Journal articles on the topic 'International finance. Tail risk. Asset pricing'
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Schreindorfer, David. "Macroeconomic Tail Risks and Asset Prices." Review of Financial Studies 33, no. 8 (September 19, 2019): 3541–82. http://dx.doi.org/10.1093/rfs/hhz105.
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Abstract I document that dividend growth and returns on the aggregate U.S. stock market are more correlated with consumption growth in bad economic times. In a consumption-based asset pricing model with a generalized disappointment-averse investor and small, IID consumption shocks, this feature results in a realistic equity premium despite low risk aversion. The model is consistent with the main facts about stock market risk premiums inferred from equity index options, remains tightly parameterized, and allows for analytical solutions for asset prices. An extension with non-IID dynamics accounts for excess volatility and return predictability, while preserving the model’s consistency with option moments. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
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de Santis, Giorgio, and Bruno Gerard. "International Asset Pricing and Portfolio Diversification with Time-Varying Risk." Journal of Finance 52, no. 5 (December 1997): 1881. http://dx.doi.org/10.2307/2329468.
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Antell, Jan, and Mika Vaihekoski. "International asset pricing models and currency risk: Evidence from Finland 1970–2004." Journal of Banking & Finance 31, no. 9 (September 2007): 2571–90. http://dx.doi.org/10.1016/j.jbankfin.2006.09.013.
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Valencia-Herrera, Humberto, and Francisco López-Herrera. "Markov Switching International Capital Asset Pricing Model, an Emerging Market Case: Mexico." Journal of Emerging Market Finance 17, no. 1 (February 26, 2018): 96–129. http://dx.doi.org/10.1177/0972652717748089.
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The article shows how the international capital asset pricing model (ICAPM) with Markov regime switching can model the asset returns in the emerging market of Mexico. For most assets, although significant, the international risk premium factor is not subject to regime switching, but the domestic factor is. The probabilities of regimes are correlated with the volatility of assets. A GARCH(1,1) Markov regime switching model offers better adjustment than a non-GARCH. JEL Classification: C58, F36, F65, G12, G15
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Ott, Steven H., Timothy J. Riddiough, Ha-Chin Yi, and Jiro Yoshida. "International Real Estate Review." International Real Estate Review 11, no. 1 (June 30, 2008): 1–37. http://dx.doi.org/10.53383/100088.
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Using over 25 years of quarterly U.S. and Japanese time series data, this paper examines the determinants of demand for an important class of real assets: commercial real estate. We specify a structural model of market equilibrium that considers direct effects of real investment on built asset price. Our empirical findings are consistent across countries and produce several new results. First, we find that real investment exerts a significant positive direct effect on asset price, which in turn feeds back to impact investment decisions. Second, idiosyncratic risk is found to be strongly positively related to asset price, and to complement supply effects. Third, systematic risk is priced as expected, where the strength of the relation between asset price and systematic risk is found to be higher than in previous studies of capital asset prices. Fourth, lagged values of price determinants (of up to two years) are consistently important in real asset demand estimation. Alternative explanations for our findings are analyzed and discussed. Implications for asset pricing model specification and interpretation are also considered.
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Wong, Wong Weng, and Wejendra Reddy. "International Real Estate Review." International Real Estate Review 21, no. 1 (March 31, 2018): 41–70. http://dx.doi.org/10.53383/100254.
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This study explores the sensitivity of the performance of Australian real estate investment trusts (A-REITs) to changes in short and long term interest rates. Based on the intertemporal capital asset pricing model in Merton (1973), we propose an asset pricing model that consists of market returns, macroeconomic indicators, and short and long term interest rates. The effect of market capitalisation is also explored. High debt funds show greater sensitivity to adverse movements in long term interest rates compared to low debt funds. This suggests that gearing levels play a significant role in the returns generating process. All size based portfolios exhibit strong exposure to market risk with medium size A-REITs displaying greater sensitivity to movements in both short and long term interest rates. Although market risk became a stronger driver of returns during the Global Financial Crisis (GFC), the impact was less prominent post-GFC possibly due to already low levels of interest which created an environment of cheap credit. The implications for asset allocation strategies are that portfolio managers and other investors can reduce exposure to interest rate risk by selecting funds with less leverage and are large in size. High debt funds benefit more during periods of low interest but this may be offset when there is a corresponding increase in long term interest rates.
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Li, Kai. "Confidence in the Familiar: An International Perspective." Journal of Financial and Quantitative Analysis 39, no. 1 (March 2004): 47–68. http://dx.doi.org/10.1017/s0022109000003884.
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AbstractOne striking feature of international portfolio investment is the extent to which equity portfolios are concentrated in the domestic equity market of the investor—the home bias puzzle. I examine the role of investors' perception of foreign investment risk on their portfolio choices. The expected returns and risk of foreign investment are specified through an asset pricing model with the home portfolio being the benchmark asset—Pastor's (2000) domestic CAPM. The model serves as a reference point around which investors can center their prior beliefs. I focus on investors' prior beliefs that are consistent with the literature on confidence in the familiar—foreign equities, in terms of both expected returns and risk, being viewed less favorably than domestic equities. These prior beliefs are then combined with the data on G7 equities, and the revised beliefs are used to obtain the global optimal asset allocation. To hold predominantly domestic equities, each G7 investor has to believe that the risk of foreign investment is several times higher than the actual risk. The home bias is more of a puzzle for a U.S. investor during the 1970s. Specifying investors' prior beliefs around the world CAPM does not help resolve the puzzle.
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Hazny, Mohamad Hafiz, Haslifah Mohamad Hasim, and Aida Yuzy Yusof. "Mathematical modelling of a shariah-compliant capital asset pricing model." Journal of Islamic Accounting and Business Research 11, no. 1 (January 6, 2020): 90–109. http://dx.doi.org/10.1108/jiabr-07-2016-0083.
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Purpose The capital asset pricing model (CAPM) is the most widely used asset pricing model that measures risk–return relationship. The CAPM is based on Markowitz’s mean variance analysis. The advancement of Islamic finance leads to the question whether or not the practice of modern investment theories and analyses such as the Markowitz’s mean variance analysis and CAPM are in accordance to shariah and could be used in pricing Islamic financial assets. Therefore, this paper aims to present a review of the CAPM and to discourse the set of assumptions underlying the model in terms of shariah compliance. Design/methodology/approach Although most of the assumptions are not contradictory to shariah principles, there are Islamic variables such as prohibition of short selling, purification and zakat that should be taken into consideration when pricing Islamic financial assets. We then develop a mathematical model which is a modification of the traditional CAPM that incorporates principles of Islamic finance and integrating zakat, purification of return and exclusion of short sales. Findings As a proof-of-concept, this paper presents the results of an empirical study on the proposed shariah-compliant CAPM in comparison to the traditional CAPM. The results show that the proposed Islamic CAPM is appropriate and applicable in examining the relationship between risk and return in the Islamic stock market. Originality/value This study contributes to existing body of knowledge by presenting an algorithm and mathematical derivation of the shariah-compliant CAPM which has been lacking in the literature of Islamic finance. The paper offers a novel approach in pricing Islamic financial assets in accordance to shariah, advocated by modern investment theories of Markowitz’s mean variance analysis and CAPM.
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Bayraktar, Sema. "The impact of exchange rate risk on international asset pricing under various market structures." Review of Quantitative Finance and Accounting 32, no. 2 (April 1, 2008): 169–95. http://dx.doi.org/10.1007/s11156-008-0089-4.
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Okunev, John, and Patrick J. Wilson. "International Real Estate Review." International Real Estate Review 11, no. 2 (December 31, 2008): 32–46. http://dx.doi.org/10.53383/100096.
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This study presents further evidence of the predictability of excess equity REIT (real estate investment trust) returns . Recent evidence on forecasting excess returns using fundamental variables has resulted in diminishing returns from the 1990’s onward. Trading strategies based on these forecasts have not significantly outperformed the buy/hold strategy of the 1990’s. We have developed an alternative strategy that is based on the time variation of the risk premium of investors. Our results indicate that it is possible to outperform the buy/hold strategy by modeling the time variation of the risk premium. By modeling the dynamic behavior of the risk premium, we are able to implicitly capture economic risk premiums that are not captured by conventional multi beta asset pricing models.
