Local risk factors in emerging markets: Are they separately priced?

We provide new evidence on the pricing of local risk factors in emerging stock markets. We investigate whether there is a significant local currency premium together with a domestic market risk premium in equity returns within a partial integration asset pricing model. Given previous evidence on currency risk, we conduct empirical tests in a conditional setting with time-varying prices of risk. Our main results support the hypothesis of a significant exchange risk premium related to the local currency risk. Exchange rate and domestic market risks are priced separately for our sample of seven emerging markets. The empirical evidence also suggests that although statistically significant, local currency risk is on average smaller than domestic market risk but it increases substantially during crises periods, when it can be almost as large as market risk. Disentangling these two factors is thus important in tests of international asset pricing for emerging markets.     

Pricing of the currency risk in the Canadian equity market

Based on a three-factor international capital asset pricing model, we examine whether the world market, the local market and the currency risks are priced in the Canadian equity market. The analysis presented in this paper is based on data collected from 2003 to 2010. As the dataset also includes the period of global financial crisis, we examine the issue of risk pricing in the full sample as well as in before and after global financial crisis periods. Unlike most existing studies, the empirical results presented in this paper are based on (i) the quasi maximum likelihood estimation (QMLE) based multivariate GARCH-in-Mean specification and (ii) the generalized method of moments (GMM) techniques. Our empirical analysis based on weekly data on 58 largest Canadian firms indicates that the currency as well as the local and the world market risks are priced in the Canadian equity market. This result holds for all exchange currency rates proxies and in all sample periods. We find that the price of the world market, the local market and the currency risks is time-varying and the Canadian equity market is partially segmented.     

Jump risk premia across major international equity markets

We decompose the non-diversifiable market risk into continuous and discontinuous components and jump systematic risks into positive vs. negative and small vs. large components. We examine their association with equity risk premia across major equity markets. We show that developed markets jumps are more closely linked to the aggregate market index than emerging and frontier ones. The reward for bearing both the continuous and downside jump risks is positive during the pre-crisis period whereas the reward for bearing the upside and large jump risks is negative during the crisis and post-crisis periods. We also provide evidence of significant continuous and discontinuous leverage effects during the pre-crisis period, suggesting that both continuous and discontinuous price and volatility risks share compensations for common underlying risk factors.     

气候变化冲击下的涉农信用风险——基于2010-2019年256家农村金融机构的实证研究

气候变化可能导致的经济金融风险已经成为学术界关注的热点问题。本文首先分析了气候变化引发涉农金融风险的传导机制,以2010-2019年256家农村金融机构的经营数据为样本,将标准化后的年均气温作为刻画气候变化程度的核心指标,评估农村金融机构所在县域地理单元的气候变化程度对其信用风险的影响。研究发现,年均气温波动对农村金融机构的信用风险水平存在显著影响,且影响呈现阶段性特征;在4个季度中,冬季气温的波动对信用风险的影响最为突出;虽然城商行与农商行、村镇银行均是立足于服务地方经济发展的商业银行,但由于城商行的业务在地域上和行业上更为分散,气候变化未对其信用风险水平产生显著影响。为此,提出了开展压力测试、实施差异化监管和创新风险缓释工具三个方面的对策建议。本文为管理由气候变化导致的涉农信用风险提供了政策启示和决策参考。     

Risk disclosure and cost of equity: The Spanish case

In this paper we make an empirical study of the relationship between risk disclosure and the cost of equity. In particular, the objective being pursued is to contrast whether or not the cost of equity for the company is related to its financial and non-financial risk disclosure. Our results show no statistically significant relationship between the latter and the cost of equity; and a statistically significant relationship, with a positive sign, between this cost and financial risk disclosure. This suggests that company risk disclosures appear to introduce unknown contingencies and risk factors rather than only update information about known risks.     

