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33 pages, 6638 KiB

Open AccessArticle

Optimal Monetary and Fiscal Policies to Maximise Non-Parallel Risk Premia in Sovereign Bond Markets

by Sanveer Hariparsad and Eben Maré

J. Risk Financial Manag. 2024, 17(11), 510; https://doi.org/10.3390/jrfm17110510 - 15 Nov 2024

Cited by 1 | Viewed by 1396

In this paper, we analysed several emerging market (EM) and developed market (DM) sovereign yield curves to identify the proportion of parallel and non-parallel shifts over time. We found that non-parallel shifts are more prevalent in EM due to higher political and economic [...] Read more.

In this paper, we analysed several emerging market (EM) and developed market (DM) sovereign yield curves to identify the proportion of parallel and non-parallel shifts over time. We found that non-parallel shifts are more prevalent in EM due to higher political and economic risks. Key drivers include systemic risk events like wars, debt distress, and pandemics. By backtesting a long butterfly strategy to extract non-parallel risk premia from June 2007 to March 2024, we observed that steeper slopes and greater curvature result in higher returns. We also quantified monetary and fiscal regimes to determine what types of policies are required to extract non-parallel risk premia from these sovereign yield curves. Our research suggests that countries with opposing monetary and fiscal policies possess higher return opportunities whilst countries with complementing policies require tactical butterfly strategies to optimise returns. Full article

(This article belongs to the Special Issue Monetary Policy in a Globalized World)

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20 pages, 592 KiB

Open AccessArticle

Durable Consumption-Based Asset Pricing Model with Foreign Factors for the Korean Stock Market

by Cheol-Keun Cho and Bosung Jang

Int. J. Financial Stud. 2023, 11(2), 62; https://doi.org/10.3390/ijfs11020062 - 24 Apr 2023

Cited by 1 | Viewed by 2481

Abstract

This paper explores the implications of consumption heterogeneity between domestic and foreign investors on the cross-section of stock returns in a host country. We argue that foreign investors in a small open economy integrated into global financial markets may face consumption risk, which [...] Read more.

This paper explores the implications of consumption heterogeneity between domestic and foreign investors on the cross-section of stock returns in a host country. We argue that foreign investors in a small open economy integrated into global financial markets may face consumption risk, which could result in risk premia being reflected in stock returns. To account for the potential influence of foreign investors on asset prices in a host country, we develop a two-country durable consumption model under market incompleteness, which extends the one-country durable consumption model. The proposed model includes both domestic and foreign pricing factors. We investigate the empirical performance of our model with Fama–French portfolios for Korea, taking U.S. investors as representative foreign investors. The empirical results advocate the two-country durable consumption model, confirming the significant role of foreign factors in the cross-section of domestic stock returns. Additionally,

R^{2}

tests conducted with different sets of test assets show that the explanatory power of our model is comparable to that of the Fama–French three-factor model. Full article

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7 pages, 194 KiB

Open AccessArticle

Website Premia for Extensive Margins of International Firm Activities: Evidence for SMEs from 34 Countries

by Joachim Wagner

Economies 2022, 10(10), 250; https://doi.org/10.3390/economies10100250 - 11 Oct 2022

Cited by 4 | Viewed by 1757

Abstract

This paper uses firm-level data from the Flash Eurobarometer 421 survey conducted in June 2015 in 34 European countries to investigate the link between having a website and international firm activities in small- and medium-sized enterprises (SMEs). We find that firms that are [...] Read more.

This paper uses firm-level data from the Flash Eurobarometer 421 survey conducted in June 2015 in 34 European countries to investigate the link between having a website and international firm activities in small- and medium-sized enterprises (SMEs). We find that firms that are present on the web more often export, import, engage in research and development cooperation with international partners, work as subcontractors for firms from other countries, use firms in other countries as subcontractors, and perform foreign direct investments—both inside and outside the European Union. The estimated website premia are statistically highly significant after controlling for firm size, country, and sector of economic activity. Furthermore, the size of these premia can be considered to be large. Internationally active firms tend to have a website. Full article

(This article belongs to the Special Issue Focused Issues and Trends in Economic Research from Germany)

