Textual risk disclosures and investors’ risk perceptions

We examine the association between changes in companies’ textual risk disclosures in 10-K filings and changes in stock market and analyst activity around the filings. We find that annual increases in risk disclosures are associated with increased stock return volatility and trading volume around and after the filings. Increases in risk disclosures are also associated with more dispersed forecast revisions around the filings. In contrast to prior literature documenting resolved uncertainties in response to various types of company disclosures, our findings suggest that textual risk disclosures increase investors’ risk perceptions. However, the results are less pronounced for firm-level disclosures that deviate from those of other companies in the same industry and year. These results lend support for critics’ arguments that firm-level risk disclosures are more likely to be boilerplate.     

Delta-hedging correlation risk?

While the Gaussian copula model is commonly used as a static quotation device for CDO tranches, its use for hedging is questionable. In particular, the spread delta computed from the Gaussian copula model assumes constant base correlations, whereas we show that the correlations are dynamic and correlated to the index spread. It might therefore be expected that a dynamic model of credit risk, which is able to capture the dependence between the base correlations and the index spread, will have better hedging performances. In this paper, we compare delta hedging of spread risk based on the Gaussian copula model, to the implementation of jump-to-default ratio computed from the dynamic local intensity model. Theoretical and empirical analysis are illustrated by using the market data in both before and after the subprime crisis. We observe that delta hedging of spread risk outperforms the implementation of jump-to-default ratio in the pre-crisis period associated with CDX.NA.IG series 5, and the two strategies have comparable performance for crisis period associated with CDX.NA.IG series 9 and 10. This shows that, although the local intensity model is a dynamic model, it is not sufficient to explain the joint dynamic of the index spread and the base correlations, and a richer dynamic model is required to obtain better hedging results. Moreover, although different specifications of the local intensity can be fitted to the market data equally well, their hedging results can be significant different. This reveals substantial model risk when hedging CDO tranches.     

Has exchange risk depressed international trade? The impact of third-country exchange risk

This paper argues that the effect of exchange risk on bilateral and aggregate trade flows should be analyzed by including the impact of third-country exchange risk factors in addition to direct bilateral or multilateral risk. After a theoretical examination of these effects, US bilateral export flow to its six largest trading partners are analyzed empirically. I find individuality and jointly significant third-country risk effects in most cases. In contrast to some recent bilateral efforts, I find a steadily growing negative impact on trade flows from exchange risk during floating. And in contrast to recent aggregate trade flow studies, I conclude that there was no temporary decline in exchange risk during the late 1970s.     

Financial risk tolerance revisited: the development of a risk assessment instrument☆

This paper explores conceptual, methodological, and empirical issues related to the development of a financial risk-tolerance assessment instrument. Financial risk tolerance is a significant factor in a number of household financial decisions, yet few recognized, valid, and reliable methods of assessment are available for use by financial service providers and educators. Empirical results from a multistage development of a 13-item risk assessment instrument are discussed. The multidimensional instrument is presented as the foundation for the development of a more widely used and accepted index. Future use by practitioners and researchers is encouraged to further validate the usefulness of the instrument.JEL classification:D81     

Learning to organise risk management in organisations: what future for enterprise risk management?

This paper identifies recurring issues in the regulation of new technologies through an historical review of the risk management of automobiles in the 1800s. Parallels are drawn between the regulation of early automobiles and that of the regulation of Unmanned Aircraft Systems (UASs) today. It is found that many of the regulatory challenges facing UASs are analogous to those which faced the automobile industry more than a century and half ago and that the need for informed and objective decision making in policy development is reinforced. A systems engineering approach, based on general systems theory and decision‐based design principles, is then proposed as a means for improving the objectivity, transparency and rationality in the risk management decision making process. An example risk management decision making scenario is given within the context of a small UAS operating over a populated area. The results obtained from this case study illustrate how even simple analysis can support the decision making process and highlights some of the potential challenges in the regulatory approach currently applied to UASs.     

Is bank default risk systematic?

We evaluate the impact of commonly used indicators of bank distress on broad (i.e. sector and country) risks. This issue deserves special attention in the banking industry where there is a strong degree of interconnectedness among institutions and the default of a single bank may cause a cascading failure, which could potentially bankrupt the entire system. Using several measures of individual bank risk our results show that these measures have a direct impact on European banking (i.e. systemic) stock market risk. We also provide strong evidence suggesting that, for listed banks, default risk tends to be systematic (i.e. non-diversifiable).     