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Maurer, Thomas A., Thuy-Duong Tô, and Ngoc-Khanh Tran. "Pricing Risks Across Currency Denominations." Management Science 65, no. 12 (December 2019): 5308–36. http://dx.doi.org/10.1287/mnsc.2018.3109.
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We use principal component analysis on 55 bilateral exchange rates of 11 developed currencies to identify two important global risk sources in foreign exchange (FX) markets. The risk sources are related to Carry and Dollar but are not spanned by these factors. We estimate the market prices associated with the two risk sources in the cross-section of FX market returns and construct FX market-implied country-specific stochastic discount factors (SDFs). The SDF volatilities are related to interest rates and expected carry trade returns in the cross-section. The SDFs price international stock returns and are related to important financial stress indicators and macroeconomic fundamentals. The first principal risk is associated with the Treasury-EuroDollar (TED) spread, quantities measuring volatility, tail and contagion risks, and future economic growth. It earns a relatively small implied Sharpe ratio. The second principal risk is associated with the default and term spreads and quantities capturing volatility and illiquidity risks. It further correlates with future changes in the long-term interest rate and earns a large implied Sharpe ratio. This paper was accepted by Lauren Cohen, finance.
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Wang, Ming-Chieh, and Jin-Kui Ye. "The relationship between covariance risk and size effects in emerging equity markets." Managerial Finance 42, no. 3 (March 14, 2016): 174–90. http://dx.doi.org/10.1108/mf-10-2014-0269.
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Purpose – The purpose of this paper is to examine whether the conditionally expected return on size-based portfolios in an emerging market (EM) is determined by the country’s world risk exposure. The authors analyze the degree of financial integration of 23 emerging equity markets grouped into five size portfolios using the conditional international asset pricing model with both world and domestic market risks. The authors also compare the model’s fitness on the predictability of portfolio returns by using world and EM indices. Design/methodology/approach – This study investigates whether large-cap stocks are priced globally and whether mid- and small-cap stocks are strongly influenced by domestic risk factors. The authors first examine the predictability of large-, mid-, and small-cap stock portfolio returns by using global and local variables, and next compare the model fitness by using world and EM indices on the prediction of size-based stock returns. Finally, the authors test whether the world price of covariance risk is the same for different portfolios. Findings – The authors find that the conditional expected returns of large-cap stocks should be priced by global variables. Mid- and small-cap stocks are influenced by domestic variables rather than global variables, and their returns are priced by local residual risks. The test of the conditional asset pricing model shows that the largest stocks have the smallest mean absolute pricing errors (MAE), and their pricing errors are lower in large markets than in small markets. Third, the EM index offers more predictability for the excess returns of mid- and small-cap stocks than the world market index, but the explanatory power of this index does not increase for large-cap stocks. Originality/value – EMs in the past were known as segment markets, with local risk factors more important than global risk factors, suggesting significant benefits from adding EMs to global portfolios. It would be interesting to examine whether financial integration differs for various firm sizes in the markets.
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Seo, Sang Byung, and Jessica A. Wachter. "Option Prices in a Model with Stochastic Disaster Risk." Management Science 65, no. 8 (August 2019): 3449–69. http://dx.doi.org/10.1287/mnsc.2017.2978.
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Contrary to well-known asset pricing models, volatilities implied by equity index options exceed realized stock market volatility and exhibit a pattern known as the volatility skew. We explain both facts using a model that can also account for the mean and volatility of equity returns. Our model assumes a small risk of economic disaster that is calibrated based on international data on large consumption declines. We allow the disaster probability to be stochastic, which turns out to be crucial to the model’s ability both to match equity volatility and to reconcile option prices with macroeconomic data on disasters. This paper was accepted by Lauren Cohen, finance.
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Tomić, Bojan, Saša Žiković, and Lorena Jovanović. "CRYPTO PORTFOLIO OPTIMIZATION THROUGH LENS OF TAIL RISK AND VARIANCE MEASURES." Zbornik radova Ekonomskog fakulteta u Rijeci: časopis za ekonomsku teoriju i praksu/Proceedings of Rijeka Faculty of Economics: Journal of Economics and Business 40, no. 2 (December 30, 2022): 297–312. http://dx.doi.org/10.18045/zbefri.2022.2.297.
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The choice of an adequate risk measure in portfolio optimization depends to a large extent on the characteristics and dynamics of the underlying assets. For investors and asset managers, a range of potential market risks provides much- needed insights into the optimization of their portfolio of assets. Since this paper focuses on multiple risk measures, it presents the investors with a better insight into the potential magnitude of the risk they are faced with. Since the risk-reward optimization target can be adjusted for a broad choice of risk measures in this paper we will test the performance of the classical risk measure i.e. standard deviation versus a tail risk measure such as expected tail loss (ETL). Our goal is to find which of the two offers the better performance for a portfolio of cryptocurrencies and if the differences are statistically significant. The setup for our analysis is testing two optimization targets (MinVar and MinETL) on 10 portfolios of cryptocurrencies randomly chosen from a sample of 70 cryptocurrencies with the highest market capitalization.
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RICHMAN, VINCENT, MICHAEL R. SANTOS, and JOHN T. BARKOULAS. "SHORT- AND LONG-TERM EFFECTS OF THE 9/11 EVENT: THE INTERNATIONAL EVIDENCE." International Journal of Theoretical and Applied Finance 08, no. 07 (November 2005): 947–58. http://dx.doi.org/10.1142/s021902490500327x.
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This paper analyzes the short- and long-term effects of the September 11, 2001 terrorist attacks on a comprehensive sample of stock market indices from 33 industrial and emerging economies. From a finance-theoretic point of view, we employ the international capital asset pricing model (ICAPM) to analyze the incidence of the 9/11 event. Consistent with expectations, we document statistically negative short-term stock market reactions to the 9/11 event for 28 countries. More importantly, we find increases in the level of systematic risk for 10 stock markets which attest to the presence of negative permanent effects emanating for the 9/11 event. However, a great many capital markets (including the US, Canada, Japan, China, Russia, and the largest European economies) did not experience statistically significant increases in systematic risk in the post-9/11 period. The decisiveness of the evidence clearly points in the direction of resilience and flexibility of the world capital markets.
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Chen, Qian, Xiang Gao, Xiaoxuan Huang, and Xi Li. "Multiple-step value-at-risk forecasts based on volatility-filtered MIDAS quantile regression: Evidence from major investment assets." Investment Management and Financial Innovations 18, no. 3 (September 20, 2021): 372–84. http://dx.doi.org/10.21511/imfi.18(3).2021.31.
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Forecasting multiple-step value-at-risk (VaR) consistently across asset classes is hindered by the limited sample size of low-frequency returns and the potential model misspecification when assuming identical return distributions over different holding periods. This paper hence investigates the predictive power for multi-step VaR of a framework that models separately the volatility component and the error term of the return distribution. The proposed model is illustrated with ten asset returns series including global stock markets, commodity futures, and currency exchange products. The estimation results confirm that the volatility-filter residuals demonstrate distinguished tail dynamics to that of the return series. The estimation results suggest that volatility-filtered residuals may have either negative or positive tail dependence, unlike the unanimous negative tail dependence in the return series. By comparing the proposed model to several alternative approaches, the results from both the formal and informal tests show that the specification under concern performs equivalently well if not better than its top competitors at the 2.5% and 5% risk level in terms of accuracy and validity. The proposed model also generates more consistent VaR forecasts under both the 5-step and 10-step setup than the MIDAS-Q model. AcknowledgmentThe authors are grateful to the editor and an anonymous referee. This research is sponsored by the National Natural Science Foundation of China (Award Number: 71501117). All remaining errors are our own.
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BRADLEY, BRENDAN O., and MURAD S. TAQQU. "AN EXTREME VALUE THEORY APPROACH TO THE ALLOCATION OF MULTIPLE ASSETS." International Journal of Theoretical and Applied Finance 07, no. 08 (December 2004): 1031–68. http://dx.doi.org/10.1142/s0219024904002815.