18 pages, 1972 KiB

Open AccessEditor’s ChoiceArticle

Willingness to Pay for Food Labelling Schemes in Vietnam: A Choice Experiment on Water Spinach

by Duc Tran, Ieben Broeckhoven, Yung Hung, Nguyen Hoang Diem My, Hans De Steur and Wim Verbeke

Foods 2022, 11(5), 722; https://doi.org/10.3390/foods11050722 - 28 Feb 2022

Cited by 21 | Viewed by 6637

Abstract

The growing concern for food safety and quality motivates governments and private sectors to improve consumers’ confidence in food systems, such as through adopting certifications and traceability systems. The recent emergence of diverse food labelling schemes and the turbulence in food systems in [...] Read more.

The growing concern for food safety and quality motivates governments and private sectors to improve consumers’ confidence in food systems, such as through adopting certifications and traceability systems. The recent emergence of diverse food labelling schemes and the turbulence in food systems in emerging countries have sparked questions about consumers’ valuation of such labels. Nonetheless, little is known on how the familiarity with, trust in and knowledge of these food labelling schemes affect consumers’ willingness to pay for labelling schemes in emerging market contexts. This study aims to address these literature gaps by investigating consumers’ valuation of existing certifications, branding and traceability labelling schemes in Vietnam. A face-to-face survey was conducted, including a discrete choice experiment on water spinach in Ho Chi Minh City, Vietnam. The findings indicated that Vietnamese consumers are generally willing to pay price premia for food labelling schemes, such as VietGAP certification, EU and USDA organic certifications, private branding and traceable Quick Response (QR) coding. While familiarity and understanding had no significant impact on Vietnamese consumers’ valuation, trust was found to be a critical factor shaping willingness to pay for products bearing VietGAP label. Policy implications and marketing strategies for organic certifications and traceability schemes in Vietnam are discussed. Full article

(This article belongs to the Special Issue Research on Influencing Factors of Food Choice and Food Consumption)

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29 pages, 5589 KiB

Open AccessArticle

The Effects of the COVID-19 Crisis on Risk Factors and Option-Implied Expected Market Risk Premia: An International Perspective

by Belén Nieto and Gonzalo Rubio

J. Risk Financial Manag. 2022, 15(1), 13; https://doi.org/10.3390/jrfm15010013 - 3 Jan 2022

Cited by 5 | Viewed by 4357

Abstract

Institutional investors often have to decide which strategy to use across international business cycles. This is especially important during economic and financial crises. The exogenous nature of the outbreak of the dramatic COVID-19 crisis represents a unique opportunity to understand the performance of [...] Read more.

Institutional investors often have to decide which strategy to use across international business cycles. This is especially important during economic and financial crises. The exogenous nature of the outbreak of the dramatic COVID-19 crisis represents a unique opportunity to understand the performance of risk factors during severe economic times across international stock markets. Even more important is to analyze how these factors behave across very different economic crises, such as the COVID-19 pandemic and the Great Recession. Although, the overall results show that the momentum and quality factors are the winners, with the value factor as the loser, this research also reports different responses of factors across crises and countries. The size, value, and defensive factors tend to perform worse during the health crisis relative to the Great Recession, while the momentum factor shows a poor performance during the financial crisis, but a positive one during the outbreak of COVID-19. The quality factor is an extraordinary defensive factor in both crises. Similarly, this paper reports heterogeneous responses of option-implied expected market risk premia across alternative stock market indices, and between the Great Recession and the COVID-19 crisis. Full article

(This article belongs to the Special Issue COVID-19’s Risk Management and Its Impact on the Economy)

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17 pages, 2017 KiB

Open AccessArticle

Multi-Asset Value Payoff: Is Recent Underperformance Cyclical?

by Yesim Tokat-Acikel, Marco Aiolfi and Yiwen Jin

J. Risk Financial Manag. 2021, 14(10), 477; https://doi.org/10.3390/jrfm14100477 - 11 Oct 2021

Cited by 1 | Viewed by 3442

Abstract

Recent value factor underperformance has called into question whether the value factor payoff is cyclically low, or if there are more structural challenges. We use a new approach to explore a link between the well-known macroeconomic exposures of traditional asset classes and those [...] Read more.

