Showing papers on "Financial risk published in 2013"

Measuring Financial Inclusion: Explaining Variation in Use of Financial Services across and within Countries

Abstract: This paper summarizes the first publicly available, user-side data set of indicators that measure how adults in 148 countries save, borrow, make payments, and manage risk We use the data to benchmark financial inclusion—the share of the population that uses formal financial services—in countries around the world, and to investigate the significant country- and individual-level variation in how adults use formal and informal financial systems to manage their day-to-day finances and plan for the future The data show that 50 percent of adults worldwide are "banked," that is, have an account at a formal financial institution, but also that account penetration varies across countries by level of economic development and across income groups within countries For the half of all adults around the world who remain unbanked, the paper documents reported barriers to account use, such as cost, distance, and documentation requirements, which may shed light on potential market failures and provide guidance to policymakers in shaping financial inclusion policies

Financial Network Systemic Risk Contributions

Abstract: We propose the realized systemic risk beta as a measure for financial companies’ contribution to systemic risk given network interdependence between firms’ tail risk exposures. Conditional on statistically pre-identified network spillover effects and market and balance sheet information, we define the realized systemic risk beta as the total time-varying marginal effect of a firm’s Value-at-Risk (VaR) on the system’s VaR. Suitable statistical inference reveals a multitude of relevant risk spillover channels and determines companies’ systemic importance in the U.S. financial system. Our approach can be used to monitor companies’ systemic importance allowing for a transparent macroprudential regulation.

The financial burden from non-communicable diseases in low- and middle-income countries: a literature review

Abstract: Non-communicable diseases (NCDs) were previously considered to only affect high-income countries. However, they now account for a very large burden in terms of both mortality and morbidity in low- and middle-income countries (LMICs), although little is known about the impact these diseases have on households in these countries. In this paper, we present a literature review on the costs imposed by NCDs on households in LMICs. We examine both the costs of obtaining medical care and the costs associated with being unable to work, while discussing the methodological issues of particular studies. The results suggest that NCDs pose a heavy financial burden on many affected households; poor households are the most financially affected when they seek care. Medicines are usually the largest component of costs and the use of originator brand medicines leads to higher than necessary expenses. In particular, in the treatment of diabetes, insulin – when required – represents an important source of spending for patients and their families. These financial costs deter many people suffering from NCDs from seeking the care they need. The limited health insurance coverage for NCDs is reflected in the low proportions of patients claiming reimbursement and the low reimbursement rates in existing insurance schemes. The costs associated with lost income-earning opportunities are also significant for many households. Therefore, NCDs impose a substantial financial burden on many households, including the poor in low-income countries. The financial costs of obtaining care also impose insurmountable barriers to access for some people, which illustrates the urgency of improving financial risk protection in health in LMIC settings and ensuring that NCDs are taken into account in these systems. In this paper, we identify areas where further research is needed to have a better view of the costs incurred by households because of NCDs; namely, the extension of the geographical scope, the inclusion of certain diseases hitherto little studied, the introduction of a time dimension, and more comparisons with acute illnesses.

Positive and Negative Corporate Social Responsibility, Financial Leverage, and Idiosyncratic Risk

Abstract: Existing research on the financial implications of corporate social responsibility (CSR) for firms has predominantly focused on positive aspects of CSR, overlooking that firms also undertake actions and initiatives that qualify as negative CSR. Moreover, studies in this area have not investigated how both positive and negative CSR affect the financial risk of firms. As such, in this research, the authors provide a framework linking both positive and negative CSR to idiosyncratic risk of firms. While investigating these relationships, the authors also analyze the moderating role of financial leverage of firms. Overall, analysis of secondary information for firms from multiple industries over the years 2000–2009 shows that CSR has a significant effect on the idiosyncratic risk of firms, with positive CSR reducing risk and negative CSR increasing it. Results also show that the reduction in risk from positive CSR is not guaranteed, with firms having high levels of financial leverage witnessing lower idiosyncratic risk reduction.

