Alternative Risk Measures Research Articles

Top management team gender diversity and firm risk-taking in the hospitality industry

PurposeThe purpose of this study is to investigate the link between top management team (TMT) gender diversity and firm risk-taking in hospitality companies. The study also links female leadership to risk-taking. Finally, this study examines the moderating effects of TMT incentive pay and TMT age on the relationship between TMT gender diversity and firm risk-taking.Design/methodology/approachThis study uses an unbalanced data set of 81 hospitality firms and 888 firm-year observations over the period of 1992–2020. The study uses fixed-effects regression estimation for primary analyses and addresses potential endogeneity concerns via two-stage least square regression with firm fixed-effects instrumental variable regression. Risk-taking is measured by total firm risk (i.e. the annualized volatility of daily stock returns). Main results are supported with alternative measures of firm risk and estimation methods.FindingsThe study finds that increasing TMT gender diversity leads to a reduction in firm risk-taking in the hospitality industry. Moreover, the study finds that hospitality firms led by a female CEO experience lower firm risk compared to firms led by a male CEO. Finally, the study finds evidence that the relationship between TMT gender diversity and firm risk is contingent on the level of incentive pay awarded to TMT members and the age of TMT members. Increasing incentive pay and aging executive teams decrease the risk reduction effect of TMT gender diversity.Practical implicationsThe findings of this study recommend that firm risk-taking in the hospitality industry is related to gender diversity in TMTs. Hence, the board of directors should pay attention to gender composition for executive positions for risk management. Moreover, the results also suggest that care should be exercised when using incentive pay to align the interests of managers and shareholders. Finally, the board of directors needs to consider both gender diversity and age of the TMT members for TMT composition to manage executives’ risk-taking behavior.Originality/valueThis study fills a research gap in the hospitality literature by providing empirical evidence for the link between TMT gender diversity and firm risk-taking. Additionally, the study introduces incentive pay and age of TMT as contingency factors for the link between TMT gender diversity and firm risk-taking.

The Impact of Geopolitical Risk on Corporate Investment: Evidence from Turkish Firms

This study analyzes the effects of geopolitical risk on the corporate investment of 164 Turkish manufacturing firms listed in Borsa Istanbul (BIST). The time covers the period from 2005 to 2019, applying the system Generalized Methods of Moments (GMM) estimator. The results indicate that geopolitical risk hurts corporate investment in Turkey. Under uncertainty induced by geographical risk, firms prefer to decline their investment. Additionally, financially constrained (non-dividend, small, young) firms are more negatively affected than financially unconstrained firms. Our findings are robust under alternative measures of geopolitical risk. Overall, this study reveals that geopolitical risk is a significant uncertainty affecting the investment decisions of manufacturing firms in Turkey

Measuring systemic risk in the global banking sector: A cross-quantilogram network approach

We propose a new systemic risk index based on the interdependence of extreme downside movements of stock returns using the cross-quantilogram and network analysis approach. While quantile dependence allows for sensitivity in times of market downturn, the topological network properties allow for capturing the interconnectedness of the banking system and identification of the specific contribution of each individual bank. Using this design, the proposed systemic risk index is not only easy to calculate and interpret but identifies the banking system's significant transmitters and receivers of extreme downside risk. For the empirical evaluation of the proposed risk index, we use a sample of 83 large banks during the 2003–2020 period, spanning multiple recent crises affecting the banking market. The proposed index is found to be robust in comparison to major alternative systemic risk measures.

Corporate social responsibility and systematic risk: international evidence

PurposeThis paper aims to close gaps in the current literature according to whether there are differences regarding the relationship between corporate social performance (CSP) and systematic risk when diverse regions of the world are considered, and what the respective drivers for this relationship are. Furthermore, it tests the robustness to alternative measures for CSP and systematic risk.Design/methodology/approachThis study focuses on the impact of corporate social responsibility on systematic firm risk in an international sample. The authors measure CSP emerging from a company's social responsibility efforts by utilizing a CSP rating framework that covers a variety of dimensions. The instrumental variable approach is applied to mitigate endogeneity and identify causal relationships.FindingsThe impact of overall CSP on systematic risk is most distinct for North American firms and, in descending order, weaker in Europe, Asia–Pacific and Japan. Risk mitigation applies across all four regions. However, the magnitude of impact differs. While the most critical drivers in North America and Japan include product responsibility, Europe is affected most by the employees category and Asia–Pacific by environmental innovation.Practical implicationsThe findings help firms to control their cost of equity and investors may identify low-risk stocks by considering certain aspects of CSP.Originality/valueThis study distinguishes itself from previous literature addressing the connection between systematic risk and CSP by focusing on regional differences in an international sample, using the very transparent CSP measures of Asset4, identifying underlying impact drivers, and testing for robustness to alternative measures of systematic risk.