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We investigate the portfolio construction problem for risk-averse investors seeking to minimize quantile based measures of risk. Using dependence measures from extreme value theory, we find that most international equity markets are asymptotically independent. We also find that the few cases of asymptotic dependence occur mostly in markets which are in close geographic proximity. We then examine how extremal dependence affects the asset allocation problem. Following the structure variable approach, we focus on the portfolio and model its tail in a manner consistent with extreme value theory. We then develop a methodology for asset allocation where the goal is to guard against catastrophic losses. The methodology is tested through simulations and applied to portfolios made up of two or more international equity markets. We analyze in detail three typical types of markets, one where the assets are asymptotically independent and the ratio of marginal risks is not constant, the second where the assets are asymptotically independent but the ratio of marginal risks are approximately constant and the third where the assets are asymptotically dependent and the ratio of marginal risks is not constant. The results are compared with the optimal portfolio under the assumption of normally distributed returns. Surprisingly, we find that the assumption of normality incurs only a modest amount of extra risk for all but the largest losses. We make the software written in support of this work freely available and describe its use in the appendix.
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Chabi-Yo, Fousseni, and Riccardo Colacito. "The Term Structures of Coentropy in International Financial Markets." Management Science 65, no. 8 (August 2019): 3541–58. http://dx.doi.org/10.1287/mnsc.2017.3017.
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We propose a new entropy-based correlation measure (coentropy) to evaluate the performance of international asset pricing models. Coentropy captures the codependence of two random variables beyond normality. We document that the coentropy of international stochastic discount factors (SDFs) can be decomposed into a series of entropy-based correlations of permanent and transitory components of the SDFs. We employ the cross section of G-10 countries to obtain model-free estimates of all the components of coentropy at various horizons and we show that the generalization of the long-run risk model featuring two predictable components of consumption growth rates, global disasters, and recursive preferences can account for the composition of codependence at all horizons. This paper was accepted by Tomasz Piskorski, finance.
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Dash, Saumya Ranjan, and Jitendra Mahakud. "Market anomalies, asset pricing models, and stock returns: evidence from the Indian stock market." Journal of Asia Business Studies 9, no. 3 (August 3, 2015): 306–28. http://dx.doi.org/10.1108/jabs-06-2014-0040.
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Purpose – This paper aims to investigate whether the use of conditional and unconditional Fama and French (1993) three-factor and Carhart (1997) four-factor asset pricing models (APMs) captures the role of asset pricing anomalies in the context of emerging stock market like India. Design/methodology/approach – The first step time series regression approach has been used to drive the risk-adjusted returns of individual securities. For examining the predictability of firm characteristics or asset pricing anomalies on the risk-adjusted returns of individual securities, the panel data estimation technique has been used. Findings – Fama and French (1993) three-factor and Carhart (1997) four-factor model in their unconditional specifications capture the impact of book-to-market price and liquidity effects completely. When alternative APMs in their conditional specifications are tested, the importance of medium- and long-term momentum effects has been captured to a greater extent. The size, market leverage and short-term momentum effects still persist even in the case of alternative unconditional and conditional APMs. Research limitations/implications – The empirical analysis does not extend for different market scenarios like high and low volatile market or good and bad macroeconomic environment. Because of the constraint of data availability, the authors could not include certain important anomalies like net operating assets, change in gross profit margin, external equity and debt financing and idiosyncratic risk. Practical implications – Although the active investment approach in stock market shares a common ground of semi-strong form of market efficiency hypothesis which also supports the presence of asset pricing anomalies, less empirical evidence has been explored in this regard to support or repute such belief of practitioners. Our empirical findings make an attempt in this regard to suggest certain anomaly-based trading strategy that can be followed for active portfolio management. Originality/value – From an emerging market perspective, this paper provides out-of-sample empirical evidence toward the use of conditional Fama and French three-factor and Carhart four-factor APMs for the complete explanation of market anomalies. This approach retains its importance with respect to the comprehensiveness of analysis considering alternative APMs for capturing unique effects of market anomalies.
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Coën, Alain, and Patrick Lecomte. "International listed real estate returns: evidence from the global financial crisis." Journal of Property Investment & Finance 37, no. 1 (February 4, 2019): 72–91. http://dx.doi.org/10.1108/jpif-03-2018-0021.
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PurposeThe purpose of this paper is to analyze and revisit the risk and performance of publicly traded real estate companies from 14 countries over the period 2000–2015, marked by the unprecedented Global Financial Crisis, in presence of errors-in-variables (EIV) and illiquidity (measured by serial correlation, following Getmanskyet al.(2004)).Design/methodology/approachThe authors extend the seminal work of Bondet al.(2003), and shed a new light on the relative performance of listed real estate before and after the GFC. First, the authors suggest the use of various asset pricing models (APM) including the Fama and French (2015) five-factor APM with global and country-level factors. Second, the authors implement unbiased estimators to correct for the econometric bias induced by EIV in APM. Third, the authors deal with the impact of illiquidity (measured by serial correlation) on the risk properties of international securitized real estate returns.FindingsThe findings show that post-GFC, a radical change in international listed real estate risk factors has resulted in more homogeneous markets internationally and less diversification opportunities for international investors.Practical implicationsThe authors suggest the use of robust linear APM (including the Fama and French (2015) five-factor APM) to analyze the risk and performance of publicly traded real estate companies from 14 countries over the period 2000–2015.Originality/valueThe authors analyze and revisit the risk and performance of publicly traded real estate companies from 14 countries over the period 2000–2015, marked by the unprecedented Global Financial Crisis.
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Ghosh, Bikramaditya, and M. C. Krishna. "Power law in tails of bourse volatility – evidence from India." Investment Management and Financial Innovations 16, no. 1 (March 26, 2019): 291–98. http://dx.doi.org/10.21511/imfi.16(1).2019.23.
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Inverse cubic law has been an established Econophysics law. However, it has been only carried out on the distribution tails of the log returns of different asset classes (stocks, commodities, etc.). Financial Reynolds number, an Econophysics proxy for bourse volatility has been tested here with Hill estimator to find similar outcome. The Tail exponent or α ≈ 3, is found to be well outside the Levy regime (0 < α < 2). This confirms that asymptotic decay pattern for the cumulative distribution in fat tails following inverse cubic law. Hence, volatility like stock returns also follow inverse cubic law, thus stay way outside the Levy regime. This piece of work finds the volatility proxy (econophysical) to be following asymptotic decay with tail exponent or α ≈ 3, or, in simple terms, ‘inverse cubic law’. Risk (volatility proxy) and return (log returns) being two inseparable components of quantitative finance have been found to follow the similar law as well. Hence, inverse cubic law truly becomes universal in quantitative finance.
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Cayón Fallon, Edgardo, and Julio Sarmiento. "Impact of commodities and global stock prices on the idiosyncratic risk of Bitcoin during the COVID-19 pandemic." Investment Management and Financial Innovations 18, no. 4 (November 24, 2021): 213–22. http://dx.doi.org/10.21511/imfi.18(4).2021.19.
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In times of exogenous systemic shocks, such as the COVID-19 pandemic, it is important to identify hedge or safe haven assets. Therefore, this paper analyzes changes in the idiosyncratic risk of Bitcoin in a portfolio of commodities and global stocks. For this purpose, the M-GARCH model employed considers the interdependence among all the portfolio assets by using a time-varying asset pricing framework. This framework measures the impact of commodities and global stock prices as sources of systemic risk for Bitcoin returns before and after the COVID-19 pandemic. The evidence suggests that during the COVID-19 pandemic, the effects of changes in commodities and global prices on the idiosyncratic risk of Bitcoin were statistically significant. The idiosyncratic risk of Bitcoin measured as a percentage of total variance not accounted for by the proposed model rose from 86.06% to 95.05% during the pandemic. These results are in line with previous studies regarding the properties of Bitcoin as a hedge or safe haven asset for a portfolio composed of commodities and global stocks.
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Shetty, Soumya, Janet Jyothi Dsouza, and Iqbal Thonse Hawaldar. "Rolling regression technique and cross-sectional regression: A tool to analyze Capital Asset Pricing Model." Investment Management and Financial Innovations 18, no. 4 (November 25, 2021): 241–51. http://dx.doi.org/10.21511/imfi.18(4).2021.21.
