Risk Appetite Research Articles

Implied volatility curve: an empirical study on Chinese SSE 50 ETF options

ABSTRACT This paper studies the determinants shaping the implied volatility curve of Chinese SSE 50 ETF options and the predictability of its patterns. Initially, the research examines the economic variables influencing the curve’s curvature. Our analysis reveals a pronounced disparity in how investor sentiment and risk appetite impact the curvature of call versus put options’ volatility curves. Subsequently, the study distinguishes four patterns of the volatility curve, exploring the causes of their formation. We observe that shifts in market conditions precipitate alterations in the curve’s patterns, with pessimistic investor sentiment and diminished risk appetite correlating with a more pronounced skewness in the curve. In the final phase, the research employs machine learning techniques to prognosticate the patterns of the volatility curve. The chosen model demonstrates robust proficiency in forecasting Smile and Smirk patterns, yet it notably struggles to predict the Frown pattern, which typically emerges alongside major market emergencies.

Enhancing Robo-Advisors: A Study of Personalized Financial Planning Through AI-Driven Insights

The emergence of robo-advisors has revolutionized the financial advisory field, presenting automated investment suggestions tailored to individual investors' distinct goals and risk appetites. This research paper aims to explore the dynamic evolution of robo-advisory services, delving into the ways artificial intelligence (AI) and data-derived insights can be harnessed to provide an even more personalized and efficient financial planning encounter. Through an exploration of advanced algorithms, machine learning methodologies, and user-centered design concepts, this investigation strives to uncover the techniques robo-advisors use to refine their decision-making procedures, accommodating the distinct financial ambitions of each investor. By means of practical analyses, illustrative case studies, and a discerning assessment of industry tendencies, this research illuminates the obstacles and prospects inherent in attaining genuine personalization within the domain of automated financial guidance.

ERM strategies for navigating financial stress: Lessons from US commercial banks

This study explores the Enterprise Risk Management (ERM) strategies employed by U.S. commercial banks during times of financial stress, with a focus on the 2008 financial crisis and the COVID-19 pandemic. It investigates how ERM frameworks enable banks to make risk-adjusted decisions and effectively manage credit risk, ensuring both operational resilience and long-term value preservation. The research highlights the critical role of ERM in guiding banks through periods of market volatility, emphasizing the need for a structured approach to risk identification, assessment, and mitigation. Through a detailed analysis, the study examines how commercial banks have adjusted their risk appetite and governance structures in response to economic disruptions, balancing short-term stability with long-term growth objectives. Key ERM components such as capital adequacy, liquidity management, and stress testing are reviewed to demonstrate their effectiveness in safeguarding financial institutions. Additionally, the research discusses the importance of leadership and governance in enhancing risk oversight and fostering a culture of risk awareness across banking operations. The findings offer valuable lessons for financial institutions on how to navigate future financial stresses by leveraging robust ERM frameworks. By examining these strategies, the paper provides insights into the adaptability and resilience of U.S. commercial banks in maintaining financial stability and shareholder value in the face of uncertainty.. Keywords: Enterprise Risk Management (ERM), Financial Stress, Credit Risk Management, Operational Resilience, U.S. Commercial Banks, Governance Structures.

Decoding the ‘Social’ in ESG

Traditionally, a company’s financial performance indicators, such as revenue generating capacity, profit margins, and inventory turnover were the driving force behind a company’s attractiveness as an investment opportunity. The rising popularity of environmental, social and governance (‘ESG’) norms in the last decade however has seen a shift in investors’ risk appetite – investors are moving away from archaic definitions of performance indicators and assessing an investee’s impact in terms of ESG metrics.While there is clarity on what factors constitute ‘environment’ and ‘governance’ principles, the ‘social’ metric continues to remain shrouded in mystery. In this article, we discuss the factors which form the building blocks of the ‘social’ metric as well as review the yardsticks available to measure this metric, particularly from an Indian standpoint.