Brand Capital and Stock Price Crash Risk

We examine the relationship between brand capital and stock price crash risk. Crash risk, defined as the negative skewness in the distribution of returns for individual stocks, captures asymmetry in risk, and has important implications for investment choices and risk management. Using a sample of 39,685 publicly listed U.S. firm-year observations covering 1975 to 2018, we show that brand capital is significantly and negatively related to crash risk. We also use an advanced machine learning approach and confirm that brand capital is a strong predictor of future stock price crashes. Our cross-sectional analyses show that this negative relationship is more evident for subsamples with transitory poor earnings performance or persistent good earnings performance, greater corporate tax avoidance, and weak corporate governance structures. The results survive numerous robustness tests, including the use of alternative measures of brand capital, crash risk, and several endogeneity tests. In sum, our findings are consistent with agency theory, suggesting that high levels of brand capital expose firms to investor and customer scrutiny, which reduces managerial opportunistic behavior that may include the accumulation and concealment of negative information. This paper was accepted by Karl Diether, finance.

Impacts of Sharīʿah supervision and corporate social responsibility on banks’ risk-taking behavior and profitability

PurposeThis paper aims to examine the impacts of both Sharīʿah supervision and corporate social responsibility on banks’ risk-taking behavior and profitability. The analysis empirically uses dynamic and balanced panel data from 12 banks of Bangladesh for 2010–2019.Design/methodology/approachDynamic panel generalized method of moments has been used primarily to examine the effects of Sharīʿah supervision and corporate social responsibility on risk-taking behavior and profitability. Later, the authors validate the core results using three-stage least squares and incorporates alternative risk and profitability measures in the baseline equation.FindingsThis study finds that Sharīʿah supervision heterogeneously derives benefits for Islamic banks and Islamic windows. Though there is no significant impact of female diversity on risk relying on board diversification, the bank can strengthen profitability. On the one hand, the annual changes in board composition reduce (increase) risk (financial and stability efficiency) but compromise profitability. Notably, socially responsible banks have been characterized as risk-averse and better stabilized (in terms of solvency and efficiency), more efficient and profitable.Originality/valueVery few studies are available in the current literature which examine the impacts of Sharīʿah supervision and corporate social responsibility on either bank performance or risk-taking in the developing economy’s context.

Navigating through Political Risk in Vietnam: The Role of Corporate Cash Holdings

ABSTRACT This paper investigates the effect of political risk on corporate cash holdings in Vietnam from 2009 to 2018. We show that political risk is positively associated with cash holdings. Our findings are robust to other advanced estimation methods when alternative measures of political risk are considered and after addressing endogeneity caveats by two-stage least square estimation. Further analyses reveal that the positive impact of political risk on cash holdings is more pronounced for financially constrained firms and firms with high institutional ownership. Overall, the findings contribute to the literature on how political risk exposure increases firm cash holdings, which is consistent with the precautionary savings motive of cash.

Does the low-risk anomaly exist in the Indian equity market? A test using alternative risk measures

