Showing papers on "Financial risk published in 2016"
TL;DR: In this paper, the authors proposed a semi-parametric measure to estimate systemic interconnectedness across financial institutions based on tail-driven spillover effects in a high dimensional framework, where the systemically important institutions are identified conditional to their interconnectedness structure.
236 citations
TL;DR: In this paper, the authors examined the significance of an individual's financial self-efficacy in explaining their personal finance behavior, through the application of a psychometric instrument, using a 2013 survey of Australian women.
211 citations
TL;DR: In this article, the authors examine how research on banks' financial reporting, informed by the financial economics literature on banking, can generate insights about how to enhance the stability of the financial system.
Abstract: The use of accounting measures and disclosures in banks’ contracts and regulation suggests that the quality of banks’ financial reporting is central to the efficacy of market discipline and nonmarket mechanisms in limiting banks’ development of debt and risk overhangs in economic good times and in mitigating the adverse consequences of those overhangs for the stability of the financial system in downturns. This essay examines how research on banks’ financial reporting, informed by the financial economics literature on banking, can generate insights about how to enhance the stability of the financial system. We begin with a foundational discussion of how aspects of banks’ accounting and disclosures may affect stability. We then evaluate representative papers in the empirical literature on banks’ financial reporting and stability, pointing out the research design issues that empirical accounting researchers need to confront to develop well-specified tests able to generate reliably interpretable findings. To this end, we provide examples of settings amenable to addressing these issues. We conclude with considerations for accounting standard setters and financial system policy makers.
158 citations
TL;DR: In this paper, the spillover effect between the U.S. market and five of the most important emerging stock markets namely those of the BRICS (Brazil, Russia, India, China and South Africa), and draws implications for portfolio risk modeling and forecasting.
151 citations
TL;DR: The authors examines the channels via which climate change and policies to mitigate it could affect a central bank's ability to meet its monetary and financial stability objectives, and argues that two types of risks are particularly relevant for central banks.
Abstract: This paper examines the channels via which climate change and policies to mitigate it could affect a central bank’s ability to meet its monetary and financial stability objectives. We argue that two types of risks are particularly relevant for central banks. First, a weather-related natural disaster could trigger financial and macroeconomic instability if it severely damages the balance sheets of households, corporates, banks, and insurers (physical risks). Second, a sudden, unexpected tightening of carbon emission policies could lead to a disorderly re-pricing of carbon-intensive assets and a negative supply shock (transition risks). Climate-related disclosure could facilitate an orderly transition to a low-carbon economy if it helps a wide range of investors better assess their financial risk exposures.
138 citations
TL;DR: This paper found that standard investments are significantly related to perceived financial literacy with an even stronger association for women than for men, while there is no relation between risk tolerance and women's sophisticated investments.
134 citations
TL;DR: This paper investigated the moderating role of perceived risk in the relationship between satisfaction, loyalty, and willingness to pay premium price (WTP), and found that the mediating effects of loyalty diminish significantly in high social risk conditions and diminish completely in high financial risk conditions.
133 citations
TL;DR: The traditional statistical models and state-of-the-art intelligent methods for financial distress forecasting are summarized, with the emphasis on the most recent achievements as the promising trend in this area.
Abstract: The assessment of financial credit risk is an important and challenging research topic in the area of accounting and finance. Numerous efforts have been devoted into this field since the first attempt last century. Today the study of financial credit risk assessment attracts increasing attentions in the face of one of the most severe financial crisis ever observed in the world. The accurate assessment of financial credit risk and prediction of business failure play an essential role both on economics and society. For this reason, more and more methods and algorithms were proposed in the past years. From this point, it is of crucial importance to review the nowadays methods applied to financial credit risk assessment. In this paper, we summarize the traditional statistical models and state-of-the-art intelligent methods for financial distress forecasting, with the emphasis on the most recent achievements as the promising trend in this area.
128 citations
TL;DR: In this article, the authors examined the relationship between efficiency and default risk in Islamic banks and conventional banks in Gulf Cooperation Countries (GCC) and three non-GCC countries over the period 2002-2010.
