of the alternative bank loans to the traditional sector. In addition, this green credit supports sustainability and environmental issues. This paper analyzes the influence of green credits on bank profits and stability in Indonesia. This study analyzed banks in Indonesia that provided green credits. Of 140 banks, only 35 banks disbursed green credits starting in 2019. Our study examined all banks providing green credit from 2019 to 2022 using annual data. The results of the study showed that green credits have a positive effect on profits, but green credits have no effect on bank stability. Small banks benefit from green credits in encouraging profitability. In addition, the profitability and stability of banks in Indonesia are greatly influenced by strong bank fundamentals such as capital and efficiency. This study has important implications in both theoretical and practical aspects. Because green credit supports profitability, the bank must diversify the loans in both the traditional sector as well as new sectors that are related to environmental issues and development sustainability following the theory of loan diversification. For practical implication, the Indonesian Financial Service Authority as a policymaker requires each bank to provide financing related to green credits. Full article

22 pages, 517 KiB

Open AccessArticle

Carbon Footprint, Financial Structure, and Firm Valuation: An Empirical Investigation

by István Hágen and Amanj Mohamed Ahmed

Risks 2024, 12(12), 197; https://doi.org/10.3390/risks12120197 - 6 Dec 2024

Abstract

This study aims to investigate the complex link between carbon emissions, firm value, and financial choice in regard to the GCC, a dynamic emerging economy. It also seeks to answer the question on whether the financial structure of a firm moderates the correlation [...] Read more.

This study aims to investigate the complex link between carbon emissions, firm value, and financial choice in regard to the GCC, a dynamic emerging economy. It also seeks to answer the question on whether the financial structure of a firm moderates the correlation between carbon emissions and firm value. We focus on analyzing data from non-financial firms registered on the GCC stock markets between 2010 and 2020. By applying the GLS technique, we assess the impact of carbon emissions on firm value and examine the manner in which a firm’s financial structure either enhances or hinders this relationship. The results demonstrate that there is a strong and adverse connection between carbon emissions and corporate value, as increased emissions translate into lower corporate value. The study then moves on to emphasize the critical role that capital financing plays in mitigating the detrimental effects of carbon emissions. This is accomplished by balancing both debt and equity in terms of their proper proportions (optimal capital structure). However, excessive borrowing could have adverse consequences in terms of carbon emissions on company value. Moreover, the GMM estimator is also applied to carry out a robustness check and the results are consistent with the main findings. This study highlights the significance of financial strategy in advancing sustainability and protecting business value. These findings are supported by both stakeholder and signaling theory, proving that companies can use their capital financing to signal their dedication to sustainability. These results could be used by GCC policymakers to create rules and regulations that encourage environmentally friendly corporate activities and efforts to lower emissions. The research expands the existing literature by examining the difficulties and opportunities faced by GCC firms when combining financial strategy with environmental objectives. It may be necessary to perform additional research in regard to various circumstances and for an extended period, because this study is restricted to non-financial sectors. Full article

15 pages, 1707 KiB

Open AccessFeature PaperReview

Enterprise Risk Management: Improving Embedded Risk Management and Risk Governance

by Werner Gleißner and Thomas B. Berger

Risks 2024, 12(12), 196; https://doi.org/10.3390/risks12120196 - 5 Dec 2024

Abstract

We argue for an integrated, decision-oriented enterprise risk management (ERM) system focused on value drivers rather than risk minimization and using quantitative risk aggregation based on the best available information. Our holistic view on ERM includes cultural, organizational, and technical aspects, presenting seven [...] Read more.