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The Capital Asset Pricing Model (henceforth, CAPM) is considered an extensively used technique to approximate asset pricing in the field of finance. The CAPM holds the power to explicate stock movements by means of its sole factor that is beta co-efficient. This study focuses on the application of rolling regression and cross-sectional regression techniques on Indian BSE 30 stocks. The study examines the risk-return analysis by using this modern technique. The applicability of these techniques is being viewed in changing business environments. These techniques help to find the effect of selected variables on average stock returns. A rolling regression study rolls the data for changing the windows for every 3-month period for three years. The study modifies the model with and without intercept values. This has been applied to the monthly prices of 30 BSE stocks. The study period is from January 2009 to December 2018. The study revealed that beta is a good predictor for analyzing stock returns, but not the intercept values in the developed model. On the other hand, applying cross-section regression accepts the null hypothesis. α, β, β2 ≠ 0. Therefore, a researcher is faced with the task of finding limitations of each methodology and bringing the best output in the model.
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Zhang, Jinping, and Keming Zhang. "Portfolio Selection Models Based on Interval-Valued Conditional Value-at-Risk (ICVaR) and Case Study on the Data from Stock Markets." Fractal and Fractional 6, no. 10 (September 22, 2022): 536. http://dx.doi.org/10.3390/fractalfract6100536.
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Risk management is very important for individual investors or companies. There are several ways to measure the risk of investment. Prices of risky assets vary rapidly and randomly due to the complexity of finance market. Random interval is a good tool to describe uncertainty including both randomness and imprecision. Considering the uncertainty of financial market, we employ random intervals to describe returns of a risk asset and define an interval-valued risk measurement, which considers the tail risk. It is called the interval-valued conditional value-at-risk (ICVaR, for short). Similar to the classical conditional value-at-risk, ICVaR satisfies the sub-additivity. Under the new risk measure ICVaR, as a manner similar to the classical Mean-CVaR portfolio model, two optimal interval-valued portfolio selection models are built. The sub-additivity of ICVaR guarantees the global optimal solution to the Mean-ICVaR portfolio model. Based on the real data from mainland Chinese stock markets and international stock markets, the case study shows that our models are interpretable and consistent with the practical scenarios.
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Ho, Kim Hin David, Kwame Addae-Dapaah, and Fang Rui Lina Peck. "Cross-listing of real estate investment trusts (REITs)." Journal of Property Investment & Finance 35, no. 5 (August 7, 2017): 509–27. http://dx.doi.org/10.1108/jpif-08-2016-0063.
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Purpose The purpose of this paper is to examine the common stock price reaction and the changes to the risk exposure of the cross-listing for real estate investment trusts (REITs). Design/methodology/approach The paper adopts the event study methodology to assess the abnormal returns (ARs). Pre- and post-cross-listing changes in the risk exposure for the domestic and foreign markets are examined, via a modified two-factor international asset pricing model. A comparison is made for two broad cross-listings, namely, the depositary receipts and the dual ordinary listings, to examine the impacts from institutional differences. Findings Cross-listed REITs generally experience positive and significant ARs throughout the event window, implying significant superior returns associated with the cross-listing for REITs. On systematic risks, REITs exhibit significant decline in their domestic market β coefficients after the cross-listing. However, the foreign market β coefficients do not yield conclusive evidence when compared across the sample. Research limitations/implications Results are consistent with prudential asset allocation for potential diversification gains from the cross-listing, as the reduction from the domestic market beta is more significant than changes in the foreign market beta. Practical implications The results and findings should incentivise REIT managers to explore viable cross-listing. Social implications Such cross-listing for REITs should enhance risk diversification. Originality/value This is a pioneer study on cross-listing of REITs. It provides a basis for investment decision making, and could provoke further research and discussion.
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Lahouel, Noureddine, and Slaheddine Hellara. "Improving the option pricing performance of GARCH models in inefficient market." Investment Management and Financial Innovations 17, no. 2 (April 23, 2020): 14–25. http://dx.doi.org/10.21511/imfi.17(2).2020.02.
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Understanding the relation between option pricing and market efficiency is important. Indeed, emphasizing this relation generates new insights that are appropriate in practice. These insights give a better understanding of the current limitations of the option pricing and hedging methods. This article thus aims to improve the performance of the option pricing approach. To start, the relation between the option pricing methodology and the informational market efficiency was discussed. It is, therefore, useful, before proceeding to apply the standard risk-neutral approach, to check the efficiency assumption. New modified GARCH processes were used to model the dynamics of the asset returns in the option pricing framework. The new considered approaches allow describing the dynamic of returns when the market is inefficient. Using real data on CAC 40 index, the performance of different models as a function of maturity and moneyness was studied. The in-sample analysis, interested in the stability of the pricing models across time, showed that the new approach, developed under the affine GARCH process, is the most accurate. The study of the out-of-sample performance, which aims to evaluate the forecasting ability of different approaches, confirmed the results of the in-sample analysis. For the optional portfolio hedging, always the best hedging approach is that obtained under the affine GARCH model. After a regression study, it was found that the difference between theoretical and observed option values can be explained by factors, which are not taken into account in the proposed pricing formulae.
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Nguyen, Pascal, Younes Ben Zaied, and Thu Phuong Pham. "Does idiosyncratic risk matter? Evidence from mergers and acquisitions." Journal of Risk Finance 20, no. 4 (August 19, 2019): 313–29. http://dx.doi.org/10.1108/jrf-03-2018-0040.
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Purpose This paper aims to investigate whether idiosyncratic volatility is a priced risk factor in the Australian stock market. Design/methodology/approach The authors use the change in idiosyncratic volatility around acquisition announcements and the related stock price revaluation to test whether the idiosyncratic risk is priced. If the idiosyncratic risk is priced, increases (decreases) in idiosyncratic volatility should be associated with decreases (increases) in the acquirer’s stock price, as the latter’s future cash flows are discounted at a higher (lower) rate. The sample consists of 2,656 completed acquisitions by Australian listed firms over the period January 1990 to October 2014 for which deal value represents more than 5 per cent of the acquirer’s market value. Findings Increases (decreases) in idiosyncratic risk are associated with significant decreases (increases) in firm value. This negative relationship is robust to the presence of outliers; is unaffected by the incidence of the 2007-2008 financial crisis; holds using alternative measures of idiosyncratic risk; and is more significant after excluding the resources sector. Firms with a higher idiosyncratic risk prior to the acquisition, and firms avoiding stock to pay for the acquisition, experience a more significant stock price increase in relation to a decrease in idiosyncratic risk. Research limitations/implications Considering the small size of the Australian economy, investors may have less scope to mitigate idiosyncratic risk. As a consequence, idiosyncratic risk is associated with the positive excess return, contrary to what standard asset pricing theory assumes. The results support Merton’s (1987) hypothesis that investors are exposed to idiosyncratic risk due to imperfect portfolio diversification and receive compensation for bearing that risk. Practical implications The pricing of idiosyncratic risk may also explain why the Australian stock market has historically offered a high equity risk premium. A practical implication would be for international investors to take advantage of the diversification constraints of local investors to capture higher risk premiums and achieve superior returns. Originality/value While prior studies demonstrate that stocks with higher idiosyncratic risk are associated with higher subsequent returns, the authors show that an increase in idiosyncratic risk is associated with a decrease in stock prices using acquisition announcements as shocks to a firm’s idiosyncratic risk. In other words, the results arise from within-firm variations rather than from cross-sectional differences in stock returns.
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Vinodkumar, Nisa, and Hadeel Khalid AlJasser. "Financial evaluation of Tadawul All Share Index (TASI) listed stocks using Capital Asset Pricing Model." Investment Management and Financial Innovations 17, no. 2 (May 15, 2020): 69–75. http://dx.doi.org/10.21511/imfi.17(2).2020.06.
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The Kingdom of Saudi Arabia is strongly committed to stimulating savings culture in the local community by providing financial literacy in financial planning, investments, and budgeting. Inculcating the savings and investment behavior among the people will help materialize one of the elements of Saudi Vision 2030. Tadawul, being the most liquid stock market in the Middle East and North Africa, offers investors the ability to grow their capital with confidence through facilitating trading in different securities such as equities, debt instruments, and Exchange Traded Funds (ETFs). There is a great scope for investors to invest in the companies listed in Tadawul All Share Index (TASI) due to its strong economic fundamentals. The present study aims to apply the CAPM in Tadawul listed stocks, which will help in understanding the systematic and unsystematic risk associated with stocks, understanding their actual and theoretical return on stocks. The methodology adopted is the analysis of secondary data for all listed stocks in Tadawul using the Bloomberg terminal. The financial valuation includes elements like beta, alpha, correlation and standard deviation, expected return and actual return. The practical value obtained from the study will help investors go for undervalued stocks with lower beta, higher expected annual return, and lower systematic risks. Thus, the result shows the predicting power in KSA market and the scope for long-term investments by the investors to boost their savings and investment behavior and materialize one element of Vision 2030. AcknowledgmentThis research was funded by the Deanship of Scientific Research at Princess Nourah bint Abdulrahman University through the Fast-Track Research Funding Program.
