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.

Corporate Governance Lessons from the Financial Crisis

Abstract: The turmoil that struck financial institutions in 2007 has, by the end of 2011, significantly deteriorated the fundamentals of the global economy, eroding trust in sustainability of the markets, solvency of banks and even the credibility of sovereign states and monetary unions. Whether this is the most serious financial crisis since the Great Depression only history will tell, but it is clear by now that the damage to the global economy has been extraordinary. This chapter looks into some of the corporate governance lessons that could prevent this from happening again and presents the main findings and conclusions of the OECD Corporate Governance Committee as reflected in several OECD publications as well as in G.Kirkpatrick (2010).Corporate governance rules and practices of many of the financial institutions that collapsed have often been blamed to be partly responsible for the crisis. The failures of risk management systems and incentive schemes that encouraged and rewarded high levels of risk taking are key factors in this context. Since reviewing and guiding risk policy is a key function of the board, these deficiencies point to ineffective board oversight. And since boards are accountable to shareholders, they also have been put under the spotlight, as many of them seemed to have no interest in expressing their views on the functioning of companies as long as returns were within targets.Corporate governance failures are surely not the cause of the crisis, but they did not prevent and may have even facilitated some of the risky and misguided corporate practices that had such severe effects once the downturn started. Importantly, much of what we have learnt from the demise of some of these financial institutions can serve as an important lesson for non-financial corporations in general. Some of the key lessons from the corporate governance perspective are described in this article.This paper is structured as follows. In the first section we describe the macro-economic as well as the corporate governance dimension of the financial crisis, particularly the way remuneration practices, risk management procedures, limited board oversight as well as shareholder passivism contributed to the poor performance of some major banks. The second section explains how existing corporate governance principles and national corporate governance codes have been re-evaluated against this background, and some of the recent developments are presented. We finish offering some general conclusions.

Theory of Financial Risk and Derivative Pricing: From Statistical Physics to Risk Management

Abstract: Foreword Preface 1. Probability theory: basic notions 2. Maximum and addition of random variables 3. Continuous time limit, Ito calculus and path integrals 4. Analysis of empirical data 5. Financial products and financial markets 6. Statistics of real prices: basic results 7. Non-linear correlations and volatility fluctuations 8. Skewness and price-volatility correlations 9. Cross-correlations 10. Risk measures 11. Extreme correlations and variety 12. Optimal portfolios 13. Futures and options: fundamental concepts 14. Options: hedging and residual risk 15. Options: the role of drift and correlations 16. Options: the Black and Scholes model 17. Options: some more specific problems 18. Options: minimum variance Monte-Carlo 19. The yield curve 20. Simple mechanisms for anomalous price statistics Index of most important symbols Index.

Against The Gods: The Remarkable Story of Risk

Abstract: Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein. 1996. New York: John Wiley & Sons. Reviewer: Brian J. Glenn, St. Antony's College, University of Oxford; Insurance Law Center, University of Connecticut School of Law In Against the Gods: The Remarkable Story of Risk, Peter Bernstein presents the reader with an easy to read and often entertaining introduction to the history and theory behind financial risk analysis. The first half of the book is devoted to the development of statistics and utility theory. As Bernstein walks the reader through the history of probability, he brings to life not only the theories being developed, but also the colorful lives of some of the major figures involved, such as Cardano, Pascal, Fermat and several members of the Bernoulli family. Those who use statistics on a daily basis will find the book offers a rich and interesting history behind statistical methods that are otherwise cold and impersonal. In the second half of the book, Bernstein presents the reader with the theory that underlies financial risk analysis. Written in the same historical style as the first half, the second half of the book focuses on issues such as incomplete information, case selection, utility theory, and the appropriateness of quantitative analysis to estimating future events. These standard issues of probability theory are presented in a highly approachable manner. The non-statistician will find these chapters helpful. Those who already understand the material will find Bernstein's handling of it remarkably refreshing. A major issue with the book is the depiction of risk. Bernstein explains that, "The word "risk" derives from the early Italian riscare, which means "to dare." In this sense, risk is a choice rather than a fate. The actions we dare to take, which depend on how free we are to make choices, are what the story of risk is all about." (p. 8) Risk is consistently presented as something to be embraced, rather than something to be avoided. Risk is also depicted as a highly personal decision made in pursuit of financial gain, as opposed to a highly social-or indeed, societal-necessary evil to be shared. In his discussion of utility theory, for example, Bernstein notes that different people have different levels of risk tolerance, "And that's a good thing." he explains, since, "If everyone valued every risk in precisely the same way, many risky opportunities would be passed up ...Without the venturesome, the world would turn a lot more slowly. Think of what life would be like if everyone were phobic about lightening, flying in airplanes, or investing in start-up companies. We are indeed fortunate that human beings differ in their appetite for risk." (p. 105) The wise risk-taking financial entrepreneurs are the heroes in this book. Indeed, after a discussion of how Bernoulli assimilated methods of financial risk assessment, Bernstein declares that, "Risk is no longer something to be faced; risk has become a set of opportunities open to choice." (p. …

The Moderating Effects of Message Framing and Source Credibility on the Price-perceived Risk Relationship

Abstract: One factor that research has identified as a critical determinant of consumers' willingness to buy a new product or brand is the perceived risk associated with the purchase. Consequently, a better understanding of the factors affecting consumers' perceptions of the financial and performance risk entailed by the purchase of a new brand is of both theoretical and pragmatic importance. Previous research has suggested that a new product's price affects consumers' perceptions of risk. The current article extends and integrates previous research by proposing that the effect of price on consumers' perceptions of risk is moderated by two communication factors: message framing and source credibility. The results of an experiment support the predictions that the influence of price on consumers' perceptions of performance risk is greater when the message is framed negatively or the credibility of the source is low. In addition, the results support the prediction that the effect of price on consumers' perceptions of financial risk is greater when the message is framed positively.

User interface for a financial advisory system

Abstract: A user interface for a financial advisory system is provided. According to one aspect of the present invention, a user may interactively explore how changes in one or more input decisions such as a risk tolerance, a savings level, and a retirement age affect one or more output values such as a probability of achieving a financial goal or an indication of short-term risk. A first and second visual indication are concurrently displayed. The first visual indication includes input mechanisms, such as slider bars, for receiving the input decisions. The second visual indication includes a set of output values that are based upon the input decisions and a recommended set of financial products. After updated values for the input decisions are received via the input mechanisms, a new recommended set of financial products and a new set of output values may be determined based upon the updated values. The second visual indication may then be updated to reflect the new set of output values. According to another aspect of the present invention, a graphical input mechanism for receiving a desired level of investment risk may be calibrated. A set of available financial products, such as a set of mutual funds, and a predefined volatility, such as the volatility of the Market Portfolio are received. The settings associated with the graphical input mechanism are constrained based upon the set of available financial products. Additionally, the calibration of the units of the graphical input mechanism may be expressed as a relationship between the volatility associated with a setting of the graphical input mechanism and the predefined volatility.