Cattle farmers’ perceptions of risk and risk management strategies: evidence from Northern Ethiopia

This study analyzes cattle farmers’ perceptions of risk and risk management strategies in Tigray, Northern Ethiopia. We use survey data from a sample of 356 farmers based on multistage random sampling. Factor analysis is employed to classify scores of risk and management strategies, and multiple regression is then used to investigate the relationship between scores and farmers’ characteristics. The results demonstrate that shortage of family labor, high price of fodder, and limited farm income were perceived as the most important risks. Use of veterinary services, parasite control, and loan utilization were perceived as the most important strategies for managing risks. Livestock disease and labor shortage were perceived as less of a risk by farmers who adopted the practice of zero grazing compared to other farmers, pointing to the potential of this practice for risk reduction. We find strong evidence that farmers engage in multiple risk management practices in order to reduce losses from cattle morbidity and mortality. The results suggest that government strategies that aim at reducing farmers’ risk need to be tailored to specific farm and farmer characteristics. Findings from this study have potentially important policy implications for risk management strategies in developing countries.     

Subtle ECG changes--a mortality risk?

Population studies have consistently reported the increased risk of coronary heart disease mortality and sudden death in subjects with resting electrocardiogram evidence of unambiguous ST depression or T wave abnormalities. However, more subtle variations in normal electrocardiographic findings may also provide predictive and prognostic information. This case study illustrates the potential risk selection implications of such changes.     

Is enterprise risk management real?

Moving from the growing relevance of the enterprise risk management (ERM) concept, this paper provides empirical evidence of ERM in practice. The paper presents ERM actual uses in a panel of nine Italian companies from different industrial fields and legislative settings and analyses the relationship between the uses and the characteristics of the ERM tool implemented in each case. The data analysis highlights the existence of different activities that are supported by the ERM tool and also different types of use (i.e. responsive, discoursive and prospective) corresponding to a different contribution of ERM to managerial action. These uses related to the specific characteristics of the tools generally indicated with the label ‘ERM’.     

Pricing Black–Scholes options with correlated interest rate risk and credit risk: an extension

This article provides a closed-form valuation formula for the Black–Scholes options subject to interest rate risk and credit risk. Not only does our model allow for the possible default of the option issuer prior to the option's maturity, but also considers the correlations among the option issuer's total assets, the underlying stock, and the default-free zero coupon bond. We further tailor-make a specific credit-linked option for hedging the default risk of the option issuer. The numerical results show that the default risk of the option issuer significantly reduces the option values, and the vulnerable option values may be remarkably overestimated in the case where the default can occur only at the maturity of the option.     

Dealing with risk–risk interdependencies and trade-offs in relation to development and use of new technologies

The paper deals with the recognized need to systematically explore trade-offs in modern among single risks in modern risk management systems. These risk trade-offs have often been downplayed as ‘side effects’ or ‘unintended consequences’ and, even more often, poorly examined, quantified, and managed. The paper proposes how to deal with the real or possible trade-offs and within a framework which covers also the emerging risks: from early notion and indications up to fully developed and recognized (mature) risks. The trade-offs have been quantified primarily by means of indicators key/safety performance indicators. The framework relies very much on the ideas proposed by IRGC, ISO 31000, Solvency directive and other recognized concepts and takes practical examples from the running EU project iNTeg-Risk.     

Farmers’ motivations,risk perceptions and risk management strategies in a developing economy: Bangladesh experience

Aquaculture farmers’ risk perceptions and risk management strategies have still received little attention in agricultural research. Therefore, an exploratory study has been undertaken to provide empirical insight into Bangladeshi coastal shrimp farmers’ risk perceptions and risk management responses. Data from our study show that 95% of farmers have no formal training in shrimp aquaculture. Shrimp farmers’ cooperative societies operate in only 13.3% of the studied areas and only 15% of shrimp farmers are involved with these cooperative societies. The results reveal that shrimp diseases, price and availability of quality shrimp seeds, exploitation by intermediaries and uncertainty about the future demand for shrimp in foreign markets are perceived as the most important sources of risk. On the other hand, prevention of disease, timely supply of shrimp seeds, elimination of middlemen from the supply chain and farm management training are considered among the best methods to manage the risks in the shrimp‐farming business. We also observe some disparities in farmers’ perceptions. For instance, farmers mentioned that removal of influence of middlemen from supply chain is essential for the betterment of their business. However, they did not consider market monitoring, direct contract with processors and improved marketing facilities as important risk management strategies, although these factors play a significant role in reducing the influence of intermediaries and private money lenders.     