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Kanaryan, Nigokhos Krikorov, Peter Chuknyisky, and Violeta Kasarova. "The cost of equity estimation in emerging Europe: the case of Bulgarian REITs." Journal of Property Investment & Finance 33, no. 6 (September 7, 2015): 517–29. http://dx.doi.org/10.1108/jpif-05-2015-0028.
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Purpose – The International Valuations Standards Committee adopts the Capital Asset Pricing Model as a method for estimation of the cost of equity. It has several drawbacks and appraisers in emerging markets need more useful model for cost of equity estimation. The paper aims to discuss these issues. Design/methodology/approach – The proposed model is a modification of the Salomon Smith Barney model for cost of capital determination. The econometric part of the model incorporates the non-synchronous effect, the thin trading effect, the time varying risk nature, and the systematic country risk. Findings – The model estimates the cost of equity of Bulgarian REITs more accurate than the one, who uses the traditional β estimation. Practical implications – The study provides appraisers, business consultants, and investment bankers with a consistent model for cost of equity estimation. The model incorporates most of the features of emerging markets REITs return series and avoids the weaknesses of the single-factor model for cost of equity estimation in emerging markets. Originality/value – The proposed model reflects the following characteristics: the degree of diversification of the particular investor (imperfectly diversified); country risk; and time-varying risk nature. The political risk is incorporated by more objective measure of the systematic country risk.
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Shilov, K. D., and A. V. Zubarev. "Evolution of bitcoin as a Financial Asset." Finance: Theory and Practice 25, no. 5 (October 28, 2021): 150–71. http://dx.doi.org/10.26794/2587-5671-2021-25-5-150-171.
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The cryptocurrency market debate resumed in 2020 with renewed vigour as the price of Bitcoin surpassed late 2017 highs. This study aims to analyse possible factors of Bitcoin’s pricing at various cryptocurrency market development stages — before the 2017 price bubble, after and during the COVID-19 pandemic. The main method of analysis is a generalized autoregressive conditional heteroskedasticity model with conditional generalized error distribution (GARCHGED). Two groups of indicators are used as possible factors related to the Bitcoin dynamics. The first group consists of various quantitative indicators directly related to Bitcoin (the so-called internal factors) — the volume of exchange trade, the volume of transactions in the Bitcoin blockchain, the number of new and active wallets, hash rate, the sum of fees paid in the blockchain, as well as the dynamics of Google Trends search queries. The second group is the return on various financial assets — stock and bond indexes, commodities, and currency markets. The results of the analysis demonstrate the absence of a stable correlation between any of the factors under consideration and Bitcoin returns in all the periods that we focus on. In the period before the 2017 price bubble, the internal factors and Bitcoin returns showed generally co-directional dynamics, but the situation changed in 2018. In early 2021, the correlation between Bitcoin and traditional financial assets returns has increased significantly. We can conclude that Bitcoin is becoming a popular means of diversification as a high-risk asset, which, however, follows the pattern of a speculative bubble at the beginning of 2021. The increased demand for the need to invest in Bitcoin using various exchange-traded instruments (ETFs for cryptocurrencies) may soon lead to a further increase in the price of this cryptocurrency if such instruments are registered on the exchange.
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Ielasi, Federica, Monica Rossolini, and Sara Limberti. "Sustainability-themed mutual funds: an empirical examination of risk and performance." Journal of Risk Finance 19, no. 3 (May 21, 2018): 247–61. http://dx.doi.org/10.1108/jrf-12-2016-0159.
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PurposeThis paper aims to analyze the portfolio characteristics and the performance measures of sustainability-themed mutual funds, compared to ethical mutual funds that implement different sustainable and responsible investment strategies.Design/methodology/approachThe study refers to a European sample of 106 ethical funds and 51 sustainability-themed funds. The monthly performance of each fund is downloaded from Bloomberg for the period from January 1996 to December 2015. By applying a Fama and French (1993) three-factor model, the authors overcome the limits of a capital asset pricing model (CAPM) based-single index model, to compare the performance of the two categories of funds.FindingsSustainability-themed funds do not differ significantly from ethical funds in terms of portfolio attributes, except for market capitalization, age and net asset value. Regarding performance measures, the results shows that sustainability-themed funds have a lower underperformance than ethical funds (as measured by Jensen’s alpha), whereas the samples do not differ in terms of market risk (as measured by Beta coefficient). The idiosyncratic risk of sustainability-themed funds is positively influenced by the specific portfolio strategies. The sustainability-themed funds show a higher concentration in the industrial sector and a lower exposure to financial sector than ethical funds; in terms of geographical strategy, they are more global and international oriented; they mainly focus on small caps and value stocks.Research limitations/implicationsThe different sustainable and responsible investment strategies can be applied simultaneously and in a growing number of possible combinations. Mutual fund managers can consider thematic approach as an efficient opportunity for reconciling financial performance and economic sustainability. It is demonstrated that sustainability-themed funds adopt a portfolio strategy significantly different from ethical funds and from the environmental, social and governance benchmarks. Mutual fund managers implement a thematic specialization without any negative impact on the funds returns compared to ethical funds; actually, with a proper diversified portfolio, they are able to reduce idiosyncratic risk.Originality/valueThe analysis is extremely innovative, especially for the thematic sample. During the past 15 years, literature about sustainable and responsible investment has been focused especially on the differences in terms of risk and performance between socially responsible and conventional funds. This paper, starting from the methodology applied in these studies, wants to compare two different types of socially responsible strategies, with a specific focus on sustainability-themed mutual funds, given their exponential growth in the past few years.
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Liow, Kim Hiang, and Zhuo Lee. "International Real Estate Review." International Real Estate Review 16, no. 2 (August 31, 2013): 147–65. http://dx.doi.org/10.53383/100168.
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The main contribution of this study is to examine the extreme dependence between the real estate securities and stock markets in Australia, China, Hong Kong, Japan, Malaysia, the Philippines, Singapore and Taiwan between January 1995 and March 2011. For each market, we derive time series tail dependence coefficients (TDC) which measure how likely financial returns move in extreme market conditions by using the dynamic conditional correlation (DCC) methodology provided by Engle (2002). Overall, our results indicate that Singapore, the Philippines and Hong Kong have the highest extreme real estate–stock market co-movement of at least 50%. In addition, during the global financial crisis (GFC) period, the securitized real estate and common stock markets in China, Hong Kong, Japan, the Philippines and Singapore displayed the highest extreme dependence to react together to financial turmoil. The results in this paper also show that the extreme dependence patterns of real estate stock markets are similar for many of the Asia-Pacific economies. Finally, correlation coefficients are not adequate for explaining extreme co-movements between the securitized real estate and common stock markets in the longer period, as well as in the two-year GFC periods. Our TDC modeling with Asia-Pacific securitized real estate and stock markets provide useful information and advice to international investors and risk management personnel in tactical asset allocation so as to manage the extreme dependence between securitized real estate and common stock market.
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McMahon, Richard G. P., and Anthony M. J. Stanger. "Understanding the Small Enterprise Financial Objective Function." Entrepreneurship Theory and Practice 19, no. 4 (July 1995): 21–39. http://dx.doi.org/10.1177/104225879501900403.
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This paper presents views on the small enterprise financial objective function that are sympathetic to existing financial thought, but which capture complexities arising in small enterprises that frequently receive minimal attention in the mainstream finance literature. It is argued that the small enterprise financial objective function should reflect the kinds of enterprise-specific risk that typically exist in small enterprises arising from liquidity, diversification, transferability, flexibility, control, and accountability considerations. A conceptualization of the small enterprise financial objective function by extension of conventional utility theory is presented. It is believed the resulting utility function holds promise as an explanatory framework for financial behavior in small enterprises in that it provides valuable insights into owner-manager decision making and small enterprise development. Consideration is also given to asset pricing model, which consequently might be used in small enterprise financial management.