Abstract: We examine the relationship between efficiency and default risk in Islamic banks (IBs) and conventional banks (CBs) in Gulf Cooperation Countries (GCC) and three non-GCC countries over the period 2002–2010. To the best of our knowledge this is the first study to consider the efficiency–default risk paradigm in a comparative setup which includes IBs. Efficiency and default risk are measured using the Stochastic Frontier Approach and distance to default (Merton's model) respectively. The existence of causality/reverse causality between the two is addressed via a panel Vector Auto Regression (VAR) framework. Our analysis shows that the relationship between profit efficiency and default risk banks across the sample, for CBs and for the GCC is such that a decrease in default risk is associated with lower efficiency levels. With the single exception of IBs, the causality from profit efficiency to default risk is inversely related for all categories. For CBs, the trade-off between efficiency and risk is evident. The absence of a trade-off for IBs suggests that efficiency and default risk are plausible early warning indicators of IB instability. These findings could be of relevance to regulators in countries where both banking system co-exist.
122 citations
TL;DR: In this paper, the authors show that the complexity of financial networks may decrease the ability to mitigate systemic risk, and thus it may increase the social cost of financial crises, and that small errors on the knowledge of the network of contracts can lead to large errors in the probability of systemic defaults.
Abstract: Financial institutions form multilayer networks by engaging in contracts with each other and by holding exposures to common assets As a result, the default probability of one institution depends on the default probability of all of the other institutions in the network Here, we show how small errors on the knowledge of the network of contracts can lead to large errors in the probability of systemic defaults From the point of view of financial regulators, our findings show that the complexity of financial networks may decrease the ability to mitigate systemic risk, and thus it may increase the social cost of financial crises
111 citations
TL;DR: Denis et al. as discussed by the authors empirically test whether firms engage in risk-shifting and find that firms reduce investment risk when they approach financial distress, and that risk reduction is most prevalent among firms that have shorter maturity debt, bank debt, and tighter bank loan financial covenants.
Abstract: I empirically test whether firms engage in risk-shifting. Contrary to what risk-shifting theory predicts, I find that firms reduce investment risk when they approach financial distress. To identify the effect of distress on risk-taking, I use a natural experiment with exogenous changes to leverage. Risk reduction is most prevalent among firms that have shorter maturity debt, bank debt, and tighter bank loan financial covenants. These findings suggest that debt composition and financial covenants serve as important mechanisms to mitigate debt-equity agency conflicts, such as risk-shifting, that are not explicitly contracted on.Received January 8, 2015; accepted May 27, 2016 by Editor David Denis.
TL;DR: In this article, the authors examined the relationship between earnings smoothing and stock price crash risk and found that a higher degree of smoothing is associated with higher stock price Crash risk, but this association was less pronounced for firms with more analyst following and higher institutional shareholdings.
Abstract: Accounting standards have some built-in flexibility that allows managers to reveal their private information on business operations and innovations. However, managers may also abuse this flexibility in order to hide bad news and to obfuscate financial volatility underlying business operations. The extant literature has mixed evidence on the beneficial and detrimental roles of earnings smoothing. In this paper, we examine the relation between earnings smoothing and stock price crash risk to assess the consequences of earnings smoothing on the downside risk of shareholder wealth. We find that a higher degree of earnings smoothing is associated with greater stock price crash risk; however, this association is less pronounced for firms with more analyst following and higher institutional shareholdings. We also find that stock price crash risk increases when earnings smoothing is accompanied by cumulative positive discretionary accruals.This finding suggests that crash risk increases with earnings smoothing when the latter reflects managerial opportunism in financial reporting. Based on our findings, we caution investors about the downside investment risk of firms reporting smooth earnings, in contrast to the anecdotal belief that these firms are low in equity risk.
TL;DR: In this paper, the relationship between gender and investment risk and the role financial self-efficacy (FSE) plays was examined in a study of 182 US student subjects and found that women make less risky investments than men do and that FSE is positively related to the level of risk taken within investment portfolios.
Abstract: Evidence shows alarming numbers of US workers nearing retirement insufficiently save for this next life stage Moreover, many women invest too conservatively This finding is of particular concern as women typically live longer than men do, and thus, rely on accumulated savings for longer periods of time This study extends work in the psychology of investing by examining the relationship between gender and investment risk and the role financial self-efficacy (FSE) plays Data collected from 182 US student subjects tested the hypotheses that women make less risky investments than men do and that FSE is positively related to the level of risk taken within investment portfolios The results not only supported the hypotheses but also the analysis shows that FSE might account for the frequently observed gender difference associated with greater financial risk taking
TL;DR: Wang et al. as discussed by the authors investigated the relation between corporate philanthropy and crash risk under the unique Chinese institutional background and found that both state ownership and the 2005 split share reform attenuate the mitigating effect of corporate philanthropies on crash risk.