The financial burden from non-communicable diseases in low- and middle-income countries: a literature review

Abstract: Non-communicable diseases (NCDs) were previously considered to only affect high-income countries. However, they now account for a very large burden in terms of both mortality and morbidity in low- and middle-income countries (LMICs), although little is known about the impact these diseases have on households in these countries. In this paper, we present a literature review on the costs imposed by NCDs on households in LMICs. We examine both the costs of obtaining medical care and the costs associated with being unable to work, while discussing the methodological issues of particular studies. The results suggest that NCDs pose a heavy financial burden on many affected households; poor households are the most financially affected when they seek care. Medicines are usually the largest component of costs and the use of originator brand medicines leads to higher than necessary expenses. In particular, in the treatment of diabetes, insulin – when required – represents an important source of spending for patients and their families. These financial costs deter many people suffering from NCDs from seeking the care they need. The limited health insurance coverage for NCDs is reflected in the low proportions of patients claiming reimbursement and the low reimbursement rates in existing insurance schemes. The costs associated with lost income-earning opportunities are also significant for many households. Therefore, NCDs impose a substantial financial burden on many households, including the poor in low-income countries. The financial costs of obtaining care also impose insurmountable barriers to access for some people, which illustrates the urgency of improving financial risk protection in health in LMIC settings and ensuring that NCDs are taken into account in these systems. In this paper, we identify areas where further research is needed to have a better view of the costs incurred by households because of NCDs; namely, the extension of the geographical scope, the inclusion of certain diseases hitherto little studied, the introduction of a time dimension, and more comparisons with acute illnesses.

How Does Country Risk Matter for Foreign Direct Investment

Abstract: In this paper, we aim to identify the political and financial risk components that matter most for the activities of multinational corporations. Our paper is the first paper to comprehensively examine the impact of various components of not only political risk but also financial risk on inward FDI, from both long-run and short-run perspectives. Using a sample of 93 countries (including 60 developing countries) for the period 1985-2007, we find that among the political risk components, government stability, socioeconomic conditions, investment profile, internal conflict, external conflict, corruption, religious tensions, democratic accountability, and ethnic tensions have a close association with FDI flows. In particular, socioeconomic conditions, investment profile, and external conflict appear to be the most influential components of political risk in attracting foreign investment. Among the financial risk components, only exchange rate stability yields statistically significant positive coefficients when estimated only for developing countries. In contrast, current account as a percentage of exports of goods and services, foreign debt as a percentage of GDP, net international liquidity as the number of months of import cover, and current account as a percentage of GDP yield negative coefficients in some specifications. Thus, multinationals do not seem to consider seriously the financial risk of the host country.

Spread of risk across financial markets: better to invest in the peripheries

Abstract: Risk is not uniformly spread across financial markets and this fact can be exploited to reduce investment risk contributing to improve global financial stability. We discuss how, by extracting the dependency structure of financial equities, a network approach can be used to build a well-diversified portfolio that effectively reduces investment risk. We find that investments in stocks that occupy peripheral, poorly connected regions in financial filtered networks, namely Minimum Spanning Trees and Planar Maximally Filtered Graphs, are most successful in diversifying, improving the ratio between returns' average and standard deviation, reducing the likelihood of negative returns, while keeping profits in line with the general market average even for small baskets of stocks. On the contrary, investments in subsets of central, highly connected stocks are characterized by greater risk and worse performance. This methodology has the added advantage of visualizing portfolio choices directly over the graphic layout of the network.

The Role of Experience Sampling and Graphical Displays on One's Investment Risk Appetite

Abstract: Financial professionals have a great deal of discretion concerning how to relay information about the risk of financial products to their clients. This paper introduces a new risk tool to communicate the risk of investment products, and it examines how different risk-presentation modes influence risk-taking behavior and investors' recall ability of the risk-return profile of financial products. We analyze four different ways of communicating risk: i numerical descriptions, ii experience sampling, iii graphical displays, and iv a combination of these formats in the “risk tool.” Participants receive information about a risky and a risk-free fund and make an allocation between the two in an experimental investment portfolio. We find that risky allocations are elevated in both the risk tool and experience sampling conditions. Greater risky allocations in the risk tool condition are associated with decreased risk perception, increased confidence in the risky fund, and a lower estimation of the probability of a loss. In addition to these favorable perceptions of the risky fund, participants in the risk tool condition are more accurate on recall questions regarding the expected return and the probability of a loss. We find no evidence of greater dissatisfaction with returns in these conditions, and we observe a willingness to take on similar levels of risk in subsequent allocations. This paper was accepted by Teck Ho, behavioral economics.

Risk Management : History, Definition and Critique

Abstract: The study of risk management began after World War II. Risk management has long been associated with the use of market insurance to protect individuals and companies from various losses associated with accidents. Other forms of risk management, alternatives to market insurance, surfaced during the 1950s when market insurance was perceived as very costly and incomplete for protection against pure risk. The use of derivatives as risk management instruments arose during the 1970s, and expanded rapidly during the 1980s, as companies intensified their financial risk management. International risk regulation began in the 1980s, and financial firms developed internal risk management models and capital calculation formulas to hedge against unanticipated risks and reduce regulatory capital. Concomitantly, governance of risk management became essential, integrated risk management was introduced and the chief risk officer positions were created. Nonetheless, these regulations, governance rules and risk management methods failed to prevent the financial crisis that began in 2007.

