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Showing papers on "Financial risk published in 2008"


Journal ArticleDOI
TL;DR: This article developed a small open economy model to study default risk and its interaction with output, consumption, and foreign debt, which predicts that default incentives and interest rates are higher in recessions, as observed in the data.
Abstract: Recent sovereign defaults in emerging countries are accompanied by interest rate spikes and deep recessions. This paper develops a small open economy model to study default risk and its interaction with output, consumption, and foreign debt. Default probabilities and interest rates depend on incentives for repayment. Default occurs in equilibrium because asset markets are incomplete. The model predicts that default incentives and interest rates are higher in recessions, as observed in the data. The reason is that in a recession, a risk averse borrower finds it more costly to repay non-contingent debt and is more likely to default. In a quantitative exercise the model matches various features of the business cycle in Argentina such as: high volatility of interest rates, higher volatility of consumption relative to output, a negative correlation of interest rates and output and a negative correlation of the trade balance and output. The model can also predict the recent default episode in Argentina.

783 citations


Journal ArticleDOI
TL;DR: In this paper, the authors demonstrate widespread financial illiteracy among the U.S. population, particularly among specific demographic groups, such as women, African-Americans, and Hispanics.
Abstract: Increasingly, individuals are in charge of their own financial security and are confronted with ever more complex financial instruments. However, there is evidence that many individuals are not well-equipped to make sound saving decisions. This paper demonstrates widespread financial illiteracy among the U.S. population, particularly among specific demographic groups. Those with low education, women, African-Americans, and Hispanics display particularly low levels of literacy. Financial literacy impacts financial decision-making. Failure to plan for retirement, lack of participation in the stock market, and poor borrowing behavior can all be linked to ignorance of basic financial concepts. While financial education programs can result in improved saving behavior and financial decision-making, much can be done to improve these programs' effectiveness.

439 citations


Posted Content
01 Jan 2008
TL;DR: It is shown that variants of two genes that regulate dopamine and serotonin neurotransmission and have been previously linked to emotional behavior, anxiety and addiction (5-HTTLPR and DRD4) are significant determinants of risk taking in investment decisions.
Abstract: Individuals vary in their willingness to take financial risks. Here we show that variants of two genes that regulate dopamine and serotonin neurotransmission and have been previously linked to emotional behavior, anxiety and addiction (5-HTTLPR and DRD4) are significant determinants of risk taking in investment decisions. These findings provide novel evidence of a genetic basis for financial choices.

319 citations


Journal ArticleDOI
TL;DR: Wang et al. as mentioned in this paper proposed a risk model (R ) that facilitates the assessment procedure and prioritize highway construction projects, which can also be used to sort highway construction project based upon risk.

266 citations


Journal ArticleDOI
TL;DR: In this paper, the effects of government climate policy uncertainty on private investors' decision-making in the power sector are analysed using a real options approach. But the authors focus on the effects on the investment decisions of the private investors.

237 citations


Journal ArticleDOI
TL;DR: In this article, an extensive review of micro finance with the objective of building a case for Islamic banking to participate in a microfinance initiative is presented, and the use of a special purpose vehicle (SPV) is suggested as one of the possible alternatives for Islamic banks channelling funds to the poor.
Abstract: Purpose – The main purpose of this paper is to review the microfinance scheme and discuss how Islamic banks can participate in such an endeavour without actually compromising the issue of institutional viability and sustainability.Design/methodology/approach – The paper is based on an extensive review of microfinance with the objective of building a case for Islamic banking to participate in a microfinance initiative.Findings – As reviewed in this paper, microfinance requires innovative approaches beyond the traditional financial intermediary role. Among others, building human capacity through social intermediation and designing group‐based lending programmes are proven to be among the effective tools to reduce transaction costs and lower exposure to numerous financial risks in relation to providing credit to the rural poor. This paper also suggests the use of a special purpose vehicle (SPV) as one of the possible alternatives for Islamic banks channelling funds to the poor.Research limitations/implicatio...