Automated workforce, financial precarities and family consumption: The importance of demand-side policies under the background of automation applications

The continuous innovation of automation technology is expanding its application in the workplace, with wide-ranging implications for the economy and society. However, it is not yet clear how workplace automation changes people’s consumption behavior. This paper conducts an empirical analysis in this regard based on the Chinese General Social Survey. The main results are shown as follows: (1) One standard deviation increase in automation contributes to an average reduction of 7.073 % in family consumption. This finding is validated by conducting several robustness and endogeneity checks using various measures of automation and consumption, instrumental variable approach, placebo analysis, etc. (2) The mechanism is that automation decreases family income and work-related social capital, resulting in a decline in families’ socioeconomic status and increased financial precarities. In addition, financial uncertainties brought about by automation decrease people’s subjective well-being, expectations for future life and risk appetite, thus prompting them to lower consumption as a precautionary measure to prepare for potential risks caused by the technological change. (3) Automation has greater negative effects on hedonic and developmental consumption, which are about three times the impact on non-hedonic and basic living expenses respectively, thus leading to a downgrade in families’ consumption structure. In addition, its effect is more pronounced for families with lower economic status, having no houses and living in urban areas. This study also highlights the importance of demand-side policies in the application of automation technology by finding that better labor protection is needed to mitigate automation’s adverse consequences for family consumption. In the context of automation’s increasingly profound impact on the society, this research has important policy implications.

Inequality and risk preference

AbstractThis paper studies the relationship between income inequality and risk taking. Increased income inequality is likely to enlarge the scope for upward comparisons and, in the presence of reference-dependent preferences, to increase willingness to take risks. Using a globally representative data set on risk preference in 76 countries, we empirically document that the distribution of income in a country has a positive and significant link with the preference for risk. This relationship is remarkably precise and holds across countries and individuals, as well as alternate measures of inequality. We find evidence of a steeper gradient between willingness to take risks and inequality for cognitively more able individuals who likely have a better assessment of inequality and for those who are dissatisfied with their income. We present results in favour of our mechanism, which suggests that falling behind one’s reference group increases the appetite for risk taking.

Collaborating with C-Level Executives to Align Security with Business Goals: How Strategic Security Initiatives were Integrated with Broader Business Objectives

A link between cybersecurity and the organization's objectives is crucial in contemporary business. With the advancement of technology, today's digital transformation has enshrined cybersecurity not as a technical problem but as an essential tool for business competition. This paper aims to understand how cybersecurity professionals work alongside C-level executives to ensure security mirrors organizational goals and objectives. By beginning with business objectives in mind, emphasizing communication, and incorporating security into transformation projects, cybersecurity can be positioned to align with business goals to support business advancement. The paper also identifies Risk management according to business risk appetite, business continuity management, and regulatory compliance as essential framework components. Rapid threat intelligence and innovative tools such as cloud security and Zero Trust Network Access (ZTNA) are key examples of how protection can precede business initiatives. This collaboration shields business operations against cyber risk and advances competitive advantage by strengthening consumers' perceptions and optimizing business functions. Therefore, with the ever-advancing threat environment to its systems, organizations must embrace AI-driven threat sensors, automated compliance solutions, and effective incident response. Finally, cybersecurity must be recognized as one of the main enablers that drive innovation and business growth and allow companies to succeed in safe digital environments. The paper offers practical advice to cybersecurity professionals on communicating with the board and other executives, thereby achieving the organizational security culture necessary to succeed in the long run.

Relationship between Risk Appetite and Investment Decisions in High-Risk Ventures in South Korea

Purpose: The aim of the study was to examine the relationship between risk appetite and investment decisions in high-risk ventures in South Korea. Methodology: This study adopted a desk methodology. A desk study research design is commonly known as secondary data collection. This is basically collecting data from existing resources preferably because of its low cost advantage as compared to a field research. Our current study looked into already published studies and reports as the data was easily accessed through online journals and libraries. Findings: The relationship between risk appetite and investment decisions in high-risk ventures in South Korea reveals a strong correlation where investors with higher risk tolerance are more likely to engage in high-risk ventures. These investors are driven by the potential for substantial returns, despite the associated volatility and uncertainty. The findings indicate that cultural factors, economic conditions, and market dynamics in South Korea play a significant role in shaping this risk appetite. Unique Contribution to Theory, Practice and Policy: Prospect theory, risk parity theory & behavioral portfolio theory may be used to anchor future studies of relationship between risk appetite and investment decisions in high-risk ventures in South Korea. Practically, businesses should focus on several strategies to optimize the effectiveness of their insurance coverage in managing business interruption risks.

