Enterprises＇ foreign exchange risk management in the floating exchange risk era

Since the foreign exchange reform on July 21^st 2005, the flexibility of RMB exchange rate has becoming big, so has the foreign exchange risk. How to effectively manage foreign exchange risk has become an emergent task to enterprises. This paper introduces the method of foreign exchange forecast which is the base of foreign exchange risk management, and then deeply discusses different measures of managing the risk.     

Does diversification promote systemic risk?

We measure systemic risk when faced with simulated shocks through the systemic model of banking originated losses. The formation mechanism of systemic risk is explored from the perspective of investment diversification and asset similarity. The results indicate that contagion risks formed by the over similarity of investment assets are the main cause of systemic risk. The similarity generally promotes contagion risks, however, it shows a double-faced effect for state-owned commercial banks that disperse shocks from counterparties through their too-big-to-fail advantages. The similarity is determined by diversification, which initially promotes similarity and disperses it after a threshold. The diversification acts on the contagion process of systemic risk by the mediation of the similarity. Therefore, diversification generally has a nonlinear impact on systemic risk. The results provide regulatory implications for the systemic stability of the banking system.     

Balance sheet effects and original sinners’ risk premiums

This paper describes an empirical model of country risk premiums and their determinants, relying on recent theories of balance sheet effects. We approach the latter by introducing a novel approach to country risk premiums that assumes that nominal exchange rates can move away from or towards equilibrium exchange rates, which allows exchange rate movements towards equilibrium to stimulate favourable competitiveness effects as opposed to adverse balance sheet effects. We investigate eight European emerging economies that suffer from “original sin” over the period 2001–2013, using the pooled mean group estimator of the dynamic panel error correction model. This methodology improves estimation efficiency and model performance, but also allows differentiation between long- and short-run country risk premium determinants. We find that, in the long run, country risk premiums increase in response to higher inflation and a higher total debt-to-GDP ratio, while they move in the opposite direction when the real GDP growth rate rises. Our results suggest that, in the short run, higher external debt service caused by exchange rate depreciation, i.e. the balance sheet effect, and market volatility tends to raise risk premiums, while higher international reserves and the federal funds rate tend to decrease them. Moreover, we show that the negative balance sheet effect is much stronger than the potentially favourable competitiveness effect, and that the rise in risk premiums is not due to the increase in the size of external debt, but to the larger debt burden represented by balance sheet effects.     

Supply chain risk management in India – practical insights

This paper reviews the supply chain risk management (SCRM) literature to identify as well as to discuss and elaborate on the impact and origin of major supply chain risk factors in an Indian context. Through a combination of existing literature and a survey instrument, we identify major SCRM issues including underlying supply chain risks and thereafter identify gaps, issues and opportunities for further research. SCRM has become a popular research topic, in part owing to increased globalisation of business. Moreover competitive factors such as shorter product life cycles, technological innovations and changing government policies have brought this topic more sharply into focus. We carried out a survey among Indian supply chain professionals, based on supply chain risk constructs developed from a literature review. Statistical analysis utilised exploratory and confirmatory factor analyses to determine the major risk factors in the Indian supply chain sector. We found a range of supply chain risks prevalent in Indian supply chains, classified here as cultural, operational, infrastructure, economic, forecasting and supplier-related risks. However, for a variety of reasons and as discussed in the paper, the implications can vary considerably. Based on the findings we provide a future SCRM research agenda from an Indian perspective. As international supply chains increasingly have Indian partners and domestic firms within India seek to be globally competitive, the risks need to be better understood. This is the first detailed study on SCRM practices in an Indian context.     

Summer Budget: calculated risk or reckless gamble?

• The Chancellor had created the expectation that his Summer Budget would be radical and he did not disappoint. The ‘rabbit from the hat’ was a compulsory ‘living wage’, expected to reach £9 per hour in 2020, which Mr Osborne hopes will help to compensate the lower paid for the slashing of in‐work benefits. This has effectively transferred responsibility for supporting low‐income households from the government to employers. The OBR expects this to have a relatively muted impact on employment, but this view looks pretty optimistic and the policy represents a major gamble.
• The reduction in welfare spending, plus an easing of the near‐term fiscal squeeze, has helped to smooth the public spending ‘rollercoaster’. But with a plethora of giveaways failing to disguise a net increase in the tax burden, the Budget is likely to weigh on growth prospects, even if the Chancellor's big gamble pays off.
• Alongside the Budget the Chancellor announced a new fiscal mandate, which will require governments to run a budget surplus in “normal times”. But meeting this mandate will require a fiscal stance very far from the historical norm and it will also force other sectors to move into deficit to compensate. It will also mean a looser monetary policy than would otherwise be the case. So a policy presented as creating room for fiscal policy to respond to future economic shocks could potentially narrow the scope for the more potent weapon of interest rate cuts.

     

The risk–return relation in the corporate loan market

This paper analyzes the hypothesis that returns play a risk-compensating role in the market for corporate revolving lines of credit. Specifically, we test whether borrower risk and the expected return on these debt instruments are positively related. Our main findings support this prediction, in contrast to the only previous work that examined this problem two decades ago. Nevertheless, we find evidence of mispricing regarding the risk of deteriorating firms using their facilities more intensively and during the subprime crisis.     