214 citations


Journal ArticleDOI
TL;DR: Individual-level data from the Study of Assets and Health Dynamics Among the Oldest Old (AHEAD) are examined, which reveal that risky health prompts safer investment, and Elderly singles respond the most to health risk.
Abstract: This article investigates the role of self-perceived risky health in explaining continued reductions in financial risk taking after retirement. If future adverse health shocks threaten to increase the marginal utility of consumption, either by absorbing wealth or by changing the utility function, then health risk should prompt individuals to lower their exposure to financial risk. I examine individual-level data from the Study of Assets and Health Dynamics Among the Oldest Old (AHEAD), which reveal that risky health prompts safer investment. Elderly singles respond the most to health risk, consistent with a negative cross partial deriving from health shocks that impede home production. Spouses and planned bequests provide some degree of hedging. Risky health may explain 20%% of the age-related decline in financial risk taking after retirement.

192 citations


BookDOI
Adam Wagstaff1
TL;DR: An overview of the methods and issues arising in each case are provided, and empirical work in the area of financial protection in health, including the impacts of government policy is presented.
Abstract: Health systems are not just about improving health: good ones also ensure that people are protected from the financial consequences of receiving medical care Anecdotal evidence suggests health systems often perform badly in this respect, apparently with devastating consequences for households, especially poor ones and near-poor ones Two principal methods have been used to measure financial protection in health Both relate a household's out-of-pocket spending to a threshold defined in terms of living standards in the absence of the spending: the first defines spending as catastrophic if it exceeds a certain percentage of the living standards measure; the second defines spending as impoverishing if it makes the difference between a household being above and below the poverty line The paper provides an overview of the methods and issues arising in each case, and presents empirical work in the area of financial protection in health, including the impacts of government policy The paper also reviews a recent critique of the methods used to measure financial protection

182 citations


Journal ArticleDOI
TL;DR: It is suggested that money alone, channeled through insurance and infrastructure strengthening, is inadequate to address the current problems of unaffordable health care and heavy financial risk, and the future challenges posed by aging populations that are increasingly affected by noncommunicable diseases.
Abstract: Both China and India have recently committed to injecting new public funds into health care. Both countries are now deciding how best to channel the additional funds to produce benefits for their populations. In this paper we analyze how well the health care systems of China and India have performed and what determines their performance. Based on the analysis, we suggest that money alone, channeled through insurance and infrastructure strengthening, is inadequate to address the current problems of unaffordable health care and heavy financial risk, and the future challenges posed by aging populations that are increasingly affected by noncommunicable diseases.

170 citations


Journal Article
TL;DR: This paper proposes a comprehensive framework focusing on health financing rules and organizations that can be used to support countries in developing their health financing systems in the search for universal coverage.
Abstract: Introduction Out-of-pocket payments create financial barriers that prevent millions of people each year from seeking and receiving needed health services (1,2) In addition, many of those who do seek and pay for health services are confronted with financial catastrophe and impoverishment (3-5) People who do not use health services at all, of who suffer financial catastrophe are the extreme Many others might forego only some services, or suffer less severe financial consequences imposed by user charges, but people everywhere, at all income levels, seek protection from the financial risks associated with ill health A question facing all countries is how their health financing systems can achieve or maintain universal coverage of health services Recognizing this, in 2005 the Member States of WHO adopted a resolution encouraging countries to develop health financing systems aimed at providing universal coverage (6) This was defined as securing access for all to appropriate promotive, preventive, curative and rehabilitative services at an affordable cost Thus, universal coverage incorporates two complementary dimensions in addition to financial risk protection: the extent of population coverage (eg who is covered) and the extent of health service coverage (eg what is covered) In some countries it will take many years to achieve universal coverage according to the above-mentioned dimensions This paper addresses a number of key questions that countries will need to address and considers how the responses can be tailored to the specific country context In addition, it highlights the critical need to pay attention to the role of institutional arrangements and organizations in implementing universal coverage Shifting to prepayment A first important observation is that many of the world's 13 billion people on very low incomes still do not have access to effective and affordable drugs, surgeries and other interventions because of weaknesses in the health financing system (1) We investigated 116 recent household expenditure surveys from 89 countries, which allowed calculations of the consequences of paying for health services by those who do use them Up to 13% of households face financial catastrophe in any given year because of the charges associated with using health services and up to 6% are pushed below the poverty line Extrapolating the results globally suggests that around 44 million households suffer severe financial hardship and 25 million are pushed into poverty each year simply because they need to use, and pay for, health services (7) Households are considered to suffer financial catastrophe if they spend more than 40% of their disposable income--the income remaining after meeting basic food expenditure--on health services They are often forced to reduce expenditure on other essential items such as housing, clothing and the education of children to pay for health services Households are considered impoverished if health expenses push them below the poverty line Inability to access health services, catastrophic expenditure and impoverishment are strongly associated with the extent to which countries rely on out-of-pocket payments as a means of financing their health systems These payments generally take the form of fees for services (levied by public and/ or private sector providers), co-payments where insurance does not cover the full cost of care, or direct expenditure for self-treatment often for pharmaceuticals A major challenge, therefore, to the achievement of universal coverage is finding ways to more away from out-of-pocket payments towards some form of prepayment Solutions are complex, and countries' economic, social and political contexts differ, moderating the nature and speed of development of prepayment mechanisms (8) Policy norms in health financing Health financing policy, however, cannot afford to focus just on how to raise revenues …