气候变化风险对金融体系的作用机理及对策研究

气候变化及其带来的自然灾害风险已成为影响经济发展和金融安全稳定的重要因素。近年来,气候变化对实体经济的影响及导致的金融风险已成为世界主要国家金融监管部门关注的重点之一。本文在对气候变化与经济增长、气候变化与金融风险及其相关领域研究综述的基础上,分析了气候变化对实体经济的影响机理,并重点围绕气候变化对银行、保险等金融体系风险作用机理进行深入分析,提出做好应对气候变化导致金融风险的防控措施及建议。     

Climate change financial risks: Implications for asset pricing and interest rates

In addition to tail macroeconomic events (e.g. wars, financial crises and pandemics), climate change poses a threat to financial stability — with extreme climatic events increasing in frequency and intensity and policy risks putting pressure on asset valuations. We study the effect of a changing climate on asset prices and interest rates through the lens of a dynamic CAPM with rare disasters, time-varying risk and recursive preferences. In our model, a changing climate makes tail events more frequent and less predictable, increasing the premium of climate risk; interestingly, this change may not be fully reflected in the overall market risk premium that includes both components of risk: macroeconomic and environmental. Our results also support the hypothesis of a declining real rate of interest as the planet warms, while the increasing risk of climate policy reduces the participation of brown assets in the market portfolio.     

When bonds matter: Home bias in goods and assets

This paper presents a model of international portfolios with real exchange rate and non-financial risks that account for observed levels of equity home bias. Bonds matter: in equilibrium, investors structure their bond portfolio to hedge real exchange rate risks. Equity home bias arises when non-financial income risk is negatively correlated with equity returns, after controlling for bond returns. Our framework allows us to derive equilibrium bond and equity portfolios in terms of directly measurable hedge ratios. An empirical application to G-7 countries finds strong empirical support for the theory. We are able to account for a significant share of the equity home bias and obtain an aggregate currency exposure of bond portfolios comparable to the data.     

Drivers of flood and climate change risk perceptions and intention to adapt: an explorative survey in coastal and delta Vietnam

Abstract

This article contributes to current research about determinants of climate change and flood risk perception, and intentions to take adaptive measures. We propose a research model that distinguishes between vulnerability and severity components of perceived risks, and adds perceived adaptive capacity as a third factor to predict the intention to take adaptive measures. We used this combined model as a conceptual lens for an explorative survey among 1086 residents of coastal and delta communities in Vietnam. Pairwise analyses revealed a significant association of flood and climate change risk perceptions with individual’s flood experience, climate change knowledge, frequency of community participation and socio-demographic factors. However, in multivariate analysis, the influence of most socio-demographic factors became weak or patchy. Flood experience was the most influential driver of flood-related risk perceptions but weak for climate change-related risk perceptions and behavioural intentions. Knowledge strongly increased the intention to adapt to flood and climate risks and the perceived vulnerability to and severity of climate change risks, but reduced the perceived capacity to adapt to climate risks. Frequency of community participation increased the perceived vulnerability and severity of climate change risks, the intention to adapt to both climate and flood risks and the perceived capacity to adapt to flood risks, but reduced the perceived capacity to adapt to climate risks. Our research confirms earlier findings that individuals’ knowledge, place-specific experience and social-cultural influences are key predictors of both flood and climate change risk perceptions and intentions to take adaptive measures. These factors should therefore receive ample attention in climate risk communication.     

How Theories of Financial Intermediation and Corporate Risk-Management Influence Bank Risk-Taking Behavior

This paper examines the rationales for risk-taking and risk-management behavior from both a corporate finance and a banking perspective. After combining the theoretical insights from the corporate finance and banking literatures related to hedging and risk-taking, the paper reviews empirical tests based on these theories to determine which of these theories are best supported by the data. Managerial incentives are the most consistently supported rationale for describing how banks manage risk. In particular, moderate/high levels of equity ownership reduce bank risk while positive amounts of stock option grants increase bank risk-taking behavior. The review of empirical tests in the banking literature also suggests that financial intermediaries coordinate different aspects of risk (e.g., credit and interest rate risk) in order to maintain a certain level of total risk. The empirical results indicate hedgeable risks such as interest rate risk represent only one dimension of the risk-management problem. This implies empirical tests of the theories of corporate risk-management need to consider individual sub-components of total risk and the bank's ability to trade these risks in a competitive financial market. This finding is consistent with the reality that banks have non-zero expected financial distress costs and bank managers cannot fully diversify their bank-related personal investments.     