We argue for an integrated, decision-oriented enterprise risk management (ERM) system focused on value drivers rather than risk minimization and using quantitative risk aggregation based on the best available information. Our holistic view on ERM includes cultural, organizational, and technical aspects, presenting seven areas for more effective risk governance and resilience grounded in a robust enterprise framework. Our analysis, supported by a structured literature review, covers these seven key areas for ERM development. Our review shows that risk aggregation, quantification, and decision-making support are only covered by a few publications. The paper offers insights on linking risk management with strategic decision-making using risk aggregation techniques (Monte Carlo simulation). Full article

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24 pages, 1562 KiB

Open AccessArticle

Impact of Macroeconomic Shocks on Financial Performance and Risk Management: A Case Study of LPP SA During the COVID-19 Pandemic and the Ukraine War

by Ewelina Sokołowska, Mariusz Chmielewski and Anna Dziadkiewicz

Risks 2024, 12(12), 195; https://doi.org/10.3390/risks12120195 - 3 Dec 2024

Abstract

This study analyses the impact of two major macroeconomic shocks—the COVID-19 pandemic and the Ukraine war—on the financial stability of LPP SA, a leading apparel company in Poland and Central and Eastern Europe. This research uses the coefficient of variation to assess changes [...] Read more.

This study analyses the impact of two major macroeconomic shocks—the COVID-19 pandemic and the Ukraine war—on the financial stability of LPP SA, a leading apparel company in Poland and Central and Eastern Europe. This research uses the coefficient of variation to assess changes in financial volatility and evaluates the effectiveness of LPP SA’s risk management strategies. The findings reveal that, while the COVID-19 pandemic had a more destabilising effect on the company’s performance, the Ukraine war’s impact was mitigated by strategic diversification and resource reallocation. The study’s implications are relevant for risk management practices in the apparel industry and other consumer-driven sectors. Full article

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14 pages, 397 KiB

Open AccessArticle

The Endowment Effect in a Field Study with Risk-Reducing Instruments

by Filip Tomicki and Paweł Kuśmierczyk

Risks 2024, 12(12), 194; https://doi.org/10.3390/risks12120194 - 3 Dec 2024

Abstract

The endowment effect is a phenomenon whereby ownership increases the perceived value of goods, thereby reducing the willingness to trade. This paper presents the results of a field experiment, designed to assess the robustness of this effect when decisions concern unique, non-tangible instruments [...] Read more.

The endowment effect is a phenomenon whereby ownership increases the perceived value of goods, thereby reducing the willingness to trade. This paper presents the results of a field experiment, designed to assess the robustness of this effect when decisions concern unique, non-tangible instruments of a very high utility. Participating students were unaware of being involved in the experiment, as we monitored their decisions concerning the examination bonuses in a natural academic setting. In contrast to the majority of prior studies that focus on commodities of a known and certain value, this research examines the effect in the context of risky and ambiguous instruments, which are more difficult to evaluate. Our results strongly support the endowment effect hypothesis, proving that the effect is robust, and likely to also be observed in markets concerning high-utility, risky instruments, such as financial ones. Additionally, we find a weak level of support for the gender effect, with female respondents demonstrating a lack of bias when endowed with ambiguous instruments. The study also analyzes the efficiency of these instruments in terms of their utility in risk reduction, and the effort incentives created. Full article

1 pages, 256 KiB

Open AccessCorrection

Correction: Fanelli (2024). Mean-Reverting Statistical Arbitrage Strategies in Crude Oil Markets. Risks 12: 106

by Viviana Fanelli

Risks 2024, 12(12), 193; https://doi.org/10.3390/risks12120193 - 2 Dec 2024

Abstract

There was an error in the original publication (Fanelli 2024) [...] Full article

(This article belongs to the Special Issue Portfolio Theory, Financial Risk Analysis and Applications)

40 pages, 3639 KiB

Open AccessArticle

Nonparametric Testing for Information Asymmetry in the Mortgage Servicing Market

by Helmi Jedidi and Georges Dionne

Risks 2024, 12(12), 192; https://doi.org/10.3390/risks12120192 - 29 Nov 2024

Abstract

Our objective is to test for evidence of information asymmetry in the mortgage servicing market. Does the sale of mortgage servicing rights (MSR) by the initial lender to a second servicing institution unveil any residual asymmetric information? We are the first to analyze [...] Read more.