Option pricing by large risk aversion utility¶under transaction costs

We consider a multi-asset continuous-time model of a financial market with transaction costs and prove that, for a strongly risk-averse investor, the reservation price of a contingent claim approaches the super-replication price increased by the liquidation value of the initial endowment.     

Liquidity risk integration in portfolio choice： The bid efficient frontier

In this paper, a tractable solution is proposed to integrate, to a certain extent, market liquidity risk in the portfolio selection process. It is shown how an investor may take advantage of this additional risk source within the standard mean-variance optimization framework, by in certain circumstances overcoming the pitfalls of illiquidity and in others seizing a liquidity premium. Bid prices appear effective to capture liquidity risk. The efficient frontier conceived with bid prices consists of mean-variance optimal allocations that cover more liquid stocks （large caps） under stressed market conditions and less liquid stocks （small caps） under normal conditions.     

Does rising income increase or decrease damage risk from natural disasters?

Recent empirical literature has found a negative relationship between income per capita and measures of risk from natural disaster, supportive of logic that higher incomes allow countries to mitigate disaster risk. We argue that behavioral changes at the micro level in response to increasing income (such as location choice and extent of costly abatement activity) may lead to a non-linear relationship between aggregate incomes and disaster damages, where the risks increase with income before they decrease. In a country-year panel data set, we show that disaster risk associated with flooding, landslides and windstorms increases with income up to GDP per capita levels of $5044, $3360, and $4688 per year respectively and decrease thereafter. Such non-linear impacts are absent for other disaster types such as extreme temperature events and earthquakes where the links between human behavioral choices and exposure to risk are not as strong. From a policy perspective, this suggests that for the least developed countries, the dual goals of disaster risk prevention and economic development cannot be assumed to be complementary for all forms of natural disaster. In addition to allocating resources to manage disaster risk, the poorest nations may have to be more proactive in enacting policies that alter the behavioral choices of citizens that impact a country's exposure to natural disaster risk.     

An economic–probabilistic model for risk analysis in technological innovation projects

This paper presents the application of an economic–probabilistic model to conduct risk analysis in technological innovation (TI) projects. The model integrates risk and economic analysis by quantifying both value and probability of occurrence of cash flow deviations, thus resulting in an economic–probabilistic analysis of the expected returns. The main risk categories and factors in TI projects are identified and associated to cash flow groups. The model allows to calculate risk-adjusted values for cash flow groups and project net present value through stochastic simulation. As a result, the model provides both the risk-adjusted project economic return with the associated probability distribution to its NPV and the variability that each risk factor generates in the project return. The model offers important benefits from the point of view of practitioners, including a condensed list of independent risk factors and the use of a monetary scale to assess risk impact which is familiar to most decision makers.     

Pharmaceutical drug misuse: are industry of employment and occupation risk factors?

We explore the misuse of pharmaceutical drugs in the Australian workforce, focusing on whether any differences exist between workers in particular industries or occupations. In terms of industry, being employed in hospitality is positively associated with pharmaceutical drug misuse, while being employed in finance, insurance and retail is inversely related. In terms of occupation, we find that being a labourer is positively related to misuse of pharmaceutical drugs, while being employed in managerial, professional, sales, clerical or administrative roles is associated with a lower tendency. Further analysis of occupational effects revealed that being in a blue‐collar occupation, as a whole, is positively related to pharmaceutical drug misuse relative to white‐collar employment. Moreover, being employed in higher status roles is associated with a lower likelihood of such behaviour. Our findings imply that particular workplace pressures, cultural norms and/or working conditions might be influential factors behind workers' drug misuse.     

Influence of decision makers＇ characteristics on risk analysis in strategic investment decisions

This study empirically examines the influence of decision makers＇ （DMs） characteristics on risk analysis in strategic investment decisions （SIDs） of companies operating automotive industry in India. This study has developed and tested a structural model that linking select demographics, risk propensity and risk analysis in SIDs. The primary data were collected from Senior Finance Professionals （CFOs, GMs, VPs and so on） representing 36 listed automotive companies operating in India. Based on the responses collected from a single cross-sectional mailed survey, this study finds that risk propensity has a significant positive influence on the extent of usage of risk analysis in SIDs.     

What drives credit risk in the Indian banking industry? An empirical investigation

Using a two-step system GMM approach on a unique bank-level dataset for the period 1998/99–2013/14, this paper tries to explore the key determinants of credit risk in the Indian banking industry. The main premise of this paper is that, along with regulatory and institutional factors, both macroeconomic and bank-specific variables influence the formation of credit risk in a banking system, and their influences vary across ownership groups. The empirical findings suggest that lower profitability, more diversification in the banking business, the large size of banks and a higher concentration of banks in lending increase the probability of defaults in India. We find a significant degree of persistence in credit risk, and the observed persistence is higher in the gross non-performing loans (NPLs) specification relative to what has been observed in the net NPLs specification. In the case of public sector banks, NPLs are more sensitive to internal bank-specific factors, while for private and foreign banks, macroeconomic and industry-related factors play a significant role in determining credit risk. Our results are robust for different panel data estimation models and sub-samples of ownership groups. The findings of this paper provide important insights into the formation of default risk in the banking system of an emerging market economy.     