Recent value factor underperformance has called into question whether the value factor payoff is cyclically low, or if there are more structural challenges. We use a new approach to explore a link between the well-known macroeconomic exposures of traditional asset classes and those of value premia in a multi-asset context, focusing on country equities, bonds, and currencies in developed markets. Taking advantage of the cross-country inflation and growth expectations implicit in every value portfolio, we derive the net inflation and real growth characteristics embedded in each asset class carry portfolio at each point in time. Our analysis provides several insights: (1) Multi-asset value payoff is only weakly related to the global business cycle. (2) However, we find that the payoff to value portfolios is strongly linked to relative growth and inflation expectations across countries. (3) Over the last decade, we find that cheaper assets have had much lower net relative macro exposures compared to earlier time periods. This characteristic coincides with the period of unconventional central bank policies designed to lift global growth after the Global Financial Crisis (GFC). Full article

(This article belongs to the Special Issue Mathematical and Empirical Finance)

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15 pages, 925 KiB

Open AccessArticle

Are the Purchase Prices of Solar Energy Projects under Development Consistent with Cost of Capital Forecasts?

by Miguel Vázquez-Vázquez, Ana B. Alonso-Conde and Javier Rojo-Suárez

Infrastructures 2021, 6(7), 95; https://doi.org/10.3390/infrastructures6070095 - 22 Jun 2021

Cited by 5 | Viewed by 5408

Abstract

The reduction in construction and maintenance costs per MW of renewable energy facilities, together with low interest rates, have led to a significant growth in the purchase prices paid for these facilities in the Spanish market. This trend is shared by other European [...] Read more.

The reduction in construction and maintenance costs per MW of renewable energy facilities, together with low interest rates, have led to a significant growth in the purchase prices paid for these facilities in the Spanish market. This trend is shared by other European countries, especially for projects that hedge energy price risk incorporating power purchase agreements with third parties. In this framework, questions arise about the economic rationale of the purchase prices paid for these projects. Consequently, we develop a project evaluation model that forecasts expected cash flow and time-varying required rates of return for a standard photovoltaic plant, in order to study the extent to which foreseeable market conditions—interest rates and equity risk premia, among others—translate into economically viable buyouts. Our results suggest that purchase prices paid for these initiatives often lead to buyer returns below those that would be reasonable according to market conditions. Indeed, we find that only facilities that reach a production 23% higher than the number of hours considered in the base case provide returns that compensate long-term financing costs. However, specialised investors can exploit their relatively low cost of financing to pay prices up to 73% higher than those affordable by classic investors. Full article

(This article belongs to the Section Sustainable Infrastructures)

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19 pages, 4821 KiB

Open AccessArticle

Self-Reinforcing Electricity Price Dynamics under the Variable Market Premium Scheme

by Ulrich J. Frey, Martin Klein, Kristina Nienhaus and Christoph Schimeczek

Energies 2020, 13(20), 5350; https://doi.org/10.3390/en13205350 - 14 Oct 2020

Cited by 13 | Viewed by 2773

Abstract

We report a potential self-reinforcing design flaw in the variable market premium scheme that occurs if variable renewable energy power plants receiving a premium become price-setting in the market. A high share of renewable energy is a goal of many countries on their [...] Read more.

We report a potential self-reinforcing design flaw in the variable market premium scheme that occurs if variable renewable energy power plants receiving a premium become price-setting in the market. A high share of renewable energy is a goal of many countries on their transformation path to a sustainable future. Accordingly, policies like feed-in tariffs have been in place for many years in many countries to support investment. To foster market alignment, variable market premia have been introduced in at least 12 European countries and a further dozen additional countries world-wide. We demonstrate both with a mathematical model and different scenarios of an agent-based simulation that the combination of variable premia and a high share of hours in which renewables are price-setting may lead to a self-reinforcing downward spiral of prices if unchecked. This is caused by the market premium opening up the bidding space towards negative prices. We discuss possible objections and countermeasures and evaluate the severity of this market design flaw. Full article

(This article belongs to the Special Issue Uncertainties and Risk Management in Competitive Energy Markets)

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24 pages, 447 KiB

Open AccessArticle

The Fundamental Equity Premium and Ambiguity Aversion in an International Context

by Minh Hai Ngo, Marc Oliver Rieger and Shuonan Yuan

Risks 2018, 6(4), 128; https://doi.org/10.3390/risks6040128 - 6 Nov 2018

Cited by 2 | Viewed by 5717

Abstract

Stocks are riskier than bonds. This causes a risk premium for stocks. That the size of this premium, however, seems to be larger than risk aversion alone can explain the so-called “equity premium puzzle”. One possible explanation is the inclusion of a degree [...] Read more.

