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     

Is a pure TIPS strategy truly risk free?

A Treasury Inflation-Protected Security (TIPS) is virtually risk free. As an obligation of the U.S. Treasury, it is mostly free of default risk. As an inflation-indexed security held to maturity, it is risk free in terms of purchasing power. However, investing in a TIPS-only portfolio for retirement is not risk free. This paper presents the results of a simulation analysis designed to evaluate the performance of a portfolio of inflation-indexed Treasury coupon bonds. This study demonstrates that significant shortfall risk exists for TIPS-only portfolios across a range of savings plans and the securities selection rules.     

Conditional risk–return relationship in a time-varying beta model

We investigate the asymmetric risk–return relationship in a time-varying beta CAPM. A state space model is established and estimated by the Adaptive Least Squares with Kalman foundations proposed by McCulloch. Using S&P 500 daily data from 1987:11–2003:12, we find a positive risk–return relationship in the up market (positive market excess returns) and a negative relationship in the down market (negative market excess returns). This supports the argument of Pettengill et al., who use a constant beta model. However, our model outperforms theirs by eliminating the unexplained returns and improving the accuracy of the estimated risk price.     

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.     

Does freezing a defined benefit pension plan affect firm risk?

This paper examines the impact of a defined benefit (DB) pension plan freeze on the sponsoring firm's risk and risk-taking activities. Using a sample of firms declaring a hard freeze on their DB plans between 2002 and 2007, we observe an increase in total risk (proxied by the standard deviation of EBITDA and asset beta), equity risk (standard deviation of returns), and credit risk following a DB-plan freeze. The increase in credit risk is reflected in a decline in credit ratings and an increase in bond yields for freezing firms. When we examine investment strategies, we observe a shift in investment from capital expenditures before the freeze to more-risky R&D projects after the freeze, and an increase in leverage. These strategies (increased focus on R&D and higher leverage) increase the operating and financial risk the firm faces. Overall, we observe an increase in risk-taking following DB plan freezes, consistent with theories that DB plans act as “inside debt” that aligns managers’ interests with bondholders’.     

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.     

Is gold a safe haven or a hedge for the US dollar? Implications for risk management

We assess the role of gold as a safe haven or hedge against the US dollar (USD) using copulas to characterize average and extreme market dependence between gold and the USD. For a wide set of currencies, our empirical evidence revealed (1) positive and significant average dependence between gold and USD depreciation, consistent with the fact that gold can act as hedge against USD rate movements, and (2) symmetric tail dependence between gold and USD exchange rates, indicating that gold can act as an effective safe haven against extreme USD rate movements. We evaluate the implications for mixed gold-currency portfolios, finding evidence of diversification benefits and downside risk reduction that confirms the usefulness of gold in currency portfolio risk management.     

Cosmopolitan risk community in a bowl: a case study of China’s good food movement

Abstract

Ulrich Beck fundamentally transformed our way of thinking about human interdependence through his three core theses on risk, individualisation and cosmopolitanisation. However, two commonly observed deficiencies in Beck’s grand theory were its Eurocentric orientation and a lack of empirical grounding. Based on 5 focus groups and 14 interviews with participants of the emerging Clean Food Movement in China, this paper extends the Beckian discussion outside Europe. Through examining how individuals understand both ‘traditional’ and ‘new’ risks associated with contemporary food consumption, this paper demonstrates that in the face of unpredictable and incalculable harms, risks are not seen as a ‘thing’, but are translated into ‘causal relations’. Subsequently, for Chinese stakeholders, the best way to safeguard food risks is to enact more visible and functioning interdependent relations in the food system. This in turn has given rise to new forms of communities which cut across conventional geographic, socio-economic and political boundaries. The paper deepens a Beckian theorisation in two ways. First, it demonstrates that the ‘enabling’ effect of risk towards a cosmopolitan society is not limited to obvious global crises, such as climate catastrophes and financial meltdown. In fact, the mundane yet intimate concern of putting ‘good’ food in one’s dinner bowl already presses actors to form new social solidarities that are cosmopolitan in nature. Second, it goes beyond Beck’s assertion that the risk society has culminated in a cosmopolitan moment, and explores how a performative cosmopolitan community reshapes the ‘relations of definition’ to mitigate risks on the ground.     

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.     

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.     