Connectedness and risk spillovers in China’s stock market: A sectoral analysis

This paper shows how sectors in the Chinese stock market are connected and investigates risk spillovers across these sectors. Using graph theory and a recently developed time series technique, we are able to identify the systemically important sector in the market and the patterns of risk spillovers across sectors over time. Unlike standard econometric modeling, graph theory enables us to approach this question in a more reader-friendly way. The empirical results show that Industrial sector plays a central role and should thus be considered the systemically most important sector in the Chinese stock market. The spillover structure is found to be time-varying. While Industrial sector dominates the system for most of the time, other sectors such as Consumer Discretionary sector also occasionally appear as the central sector. Our empirical results also indicate that the simple correlation-based approach can produce equally useful information as more advanced econometric models.     

On Kullback–Leibler information of order statistics in terms of the relative risk

The representation of the entropy in terms of the hazard function and its extensions have been studied by many authors including Teitler et al. (IEEE Trans Reliab 35:391–395, 1986). In this paper, we consider a representation of the Kullback–Leibler information of the first \(r\) order statistics in terms of the relative risk (Park and Shin in Statistics, 2012), the ratio of hazard functions, and extend it to the progressively Type II censored data. Then we study the change in Kullback–Leibler information of the first \(r\) order statistics according to \(r\) and discuss its relation with Fisher information in order statistics.     

Calibrating the wealth effects of decoupled payments: Does decreasing absolute risk aversion matter?

Arrow’s hypotheses regarding the relationship between wealth and risk aversion measures have formed the basis for a large body of empirical research and theory. For example, many have suggested that decoupled farm subsidy payments may increase production as they decrease farmers’ risk aversion. This paper develops a new calibration technique designed to measure the minimum change in concavity of a utility of wealth function necessary to describe a particular change in production behavior for some discrete change in wealth. I conclude that measurable changes in production levels should not be produced by changing levels of risk aversion except when wealth changes are a substantial portion of wealth. This tool draws into question the usefulness of Arrow’s hypotheses in many current applications.     

Jump risk and cross section of stock returns: evidence from China’s stock market

Various studies have confirmed the existence of jumps in different financial markets. However, there is sparse theoretical or empirical effort to examine the dynamic relation between jump risk and cross-sectional expected stock returns. We follow a stylized SDF-based diffusion-jump model to examine its testable implications about the relation between cross-section expected excess returns and variations in jump intensities across stocks. The zero-cost portfolio, exploiting the return spreads between the top and bottom decile portfolios formed on jump intensity, could earn an annualized return as high as 24% with an annualized Sharpe ratio of 1.67. A Fama-MacBeth test shows that stock excess returns monotonically decrease in jump intensity even after controlling for other common risk factors.     

Prospect theory and risk appetite: an application to traders’ strategies in the financial market

According to behavioral finance theories, in this article we develop a dynamic model with heterogeneous traders, where the asset price is determined by the interaction among four different groups of agents: trend reversers, trend followers, risk averters and risk seekers. The main purpose of the study is centered on modeling and testing how the market efficiency changes along with the changes of agent’s behavior preference without exogenous influence. Combining with the assumption of risk appetite and prospect theory, focusing on analyzing the rules for selecting strategies, we establish a more reliable and comprehensive dynamic mechanism. In particular, our study suggests that diversified trading strategies will help to realize market efficiency.     

Is the 2008 financial turmoil increasing the risk of a bank run？ An empirical research in Geneva

In this paper, the authors present the results of an empirical study that attempts to analyse the risk of bank run in Geneva, Switzerland. Two similar surveys have been conducted upon two independent samples of Geneva population （June 2008 and February 2009） to detect the existence of predictive signals leading to a bank run within the selected area. The authors discover that Geneva inhabitants are generally confident in Swiss banks; the risk of a bank run in the area is low. However, reliance to the national banking system is worsening： The number of people fearing about their savings and those thinking the default of a major Swiss bank as ＂possible＂ has significantly risen. Also, more and more people keep updated about the current financial crisis; overall trust in Swiss banks has slightly decreased.     

The relation between the equity risk premium and the bond maturity premium in the UK: 1900–2006

Using a rich data set for the UK for over a century, we find that the relation between the equity risk premium and the government bond maturity premium is nonlinear and subject to stochastic regime switching. We identify a regime in which both premia are jointly characterized by low volatility and another regime in which both premia are characterized by high volatility. The occurrence of the high volatility regime chronologically coincides with major changes in the pound exchange rate. The low volatility regime has a higher probability of turning up over two consecutive years than the high volatility regime, but it is not perceived by investors to be an absorbing regime. The lagged maturity premium is a strong predictor of the equity risk premium only in the regime of low volatility. In addition, the lagged equity premium is a predictor of the maturity premium also in the low volatility regime. This result on regime-dependent bidirectional predictability is robust to alternative definitions of the equity premium, and to the inclusion of real interest rate and real growth effects.