PurposeThis study aims to investigate the risk-return trade-off in the Indian equity market at both the aggregate equity market level and in the cross-sections of stock return using alternative risk measures.Design/methodology/approachThe study uses weekly and monthly data of 3,085 Bombay Stock Exchange-listed stocks spanning over 20 years from January 2000 to December 2019. The study evaluates the risk-return trade-off at the aggregate equity market level using the value-weighted and the equal-weighted broader portfolios. Eight different risk proxies belonging to the conventional, downside and extreme risk categories are considered to analyse the cross-sectional risk-return relationship.FindingsThe results show a positive equity premium on the value-weighted portfolio; however, the equal-weighted portfolio of these stocks shows an average return lower than the return on the 91-day Treasury Bills. The inverted size premium mainly causes this anomaly in the Indian equity market as the small stocks have lower returns than big stocks. The study presents a strong negative risk-return relationship across different risk proxies. However, under the subsample of more liquid stocks, the low-risk anomaly regarding other risk proxies becomes moderate except the beta-anomaly. This anomalous relationship seems to be caused by small and less liquid stocks having low institutional ownership and higher short-selling constraints.Practical implicationsThe findings have important implications for investors, managers and practitioners. Investors can incorporate the effects of different highlighted anomalies in their investment strategies to fetch higher returns. Managers can also use these findings in their capital budgeting decisions, resource allocations and other diverse range of direct and indirect decisions, particularly in emerging markets such as India. The findings provide insights to practitioners while valuing the firms.Originality/valueThe study is among the earlier attempts to examine the risk-return trade-off in an emerging equity market at both the aggregate equity market level and in the cross-sections of stock returns using alternative measures of risk and expected returns.

Shadow banking participation and stock market crash risk: evidence from China

ABSTRACT In this paper, we use public entrusted loan announcements and financial data on China listed A-shares to identify shadow banking participation as a new factor affecting firms’ stock market crash risks. We also provide new sets of empirical evidence to the inconclusive literature about how borrowing and lending behaviours affect investors’ perceptions and the firms. We find that both borrowing and lending of small firms reduce firms’ stock market crash risks, and lending of big firms increases firms’ crash risks. Moreover, our results on affiliated transactions suggest the existence of both risk-sharing and negative spillover effects in Chinese business groups. The results are robust to different fixed effects, different standard error clustering specifications, alternative crash risk measures and additional control variables.

Bank solvency risk and funding cost interactions: Evidence from Korea

Using proprietary balance sheet data for Korean banks and a simultaneous equation model, we use a unique measure of the cost of new funding to document that increased funding costs lead to larger solvency risk (as measured by regulatory capital), which, in turn, leads to larger funding costs. When including the great financial crisis in the sample, our estimates imply that a 100 basis points (bp) increase in the cost of new funding (regulatory capital) is associated with a 265 (23) bp increase in regulatory capital (cost of new funding). We show these results are robust to alternative measures of solvency risk and that the traditionally used measure of average funding costs (interest expense over interest-bearing liabilities) does not properly capture this two-way negative feedback loop. The strength of this link is weaker during periods of monetary policy tightening, and is not affected by the specific funding business model chosen by banks. Our findings can inform macroprudential stress-tests calibration.

Methylation of FKBP5 is associated with accelerated DNA methylation ageing and cardiometabolic risk: replication in young-adult and middle-aged Black Americans

ABSTRACT Methylation of FKBP5 is involved in the regulation of the stress response and is influenced by early stress exposure. Two CpG sites, cg20813374 and cg00130530, have been identified as potential reporters of early stress. We examined whether FKBP5 methylation was associated with accelerated DNA methylation ageing and indirectly predicted poorer cardiovascular health among both young adult and middle-aged Black Americans. Four hundred and forty-nine young adults, with a mean age of 28.67 and N = 469 middle-age parents and their current partners with a mean age of 57.21, provided self-reports, biometric assessments, and blood draws. Methylation values were obtained using the Illumina Epic Array. Cardiometabolic risk was calculated by summing the standardized log-transformed scores for the body mass index, mean arterial blood pressure, and HbA1c. We also used a more standard index of risk, the Framingham 10-year cardiometabolic risk index, as an alternative measure of cardiometabolic risk. To measure accelerated ageing, four widely used indices of accelerated, DNA methylation-based ageing were used controlling sex, age, other variation in FKBP5, and cell-type. Exposure to community danger was associated with demethylation of FKBP5. FKBP5 methylation was significantly associated with accelerated ageing for both young-adult and middle-aged samples, with significant indirect effects from FKBP5 methylation to cardiometabolic risk through accelerated ageing for both. Early exposure to danger may influence FKBP5 methylation. In turn, FKBP5 methylation may help explain intrinsic accelerated ageing and elevated cardiometabolic risk in adulthood for Black Americans.