Our objective is to test for evidence of information asymmetry in the mortgage servicing market. Does the sale of mortgage servicing rights (MSR) by the initial lender to a second servicing institution unveil any residual asymmetric information? We are the first to analyze the originator’s selling choice of MSR. We use a large sample of U.S. mortgages that were securitized through the private-label channel during the period of January 2000 to December 2013 (more than 5 million observations). We propose a new nonparametric instrumental variable testing procedure to account for potential endogeneity. For robustness, we present parametric analyses to corroborate our results using instrumental variables. Our empirical results provide strong support for the presence of second-stage asymmetric information in the mortgage servicing market during the period of analysis and before the risk retention reform of 2014. Full article

(This article belongs to the Special Issue Financial Analysis, Corporate Finance and Risk Management)

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33 pages, 3721 KiB

Open AccessArticle

Investment Portfolio Allocation and Insurance Solvency: New Evidence from Insurance Groups in the Era of Solvency II

by Thomas Poufinas and Evangelia Siopi

Risks 2024, 12(12), 191; https://doi.org/10.3390/risks12120191 - 29 Nov 2024

Abstract

This study examines the effect of the investment portfolio structure on insurers’ solvency, as measured by the Solvency Capital Requirement ratio. An empirical sample of 88 EU-based insurance groups was analyzed to provide robust evidence of the portfolio’s impact on the Solvency Capital [...] Read more.

This study examines the effect of the investment portfolio structure on insurers’ solvency, as measured by the Solvency Capital Requirement ratio. An empirical sample of 88 EU-based insurance groups was analyzed to provide robust evidence of the portfolio’s impact on the Solvency Capital Requirement ratio from 2016 to 2022. Linear regression and supervised machine learning models, particularly extra trees regression, were used to predict the solvency ratios, with the latter outperforming the former. The investigation was supplemented with panel data analysis. Firm-specific factors, including, unit-linked and index-linked liabilities, firm size, investments in property, collective undertakings, bonds and equities, and the ratio of government bonds to corporate bonds and country-specific factors, such as life and non-life market concentration, domestic bond market development, private debt development, household spending, banking concentration, non-performing loans, and CO₂ emissions, were found to have an important effect on insurers’ solvency ratios. The novelty of this research lies in the investigation of the connection of solvency ratios with variables that prior studies have not yet explored, such as portfolio asset allocation, the life and non-life insurance market concentration, and unit-linked and index-linked products, via the employment of a battery of traditional and machine enhanced methods. Furthermore, it identifies the relation of solvency ratios with bond market development and investments in collective undertakings. Finally, it addresses the substantial solvency risks posed by the high banking sector concentration to insurers under Solvency II. Full article

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29 pages, 2944 KiB

Open AccessArticle

The Role of Credit Consortia in the Financial Structure of Sardinian Companies During the SARS-CoV-2 Crisis

by Marco Desogus, Enrico Sergi and Stefano Zedda

Risks 2024, 12(12), 190; https://doi.org/10.3390/risks12120190 - 28 Nov 2024

Abstract

In this paper, we analyzed the role of credit consortia in supporting SMEs of the Italian region of Sardinia around and during the SARS-CoV-2 pandemic crisis. Credit consortia (or credit guarantee schemes) are financial companies whose institutional role is to support small firms [...] Read more.

In this paper, we analyzed the role of credit consortia in supporting SMEs of the Italian region of Sardinia around and during the SARS-CoV-2 pandemic crisis. Credit consortia (or credit guarantee schemes) are financial companies whose institutional role is to support small firms needing bank lending who are individually weak in the bank–firm relationship. Credit consortia are particularly relevant in Italy, where they mitigate credit restrictions for SMEs by supplying guarantees to the bank, allowing for partial coverage of potential losses, providing peer-monitoring activity, and collectively negotiating more favorable interest rates and other conditions with banks. During the SARS-CoV-2 pandemic, credit consortia had a crucial role in supporting Sardinian SMEs with guarantees and obtaining government financial support. The evolution of Sardinian companies’ financial structures during the SARS-CoV-2 pandemic shows that the confidi-supported firms have low capitalization and are financially fragile yet capable of good returns. The liquidity provided by the government during the pandemic loosened these constraints, boosting the available liquidity, which translated, in short, into higher investment and higher sales. The demographics of Sardinian companies in 2019–2022 and the volumes of loans and savings showed a strengthening of debt capital payments, increased collections, and a progressive improvement of the Sardinian companies’ net financial positions. Full article