Abstract: How to mitigate stock price crash risk has become a focus in the theoretical and practical fields. Building on the work of Kim et al. (J Bank Finance, 43:1–13, 2014b), this paper investigates the relation between corporate philanthropy and crash risk under the unique Chinese institutional background. The results show that both state ownership and the 2005 split share reform attenuate the mitigating effect of corporate philanthropy on crash risk. Specifically, the negative relation between corporate philanthropy and crash risk is less pronounced for state-owned enterprises than for non-state-owned enterprises, and it is also less pronounced after firms accomplish the split share reform. Further, this effect is more pronounced for firms with greater financial risks and poorer performance. Our paper contributes to the growing literature on the determinants of stock price crash risk and the economic consequences of corporate philanthropy. It also offers useful guidance to firms that are seeking to reduce stock price crash risk in emerging markets.
TL;DR: In this article, the authors examined the underlying motives of producers to adopt sustainable practices and found that perceived risk is a barrier to the adoption of sustainable practices, risk tolerance is a positive moderator of the relationship between economic rewards and adoption.
Abstract: Understanding the motives and risk attitudes of producers to engage in sustainable practices is important for policy-makers who wish to increase the likelihood of adoption and improve the design of incentives. This article examines the underlying motives of producers to adopt sustainable practices. We focus on expected economic, social and personal rewards and analyse the role of producers' financial risk perception and risk tolerance. Results from personal interviews with 164 hog producers show that the adoption of sustainable practices is affected by expected economic rewards but not by social and personal rewards. Further, while perceived risk is a barrier to the adoption of sustainable practices, risk tolerance is a positive moderator of the relationship between economic rewards and adoption. In addition, perceived tax benefits and turnover have a significant positive relationship with adoption, while education and age do not play a role.
TL;DR: In this article, the authors examined the relationship between operational productivity (OP), corporate social performance (CSP), financial performance (FP), and risk and found that OP is essential for good financial performance and reduced risk, but the main effects of CSP are mixed.
Abstract: We examine the relationship between Operational Productivity (OP), Corporate Social Performance (CSP), Financial Performance (FP), and risk. Our sample frame comprises 476 firms in nine US manufacturing industries during the period 1999–2009. We employ DEA-based measures for OP and CSP, two operationalizations for FP to reflect current profitability and market value, and two operationalizations for risk to reflect bankruptcy risk and stock price volatility. We confirm that OP is essential for good financial performance and reduced risk (as expected), but the main effects of CSP are mixed. Importantly, we find that OP moderates the CSP–FP and CSP–risk relationships. Specifically, if OP is poor, CSP is of limited benefit to FP or risk. However, at or above a threshold level of OP, firms can use CSP to build upon it to yield further improvements in FP and reductions in risk. We discuss the implications of our findings for theory and practice.
TL;DR: In this paper, the authors investigated variables which are affecting investment preferences of individual investors and found that the level of financial literacy and risk perception are important factors for individual investors to make investment decisions.
TL;DR: The model shows that when financial innovation reduces the cost of diversification below a given threshold, the strength and coordination of feedback effects increase, triggering a transition from a stationary dynamics of price returns to a nonstationary one characterized by steep growths and plunges of market prices.
Abstract: By exploiting basic common practice accounting and risk-management rules, we propose a simple analytical dynamical model to investigate the effects of microprudential changes on macroprudential outcomes. Specifically, we study the consequence of the introduction of a financial innovation that allows reducing the cost of portfolio diversification in a financial system populated by financial institutions having capital requirements in the form of Value at Risk (VaR) constraint and following standard mark-to-market and risk-management rules. We provide a full analytical quantification of the multivariate feedback effects between investment prices and bank behavior induced by portfolio rebalancing in presence of asset illiquidity and show how changes in the constraints of the bank portfolio optimization endogenously drive the dynamics of the balance sheet aggregate of financial institutions and, thereby, the availability of bank liquidity to the economic system and systemic risk. The model shows that when fin...
01 Jan 2016
TL;DR: This paper found that financial market information does not bear out the predictions of financial theory and that the ratio of the market value of common equity to assets on both a risk-adjusted and risk-unadjusted basis has declined significantly from the precrisis period to the current period for most major banks.
