Financial risk

About: Financial risk is a research topic. Over the lifetime, 11899 publications have been published within this topic receiving 231404 citations. The topic is also known as: economic risk.

Country Risk Components, the Cost of Capital, and Returns in Emerging Markets

Abstract: This paper examines the importance of political risk, the financial risk, and economic risk in portfolio and direct investment decisions. In addition, the components (from the International Country Risk Guide) of each of these risk measures are examined. The components of political risk include: Government Stability, Socioeconomic Conditions, Investment Profile, Internal Conflict, External Conflict, Corruption, Military in Politics, Religion in Politics, Law and Order, Ethnic Tensions, Democratic Accountability, and Bureaucracy Quality. The financial risk components include: Foreign Debt as a Percentage of GDP, Foreign Debt Service as a Percentage of Exports of Goods and Services, Current Account as a Percentage of Exports of Goods and Services, Net International Liquidity as Months of Import Cover, and Exchange Rate Stability. The Economic Risk category includes: Per Capita GDP, Real GDP Growth, Annual Inflation Rate, Budget Balance as a Percentage of GDP, and Current Account as a Percentage of GDP. First, I explore whether any of these measures contain information about future expected stock returns by conducting trading simulations. Second, I show the relation between these measures and implied costs of capital based on earnings forecasts. My results suggest that the country risk measures are correlated future equity returns - but only in emerging markets. These results are consistent with emerging markets being to some degree segmented from world capital markets.

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 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 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 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 observe a willingness to take on similar levels of risk in subsequent allocations.