170 citations


Posted Content
TL;DR: In this paper, the authors evaluated the performance and efficiency of the commercial and cooperative banks in Greece for the period 2003-2004, and the results indicated that commercial banks are tending to increase their accounts, to attract more customers and ameliorate their financial indices, thereby becoming more competitive and maximizing their profits.
Abstract: During the last few years, the Second Banking Directive has set out the principles of banking in the single European financial market and provided equal competitive conditions for all European banking institutions. Thus, banks have been forced to be more competitive and to implement bank rating systems to evaluate their financial risks. The present study evaluates the performance and efficiency of the commercial and cooperative banks in Greece for the period 2003-2004. Moreover, the Greek banks are rated based on their performance. The ranking result can be used to analyse the strengths and weaknesses of a bank compared to its competitors and it can serve as a basis for the construction of a rating system for Greek banks. The results obtained indicate that commercial banks are tending to increase their accounts, to attract more customers and ameliorate their financial indices, thereby becoming more competitive and maximizing their profits. Concerning the cooperative banks in Greece, the conclusions are not so uniform, since there are banks that are enjoying considerably increased profits and market shares, and others whose financial indices seem to be deteriorating.

Posted Content
TL;DR: In this article, the authors examined the effect of issue capability and gender on risk taking in the Jeopardy! game show and found that women's risk taking is more sensitive to issue capability than men's because the nature of the decision task is consistent with men's agentic orientation focused on the self.
Abstract: This article examines the joint effect of issue capability and gender on risk taking. Across three studies, the authors show that the effect of issue capability is moderated by gender, depending on the compatibility between the goal orientation of the decision maker and the nature of the decision task. For decisions that are mainly driven by achievement of gains (e.g., investment decisions), men’s risk-taking propensity is more influenced by their levels of issue capability than women’s because the nature of the decision task is consistent with men’s agentic orientation focused on the self. Conversely, for decisions that are mainly driven by avoidance of losses (e.g., insurance decisions), women’s risk taking is more sensitive to issue capability than men’s because the nature of such decisions is consistent with women’s communion orientation. The authors analyze the betting data from the Daily Double in the Jeopardy! game show (Study 1). The results show that gender moderates the effect of issue capability on the actual betting behavior in Jeopardy! In Study 2, the authors test the underlying mechanism through mediation analyses of the focus of attention. In Study 3, the authors manipulate the task nature and demonstrate that men’s risk taking is more sensitive to issue capability in investment decisions, whereas women’s risk taking is more sensitive to issue capability in insurance decisions.

Journal ArticleDOI
TL;DR: In this article, it is demonstrated that even in what may be the easiest and most reliable modeling exercise, value-at-risk forecasts from the most commonly used risk models provide very inconsistent results.