Show Me the Honey! Effects of Social Exclusion on Financial Risk-Taking

Abstract: This research examines the effects of social exclusion on a critical aspect of consumer behavior, financial decision-making. Specifically, four lab experiments and one field survey uncover how feeling isolated or ostracized causes consumers to pursue riskier but potentially more profitable financial opportunities. These daring proclivities do not appear driven by impaired affect or self-esteem. Rather, interpersonal rejection exacerbates financial risk-taking by heightening the instrumentality of money (as a substitute for popularity) to obtain benefits in life. Invariably, the quest for wealth that ensues tends to adopt a riskier but potentially more lucrative road. The article concludes by discussing the implications of its findings for behavioral research as well as for societal and individual welfare.

Risk Aversion and Religion

Abstract: We use a dataset for a demographically representative sample of the Dutch population that contains a revealed preference risk attitude measure, as well as detailed information about participants’ religious background, to study three issues. First, we find strong confirmatory evidence that more religious people, as measured by church membership or attendance, are more risk averse with regard to financial risks. Second, we obtain some evidence that Protestants are more risk averse than Catholics in such tasks. Third, our data suggest that the link between risk aversion and religion is driven by social aspects of church membership, rather than by religious beliefs themselves.

The Effect of Perceived Risk on Online Shopping in Jordan

Abstract: Consumers’ perceived risk has been considered as a fundamental concern of decision making process during online shopping. For the purpose of this study, perceived risk is defined as the potential for loss in pursuing a desired outcome from online shopping. The study aimed to examine the effect of perceived risks (financial risk, product risk, time risk, delivery risk, and information security risk) on online shopping behavior in Jordan. To investigate the hypotheses of the research, data was collected from online shopping users; a survey was conducted with a sample size of 395 online shoppers among consumers who previously purchased online and mainly from the main popular online stores in Jordan, methodology was done using SPSS 17 and Amos 18. The study revealed that financial risk, product risk, delivery risk, and information security risk negatively affect online shopping behavior. The results also showed that the other two dimensions, perceived time risk, and perceived social risk have no effect on online shopping. The study has an important managerial implication; it provides marketers with the importance of consumers risk perception in order to adopt adequate risk-reduction strategies in the internet shopping environment. Keywords: Perceived Risk, Risk Dimensions, Online Shopping, Electronic Commerce, Jordan.

Risk Management: History, Definition, and Critique

Abstract: The study of risk management began after World War II. Risk management has long been associated with the use of market insurance to protect individuals and companies from various losses associated with accidents. Other forms of risk management, alternatives to market insurance, surfaced during the 1950s when market insurance was perceived as very costly and incomplete for protection against pure risk. The use of derivatives as risk management instruments arose during the 1970s, and expanded rapidly during the 1980s, as companies intensified their financial risk management. International risk regulation began in the 1980s, and financial firms developed internal risk management models and capital calculation formulas to hedge against unanticipated risks and reduce regulatory capital. Concomitantly, governance of risk management became essential, integrated risk management was introduced, and the chief risk officer positions were created. Nonetheless, these regulations, governance rules, and risk management methods failed to prevent the financial crisis that began in 2007.

How Inventory Is (Should Be) Financed: Trade Credit in Supply Chains with Demand Uncertainty and Costs of Financial Distress

Abstract: A new substantially revised version of this paper under the title of "Trade Credit, Risk Sharing, and Inventory Financing Portfolios" is available for download at: http://ssrn.com/abstract=2746645.As an integrated part of a supply contract, trade credit has intrinsic connections with supply chain contracting and inventory management. Using a model that explicitly captures the interaction of firms’ operations decisions and financial risks, this paper attempts to develop a deeper understanding of trade credit from an operational perspective. Revolving around the question of what role trade credit plays in channel coordination and inventory financing, we demonstrate that with demand uncertainty, trade credit enhances supply chain efficiency by serving as a risk-sharing mechanism. When offering trade credit, the supplier balances its impact on operational profit and costs of financial distress. Facing a trade credit contract, the retailer finances inventory using a portfolio of cash, trade credit, and short-term debt, where the structure of this inventory financing portfolio depends on the retailer’s financing need and bargaining power. Additionally, our model suggests that financial diversification, that is, employing multiple financing sources, provides an alternative explanation for the use of factoring in accounts receivable management and the decentralization of some supply chains. Finally, using a sample of firm-level data from Compustat, we find that the inventory financing pattern our model predicts exists in a wide range of firms.