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Hsu, Audrey Wen-hsin, Chung-Fern Wu, and Jui-Chia Lin. "Factors in Managing Actuarial Assumptions for Pension Fair Value: Implications for IAS 19." Review of Pacific Basin Financial Markets and Policies 16, no. 01 (March 2013): 1350002. http://dx.doi.org/10.1142/s0219091513500021.
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Corporate managers make several discretionary assumptions (i.e., the rate of salary growth and assumed return rate of pension plan assets) in calculating the fair value of pension assets and value of pension liabilities. In this study, we examine the factors that can induce managers to increase (decrease) fair value of pension assets (liabilities) through pension assumptions. We use the Taiwan setting as a natural experiment because Taiwan is planning to adopt IFRS from 2013 on. The estimation of pension asset (liability) value is similar between Taiwan accounting standards (i.e., TFAS 18) and international accounting standards (IAS 19); however, fair value is only disclosed in the financial statements under TFAS 18, but is required to be recognized in the balance sheet under IAS 19. The findings under TFAS 18 can provide important implications for future adoption of IAS 19. Using two key inputs for pension pricing model, this study finds that companies are inclined to increase (decrease) the value of pension assets (liabilities) by rising (lowering) the assumed expected rate of asset returns (expected salary growth). The manipulation is more pronounced for firms with high distress risk and complex ownership structure. Prior studies find that once firms are required to recognize the fair value (i.e., adopting IAS 19) as opposed to disclose the information (i.e., TFAS 18), firms have higher incentives to manipulate the model inputs. This suggests that the regulator needs to specify the authoritative enforcement rules regarding fair value estimation, and provides more insights on firms with high distress risk and complex ownership structure.
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Ekemode, Benjamin Gbolahan, and Abel Olaleye. "Convergence between direct and indirect real estate investments." Journal of Financial Management of Property and Construction 21, no. 3 (November 7, 2016): 212–30. http://dx.doi.org/10.1108/jfmpc-12-2015-0040.
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Purpose This paper aimed to examine the return/risk performance of direct and indirect real estate (listed property stock) in the Nigerian real estate market and analyzed the short-term integration between the two classes of real estate assets. It also established whether investors could achieve diversification benefits by combining both assets in a portfolio. Design/methodology/approach The data utilized comprised annual returns on direct real estate calculated from the rental and capital values of 226 direct commercial properties obtained from property valuers in Lagos, Nigeria, for a period of January 1999-December 2014. The appraisal-based direct real estate returns were de-smoothed using the Geltner (1993) procedure. The annual returns of indirect real estate were also computed from the transactions of listed property stock on the Nigerian Stock Exchange for the study period. The return-risk profiles were also broken down into short- and medium-term sub-periods, comprising 3, 5, 8 and 12 years to reflect the level of volatility in the market, whereas the nature of the short-term relationship between the two real estate assets classes was tested using Granger causality technique. Findings The results revealed that listed property stock performed better than unsmoothed direct real estate on a risk-adjusted performance basis. The performance profile, however, varies over the different sub-periods considered. Short-term integration analysis showed that there was no bidirectional relationship between direct and listed property stock, implying diversification and risk reduction possibilities in combining both assets with other asset classes in a domestic asset portfolio. Overall, the results confirm the findings of previous study that listed property stocks return is segmented from the direct real estate market upon which its pricing and trading in the stock market are based. Practical implications The conclusion of the study suggests that investors could achieve improved performance by investing in listed property stocks than direct real estate in the Nigerian real estate market. The inclusion of both assets in a domestic mixed-asset portfolio could also be expected to offer diversification and risk reduction benefits. Originality/value This is one of the few studies that examine the short-run integration between direct real estate and listed property stocks with a focus on an emerging African market.
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Ryan Homan, Garth, and Gary van Vuuren. "Applied prospect theory: assessing the βs of M&A-intensive firms." Investment Management and Financial Innovations 16, no. 2 (June 14, 2019): 236–48. http://dx.doi.org/10.21511/imfi.16(2).2019.20.
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Behavioral components of Kahneman and Tversky’s (1979) prospect theory (PT) were applied to derive an adjusted Capital Asset Pricing Model (CAPM) in the estimation of merger and acquisition-intensive firms’ expected returns. The premise was that the CAPM – rooted in expected utility theory – is violated by the behavioral biases identified in prospect theory. Kahneman and Tversky’s prospect theory (1979) has demonstrated that weaknesses abound in the viability of classical utility theory predictions. For mergers and acquisitions, firms appear to be isolated from and immune to human error, yet decisions which involve the undertaking of capital-intensive projects are delegated to senior management. These individuals are prone to cognitive biases and personalized risk appetites that may (and often do) compromize attitudes and behavior when it comes to pricing risky ventures. Having established that beta estimates using linear regression are inferior, the CAPM was implemented utilizing beta estimates obtained from the Kalman filter. The results obtained were assessed for their long-term market price predictive accuracy. The authors test the reliability of the CAPM as a predictor of price, observe the rationality of human behavior in capital markets, and attempt to model premiums to adjust CAPM returns to a level that more appropriately accounts for firm specific risk. The researchers show that market participants behave irrationally when assessing M&A firms’ specific risk. Logistic regression coupled with the development of a risk premium was implemented to correct the original Kalman filter returns and was tested for improvements in predictive power.
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Tai, Chu-Sheng. "International diversification during financial crises." Managerial Finance 44, no. 12 (December 3, 2018): 1434–45. http://dx.doi.org/10.1108/mf-11-2017-0477.
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Purpose The purpose of this paper is to provide empirical evidence on how 1999–2001 dot-com crisis and 2007–2009 subprime crisis affect the gains from international diversification from the perspective of US investors. Design/methodology/approach A conditional international CAPM with asymmetric multivariate GARCH-M specification is used to estimate international diversification gains. Findings The authors find that over the entire sample period, the average gains from international diversification is statistically significant and about 1.253 percent per year. During the subprime crisis period, the average gains decreases to about 0.567 percent per year, but it increases to 2.829 percent per year during the dot-com crisis. Research limitations/implications These research findings although confirm the conjectures that international financial turmoil tends to increase the co-movements among global financial markets, are in contrast to the conjectures that international diversification does not work during the financial crisis as evidence from the dot-com crisis. Therefore, future research on international diversification should not just focus on the correlation among international financial markets and should adopt a fully parameterized asset pricing model to study this research topic. Practical implications Given the empirical results found in this paper that international diversification gains may be decreasing or increasing during the financial crisis, as long as investors are not able to predict international financial crises, it is the average gains from international diversification over the longer periods that should encourage investors to diversify, regardless of potentially lower benefits over the shorter periods of time. Originality/value The major value of this paper is that although the increase in the conditional correlation during the financial turmoil is consistent with previous studies, the empirical results clearly show that the impact of a financial crisis on the gains from international diversification cannot be solely determined by the correlation between domestic and world stock market returns since the gains also depend on the unsystematic risk from the domestic stock market. Consequently, it is premature for previous studies to conclude that the gain from international diversification is diminishing due to an increasing correlation among international stock markets during the financial crisis.
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Sehrawat, Neeraj, Amit Kumar, Narander Kumar Nigam, Kirtivardhan Singh, and Khushi Goyal. "Test of capital market integration using Fama-French three-factor model: empirical evidence from India." Investment Management and Financial Innovations 17, no. 2 (May 22, 2020): 113–27. http://dx.doi.org/10.21511/imfi.17(2).2020.10.
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Integration or segmentation of markets determines whether substantial advantages in risk reduction can be attained through portfolio diversification in foreign securities. In an integrated market, investors face risk from country-specific factors and factors, which are common to all countries, but price only the later, as country-specific risk is diversifiable. The aim of this study is two-fold, firstly, investigating the superiority of the Fama-French three-factor model over Capital Asset Pricing Model (CAPM) and later using the superior model to test for integration of Indian and US equity markets (a proxy for global markets). Based on a sample of Bombay Stock Exchange 500 non-financial companies for the period 2003–2019, the data suggest the superiority of Fama-French three-factor model over CAPM. Using the Non-Linear Seemingly Unrelated Regression technique, the first half of the sample period (2003–2010) shows evidence of market segmentation; however, the second sub-period (2011–2019) shows weak signs of market integration, which is supported by the Johansen test of cointegration, suggesting that Indian market is gradually getting integrated with global markets.
