Time-varying beta in functional factor models: Evidence from China

In this paper, we introduce a functional method to investigate how betas change over time in factor models. Based on the China A-share data, we drop the constant beta assumption in the CAPM and multi-factor models to estimate the time-varying betas directly from the functional data regression. The empirical results show that exposures to all risk factors have certain time-varying patterns in the Chinese A-share stock market.     

Modelling demand for lotto using a novel method of correcting for endogeneity

Modelling lottery sales as a function of the mean, standard deviation and skewness of the probability distribution of returns potentially gives insights into how the design of a game could be modified to maximise net revenue. But use of OLS is problematic because the level of sales itself affects values of the moments (and insufficient instruments are available for IV regression). We draw on the concept of a rational expectations equilibrium, developing a new regression model which corrects for endogeneity where the causal impact of the dependent variable on the right-hand side variables is deterministic. We apply the model to data on lotto sales from Spain. Using the Spanish data, we show that results provide more reliable guidance to lottery agencies because accounting for endogeneity leads to significantly different results from OLS and these results have superior performance in out-of-sample forecasting of sales. More generally, results prove consistent with the Friedman-Savage explanation of why people buy lottery tickets and with evidence from racetrack data that ‘bettors love skewness’.     

Risk,uncertainty, and leverage

Using mostly theoretical models and traditional risk/uncertainty measures (VIX index, panic, precaution, scary bad news, etc.), the current literature tries to clarify the risk/uncertainty-deleveraging pattern. The findings are not sufficient to explain the dynamic empirical relationship between modern risk/uncertainty indicators and leverage. We fill this gap in the literature by using US quarterly data, from 1985:1 to 2018:4, Granger causality tests, and a structural vector autoregression model. We find that commercial bank leverage rises when geopolitical risk and macroeconomic, policy, and equity uncertainty increase. Client-based business relationships of banks and high government borrowing from banks during crises periods are responsible for this relationship. We find that the leverage of broker-dealers and shadow banks declines when Chicago risk and macroeconomic, policy, financial, and equity uncertainty increase. We argue that the vulnerability of broker-dealers and shadow banks to the risk/uncertainty of the entire market system is responsible for this relationship.     

‘Real without being concrete’: the ontology of public concern and its significance for the Social Amplification of Risk Framework (SARF)

Abstract

Public concern is a pivotal notion in the risk perception, communication and management literature. It is, for example, a central concept with regard to the social amplification of risk, and as a justification for policy attention. Despite its ubiquity, the notion of public concern remains a ‘black box’ presenting a poorly understood state of affairs as a reified matter-of-fact. Paying attention to the deployment and metrics of public concern, and the work it is required to do, will enhance the power of approaches to understanding risk, and policymaking. Thus, the broad purpose of this paper is to unpack the notion of public concern by adopting an ontological yet critical perspective, drawing on a range of literature that considers ontology. We reflect on how publics and public concern have been conceptualised with regard to the dichotomies of individual/social and private/public, given that they imply different levels and dimensions of concern. We draw on empirical work that illuminates the assessment and measurement of public concern and how the public have responded to risk events. Considering public concern through an ontological lens affords a means of drawing renewed critical attention to objects that might otherwise appear finished or ready-made.     

Perceived risk and insurance decision taking for small losses

Abstract

Little systematic research has investigated differences in expressed attitude as a function of the manner in which probability information is communicated to a decision maker. The purpose of this paper is to investigate differences in expressed attitude when insurance coverage is introduced in a known-risk situation (the probability of loss is known), an uncertain situation (there is no prior information on the probability of loss) or an ambiguous (the information provided is vague). The experiments reported in this paper have been developed and tested in the classroom with undergraduate students. Unlike the vast majority of previous work dealing with lotteries and laboratory gambles, this study examine the behavior of people when facing a purchase decision on a well-known consumer good, i.e. a bottle of wine. The comparative results provide some evidence on the risk-taking behavior of consumers for small losses. Within an insurance context, people prefer the more familiar option of a known-risk situation and contrary to expectations, the results do not provide support to ambiguity aversion but to ambiguity seeking.     

The Income and Consumption Effects of COVID-19 and the Role of Public Policy*

We provide empirical evidence on the labour market impacts of COVID-19 in the UK and assess the effectiveness of mitigation policies. We estimate the relationship between employment outcomes and occupational and industrial characteristics and assess the effects on consumption. Seventy per cent of households in the bottom fifth of the earnings distribution hold insufficient assets to maintain current spending for more than one week. We compare the effectiveness of the UK's Coronavirus Job Retention Scheme and of Economic Impact Payments in the US. The EIPs are more effective at mitigating consumption reductions as they have full coverage, depend on household structure and are higher for low-income workers.     

Decomposing financial (in)stability in emerging economies

The analysis of the build-up of risks in emerging economies have traditionally been scarce and focused mostly on external risks, despite the recent substantial development of their financial system. This paper builds an index of financial vulnerabilities tailored to emerging economies, grouping 32 indicators around four poles: valuation and risk appetite, imbalances in the non-financial sector, financial sector vulnerabilities, and global vulnerabilities. It adopts a model-free approach, purposely departing from early warning models or complex econometric constructs, and rely on data made already available by international organisations. Our index of financial vulnerabilities enables a granular mapping of where risk originates and how it spreads to other parts of the financial system. Using various data visualisation tools and benefitting from the flexibility of our index’s methodology, we are able build a narrative of the evolution of financial stability in emerging economies from 2005 to 2015. Finally, we also discuss the relation between our index and both the business cycle (proxied by GDP) and the credit cycle (proxied by the credit-to-GDP gap).     

The fair value of a token: How do markets price cryptocurrencies?

With the rise of cryptocurrency tokens as a new asset class, the question of the fair evaluation of a cryptocurrency token has become a question of increasing importance. We estimate the pricing kernel with which users price factors affecting their token holdings. We investigate how traditional risk factors such as market risk are evaluated, as well as how blockchain specific risk factors are priced in. In order to do so, we introduce an asset pricing model and modify its properties to make it applicable to cryptocurrency markets. We group the risk factors into market related and Bitcoin- and Ethereum blockchain specific risk factors. We find that blockchain specific risk factors are priced in. There is evidence that risk factors have moved from Bitcoin to Ethereum specific risk factors with an increasing importance of market factors, providing evidence for a decoupling of on-chain and off-chain trading activity.     

Independence in bank governance structure: Empirical evidence of effects on bank risk and performance

We investigate how different governance arrangements affect risk and return in banks. Using a new data set for UK banks over the period 2003–2012, we employ a simultaneous equations framework to control for the reciprocal relationship between risk and return. We show that separation of the roles of CEO and Chairman increases bank risk without causing a concurrent increase in return. We also find that oversight by a Remuneration Committee and Non-Executive Directors (NEDs) lowers the probability of bank failure, indicating that empowering an independent Chairman has different effects from empowering independent NEDs. Overall, our results underline the importance of accounting for the heterogeneity in corporate governance arrangements within banks.