Evaluating an analytic–deliberative risk‐ranking process in a Chinese context

In previous research, a deliberative process for integrating stakeholder perspectives in the ranking of risks was introduced and empirically tested with lay groups composed predominantly of Americans. In this paper, we explore the viability of this process with lay groups of Chinese, because previous research has shown that Americans and Chinese differ substantially along many dimensions of cognition and social organization relevant to decision‐making. Using 10 environmental hazards based on current Chinese environmental regulatory programs as the risk domain, five groups of 8–9 participants ranked hazards using both holistic and multi‐attribute approaches. Results show that (1) risk rankings from the holistic and multi‐attribute approaches are consistent, (2) participants indicate that they are satisfied with the procedures and resulting rankings, and (3) agreement between participants increases over the course of the ranking exercise. Results for Chinese participants were compared with previously reported results for Americans to look for cultural effects involving deference to technical expertise and quantitative analysis, and skepticism toward public participation in policy‐making. Although there were some hints of cultural differences, neither difference significantly affected measures of the method’s validity or replicability. Because this process offers a scientifically sound and measured approach to stakeholder involvement in risk management, it may be attractive to Chinese leaders as they respond to growing demand for public participation in the policy‐making process. Whether Chinese citizens would consider the process described here to be satisfactory in a real policy context remains to be tested.     

Toward the NGO-involved schooling: a study on teachers’ risk perceptions and teachings

This paper focuses on revealing the ambivalent situations in teachers’ risk perceptions and teachings. Three ambivalent situations are found. The first is that, although the teachers reported that collective-related risks are more important than personal-related risks, they are less active in gathering knowledge regarding collective-related risks. The second situation is that, although teachers try to supplement their teaching materials with more risk phenomena, this may just be in response to their occupational needs, rather than due to their moral reflexivity. The third ambivalent situation is that the competitive and individualized environment seems to limit the teachers’ risk teaching. Based on these findings and other research, the author states that NGO-involved schooling might be a significant strategy to face the challenge of world risks in the neoliberal world.     

Do dividend initiations signal a reduction in risk? Evidence from the option market

We investigate whether dividends convey information about the risk of a company by examining the reaction of implied volatility in the option market to the announcement of a dividend initiation. Implied volatility decreases after the announcement and the magnitude of the decline in volatility is positively related to both the magnitude of cumulative abnormal returns (CAR) in the equity markets and the size of the dividend. Additionally, firms with weaker (stronger) corporate governance experience larger (smaller) declines in implied volatility. Cross sectional analysis shows that a one-standard deviation decline in measures of risk increases the 2-day CAR by 74–137 basis points. Our results suggest that dividend initiations signal declining firm risk.     

What's in a frame? Social organization,risk perception and the sociology of knowledge

A central problem in the sociology of knowledge has been to show that sane people can intelligibly have quite different alternative understandings of the same problem, such as a kind of risk, without abandoning the idea that there is a real problem about which to disagree, and to show the social basis of both plurality and viability. In recent decades, attempts to make this problem tractable have focused on the idea of a ‘frame’. Theories of frames offer accounts of the range of content, as distinguished from theories of processes of diffusion, of which risk amplification theory is the best known example. In this article, several theories of frames – those of Goffman, D'Andrade, Moscovici, Gamson, Schön and Rein, and of prospect theory – found are to be inadequate, because of their lack of clarity and plausibility in their answers to four key questions: ‘what is the relationship between sense‐making and bias?’, ‘how are frames to be individuated?’, ‘where do frames come from?’, and ‘how far and how can people move between frames?’. The article makes the case for a neo‐Durkheimian institutional theory developed by Douglas and others. This approach derives frames as concrete applications to specific contexts from thought styles, which are in turn the product of solidarities or institutional styles of social organization, because it can offer clear, testable, parsimonious hypotheses with which to answer these four questions. The theory therefore provides an account of the institutional logic of framing, and presents reasons for preferring this to non‐institutional approaches such as the various kinds of cognitivism. The article offers three conceptual innovations with which to develop the neo‐Durkheimian theory, in order better to deal with the crucial fourth question about the scope for mobility between frames. These innovations and some specific hypotheses about the scope for mobility between frames are supported by consideration of some exploratory qualitative empirical research on privacy risk perception. The theory provides a more satisfactory strategy for tackling the core problem than most others, by showing plurality to be limited, by showing clear and specific social bases for plurality of frames, by neither wholly endorsing nor wholly rejecting any basic bias, and by showing that their conflictual and systemic interdependence is what makes for viability.     

Travelling risks: How did nanotechnology become a risk in India and South Africa?

India and South Africa have invested in nanotechnology since the early 2000s and have identified risks to human health and the environment as an important issue for governance. This is exemplary for a wider trend in which ‘developing countries’ play an increasingly prominent role in the development, production and use of emerging technologies. This validates the claim of the world risk society thesis that countries around the world are now confronted with the risks of emerging technologies. Little is known, however, about the way developing countries deal with the potential risks of emerging technologies. Starting from the observation that the risk colonization of nanotechnology in developing countries cannot be taken for granted, this article draws upon the relational theory of risk in order to investigate how nanotechnology became understood as an object of risk in South Africa and India. The article shows that nanotechnology was constituted as an object of risk in rather different ways in India and South Africa, demonstrating that the spread of risk discourses – and the emergence of a world risk society – cannot be understood without attending to the local context. The article shows that way risk is understood and dealt with changes as risk discourses travel around the world, giving many different faces to the world risk society.