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Pan, Zhiyuan, Xu Zheng, and Qiang Chen. "Testing asymmetric correlations in stock returns via empirical likelihood method." China Finance Review International 4, no. 1 (February 11, 2014): 42–57. http://dx.doi.org/10.1108/cfri-08-2012-0091.
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Purpose – This study aims to propose a model-free statistic that tests asymmetric correlations of stock returns, in which stocks move more often with the market when the market goes down than when it goes up, and then empirically analyze the asymmetric correlations of the China stock market and international stock markets, respectively. Design/methodology/approach – Using empirical likelihood method, this study designs and conducts a model-free test, which converges to χ2 distribution under regulated conditions and performs well in the finite sample using bootstrap critical value method. Findings – By analyzing the authors' model-free test, the authors find that compared with Hong et al.'s test that closely relates to the authors, both of the tests are under rejected using asymptotic critical value. However, using the bootstrap critical value method can greatly improve the performance of the two tests. Second, investigating the power of the two tests, the authors find that the proportion of rejections of the authors' test is roughly 10-20 percent larger than Hong et al.'s test in mixed copula model setting. The last finding is the authors find evidence of asymmetric for small-cap size portfolios, but no evidence for middle-cap and large-cap size portfolios in the China stock market. Besides, the authors test asymmetric correlations between the USA and Japan, France and the UK; the asymmetric phenomenon exists in international stock markets, which is similar to Longin and Solnik's findings, but they are not significant according to both the authors' test and Hong et al.'s test. Research limitations/implications – The findings in this study suggest that both the authors' test and Hong et al.'s test are under rejected using asymptotic critical value. When applying these statistics to test asymmetric correlations, the authors should take care with the choice of critical value. Practical implications – The empirical analysis has a significant practical implication for asset allocation, asset pricing and risk management fields. Originality/value – This study constructs a model-free statistic to test asymmetric correlations using empirical likelihood method for the first time and corrects the size performance by bootstrap method, which improves the performance of Hong et al.'s test. To the authors' knowledge, this is the first study to test the asymmetric correlations in the China stock market.
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Burtnyak, Ivan, and Anna Malytska. "Spectral study of options based on CEV model with multidimensional volatility." Investment Management and Financial Innovations 15, no. 1 (January 3, 2018): 18–25. http://dx.doi.org/10.21511/imfi.15(1).2018.03.
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This article studies the derivatives pricing using a method of spectral analysis, a theory of singular and regular perturbations. Using a risk-neutral assessment, the authors obtain the Cauchy problem, which allows to calculate the approximate price of derivative assets and their volatility based on the diffusion equation with fast and slow variables of nonlocal volatility, and they obtain a model with multidimensional stochastic volatility. Applying a spectral theory of self-adjoint operators in Hilbert space and a theory of singular and regular perturbations, an analytic formula for approximate asset prices is established, which is described by the CEV model with stochastic volatility dependent on l-fast variables and r-slowly variables, l ≥ 1, r ≥ 1, l ∈ N, r ∈ N and a local variable. Applying the Sturm-Liouville theory, Fredholm’s alternatives, as well as the analysis of singular and regular perturbations at different time scales, the authors obtained explicit formulas for derivatives price approximations. To obtain explicit formulae, it is necessary to solve 2l Poisson equations.
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Montiel, Eduardo Luis, and Octavio Martinez. "Hotel Business Inn." Emerald Emerging Markets Case Studies 9, no. 4 (December 13, 2019): 1–15. http://dx.doi.org/10.1108/eemcs-10-2019-0258.
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Learning outcomes These are the three most important learning outcomes: discuss the relevance of capital asset pricing model (CAPM) as the methodology to estimate the cost of equity for an investment in an emerging market; analyze the different alternatives to estimate country risk discussing the pros and cons of each. Consider the additional complexity in estimating the cost of equity, contrasting the perspective of a local, non-diversified investor with that of a multinational company operating in 39 countries. Case overview/synopsis The Chief Financial Officer of a business group has to determine the correct discount rate for an investment in a new hotel in Guayaquil, Ecuador. The group has traditionally used the same discount rate for all projects and is now presented with several alternatives by his team. Estimating the correct country risk adjustment for the project is an important challenge. He knows that there is no clear solution to this challenge that is accepted by all practitioners and academics, but he has to present a recommendation to the board. Complexity academic level The case study is designed for corporate finance, appraisal or international finance courses in both MBA and executive training programs. To discuss this case study, students are assumed to have been already exposed to the weighted average cost of capital and the CAPM. Supplementary materials Teaching Notes are available for educators only. Please contact your library to gain login details or email support@emeraldinsight.com to request teaching notes. Subject code CSS 1: Accounting and finance.
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Bouri, Elie, Riza Demirer, Rangan Gupta, and Jacobus Nel. "COVID-19 Pandemic and Investor Herding in International Stock Markets." Risks 9, no. 9 (September 13, 2021): 168. http://dx.doi.org/10.3390/risks9090168.
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The aim of this study is to understand the effect of the recent novel coronavirus pandemic on investor herding behavior in global stock markets. Utilizing a daily newspaper-based index of financial uncertainty associated with infectious diseases, we examine the association between pandemic-induced market uncertainty and herding behavior in a set of 49 global stock markets. More specifically, we study the pattern of cross-sectional market behavior and examine whether the pandemic-induced uncertainty drives directional similarity across the global stock markets that cannot be explained by the standard asset pricing models. Utilizing a time-varying variation of the static herding model, we first identify periods during which herding is detected. We then employ probit models to examine the possible association between pandemic-induced uncertainty and the formation of herding. Our findings show a strong association between herd formation in stock markets and COVID-19 induced market uncertainty. The herding effect of COVID-19 induced market uncertainty is particularly strong for emerging stock markets as well as European PIIGS stock markets that include some of the hardest hit economies in Europe by the pandemic. The findings establish a direct link between the recent pandemic and herd formation among market participants in global financial markets. Considering the evidence that herding behavior can drive security prices away from equilibrium values supported by fundamentals and further contribute to price fluctuations in financial markets, our findings have significant implications for policy makers and investors in their efforts to monitor investor sentiment and mitigate mis-valuations that might occur as a result. Furthermore, the evidence on the behavioral pattern of stock investors in relation to infectious diseases uncertainty can be useful in studying price discovery in stock markets and might help market participants in forming hedging strategies to mitigate downside risk in their investment portfolios.
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S. Daugherty, Mary, Thadavillil Jithendranathan, and David O. Vang. "Portfolio selection using the multiple attribute decision making model." Investment Management and Financial Innovations 18, no. 2 (May 27, 2021): 155–65. http://dx.doi.org/10.21511/imfi.18(2).2021.13.
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This paper uses a Multiple Attribute Decision Making (MADM) model to improve the out-of-sample performance of a naïve asset allocation model. Under certain conditions, the naïve model has out-performed other portfolio optimization models, but it also has been shown to increase the tail risk. The MADM model uses a set of attributes to rank the assets and is flexible with the attributes that can be used in the ranking process. The MADM model assigns weights to each attribute and uses these weights to rank assets in terms of their desirability for inclusion in a portfolio. Using the MADM model, assets are ranked based on the attributes, and unlike the naïve model, only the top 50 percent of assets are included in the portfolio at any point in time. This model is tested using both developed and emerging market stock indices. In the case of developed markets, the MADM model had 24.04 percent higher return and 53.66 percent less kurtosis than the naïve model. In the case of emerging markets, the MADM model return is 90.16 percent higher than the naïve model, but with almost similar kurtosis.
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Chenchik, Ya V. "How to Estimate the Impact of an Issuer’s ESG Risk on the Yield of its Bonds." Issues of Risk Analysis 19, no. 3 (June 30, 2022): 86–100. http://dx.doi.org/10.32686/1812-5220-2022-19-3-86-100.