(This article belongs to the Special Issue Financial Analysis, Corporate Finance and Risk Management)

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15 pages, 3466 KiB

Open AccessArticle

The Cost of Borrowing as a Limiting Factor of Non-Life Insurance Development: The Italian Case

by Giovanni Millo

Risks 2024, 12(12), 189; https://doi.org/10.3390/risks12120189 - 27 Nov 2024

Abstract

We address the effect of local financial conditions on the demand for non-life insurance. We consider the spread between the interest rates faced by the insured on the local credit market and the return rates earned by the insurer on national or international [...] Read more.

We address the effect of local financial conditions on the demand for non-life insurance. We consider the spread between the interest rates faced by the insured on the local credit market and the return rates earned by the insurer on national or international financial markets, sketching how it influences the present value of an insurance policy; we then use the local invariance of the insurer’s returns to identify the effect on demand. Drawing on a panel of Italian provinces with ample variability in insurance density as well as borrowing conditions, we show that the demand for non-life insurance decreases with the borrowing rate. We separate between different non-life insurance lines, finding a stronger effect for the lines prevailing in advanced economic systems. Credit conditions turn out to be an important factor of non-life insurance development, and they help to explain the underdevelopment of insurance markets in Southern Italy. Full article

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23 pages, 4592 KiB

Open AccessArticle

Debt Sustainability in the Context of Population Ageing: A Risk Management Approach

by Samantha Ajovalasit, Andrea Consiglio and Davide Provenzano

Risks 2024, 12(12), 188; https://doi.org/10.3390/risks12120188 - 26 Nov 2024

Abstract

The ageing of the population has negative effects on the gross domestic product (GDP), influencing various economic and social aspects. These effects, in turn, contribute to an increase in the debt-to-GDP ratio, raising concerns about the long-term sustainability of public debt. The objective [...] Read more.

The ageing of the population has negative effects on the gross domestic product (GDP), influencing various economic and social aspects. These effects, in turn, contribute to an increase in the debt-to-GDP ratio, raising concerns about the long-term sustainability of public debt. The objective of our study is to evaluate the possible dynamics of debt sustainability with a certain level of probability. The analysis employs the stochastic modelling of risk factors influencing the debt-to-GDP ratio, particularly emphasising the economic consequences of population ageing. Using advanced risk management techniques, we aim to provide a robust assessment of how future demographic outlooks impact debt sustainability. Full article

(This article belongs to the Special Issue Integrating New Risks into Traditional Risk Management)

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19 pages, 1107 KiB

Open AccessArticle

An Empirical Implementation of the Shadow Riskless Rate

by Davide Lauria, Jiho Park, Yuan Hu, W. Brent Lindquist, Svetlozar T. Rachev and Frank J. Fabozzi

Risks 2024, 12(12), 187; https://doi.org/10.3390/risks12120187 - 26 Nov 2024

Abstract

We address the problem of asset pricing in a market where there are no risky assets. Previous work developed a theoretical model for a shadow riskless rate (SRR) for such a market, based on the drift component of the state-price deflator for that [...] Read more.