The nexus between bank connectedness and investors’ sentiment

This paper explores European bank connectedness built on the idiosyncratic returns and proposes an alternative systemic risk measure based on sentiments. The results show that banks in developed European countries form a large network, alongside the U.S. banks, while banks in European catch-up countries are gathered in their own clusters. The spillovers received by the European banks from the U.S. are higher compared to those received by the U.S. banks from the European banks. The network connectedness is sensitive to the nature of each crisis. The TRMI financial sentiment index proves to be a suitable proxy for the systemic risk.

Practical Applications of Modeling Price Dynamics, Optimal Portfolios, and Option Valuation for Cryptoassets

In Modeling Price Dynamics, Optimal Portfolios, and Option Valuation for Cryptoassets, from the Summer 2021 issue of The Journal of Alternative Investments, Yuan Hu and Brent Lindquist, both at Texas Tech University, and Frank Fabozzi, of EDHEC Business School, emphasize the need for the development of a cryptocurrency index and associated hedging and trading vehicles, all designed to be consistent with modern portfolio theory. In an example, they create smart-beta-like cryptoasset indexes and suggest tracking them with a tradable ETF, and they show how to value options based on such indexes. Essentially, the authors provide a unified framework for applying financial theory to this new investment class, which consists primarily of risky assets–despite the commonly used label of currencies. The main message is that risk analysis, portfolio optimization, and derivative pricing should all be done within the same model. TOPICS:Currency, options, statistical methods, VAR and use of alternative risk measures of trading risk

An empirical analysis of the cardinality constrained expectile-based VaR portfolio optimization problem

Expectiles are asymmetric generalizations of mean that are extensively employed by statisticians in regression analysis. In the last decade, the coherence and elicitability characteristics of expectiles have attracted attention of the researchers in risk management field. Recently, expectile has been recommended as an alternative risk measure to value-at-risk (VaR) and conditional value-at-risk (CVaR). As an analogy to VaR and CVaR, expectile is defined as a risk measure called expectile-based value-at-risk (EVaR). In this study, EVaR optimization model is extended with a set of practical constraints such as no short-selling, target return, proportional bounds, and portfolio cardinality constraints. The ex-ante and ex-post risk-adjusted return performances of the proposed model are compared with those of CVaR model by using historical data of the stocks listed in the BIST 100 and the S&P 100 indices. Furthermore, we perform an extensive numerical investigation to reveal the impact of important parameters on the performances of the models. The obtained results show the potential benefits of using EVaR model in practical investment decisions.

Multivariate crash risk

This paper investigates whether multivariate crash risk (MCRASH), defined as exposure to extreme realizations of multiple systematic factors, is priced in the cross-section of expected stock returns. We derive an extended linear model with a positive premium for MCRASH, and we empirically confirm that stocks with high MCRASH earn significantly higher future returns than stocks with low MCRASH. The premium is not explained by linear factor exposures, alternative downside risk measures, or stock characteristics. Extending market-based definitions of crash risk to other well-established factors helps to determine the cross-section of expected stock returns without further expanding the factor zoo.

Does geopolitical risk matter for corporate investment? Evidence from emerging countries in Asia

This paper examines the effect of geopolitical risk on corporate investment in emerging Asian countries. Using an extensive sample spanning 1995–2018, we find that geopolitical risk is negatively associated with corporate investment. Geopolitical risks in China and Russia have a greater impact on corporate investment, while a less significant influence is found in India and Turkey. Our findings are robust to using alternative measures of geopolitical risk, using alternative proxies of investment, even after controlling for endogeneity concerns by a two-stage least square estimation, a system generalized method of moments regression, and the incremental effect of geopolitical risk. The adverse impact of geopolitical risk on firm investment is more pronounced for firms with a higher degree of investment irreversibility. However, firms with greater cash holdings can better mitigate this negative impact. Overall, this paper shows that geopolitical risk is a crucial macrolevel shock influencing corporate investment.