Abstract: Since the financial crisis, there have been major changes in the regulation of large banks directed at reducing their risk. Measures of regulatory capital have substantially increased; leverage ratios have been reduced; and stress-testing has sought to further assure safety by raising levels of capital and reducing risk-taking. Standard financial theories predict that such changes would lead to substantial declines in financial market measures of risk. For major banks in the United States and around the world and for midsized banks in the United States, we test this proposition using information on stock price volatility, option-based estimates of future volatility, beta, credit default swaps, price–earnings ratios, and preferred stock yields. To our surprise, we find that financial market information does not bear out the predictions of financial theory. Measures of volatility and risk premiums today are no lower and perhaps somewhat higher than they were prior to the financial crisis. We examine a number of possible explanations for our findings. While financial markets underestimated risk prior to the crisis and regulatory measures of capital are flawed, we believe that the most important explanation for our findings is the dramatic decline in the franchise value of major banks. We highlight that the ratio of the market value of common equity to assets on both a risk-adjusted and risk-unadjusted basis has declined significantly from the precrisis period to the current period for most major banks. As a consequence, banks are more vulnerable to adverse shocks. We argue for taking a dynamic view of capital that recognizes future profits as a source of capital, and urge approaches to financial regulation supervision that will reliably force rapid capital replenishment in difficult times—something that did not take place in the United States in 2008 and is not taking place in Europe today.
TL;DR: In this paper, the authors provide an update to the risk management literature, as they compiles a survey of 65 recent theoretical and empirical studies on the topic, concluding that risk management increases firm value and returns, while reducing return and cash flow volatility.
Abstract: Purpose – This paper aims to provide an update to the risk management literature, as it compiles a survey of 65 recent theoretical and empirical studies on the topic. Design/methodology/approach – This is a survey paper that summarizes recent theoretical and empirical research regarding the relationship between risk management and firm value. Findings – Recent empirical evidence provides support for theoretical propositions in the literature that risk management increases firm value and returns, while reducing return and cash flow volatility. The results are largely consistent with early findings, and there have been significant empirical advances that address concerns regarding the endogeneity of risk management practices relative to corporate financial decisions. The literature has become broader and deeper, as there are now studies with larger sample sizes across more industries and geographic areas. Practical implications – Firms that use sound risk management practices obtain higher valuations, achie...
TL;DR: In this article, the importance of functional and financial risks in a B2B context and show that business customers' personal and psychological fears hinder their use of technology-based services.
TL;DR: It is suggested that MHI, targeted at the low-income households and tailored to suit the cultural and geographical structures in the various areas of Pakistan, may contribute towards providing protection to the households from catastrophe and impoverishment resulting from health expenditures.
Abstract: Out of pocket payments are the predominant method of financing healthcare in many developing countries, which can result in impoverishment and financial catastrophe for those affected. In 2010, WHO estimated that approximately 100 million people are pushed below the poverty line each year by payments for healthcare. Micro health insurance (MHI) has been used in some countries as means of risk pooling and reducing out of pocket health expenditure. A systematic review was conducted to assess the extent to which MHI has contributed to providing financial risk protection to low-income households in developing countries, and suggest how the findings can be applied in the Pakistani setting. We conducted a systematic search for published literature using the search terms “Community based health insurance AND developing countries”, “Micro health insurance AND developing countries”, “Mutual health insurance AND developing countries”, “mutual OR micro OR community based health insurance” “Health insurance AND impact AND poor” “Health insurance AND financial protection” and “mutual health organizations” on three databases, Pubmed, Google Scholar and Science Direct (Elsevier). Only those records that were published in the last ten years, in English language with their full texts available free of cost, were considered for inclusion in this review. Hand searching was carried out on the reference lists of the retrieved articles and webpages of international organizations like World Bank, World Health Organization and International Labour Organization. Twenty-three articles were eligible for inclusion in this systematic review (14 from Asia and 9 from Africa). Our analysis shows that MHI, in the majority of cases, has been found to contribute to the financial protection of its beneficiaries, by reducing out of pocket health expenditure, catastrophic health expenditure, total health expenditure, household borrowings and poverty. MHI also had a positive safeguarding effect on household savings, assets and consumption patterns. Our review suggests that MHI, targeted at the low-income households and tailored to suit the cultural and geographical structures in the various areas of Pakistan, may contribute towards providing protection to the households from catastrophe and impoverishment resulting from health expenditures. This paper emphasizes the need for further research to fill the knowledge gap that exists about the impact of MHI, using robust study designs and impact indicators.
TL;DR: In this paper, the authors investigated whether and how the crisis in 2008/2009 affects households' risk attitudes, subjective risk and return expectations, and planned financial risk taking using the German SAVE study and found that households that attribute losses to the crisis decreased their risk tolerance and planned risk taking; the probability of expecting an increase in risks and returns is increased.
TL;DR: In this article, the relation between personal traits, psychological biases and financial risk tolerance of inverstors were tested through a questionnaire and the hypotheses made within the scope of the study were tested by chi-square analysis and logistic regression analysis.