We address the problem of asset pricing in a market where there are no risky assets. Previous work developed a theoretical model for a shadow riskless rate (SRR) for such a market, based on the drift component of the state-price deflator for that asset universe. Assuming that asset prices are modeled by correlated geometric Brownian motion, in this work, we develop a computational approach to estimate the SRR from empirical datasets. The approach employs principal component analysis to model the effects of individual Brownian motions, singular value decomposition to capture abrupt changes in the condition number of the linear system whose solution provides the SRR values, and regularization to control the rate of change of the condition number. Among other uses such as option pricing and developing a term structure of interest rates, the SRR can be used as an investment discriminator between different asset classes. We apply this computational procedure to markets consisting of various groups of stocks, encompassing different asset types and numbers. The theoretical and computational analysis provides the drift as well as the total volatility of the state-price deflator. We investigate the time trajectory of these two descriptive components of the state-price deflator for the empirical datasets. Full article

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14 pages, 650 KiB

Open AccessArticle

The Effect of Risk Management on Direct and Indirect Capital Structure Deviations

by Xiaoyi Li and Yung-Ming Shiu

Risks 2024, 12(12), 186; https://doi.org/10.3390/risks12120186 - 25 Nov 2024

Abstract

This study explores the effect of risk management on capital structure deviations. Specifically, we innovatively classify capital structure deviations into direct and indirect deviations, with our classification being based on deviations resulting mainly from changes in either actual or target leverage. Thus, if [...] Read more.

This study explores the effect of risk management on capital structure deviations. Specifically, we innovatively classify capital structure deviations into direct and indirect deviations, with our classification being based on deviations resulting mainly from changes in either actual or target leverage. Thus, if the variation in the actual leverage exceeds the variation in the target leverage, this deviation is considered direct. Conversely, if the target leverage varies more than the actual leverage, it is considered an indirect deviation. Our results reveal that risk management can help reduce these deviations, which mainly result from changes in actual leverage. We further demonstrate that insurers with direct deviations adjust their capital structure approximately 29.2% faster than insurers with indirect deviations. Full article

(This article belongs to the Special Issue Risk Management for Capital Markets)

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22 pages, 2127 KiB

Open AccessArticle

Does ESG Predict Business Failure in Brazil? An Application of Machine Learning Techniques

by Mehwish Kaleem, Hassan Raza, Sumaira Ashraf, António Martins Almeida and Luiz Pinto Machado

Risks 2024, 12(12), 185; https://doi.org/10.3390/risks12120185 - 25 Nov 2024

Abstract

The aim of this study is to explore the influence of environmental, social, and governance (ESG) factors on business failure in Brazil by employing advanced machine learning techniques. We collected data from 235 companies and conducted principal component analysis (PCA) on 40 variables [...] Read more.

The aim of this study is to explore the influence of environmental, social, and governance (ESG) factors on business failure in Brazil by employing advanced machine learning techniques. We collected data from 235 companies and conducted principal component analysis (PCA) on 40 variables already used in the bankruptcy failure literature, resulting in the formation of seven variables that predict business failure. The results indicate that ESG factors significantly predict business failure in Brazil. This study has implications for investors, policymakers, and business leaders, offering a more precise tool for risk assessment and strategic decision-making. Full article

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23 pages, 3480 KiB

Open AccessArticle

Research Trends in Going Concern Assessment and Financial Distress in Last Two Decades: A Bibliometric Analysis

by Dorotheea-Beatrice-Ruxandra Chiosea and Camelia-Daniela Hategan

Risks 2024, 12(12), 184; https://doi.org/10.3390/risks12120184 - 25 Nov 2024

Abstract

Over time, companies have faced many crises that have impacted their capacity to remain operational in the market. When going through periods of financial distress, companies must find solutions to face the risks and to fulfill the going concern assumption, which is an [...] Read more.

Over time, companies have faced many crises that have impacted their capacity to remain operational in the market. When going through periods of financial distress, companies must find solutions to face the risks and to fulfill the going concern assumption, which is an essential principle in accounting and also of major importance in financial-statements auditing. The research objective is to identify the research trends and approaches in the fields of going concern and financial distress. To achieve this purpose, a bibliometric analysis was carried out of the articles published in the journals indexed in Web of Science Clarivate Analytics (WoS) for the period 2004–2023. The selection criteria was based on instances of the keywords “going concern” and “financial distress” appearing in a sample of 2.859 articles. The results highlighted that these fields represent a domain of interest in the research, with the trend being most pronounced in the area of financial distress, since 2018. Based on the content analysis of the most influential articles, the main topics addressed were related to audit quality and aspects related to management and corporate governance. Thus, it is confirmed that the area of financial distress and going concern assessment is a widely studied one, and the studies made can provide essential information to overcome the difficult periods that a company can go through. Full article