Dependent conditional value-at-risk for aggregate risk models

Risk measure forecast and model have been developed in order to not only provide better forecast but also preserve its (empirical) property especially coherent property. Whilst the widely used risk measure of Value-at-Risk (VaR) has shown its performance and benefit in many applications, it is in fact not a coherent risk measure. Conditional VaR (CoVaR), defined as mean of losses beyond VaR, is one of alternative risk measures that satisfies coherent property. There have been several extensions of CoVaR such as Modified CoVaR (MCoVaR) and Copula CoVaR (CCoVaR). In this paper, we propose another risk measure, called Dependent CoVaR (DCoVaR), for a target loss that depends on another random loss, including model parameter treated as random loss. It is found that our DCoVaR provides better forecast than both MCoVaR and CCoVaR. Numerical simulation is carried out to illustrate the proposed DCoVaR. In addition, we do an empirical study of financial returns data to compute the DCoVaR forecast for heteroscedastic process of GARCH(1,1). The empirical results show that the Gumbel Copula describes the dependence structure of the returns quite nicely and the forecast of DCoVaR using Gumbel Copula is more accurate than that of using Clayton Copula. The DCoVaR is superior than MCoVaR, CCoVaR and CoVaR to comprehend the connection between bivariate losses and to help us exceedingly about how optimum to position our investments and elevate our financial risk protection. In other words, putting on the suggested risk measure will enable us to avoid non-essential extra capital allocation while not neglecting other risks associated with the target risk. Moreover, in actuarial context, DCoVaR can be applied to determine insurance premiums while reducing the risk of insurance company.

Liquidity Risk and Asset Pricing in Pakistan Stock Exchange

This paper empirically investigates the impact of liquidity risk on stock returns in Pakistan and determines investors’ attitude under bull and bear market conditions. Specifically, the liquidity adjusted capital asset pricing model(CAPM) is modified by including the interaction between the liquidity risk and the indicators of bull- and bear-market periods to investigate whether the pricing of liquidity risk differs in both upward and downward market trends. The analysis is carried out for a large panel of Pakistani manufacturing firms listed at the Pakistan Stock Exchange for the period January 2000 – December 2015. We use alternative liquidity risk measures to check the robustness of the liquidity risk effect. We observe that higher liquidity risk yields higher excess stock returns, implying pricing of liquidity risk during the examined period. The results also reveal that the liquidity risk is positively and significantly related to excess returns in the high-liquidity-risk beta portfolios, whereas it is negatively or insignificantly related to excess returns of low-liquidity-risk beta portfolios. The results also provide evidence that stocks affected by liquidity risk yield positive expected returns in both bull and bear market conditions. However, we find significant differences in the pricing of liquidity risk under upward and downward market trends. The robustness check confirms that the findings on the pricing of liquidity risk are not driven by any specific measure of liquidity.

The combined effects of innovation and corporate social responsibility on firm financial risk

AbstractPrior literature has largely dealt with the effect of either corporate social responsibility (CSR) or innovation on firm financial risk. No earlier research has examined the combined effect of a firm's simultaneous pursuit of CSR and innovation on firm financial risk. This study investigates the combined effects with a view to fostering our understanding of relationships of CSR and innovation with financial risk. Using the patent application and CSR data of 2,174 Chinese listed firms over the period 2010–2016, this study finds that firms with higher levels of imitative innovation and good CSR performance exhibit higher financial risk. The results remain after a series of robustness tests including the use of an alternative measure of firm financial risk and CSR. The results indicate that firms with a higher level of imitative innovation exhibit greater financial risk; however, the risk cannot be mitigated by firms' good CSR performance. CSR performance helps firms boost the positive image of a “good citizen” and reduce firm financial risk; however, the combined effects of CSR and imitative innovation trigger higher financial risk. The results of this study support the umbrella theory of CSR that exacerbates the moral hazard for those firms that rely on imitative innovation.

Risk management and the cost of equity: evidence from the United Kingdom’s non-life insurance market

We investigate the effect of risk management (reinsurance) on the corporate cost of equity using panel data drawn from the United Kingdom’s (UK) non-life insurance industry. Our results show that use of reinsurance lowers the cost of equity but that the relation is non-linear. We find that the rate of reduction declines as the level of premiums ceded relative to total gross premiums written increases. We also find that the reinsurance-cost of equity relation is moderated by the risk of financial distress/bankruptcy. This moderating relation is robust to the use of three alternative measures of financial distress and bankruptcy risk.