Stocks are riskier than bonds. This causes a risk premium for stocks. That the size of this premium, however, seems to be larger than risk aversion alone can explain the so-called “equity premium puzzle”. One possible explanation is the inclusion of a degree of ambiguity in stock returns to account for an additional ambiguity premium, whose size depends on the degree of ambiguity aversion among investors. It is, however, difficult to test this empirically. In this paper, we compute the first firm-level estimation of equity premium based on the internal rate of return (IRR) approach for a total of N = 28,256 companies in 54 countries worldwide. Using a survey of international data on ambiguity aversion, we find a strong and robust relation between equity premia and ambiguity aversion. Full article

19 pages, 5885 KiB

Open AccessArticle

Measuring Financial Fragmentation in the Euro Area Corporate Bond Market

by Guillaume Horny, Simone Manganelli and Benoit Mojon

J. Risk Financial Manag. 2018, 11(4), 74; https://doi.org/10.3390/jrfm11040074 - 29 Oct 2018

Cited by 13 | Viewed by 5841

Abstract

This paper analyses the determinants of euro area non-financial corporate bonds since the early 2000s, so as to gauge deviations from the law of one price. We decompose the spread between the yield of German, French, Italian and Spanish corporate bonds vis-à-vis the [...] Read more.

This paper analyses the determinants of euro area non-financial corporate bonds since the early 2000s, so as to gauge deviations from the law of one price. We decompose the spread between the yield of German, French, Italian and Spanish corporate bonds vis-à-vis the German Bund of similar maturity into country, credit and duration risk premia components via dummy regressions. We highlight three main findings. First, the initial phase of the financial crisis (2008–2009) caused an overall increase in credit risk premia. Since the beginning of 2013 credit risk premia are back to levels comparable to those preceding the financial crisis. Second, at the height of the euro area sovereign crisis (2011–2012), high credit risk premia were accompanied by strong and persistent signs of market fragmentation in Italy and Spain (but not in France). This fragmentation has reached its peak in the second half of 2012 and has started to recede only after the announcement of the OMT. Third, we provide a simple measure of financial integration across the big 4 member states of the euro area. Full article

(This article belongs to the Special Issue Corporate Debt)

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19 pages, 338 KiB

Open AccessArticle

On Long-Term Transmission Rights in the Nordic Electricity Markets

by Petr Spodniak, Mikael Collan and Mari Makkonen

Energies 2017, 10(3), 295; https://doi.org/10.3390/en10030295 - 2 Mar 2017

Cited by 7 | Viewed by 5924

Abstract

In vein with the new energy market rules drafted in the EU this paper presents and discusses two contract types for hedging the risks connected to long-term transmission rights, the financial transmission right (FTR) and the electricity price area differentials (EPAD) that are [...] Read more.

In vein with the new energy market rules drafted in the EU this paper presents and discusses two contract types for hedging the risks connected to long-term transmission rights, the financial transmission right (FTR) and the electricity price area differentials (EPAD) that are used in the Nordic electricity markets. The possibility to replicate the FTR contracts with a combination of EPAD contracts is presented and discussed. Based on historical evidence and empirical analysis of ten Nordic interconnectors and twenty bidding areas, we investigate the pricing accuracy of the replicated FTR contracts by quantifying ex-post forward risk premia. The results show that the majority of the studied FTR contain a negative risk premium, especially the monthly and the quarterly contracts. Reverse flow (unnatural) pricing was identified for two interconnectors. From a theoretical policy point of view the results imply that it may be possible to continue with the EPAD-based system by using EPAD Combos in the Nordic countries, even if FTR contracts would prevail elsewhere in the EU. In practice the pricing of bi-directional EPAD contracts is more complex and may not always be very efficient. The efficiency of the EPAD market structure should be discussed from various points of view before accepting their status quo as a replacement for FTRs in the Nordic electricity markets. Full article

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