Risk-Constrained Multi-Stage Wind Power Investment

Abstract: When deciding on wind power investments, three major issues arise: the production variability and uncertainty of wind facilities, the eventual future decline in wind power investment costs, and the significant financial risk involved in such investment decisions. Recognizing the above important issues, this paper proposes a risk-constrained multi-stage stochastic programming model to make optimal investment decisions on wind power facilities along a multi-stage horizon. The proposed model is illustrated using a clarifying example and a case study.

Health-related financial catastrophe, inequality and chronic illness in Bangladesh.

Abstract: Background Bangladesh has a high proportion of households incurring catastrophic health expenditure, and very limited risk sharing mechanisms. Identifying determinants of out-of-pocket (OOP) payments and catastrophic health expenditure may reveal opportunities to reduce costs and protect households from financial risk.

Boards of Directors and Financial Risk during the Credit Crisis

Abstract: Research Question/Issue This research examines the relationship between board processes and corporate financial risk. Using a unique questionnaire survey about board behavior, several measures related to board processes are developed and used to explain certain aspects of financial risk during the recent crisis. Research Findings/Insights In a sample of 141 companies with complete data collected from company chairs on both board structure and process, board process is found to be an important determinant of financial risk during the crisis of 2008–2009. In particular, financial risk is lower where non-executive directors have high effort norms and where board decision processes are characterized by a degree of cognitive conflict. The impact of cognitive conflict is, however, found to be less pronounced in boards with high levels of cohesiveness. Theoretical/Academic Implications The study provides theoretical and empirical advancement of the governance literature towards an understanding of group process-oriented views of boards' work and effectiveness. This study identifies the significance of board processes and their impact on financial risk supported by quantitative empirics. Findings of a strong relationship between board process and financial risk augment existing theories to suggest that the effects of boards work through group processes that bring executives and non-executives together in relations laced with control and collaboration. Practitioner/Policy Implications Regulators, acting post the financial crisis have produced governance codes that emphasize risk management as a key responsibility of boards. The link between board process and financial risk established in this paper provides evidence for company chairs and other directors on the possibilities and potential effectiveness of boards in discharging this responsibility.

What is systemic risk

Abstract: The traditional view of risk in a financial system is that it is the summation of individual risks within the system. However, the financial crisis that started in 2007 has driven home that this view of risk is inadequate. It is the interactions of financial institutions and markets that determine the systemic risks that drive financial crises. We identify four types of systemic risk. These are (i) panics—banking crises due to multiple equilibria; (ii) banking crises due to asset price falls; (iii) contagion; and (iv) foreign exchange mismatches in the banking system.

Exploring the link between products and services in low-income markets: Evidence from solar home systems

Abstract: One of the key challenges of energy access in emerging markets and developing countries is how to reach households and communities that are unlikely to get a grid connection in the long term or those that are connected to the grid but suffer from regular blackouts or low voltage. By surveying entrepreneurs selling Solar Home Systems (SHSs) on a commercial basis in emerging and developing countries, this study is one of the first attempts to quantify the key elements of four potential Product Service Systems (PSSs): Cash, Credit, Leasing and Fee-for-Service. Whereas the Fee-for-Service approach was found to be suitable only under certain conditions, all PSSs share two key elements for successful market deployment: one or more years of maintenance, and customer support in financing these customers' new asset. Moreover, it appears that private sector companies are in principle able to deliver SHSs to households with incomes greater than USD 1000 per year. The implications for policy makers and development aid agencies are, first, to include maintenance services into public programmes or public-private partnerships and, second, to explicitly consider financial risks for entrepreneurs (e.g. customer commitment and repayment conditions). © 2012 Elsevier Ltd.

Intrepid, Imprudent, or Impetuous?: The Effects of Gender Threats on Men's Financial Decisions

Abstract: Among the conjectured causes of the recent U.S. financial crisis is the hyper-masculine culture of Wall Street that promotes extreme risk-taking. In two experiments, we found that threats to their manhood motivated men to take greater financial risks and favor immediate (vs. delayed) fiscal rewards. In Experiment 1, men placed larger bets during a gambling game after a gender threat as compared to men in an affirmation condition. In Experiment 2, after a gender threat, men pursued an immediate financial payoff rather than waiting for interest to accrue, but only if they believed their decision was public. When the decision was private, gender-threatened men did not show the same desire for immediate reward. These results suggest that gender threats may shift men’s financial decisions toward more risky and short-sighted public choices.