The determinants of stock–bond return correlations

I study the options-implied market risks that affect US stock–bond correlations from 2007 to 2021. I discover that US stock and bond market uncertainty, stock market tail risk, and global credit-default risk are dominant contributors to changing stock–bond correlations during the global financial crisis (GFC) period. However, these market risks collectively contribute much less to time-varying correlations in the post-GFC period. Furthermore, stock–bond correlations rise in times of rising US and global bond market risks. Rising stock market uncertainty raises stock–bond correlations in the GFC period but lowers them in the post-GFC period. My results disentangle the risks of stock and bond markets and show that equity tail risk, bond market risk, and stock market uncertainty are dominant factors in changing stock–bond diversification benefits in periods of market turmoil.     

融资融券和股指期货对中国股市的影响：国别经验和初步评估

通过比较部分国家和地区推出融资融券和股指期货对股票市场的影响,并就中国融资融券和股指期货相关政策法规设计对股票市场的影响以及股票市场可能出现的问题和风险进行初步评估,结果表明融资融券和股指期货能够在一定程度上提高市场流动性,且在推出初期可能会加大市场波动;但长期而言必将有利于市场的稳定;也会带来市场结构调整的进一步深化以及交易策略、产品等的创新;同时还将对风险监管、指数权重股的交易监管带来新的挑战,     

中国居民储蓄与股票市场之间的联动效应——理论分析与实证检验

从资产需求理论出发的理论分析、对我国现实情况进行的剖析,以及利用2001～2007年3月的最新数据对居民储蓄与股票市场之间联动关系进行的实证分析显示:随着经济的发展和资本市场的深化,我国居民的储蓄偏好和证券投资倾向正逐步发生变化;我国股市交易与居民储蓄存在联动效应,居民主动投资股票市场的积极性在增强,但两者之间的影响幅度还相对较小,这与我国居民储蓄存款的低利率弹性、股票市场的高风险特征以及股票市场的风险溢价波幅较大等有关.     

Optimism and the perceptions of new risks

While many risks, especially new ones, are not objectively quantifiable, individuals still form perceptions of risks using incomplete or unclear evidence about the true nature of those risks. In the case of well known risks, such as smoking, individuals perceive risks to be smaller for themselves than others, exhibiting ‘optimism bias’. Although existing evidence supports optimism bias occurring in the case of risks about which individuals are familiar, evidence does not yet exist to suggest that optimism bias applies for new risks. This paper addresses this question by examining the gap in perceptions of risks individuals have for themselves versus society and the environment, conceptualised as social and/or environmental optimism biases. We draw upon the 2002 UEA‐MORI Risk Survey to examine the existence of optimism bias and its effects on risk perceptions and acceptance regarding five science and technology‐related topics: climate change, mobile phones, radioactive waste, GM food and genetic testing. Our findings provide evidence of social and environmental optimism bias following similar patterns and optimism bias appearing greater for those risks bringing sizeable benefit to individuals (e.g. mobile phone radiation) rather than those more acutely affecting society or the environment (e.g. GM food or climate change). Social optimism bias is found to reduce risk perceptions for risks that have received large amounts of media attention, namely, climate change and GM food. On the other hand, optimism bias appears to increase risk perceptions about genetic testing.     

Comoment risk and stock returns

We estimate investable comoment equity risk premiums for the US markets. The stock's contribution to the asymmetry and the fat tails of the market portfolio's payoff are priced into a coskewness premium and a cokurtosis premium. We construct zero-investment strategies that are long and short in coskewness and cokurtosis equity risks; we infer from the spread the returns attached to a unit exposure to US equity coskewness and cokurtosis. The coskewness and cokurtosis premiums present positive monthly average returns of 0.27% and 0.14% from January 1959 to December 2011. Comoment risks appear to be significantly priced within the US stock market and display significant explanatory power regarding the US size and book-to-market effects. The premiums do not subsume, but rather complement the empirical capital asset pricing model. Our analysis relies on data collected from CRSP (Chicago Research Center for Security Prices) over December 1955 to December 2011. To our knowledge, the paper is the first to propose investable higher-moment risk factors over such an extensive time period.     