Abstract: In financial investment decisions to be made by individual investors, it is highly important that they should be aware of the possibility of facing with psychological biases by knowing their own personality traits and should consider their own financial risk tolerances. In this study, the relation between personal traits, psychological biases and financial risk tolerance of inverstors were tested through a questionnaire. Sample of the study were selected among individual inverstor who live in Istanbul and operate in financial markets. The hypotheses made within the scope of the study were tested by chi-square analysis and logistic regression analysis. As a result of the hypotheses testing, it was concluded that there was a significant relation between the personality traits of investors and the psychological biases they faced and that the personality traits of investors affected their financial risk tolerances.
TL;DR: In this paper, a review of the literature on sovereign CDS spreads highlights current academic debates and contrasts them with contradictory statements from the popular press, concluding that global macroeconomic risk unspanned by global financial risk bears some responsibility for the strong co-movement in sovereign spreads.
Abstract: This doctoral thesis consists of 4 self-contained chapters:Sovereign Credit Default Swap Premia. This comprehensive review of the literature on sovereign CDS spreads highlights current academic debates and contrasts them with contradictory statements from the popular press. Real Economic Shocks and Sovereign Credit Risk. New empirical evidence highlights that global macroeconomic risk unspanned by global financial risk bears some responsibility for the strong co-movement in sovereign spreads. A model with only two global macroeconomic state variables rationalizes the existence of time-varying risk premia as a compensation for exposure to common U.S. business cycle risk.The Term Structure of CDS Spreads and Sovereign Credit Risk. The term structure of CDS spreads is an informative signal about the relative importance of global and country-specific risk factors for the time variation of sovereign credit spreads. An empirically validated model illustrates how local risk matters relatively more when the slope is negative, while systematic risk bears more responsibility when the slope is positive.Squeezed Everywhere - Disentangling Types of Liquidity and Testing Limits-to-Arbitrage. The CDS-Bond basis is used as a laboratory to disentangle different types of liquidity and to test limits-of-arbitrage. While asset-specific liquidity is cross-correlated in both the cash and derivative market, funding and market liquidity matter only for the former. The tests find strong evidence in favor of margin-based asset pricing and flight-to-quality effects.
TL;DR: In this article, the authors investigated the extent to which environmental incentives influence German non-financial firms in revealing risk information in their annual report narratives and found that the decision to provide or withhold such risk information is less likely to be significantly associated with environmental incentives.
TL;DR: In this paper, the authors compare empirically the nature, level and influence of perceived risks involved in a retailer's website and stores, as multichannel shoppers will do when deciding which distribution channel to buy in.
Abstract: Purpose – The purpose of this paper is to compare empirically the nature, level and influence of perceived risks involved in a retailer’s website and stores, as multichannel shoppers will do when deciding which distribution channel to buy in. Design/methodology/approach – The research design uses an online survey of 1,015 multichannel customers that was drawn from the behavioural databases of a French multichannel retailer. Findings – Overall risk as well as risks associated with logistics, psychological and performance are higher and more dissuasive for an online purchase; however, financial, time and transaction risks tend predominantly or exclusively to discourage in-store purchasing. Customers’ familiarity with the channel seems to make them more vigilant. Research limitations/implications – The concept of risk, and especially financial risk, is variable among researchers, making it more difficult to undertake comparative studies on e-commerce than on stores or products. Practical implications – Retai...
01 Jan 2016
TL;DR: In this paper, the authors provide an overview of the important role financial risk tolerance plays in shaping consumer financial decisions and provide a review of normative and descriptive models of risk tolerance, as well as additional discussion regarding the measurement of risk-tolerance is also presented.
Abstract: This chapter provides an overview of the important role financial risk tolerance plays in shaping consumer financial decisions. A review of normative and descriptive models of risk tolerance is provided. Additional discussion regarding the measurement of risk tolerance is also presented. The chapter includes the presentation of a conceptual model of the principal factors affecting financial risk tolerance with recommendations designed to enhance the consumer finance field’s knowledge of risk tolerance. The chapter concludes with a summary of additional research needed to better understand the multidimensional nature of risk tolerance.
TL;DR: A mixed integer linear programming (MILP) formulation is proposed that integrates financial risk measures into the design and planning of closed-loop supply chains, considering demand uncertainty of final products.
TL;DR: In this article, the authors used a dynamic system GMM model and panel data of 30 Sub-Saharan African (SSA) countries from 1976 to 2010 to investigate the impact of international financial integration (IFI) on economic performance.