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All over the world, the ESG agenda is receiving more and more attention from the leadership of countries, international organizations and companies. These trends can be reflected both in the operating activities of companies and in the way they raise funds in financial markets, as well as in the pricing of financing instruments such as bonds. The subject of the study is the yield of circulating bonds of issuers with a credit rating, as well as ESG risk expressed by the ESG rating assigned to the issuer. The aim of the study is to develop the author’s theoretical and methodological approach to modeling the pricing of bonds and calculating their yield to maturity, which, in addition to generally accepted factors, also takes into account the issuer’s ESG risks. The methodological base of the study includes the analysis and comparison of the yield to maturity of bonds of corporate borrowers against the zero-coupon yield curve of federal loan bonds, ratings of rating agencies regarding the creditworthiness of issuers and their ESG risks. The author uses the total risk premium approach and evaluates the risk premium for investing in the issuer’s bonds as the sum of premiums for certain types of risks. At the same time, the author proposes an author’s modification of this approach in order to take into account the grade of the issuer’s ESG rating in the risk premium of its bonds and, accordingly, their yield to maturity, which is the scientific novelty and relevance of this work. Based on the performed mathematical modeling, the obtained results demonstrate that investors differently evaluate the required yield to maturity for an asset, depending on the grade of the issuing company’s ESG rating. In addition to describing the observed non-linear relationship between the factors that characterize the company, its bond issues and the return required by investors, modeling makes it possible to conclude that in the current realities, the investment idea to invest in Russian companies that follow the concept of sustainable development is conservative. Following sustainable development strategies by a larger number of companies from different industries and regions, together with the development of regulation, will lead to the further development of the green finance market in Russia and the world, and an increase in the coverage of companies by rating agencies. This will provide the author’s approach with development prospects, in particular, the modeling will be enriched with a large amount of input data, it will take into account a larger number of companies and their bond issues, and the possibility of adding new factors to the model will be studied.
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Ahmed, Essia Ries, Md Aminul Islam, Tariq Tawfeeq Yousif Alabdullah, and Azlan Bin Amran. "A qualitative analysis on the determinants of legitimacy of sukuk." Journal of Islamic Accounting and Business Research 10, no. 3 (May 7, 2019): 342–68. http://dx.doi.org/10.1108/jiabr-01-2016-0005.
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Purpose This paper aims to investigate the influence of the determinants (pricing, type of structure, Shariah auditing, Shariah risk and Shariah documentation) and the sukuk legitimacy among Islamic financial institutions using a qualitative approach. The paper further explained the significance of the determinants on legitimacy, evaluated the relationship between sukuk characteristics and sukuk legitimacy and examined the moderating effect of Shariah Supervisory Board (SSB) on the relationship. Design/methodology/approach The study used a purposive sampling technique to select the target respondents required for the survey (semi-structured interview). This technique is applied by selecting members of SSBs among Islamic financial institutions. A total number of ten members are selected as the sample size for the study based on their experience and basic knowledge of Fiqh Al-Mua’malat and its application in Islamic financial institutions. Findings The findings revealed that the determinants have a significant impact on the sukuk legitimacy, meaning that there is a positive and significant relationship between the determinants and the sukuk legitimacy. In addition, this study indicates the empirical evidence of the moderating effect of SSB on the relationship between the determinants and the sukuk legitimacy. Practical implications This study has added to the literature by examining the determinants of sukuk legitimacy while evaluating the moderating effect of SSB on the relationship. Besides, this might add benefits to the numerous Islamic financial institutions relating to the amendment of its regulatory frameworks with the view to pushing the sukuk market investors to move toward asset-backed structure. In addition, the SSB in central banks must also focus its attention regarding the sukuk legitimacy and its application among the various Islamic financial institutions. Originality/value This study has added a new discussion to the body of knowledge, i.e. examining the sukuk legitimacy and its relationship with sukuk determinants; hence, an approach that is not widely discussed in the previous studies. Furthermore, conducting such research in the field of Islamic finance provides novelty in the literature among both emerging and developed economies including Malaysia. This is because to the best knowledge of the researchers, there was no empirical study (within the literature) that combined these variables and evaluated their empirical significance. Accordingly, this would enlighten the Islamic Ummah and propel the society’s intensity toward contributing to knowledge and might further provide clarification on the determinants and the sukuk legitimacy to prospective scholars, precisely on the moderating effect of SSB on the relationship between determinants and legitimacy of sukuk.
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"Tail Risk in the Cross Section of Alternative Risk Premium Strategies." Journal of Portfolio Management, January 1, 2019. http://dx.doi.org/10.3905/jpm.2018.45.2.093.
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In this article, the authors attempt to get a better understanding of the cross-section of alternative risk premiums using a multi-asset version of the downside risk capital asset pricing model (CAPM). In line with the empirical literature, they find that the cross-section of realized returns is much better explained when using the downside CAPM, rather than relying on the traditional CAPM. However, in contrast to the empirical literature, the authors cannot always recover the required signs in their cross-sectional regressions. In particular, they find that taking on downside risk is not always systematically rewarded. This might be due to the limited availability of time series that essentially overweight the exceptional events of 2008 or a direct result of creating backtests with attractive in-sample features that are impossible to repeat out-of-sample.
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Bekaert, Geert, Eric Engstrom, and Andrey Ermolov. "The Variance Risk Premium in Equilibrium Models." Review of Finance, March 1, 2023. http://dx.doi.org/10.1093/rof/rfad005.
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Abstract The equity variance risk premium is the expected compensation earned for selling variance risk in equity markets. The variance risk premium is positive and shows only moderate persistence. High variance risk premiums coincide with the left tail of the consumption growth distribution shifting down. These facts, together with risk neutral skewness being substantially more negative than physical return skewness, refute the bulk of the extant consumption-based asset pricing models. We introduce a tractable habit model that does fit the data. In the model, the variance risk premium depends positively (negatively) on ”bad” (”good”) consumption growth uncertainty.
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Aramonte, Sirio, Mohammad R. Jahan-Parvar, Samuel Rosen, and John W. Schindler. "Firm-Specific Risk-Neutral Distributions with Options and CDS." Management Science, October 28, 2021. http://dx.doi.org/10.1287/mnsc.2021.4170.
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We propose a method to extract the risk-neutral distribution of firm-specific stock returns using both options and credit default swaps (CDS). Options and CDS provide information about the central part and the left tail of the distribution, respectively. Taken together, but not in isolation, options and CDS span the intermediate part of the distribution, which is driven by exposure to the risk of large, but not extreme, returns. Through a series of asset-pricing tests, we show that this intermediate-return risk carries a premium, particularly at times of heightened market stress. This paper was accepted by David Simchi-Levi, finance.
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Chen, Jian, Jiaquan Yao, Qunzi Zhang, and Xiaoneng Zhu. "Global Disaster Risk Matters." Management Science, March 14, 2022. http://dx.doi.org/10.1287/mnsc.2022.4328.
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This article examines the cross-country asset pricing implications of disaster risk concerns. We construct a new disaster risk index, relying on six news-implied rare disaster proxies of Manela and Moreira (2017) , and show that this index is a powerful predictor for stock returns and other asset returns in international markets both in and out of sample. By further disentangling a global common component from our rare disaster index, we find evidence supporting theories that emphasize globally shared disaster risk as the important driving force of asset price fluctuations. Moreover, we conduct a return decomposition analysis and find that the global disaster risk drives stock returns primarily through the discount rate channel. This paper was accepted by Karl Diether, finance.
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Su, Chi-Wei, Yiru Liu, Tsangyao Chang, and Muhammad Umar. "CAN GOLD HEDGE THE RISK OF FEAR SENTIMENTS?" Technological and Economic Development of Economy, December 16, 2022, 1–22. http://dx.doi.org/10.3846/tede.2022.17302.
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This paper investigates the interaction between fear sentiments and gold price (GP) by utilising the full-sample and sub-sample rolling-window bootstrap causality tests. It can be observed that GP can hedge the risk of fear sentiments in a certain period. The result supports the inter-temporal capital asset pricing model, which demonstrates that the increase in fear sentiments can promote the rise in gold prices. Due to excessive panic, fear sentiments also have negative effects on GP. In contrast, GP positively impacts fear sentiments, which manifests that market sentiment can be forecasted based on changes in the gold market. In addition, the negative influences from GP to fear sentiments indicate there are diversified assets that can be alternatives to gold. In the complicated international environment and volatile market sentiments, investors can benefit by optimising their asset portfolio. The governments can mitigate the adverse effects of large fluctuations in both markets by grasping the movement of gold and fear sentiments.