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.

Risk Management for Hedge Funds: Introduction and Overview

Abstract: Although risk management has been a well-plowed field in financial modeling for more than two decades, traditional risk management tools such as mean–variance analysis, beta, and Value-at-Risk do not capture many of the risk exposures of hedge-fund investments. In this article, I review several unique aspects of risk management for hedge funds—survivorship bias, dynamic risk analytics, liquidity, and nonlinearities—and provide examples that illustrate their potential importance to hedge-fund managers and investors. I propose a research agenda for developing a new set of risk analytics specifically designed for hedge-fund investments, with the ultimate goal of creating risk transparency without compromising the proprietary nature of hedge-fund investment strategies.

Managerial Agency and Bond Covenants

Abstract: Based on an analysis of the agency risk for bondholders from managerial entrenchment and fraud, we derive and test refutable hypotheses about the influence of managerial agency risk on bond covenants, using a comprehensive database of corporate bonds from the 1993--2007 period. Managerial entrenchment and the risk of managerial fraud significantly influence the use of covenants, in the direction predicted by the agency-theoretic framework. Our analysis highlights the varied effects of entrenchment on different types of agency risks faced by bondholders: Entrenched managers aggravate investment risk, but ameliorate risk from shareholder opportunism. Covenant use also responds efficiently to the quality of information available regarding the risk of managerial fraud. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Health Systems Financing and the Path to Universal Coverage

Abstract: Donor commitments to health have increased more than fourfold since the Millennium Declaration was signed in September 2000, reaching more than US$ 20 billion in 2008.1 Despite this, progress towards some of the health Millennium Development Goals (MDGs) has been disappointing in many settings.2 The simple act of raising more international funds cannot, by itself, achieve the Goals if the health system is too weak to support the rapid scale-up of service coverage.3 Where there are insufficient health workers and health facilities, or where people can’t obtain health care because they cannot afford to pay, supporting actions are needed. Domestic health financing systems must be robust enough to attain and sustain increased coverage. Financing for universal coverage is based on two interlinked foundations. The first is to ensure that financial barriers do not prevent people from using the services they need – prevention, promotion, treatment and rehabilitation. The second is to ensure that they do not suffer financial hardship because they have to pay for these services.4 Health services cost money and someone has to pay. Even with the recent increase in external funds for health in low-income countries, these countries still have to find almost 75% of their health funding in domestic sources. The way that countries raise those funds is critical. Direct payments required when people obtain care (e.g. user charges) prevent many people from seeking care in the first place, and may result in financial catastrophe, even impoverishment, for many.5 Improving universal coverage requires systems that raise the bulk of funds through forms of prepayment (e.g. taxes and/or insurance), and then pool these funds to spread the financial risk of illness across the population. They require health financing systems with inbuilt incentives to ensure that these funds are used efficiently and equitably. The World Health Organization’s next world health report will be on health financing and will argue that almost every country, rich and poor, can improve service coverage or financial risk protection by addressing one or more of the core tasks of a financing system – raising sufficient funds, pooling these funds to spread financial risks and spending wisely. The Bulletin of the World Health Organization has been running a series of news stories since December 2009, showing how health financing systems affect people’s lives. Reports have been published in the following order from Spain,6 China,7 Thailand,8 the Republic of Korea,9 Switzerland,10 Nigeria11 and, in this issue, the United States of America.12 In addition, some of the issues that policy-makers inevitably face as they develop their health financing systems are highlighted in perspectives published this month. In terms of raising more funds, Fryatt & Mills13 outline the main achievements of the high-level Taskforce on Innovative International Financing for Health Systems. They claim that it has helped maintain momentum for increased international financial support for health in low-income countries at a time of the financial crisis. In response, McCoy & Brikci14 argue that the Taskforce report was disappointing. It gave only lukewarm support to a financial transactions levy, an option targeting the banking sector, while supporting consumer taxes affecting the poorer population groups. The focus on innovative financing could also backfire by encouraging countries to renege on their commitments to provide official development assistance – in fact only a few of them have kept their international promises to date. Yates15 focuses on how funds for health are raised and makes a case for abolishing user fees, starting with services for women and children. On the other hand, Jowett & Danielyan16 claim that the debate about user-charges is not so straightforward. For example, Armenia has developed an official fee schedule for health services as a way of countering unofficial or under-the-table payments. Finally, Leatherman & Dunford17 report that microfinance increasingly provides relatively poor people, often women, with income-earning opportunities and suggests that it might also help people to access health services where they must pay for them. Many countries are very close to universal coverage and others are making good progress. The Bulletin’s articles on this topic raise fundamental questions that must be considered when thinking about how best to develop and adapt national health financing systems for universal coverage.

Genetic Determinants of Financial Risk Taking

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.

The Theoretical Relationship Between Systematic Risk and Financial (Accounting) Variables

Abstract: CONSIDERABLE EMPIRICAL RESEARCH HAS been directed to the relationship between financial and accounting variables and market based measures of risk.1 The results of this research indicate that some financial (accounting) variables are highly correlated with a market based measure of risk (beta) and are useful in the prediction of future risk. However, there has been relatively little research into the theoretical relationship between financial variables and market determined risk. Hamada [13, 14] has researched the relationship between portfolio analysis and corporate finance. More specifically, he has shown that the systematic risk of a firm's common stock should be positively correlated with the firm's leverage. The analytical approach used by Hamada will be discussed more thoroughly below. The approach used in this paper to develop a relationship between systematic risk and leverage draws on the earlier work of Hamada. In the later paper, he adopted a different approach to arrive at a similar conclusion. Lev [19] has shown, using the approach adopted by Hamada [14], that a firm's operating leverage (the ratio of fixed to variable operating costs) is a variable affecting systematic risk. Pettit and Westerfield [30] assumed a discounted cash flow valuation model and separated the individual security return into cash flow and capitalization rate components. They proceeded to analytically develop a two factor model of beta.2 Although the approach which they used is promising, the model which they developed was not readily testable. The purpose of this paper is to provide a theoretical basis for empirical research into the relationship between systematic risk and financial (accounting) variables. Section II develops the assumptions and relationships of the capital asset pricing model. Systematic risk is defined as the /B parameter from this model. In the following sections we will show that, given the assumptions, there is a theoretical relationship between a firm's systematic risk and the firm's leverage and accounting beta. Also, we show that systematic risk is not theoretically related (directly) to the earnings variability, dividends, size or growth of a firm.