Energy commodities spillover analysis for assessing the functioning of the European Union Emissions Trading System trade network of carbon allowances

The European Union Emissions Trading System (EU ETS) is designed to promote carbon reduction in a cost-effective and economically efficient manner. To meet their compliance requirements, participants within the EU ETS can either invest in carbon abatement, thereby improving their environmental performances, or purchase carbon allowances from the market. Our analysis aims to investigate the structural features of the EU ETS trade network of allowances and assess its robustness to spillovers propagated from energy commodities. We build the EU ETS trade network of allowances on a daily basis by leveraging a granular dataset comprising over 32k accounts that performed approximately 720k trades, involving more than 127 billion of allowances from 2005 to 2020. Importantly, our analysis is able to cover entirely the first three phases of the EU ETS, thus providing an updated view on the functioning of the EU ETS. We find that the EU ETS trade network of allowances is disassortative and characterized by very active nodes belonging to the energy sector. Moreover, we detect that energy commodity transmission channels can be substantial and may shape the way nodes transfer allowances, with the configuration of the EU ETS often being a net receiver of spillovers. These findings are robust even when we analyze extreme quantiles of the distribution to account for distressed periods. Our study shows how the functioning of the EU ETS can be influenced by spillovers imported from energy commodity markets. We discuss how investors can build portfolios that either hedge or amplify the impact of such spillovers, depending on their risk appetite. Given that energy commodities are significant inputs in the production processes of energy firms—who are highly active participants in the trade network of allowances—analyzing market responses to shocks in energy commodities is crucial for the effective implementation of the policy.

Bringing morality back in: Accounting as moral interlocutor in reflective equilibrium processes

The situations in which accounting is practiced raise moral concerns about customer and employee safety, community welfare, environmental sustainability, and human rights. Traditional accounting practices, such as budgets and performance measurement systems, have been widely regarded as ‘crowding out morality’ by objectifying the people affected by a firm's actions. In two North American utilities, we observed a stepwise structured process of moral reflection (which we identify as an instance of Rawls's reflective equilibrium approach), in which accounting, in the form of the risk appetite radar, helped guide executive decision making informed by moral principles. We develop two dimensions of accounting's role as ‘moral interlocutor’: enabling organizational value consensus and organizational value coherence. We identify three features of the observed accounting practice that enable it to act as moral interlocutor: subjectification rather than objectification of potential victims of the firm's actions; de-monetization, that is, considering trade-offs in terms of multiple organizational values, not only in terms of cost; and visualization of the organizations' moral principles on value priorities and how they are shaped by organizational decision making and action. The accounting visualizations did not only enable executives' reflection on rights and wrongs, but also triggered a fuller and richer moral vocabulary that was used for complex decision making involving, for instance, automation and the risk of suicides.

Dutch auction dynamics in non-fungible token (NFT) markets

Non-fungible tokens (NFTs) rose to prominence as a wide-scale implementation of blockchain technology to support the emergence of crypto-asset markets. These nascent digital markets raise questions about the behaviours of investors in the digital economy and their appetite for risk. Using 28,919 auction listings, 4937 sales, and 30,197 Telegram messages, we conduct a field study on the bidding and selling behaviours of NFT investors in a Dutch auction system. We reveal risk-seeking behaviours in our sample of Dutch auction sales. We document that time pressures and value propositions significantly influence NFT investors: fast clock speeds and greater price separations induce underbidding behaviours and are associated with low value retention for sellers. These results are confirmed using a matched-pairs analysis. Our study raises further questions on the risk preferences of investors in emergent digital marketplaces. We propose value maximisation strategies for marketplace developers and participants, while drawing attention to the presence of potentially exploitable biases and heuristics amongst participants, courtesy of bidding incentivisation schemes significantly altering how investors value NFTs.