Individual differences in a switch from risk‐averse preferences for gains to risk‐seeking preferences for losses: can personality variables predict the risk preferences?

Individual differences on a framing problem and a reflection problem were examined in light of the Myers–Briggs Type Indicator. The predictions on information processing style, derived from Jungian personality type theory, were tested for the much‐discussed framing effect in the Asian Disease Problem and for the reflection effect on which the framing effect presumably depends. As anticipated, the results revealed that business students with higher iNtuition/Extraversion scores and lower Judging score were more likely to be consistently risk‐seeking. Conversely, those with higher Sensing/Judging scores were more likely to be consistently risk‐averse. Both framing and reflection effects were displayed by those with higher Sensing/Judging scores. However, the second expected result was not supported. Rather, a so‐called ‘gray hair/clouds’ effect (effect name inspired by Medin and Shoben's research in 1988), questioning the validity of risk propensity, was observed and analyzed. The somewhat surprising results and their theoretical and practical implications are discussed.     

When does low interconnectivity cause systemic risk?

We analysed a systemic liquidity crisis by using a unique money market data-set in which the coded identity of the counterparties of each trade is known. Contrary to recent findings, we did not observe a positive relationship between interconnectivity and systemic risk. We have concluded that our conflicting findings can be related to the degree of market concentration on the borrowing side of the funding market. High level of concentration in the borrowing side led to lower interconnectivity but higher systemic risk prior to the crisis. We conclude that measures of market heterogeneity should be used to generalize the relationship between systemic risk and interconnectivity.     

The Prestige disaster: risk or danger?

The sinking of the Prestige off the coast of Galicia in north-west Spain in November 2002 was an enormous environmental disaster and it had an immense media impact both nationally and internationally, lasting weeks as a social and political phenomenon. Five days before the ship sank, the captain had reported to the maritime authorities that the old tanker was damaged and in trouble. During these five days leading up to the shipwreck, a crucial decision had to be made: what should be done with this dangerous oil tanker? Temporality is a property of the hazardous events which, after being noticed, are evaluated as imminent or deferred. This temporality makes a clear difference between a risk and a danger. Whereas the risk has time to anticipate the events, danger has just a very short time or even has no time. At this point, the Prestige disaster turns to be paradigmatic. To tow away this damaged oil tanker was a risk decision which estimated that there was still a time to prevent its running aground what meant to follow the story repeatedly told by the narrative context of risk. However, the Prestige had been spilling out oil all the time and the damage was not a probability but a fait accompli. This accident has not a risk temporality; in fact, it had not temporality at all because it demanded an immediate intervention. My conclusion here is that this crisis was managed in terms of risk when it should have been treated as a danger situation.     

The perceiver’s social role and a risk’s causal structure as determinants of environmental risk evaluation

We present a dual-process risk perception model that integrates cognitive and emotional as well as consequentialist and deontological components by distinguishing between two modes of evaluative processing: (a) a consequentialist evaluation that focuses on potential consequences and (b) a deontological evaluation that focuses on moral values. Each of these two modes is assumed to trigger specific cognitive evaluations, specific emotions, and specific behavioral tendencies concerning a perceived risk. We conducted an experiment (N = 270) that tested whether the relative dominance of the two evaluative modes would depend on the causal structure of the environmental risk being evaluated and on the social role of the evaluator. Three types of causal structure were varied by providing scenario information: (a) anthropogenic risks that endanger only nature, (b) naturally caused risks with potential harmful consequences for humans, and (c) anthropogenic risks that may harm humans. Participants evaluated each scenario from the perspective of one of three social roles: mayor, expecting parent, and environmental activist. For each scenario, participants specified their focus and evaluated the event’s morality and perceived risk, the intensity of specific emotions, and their preferences for prospective behaviors. Results showed that the consequentialist evaluation was generally stronger than the deontological evaluation and was less affected by the experimental manipulations. The deontological evaluation was substantially affected by the risk’s causal structure. It was stronger for anthropogenic than for natural causation; risks caused by humans were associated with greater perceived moral blameworthiness, more intense morality-based emotions (e.g. outrage), and a stronger tendency to perform agent-related behaviors (e.g. aggression) than naturally occurring risks. The effect of the social role was less pronounced than that of the causal structure. Furthermore, the effect of an evaluative focus on behavior was fully mediated by emotions for deontological evaluations and partially mediated for consequentialist evaluations. The implications for environmental risk perception and communication are discussed.