Journal ArticleDOI
TL;DR: The authors found that the more people associate themselves with masculine attributes, the more financial risks they tend to take, regardless of biological sex, and that gender priming on masculinity and femininity affected risk taking of the male sample.

Posted Content
TL;DR: In this article, the authors investigated the relationship between financial reporting risk and audit fees and found a positive statistically and economically significant relationship between risk and fees paid to Big 4 auditors.
Abstract: This study investigates whether the association between financial reporting risk and audit fees changed during 2000-2003: a time period marked by momentous and historic events for auditors. We find a positive statistically and economically significant relationship between financial reporting risk and audit fees paid to Big 4 auditors. More importantly, we predict and find that the relation between financial reporting risk and audit fees strengthened significantly in 2002 and 2003, consistent with a shift in the way auditors priced risk, likely in response to the events surrounding the Sarbanes-Oxley Act of 2002. Finally, we provide evidence that a commercially developed, comprehensive risk measure effectively proxies for an element of risk beyond what has traditionally been captured by various risk measures in audit fee models: namely, the risk that financial statements have been intentionally misstated. We believe this risk measure will be of interest to future researchers.

Journal ArticleDOI
TL;DR: The authors evaluate empirically four types of cost that may result from an international sovereign default: reputational costs, international trade exclusion costs, costs to the domestic economy through the financial system, and political costs to authorities.
Abstract: This paper evaluates empirically four types of cost that may result from an international sovereign default: reputational costs, international trade exclusion costs, costs to the domestic economy through the financial system, and political costs to the authorities. It finds that the economic costs are generally significant but short-lived, and sometimes do not operate through conventional channels. The political consequences of a debt crisis, by contrast, seem to be particularly dire for incumbent governments and finance ministers, broadly in line with what happens in currency crises.

Journal ArticleDOI
TL;DR: This paper explored the linkage between financial risk tolerance (FRT) and risk aversion and found that the two approaches to analyzing decision-making under uncertainty are strongly aligned, particularly for the female participants in their sample.
Abstract: We explore the linkage between financial risk tolerance (FRT) and risk aversion. To do this, we obtain FRT scores from a psychometrically validated survey and conduct a battery of online lottery choice experiments involving the same nonstudent participants. We contrast: real and hypothetical payoffs, low and high stakes, decisions involving gains and losses, and order effects. Our key finding is that the two approaches to analyzing decision making under uncertainty are strongly aligned. We present evidence that this is particularly the case for the female participants in our sample and when high-stake gambles are employed.

Journal ArticleDOI
TL;DR: In this article, the importance of longevity risk for the solvency of portfolios of pension annuities is analyzed, and the relative importance of micro- and macro-longevity risk for funding ratio uncertainty is assessed.
Abstract: We analyze the importance of longevity risk for the solvency of portfolios of pension annuities. We distinguish two types of mortality risk. Micro-longevity risk quantifies the risk related to uncertainty in the time of death if survival probabilities are known with certainty, while macro-longevity risk is due to uncertain future survival probabilities. We use a generalized two-factor Lee–Carter mortality model to produce forecasts of future mortality rates, and to assess the relative importance of micro- and macro-longevity risk for funding ratio uncertainty. The results show that if financial market risk is fully hedged so that uncertainty in future lifetime is the only source of uncertainty, pension funds are exposed to a substantial amount of risk. Systematic and non-systematic deviations from expected survival imply that, depending on the size of the portfolio, buffers that reduce the probability of underfunding to 2.5% at a 5-year horizon have to be of the order of magnitude of 7% to 8% of the initial value of the liabilities.

Journal ArticleDOI
TL;DR: This article found that the changes in shorter-term and longer-term risk measures vary inversely with the strength of disclosure and governance characteristics of financial services firms, and that the financial market rewarded firms with stronger disclosure and stronger governance.
Abstract: This study finds significant changes in capital market measures of risk following the passage of Sarbanes-Oxley for US financial services firms. Shorter-term measures of risk shifts are positive, on average, and consistent with the mandatory nature of the disclosure and governance provisions. Longer-term total and unsystematic risk shifts are negative, on average, and consistent with reductions in investor uncertainty as transparency improved. We find that the changes in shorter-term and longer-term risk measures vary inversely with the strength of disclosure and governance characteristics. The financial market rewarded (punished) firms with stronger (weaker) disclosure and stronger (weaker) governance.