A life history approach to perceptions of global climate change risk: young adults’ experiences about impacts,causes, and solutions

Although the general acceptance of human-influenced global climate change within the technical sphere of science is important to consider, public perceptions of global climate change risks, impacts, causes, and solutions are as important to policy actions as scientific findings. Yet, studies analyzing climate change risk perceptions suffer from a number of limitations or use only a handful of approaches. Using a limited life history approach, this article answers calls for additional qualitative approaches in risk perception research. This article (1) introduces risk perception researchers to the limited life history method; (2) discovers that young adults articulate climate change solutions at the individual level, often as consumers, and blend their responses to climate change risks and advocacy for solutions with a general, environmentally friendly orientation, a ‘green posture;’ and (3) contends the key sources informing young adults’ perceptions about climate change risk have changed significantly from previous studies.     

On the importance of systematic risk factors in explaining the cross-section of corporate bond yield spreads

In this paper we examine the importance of systematic equity market factors in explaining the cross-sectional variation in yield spreads on corporate debt. Based on a sample of 1771 corporate bonds over the period from January 1985 to March 1998, we find that once the default-related variables are controlled for, bond betas or sensitivities to aggregate equity market risks have very limited explanatory power. This is in contrast to [Elton, E.J., Gruber, M.J., 2001. Explaining the rate spread on corporate bonds. Journal of Finance 56, 247–277] who find that market factors tied to expected returns are predominantly important, but who do not control for these variables (i.e. the relevant variables from structural models), possibly biasing their estimates. On the other hand, our finding that the systematic factors exhibit some limited explanatory power suggests that the standard contingent claims approach may not fully apply. This finding is consistent with previous research that bond betas are not completely irrelevant once market frictions are introduced. Overall, the evidence provides empirical support for the proposition that structural models capture important elements of corporate bond yield spread determination and equity market systematic factors are by no means predominant.     

The risk appetite of private equity sponsors

Using a unique proprietary data set of 460 realized buyouts completed between 1990 and 2005, we examine the risk appetite of private equity (PE) sponsors in different states of the PE market and analyze key determinants of deal-level equity risk. We develop a new approach to mathematically model PE investment equity risk based on the Black-Cox default model. We find higher equity volatilities during boom periods. Further, deals conducted by more reputed PE sponsors have lower equity volatilities as they are unwilling to imperil their reputation by taking excessive risks. In addition, we find that PE sponsors' risk appetite is negatively related to the ownership stake in the buyout target company.     

The relationship between risk experience and risk response: a study of farmers and climate change

Within the existing literature, the role of experience of risk on attitudinal and behavioural risk response has been relatively neglected. Recent research that draws on the psychological distance of climate change as a concept notes the importance of local, significant experience as a driver for encouraging appropriate response. The experience of flooding was used as the stimulus in this paper, and emphasis placed on whether direct and/or indirect experience of flood risk is associated with different responses to climate change risk. In order to explore the relationship between climate change risk experience and response in the form of on-farm mitigation and adaptation, this paper draws on a case study of farmers in England, many of whom have experienced flooding. Results from a quantitative survey undertaken with 200 farmers in Gloucestershire, England are discussed. Statistical analysis found experience of flooding to be significantly associated with a heightened concern for climate change. Although also finding an association between experience and behavioural response, the sample were most likely to be taking adaptive behaviour as part of normal practice, with factors such as lack of overall concern for climate change risk and absence of information and advice likely to be the main barriers to action. Risk communication needs to further emphasise the connection between climate change and extreme weather events to allow for farmers to perceive climate change as a relevant and locally salient phenomenon, and subsequent tailored information and advice should be offered to clearly illustrate the best means of on-farm response. Where possible, emphasis must be placed on actions that also enable adaptation to other, more immediate risks which farmers in this study more readily exhibited concern for, such as market volatility.     

Climate Change Scenario Analysis for Public Market Investors

Academic studies suggest that market participants are demanding higher risk premiums for carbon‐intensive assets, but that natural disasters have yet to be efficiently priced into the market. And as a consequence, asset owners and investors are less than fully informed about the evidence of climate change uncovered by the scientific community. The author assesses the exposure to climate risk of Rockefeller Capital's ‘Ocean Strategy,” an actively managed global equity portfolio, by using three publicaly available climate change scenario analysis tools: (1) Paris Agreement Capital Transition Assessment (PACTA); The Transition Pathway Initiative (TPI), and (3) Carbon Tracker's 2 Degrees of Separation.