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15 pages, 648 KiB

Open AccessFeature PaperArticle

Dynamic Programming for Designing and Valuing Two-Dimensional Financial Derivatives

by Malek Ben-Abdellatif, Hatem Ben-Ameur, Rim Chérif and Bruno Rémillard

Risks 2024, 12(12), 183; https://doi.org/10.3390/risks12120183 - 21 Nov 2024

Abstract

We use dynamic programming, finite elements, and parallel computing to design and evaluate two-dimensional financial derivatives. Our dynamic program is flexible, as it divides the evaluation process into two components: one related to the dynamics of the underlying process and the other to [...] Read more.

We use dynamic programming, finite elements, and parallel computing to design and evaluate two-dimensional financial derivatives. Our dynamic program is flexible, as it divides the evaluation process into two components: one related to the dynamics of the underlying process and the other to the characteristics of the financial derivative. It is efficient as it uses local polynomials at each step of the backward recursion to approximate the option value function, while it assumes only a numerical (but not a statistical) error and a state (but not a time) discretization. Parallel computing is used to speed up the model resolution and enhance its overall efficiency. To support our construction, we evaluate American options, which are subject to market risk, and exchangeable bonds, which are subject to default risk. Full article

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30 pages, 525 KiB

Open AccessArticle

Navigating Dividend Decisions: The Impact of Outsider CEOs in Imputation Tax Environments

by Ariful Hoque, Md Rayhan Islam and Shahadat Hossain

Risks 2024, 12(11), 182; https://doi.org/10.3390/risks12110182 - 19 Nov 2024

Abstract

This study examines the influence of outsider CEOs on corporate dividend policies, specifically within the framework of an imputation tax environment, like in Australia. The study analyses 9826 firm-year observations from Australian firms listed on the ASX from 2012 to 2021. The study [...] Read more.

This study examines the influence of outsider CEOs on corporate dividend policies, specifically within the framework of an imputation tax environment, like in Australia. The study analyses 9826 firm-year observations from Australian firms listed on the ASX from 2012 to 2021. The study reveals that outsider CEOs tend to distribute lower dividend payouts; a trend observed even after robustness tests. Methodologically, the study addresses potential endogeneity issues through sophisticated methods like propensity score matching, difference-in-difference approach, and two-stage system generalized method of moments. The findings indicate that firms led by outsider CEOs, particularly those with specialized industry knowledge, are more inclined to invest undistributed profits in capital expenditure projects, reflecting an investment-oriented strategy. This research contributes significantly to understanding the strategic decision-making of outsider CEOs and their impact on dividend policies in specific tax environments. Full article

19 pages, 692 KiB

Open AccessArticle

Climate-Related Default Probabilities

by Augusto Blanc-Blocquel, Luis Ortiz-Gracia and Simona Sanfelici

Risks 2024, 12(11), 181; https://doi.org/10.3390/risks12110181 - 14 Nov 2024

Abstract

Climate risk refers to the risks associated with climate change and has already started to impact various sectors of the economy. In this work, we focus on the impact of physical risk on the probability of default for a firm in the agribusiness [...] Read more.

Climate risk refers to the risks associated with climate change and has already started to impact various sectors of the economy. In this work, we focus on the impact of physical risk on the probability of default for a firm in the agribusiness sector. The probability of default is estimated based on the Merton model, where the firm defaults when its asset value falls below the threshold defined by its liabilities. We study the relationship between the stock value of the firm and global surface temperature anomalies, observing that an increase in temperature negatively affects the stock value and, consequently, the asset value of the firm. A decrease in the asset value of the firm translates into an increase in its probability of default. We also propose a model to assess the exposure of the firm to transition risk. Full article

(This article belongs to the Special Issue Integrating New Risks into Traditional Risk Management)

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