Journal ArticleDOI
TL;DR: In this paper, the authors bring together the evidence on two asset pricing anomalies (continuation of prior returns (momentum) and market mispricing of distressed firms) using UK data, and demonstrate both these effects are driven by market underreaction to financial distress risk.
Abstract: This paper brings together the evidence on two asset pricing anomalies-continuation of prior returns (momentum) and the market mispricing of distressed firms-using UK data. Our analysis demonstrates both these effects are driven by market underreaction to financial distress risk. In particular, we find momentum is proxying for distress risk, and is largely subsumed by our distress risk factor. We also find, as with US studies, no evidence that size and book-to-market (B/M) effects in stock returns are linked to financial distress.

Journal ArticleDOI
TL;DR: In this paper, the authors show that although the resulting diversification gains make institutions appear individually less risky, financial stability does not necessarily improve since the total risks in the financial system may remain unchanged.
Abstract: Financial institutions have reached beyond their traditional activities in recent years and have become more homogenous as a result. We show that, although the resulting diversification gains make institutions appear individually less risky, financial stability does not necessarily improve since the total risks in the financial system may remain unchanged. Stability may even fall because institutions' incentives for holding liquidity and limiting their riskiness deteriorate following diversification. Optimal regulation may hence not provide a relief for diversification. However, there are also important benefits of this development. When financial institutions become more homogenous, the need for inter-institutional risk sharing decreases. The impact of any imperfections such risk sharing may be subject to is hence mitigated. Moreover, institutions then need to rely less on such risk sharing, which reduces externalities among them and lessens the need for regulating them.

Journal ArticleDOI
TL;DR: In this paper, the authors linked existing results of ecological research with bioeconomic modelling to test the financial sensitivity of bioeconomic models against fairly well documented ecological effects in mixed forests. But the results showed that ignoring ecological effects could lead to seriously biased financial results.


Reference EntryDOI
James Lam1
15 Sep 2008
TL;DR: A survey conducted by The Conference Board/Mercer Oliver Wyman indicated that 91% of 271 executives at companies with over US$1 billion in sales were either positively disposed toward or have begun implementing ERM.
Abstract: One of the reasons why risk management has received so much ongoing attention is that financial disasters seem to occur on a regular basis to remind us of the perils of “not getting it right.” Risk management problems led to the collapse of financial institutions such as Barings and Kidder, and corporations such as Enron and WorldCom. Global financial markets were threatened by the near collapse of the once high-flying Long-Term Capital Management and the resultant losses at leading financial institutions that had to fund a $3.5 billion bailout of the hedge fund. As a result of these wake-up calls and internal risk reviews, leading companies are abandoning their traditional approach of “managing risk by silos,” whereby different types of risks are the responsibility of various corporate and business units. Instead, they are adopting an enterprise risk management (ERM) approach. ERM has gained wide acceptance at global companies. The results of a 2005 survey conducted by The Conference Board/Mercer Oliver Wyman indicated that 91% of 271 executives at companies with over US$1 billion in sales were either positively disposed toward or have begun implementing ERM. Keywords: enterprise risk management; chief risk officer; risk transfer; corporate governance; stakeholder management; line management; risk analytics

Journal ArticleDOI
TL;DR: In this article, the authors explain the causes and consequences of the U.S. subprime mortgage crisis and how this crisis has led to a generalized credit crunch in other financial sectors that ultimately affects the real economy.
Abstract: This paper seeks to explain the causes and consequences of the U.S. subprime mortgage crisis, and how this crisis has led to a generalized credit crunch in other financial sectors that ultimately affects the real economy. It postulates that, despite the recent financial innovations, the financial strategies leveraging and financial risk mismatching that led to the present crisis are similar to those found in the U.S. savings-and-loan debacle of the late 1980s and in the Asian financial crisis of the late 1990s. However, these strategies are based on market innovations that have heightened, not reduced, systemic risks and financial instability. They are as the title implies: old wine in a new bottle. Going beyond these financial practices, the underlying structural causes of the crisis are located in the loose monetary policies of central banks, deregulation, and excess liquidity in financial markets that is a consequence of the kind of economic growth that produces various imbalances trade imbalances, financial sector imbalances, and wealth and income inequality.