Introduction to Risk Parity and Budgeting

Abstract: Although portfolio management didn’t change much during the 40 years after the seminal works of Markowitz and Sharpe, the development of risk budgeting techniques marked an important milestone in the deepening of the relationship between risk and asset management. Risk parity then became a popular financial model of investment after the global financial crisis in 2008. Today, pension funds and institutional investors are using this approach in the development of smart indexing and the redefinition of long-term investment policies. Introduction to Risk Parity and Budgeting provides an up-to-date treatment of this alternative method to Markowitz optimization. It builds financial exposure to equities and commodities, considers credit risk in the management of bond portfolios, and designs long-term investment policy. This book contains the solutions of tutorial exercices which are included in Introduction to Risk Parity and Budgeting.

Risk Protection, Service Use, and Health Outcomes Under Colombia's Health Insurance Program for the Poor

Abstract: In developing countries, the inability to smooth consumption directly reduces welfare and leads to informal risk management strategies that stifle productive activity (Paxson 1993, Townsend 1994, Morduch 1995). Because unexpected illness is a leading source of economic risk, the expansion of health insurance is therefore a public policy priority in many parts of the developing world (Gertler and Gruber 2002, GTZ, WHO, and ILO 2005, WHO 2010, Mohanan 2012).1 Such initiatives are often large, centrally-planned programs operated exclusively through the public sector – and they focus primarily on reducing the out-of-pocket price of medical care.2 An early exception is Colombia’s Regimen Subsidiado (or “Subsidized Regime,” henceforth “SR”). Introduced in 1993, the SR is a pluralistic, publicly-financed health insurance program targeted to the poor.3 Colombians meeting a proxy means-test (determined by the Sistema de Identificacion de Beneficiarios, or SISBEN) are fully-subsidized to purchase insurance from private, government-approved insurers. In contrast to the classical ‘managed competition’ model of insurance (Enthoven 1978a and 1978b), participating insurers must offer standardized benefits packages and accept standardized premiums. Insurers can, however, form restrictive medical care networks, deny reimbursement for services deemed ‘unnecessary,’ and pay health care providers in ways that encourage higher quality and lower cost medical care (through capitated payment contracts, for example – fixed payments per enrollee per month). Overall, Colombia’s SR shares features of managed care models of health insurance that emphasize cost-containment and allocative efficiency traditionally found only in wealthy countries. It therefore represents important early experience in a markedly different institutional environment. This paper studies the impact of the SR on financial risk protection, service use, and health outcomes among Colombia’s poor. Program eligibility is supposed to be determined according to a discrete threshold in the continuous SISBEN index, so in principle we could use a regression discontinuity design to do so. Because SISBEN scores are manipulated in practice (BDO and CCRP 2000, DNP 2001, DNP 2003a, and 2003b, Fresneda 2003, Camacho and Conover 2011), we instead use underlying index components collected through independent household surveys to generate our own (un-manipulated) SISBEN score calculations. We then instrument for SR enrollment with our re-constructed eligibility measure (Hahn, Todd, and Van der Klaauw 2001). In general, our estimates are robust across a variety of parametric and non-parametric specifications. Despite our strategy for addressing manipulation of eligibility, our approach has limitations. First, because we use household surveys to implement a “fuzzy” regression discontinuity design, our samples are relatively small. Second, we measure SISBEN index components after official SISBEN classification occurred, presumably resulting in a degree of measurement error. Third, due to financial shortfalls, many of Colombia’s municipios (hereafter, “counties”) used eligibility thresholds that fell short of the official one. Following Chay, McEwan, and Urquiola (2005), we therefore estimate and use county-specific thresholds. These limitations introduce noise into the regression discontinuity design and generally bias us against finding behavioral responses to the SR. We first find evidence that by the mid-2000s, the SR succeeded in protecting poor Colombians from financial risk associated with the medical costs of unexpected illness. In particular, SR enrollment appears to have reduced the variability of out-of-pocket spending for inpatient care. Despite this reduction in risk, however, we observe little evidence of meaningful portfolio choice effects (changes in the composition of household assets, human capital investments, or household consumption), perhaps because the SR falls short of providing full insurance. Our results also suggest that SR enrollment is associated with large increases in the use of traditionally under-utilized preventive services – some of which nearly doubled. Moreover, we find evidence of health improvement under the SR as well – specifically, gains along margins sensitive to the increases in preventive care that we observe. There is more mixed evidence of changes in the use of curative services (although theoretical predictions about the use of curative care are ambiguous). We conclude by discussing the underlying behavioral mechanisms that may explain our results. Because the SR is complex and multi-faceted, it is important to note that we cannot draw firm inferences about them; we emphasize this as an important direction for future research. Overall, we highlight two mechanisms that we suspect are important: high-powered supply-side incentives and the possibility that enrollees receive care from higher-quality private sector facilities.