Journal ArticleDOI
TL;DR: In this paper, an overlapping generations model where investors trade in a firm's stock is considered and it is shown that asymmetric reporting of good and bad news is value relevant as it affects the allocation of risk among future generations of shareholders.
Abstract: This paper considers an overlapping generations model where investors trade in a firm's stock. Investment risk is partly determined by the volatility of the stock price at which current investors can sell their shares to the next generation of investors. It is shown that asymmetric reporting of good and bad news is value relevant as it affects the allocation of risk among future generations of shareholders.

Journal ArticleDOI
TL;DR: This article investigated the relationship between advertising expenditure, intangible value, and risk in stock returns of restaurant firms between 2000 and 2005, and found that the level of advertising expenditure has a significant positive effect on the intangible value of the firm, suggesting that advertising expenditures could help generate intangible value in restaurant firms.

Posted Content
TL;DR: In this paper, the authors identify different sources of risk as important determinants of banks' corporate structures when expanding into new markets and identify branch-based and subsidiary-based structures as the most appropriate structures for new markets.
Abstract: We identify different sources of risk as important determinants of banks' corporate structures when expanding into new markets. Subsidiary-based corporate structures benefit from greater protection against economic risk because of affiliate-level limited liability, but are more exposed to the risk of capital expropriation than are branches. Thus, branch-based structures are preferred to subsidiary-based structures when expropriation risk is high relative to economic risk, and vice versa. Greater cross-country risk correlation and more accurate pricing of risk by investors reduce the differences between the two structures. Furthermore, the corporate structure affects bank risk taking and affiliate size.

Journal ArticleDOI
TL;DR: In this article, the effectiveness of the new liquidity facilities that the Federal Reserve established in response to the recent financial crisis is examined, by first examining their effects in relieving financial institutions' liquidity concerns and reducing the counterparty risk premiums, and then quantifying their overall effects in reducing financial strains in the interbank money market.
Abstract: This paper examines the effectiveness of the new liquidity facilities that the Federal Reserve established in response to the recent financial crisis. I develop a no-arbitrage based affine term structure model with default risk and conduct a thorough factor analysis of the counterparty default risk among major financial institutions and the underlying mortgage default risk. The new facilities' effectiveness is examined, by first separately examining their effects in relieving financial institutions' liquidity concerns and reducing the counterparty risk premiums, and then quantifying their overall effects in reducing financial strains in the inter-bank money market. Empirical results indicate that the Term Auction Facility (TAF) has a strong effect in reducing financial strains in the inter-bank money market, primarily through relieving financial institutions' liquidity concerns. Heightened uncertainty regarding the macroeconomy, financial markets, and mortgage default risk have significantly raised counterparty risk premiums among financial institutions, but have had little effect on their liquidity premiums. The Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF), however, are found to have had less discernible effects so far in relieving financial strains in the Libor market. This is consistent with market observations of a weaker interest from primary dealers in participating in the TSLF auctions than banks have shown in tapping the TAF.

Journal ArticleDOI
TL;DR: The authors investigated whether the relative bargaining power of spouses plays a role in explaining household financial risk taking, and found that women are more risk averse than men and that households exhibit less financial risk-taking as the bargaining power increases.
Abstract: This study investigates whether the relative bargaining power of spouses plays a role in explaining household financial risk taking. Traditional models assume that household decisions are made based on pooled resources and common preferences. In contrast, bargaining models hypothesize that household decisions depend on the relative bargaining power of spouses. According to bargaining models, if women are more risk averse, then households should exhibit less financial risk taking as the bargaining power of the wife increases. Results of an analysis of household financial risk taking in a sample of dual-earner, married households from the 2004 Survey of Consumer Finances are more consistent with decision making based on pooled resources rather than on the relative bargaining power of spouses.