Financial literacy of Russians: The relationship with socio-demographic and psychological characteristics

The goal of the study is to reveal the relationship between the financial literacy of Russians and socio-demographic and psychological factors using data from three waves of the All-Russian Panel Survey of Consumer Finances (2018, 2020 and 2022). Fixed effects regression shows that the age of an individual is related non-linearly with financial literacy and the profile has the inverted U-shape. The association of education with financial literacy is positive: respondents with specialized secondary and higher education are more financially literate compared to people with general secondary education or lower. Income, Internet use, the presence of a spouse, paid employment, and a bank account are also positively related to financial literacy. Individuals with higher risk appetite, low ability to control their emotions, and short-term time preferences are worse literate in personal finance. Robustness tests allowed us to conclude that the influence of gender on the level of financial literacy in Russia is insignificant.

Effective Strategies For Small Startups To Attract Venture Capital

In essence, for small startups, securing VC is a major breakthrough for growing and scaling up their business. The paper now zeroes in on the tactics that small startups can employ to capture, to a larger extent, the potential attention of VCs. The most critical strategies in order to engage VCs will be what this discussion will be based on as we turn into a collection of previous literature, case studies, and expert insights. Forge a Convincing Business Model: One solid business model is what lies at the core of how to attract VC investment. How a startup can sketch out its value proposition, revenue streams, and path to scaling. This business model does not only bring out the potential for high returns that the startup might have; it also aligns with the risk appetite of these venture capitalists. Network Building: Networking forms one of the core functions of the entire venture capital business. This paper looks into just how a network of one's own can be built and leveraged via industrial connections, along with mentors and advisors. Proper networking will result in more visibility and credibility, thus increasing the opportunity for start-ups to reach out to potential investors. Demonstrating Market Potential: For venture capitalists, the ability to demonstrate a clear market potential is very much desirable from startups. We will see how startups can present information on market size, customer segments, and competitive landscape to secure an investment interest. Making a Strong Pitch: Preparing a convincing pitch is a sure way of attracting the interest of VCs. We will look at the main components of the pitch: elevator pitch, articulating the problem and solution, definition of the market opportunity, articulation of the solution itself, business model, traction, team, and financial projections. Preparing a sound pitch can dramatically increase the chance of receiving venture capital. Apart from these, the paper also makes the target to address the critical pitfalls which startup companies often face in the form of indistinct ideas, over-promise on market size, and unrealistic projections for financials. It must help the startups, through practical recommendations and insights, reach an optimization of approaches toward venture capital and hence secure the necessary funding portions of growth and success

Strategic risk management in financial institutions: Ensuring robust regulatory compliance

Strategic risk management in financial institutions is a critical component for ensuring robust regulatory compliance and maintaining financial stability. This review explores the multifaceted nature of strategic risk management and its importance in the dynamic regulatory landscape of the financial sector. It delves into the fundamental components of risk management, including risk identification, assessment, mitigation, and monitoring, highlighting how these processes help institutions navigate the complexities of regulatory requirements. The discussion encompasses various types of risks faced by financial institutions, such as credit, market, operational, liquidity, and compliance risks, illustrating the need for comprehensive risk management frameworks. The review also reviews key regulatory frameworks, including Basel III, the Dodd-Frank Act, and guidelines from the European Banking Authority, emphasizing their impact on capital requirements, liquidity standards, and governance expectations. A robust risk management framework integrates compliance efforts with business strategy, ensuring that institutions are not only adhering to regulatory mandates but also aligning their risk appetite and tolerance with their strategic objectives. The role of technology, particularly in data analytics, real-time risk monitoring, and cybersecurity, is examined as a crucial enabler for effective risk management and compliance. Best practices for enhancing regulatory compliance are outlined, including continuous monitoring, regular audits, and scenario analysis. Challenges such as evolving regulations, financial product complexity, and globalization are addressed, with recommendations for adaptive strategies and industry collaboration. Through case studies, the review provides insights into successful risk management implementations and lessons learned from compliance failures. The review underscores the importance of strategic risk management in fortifying regulatory compliance and suggests future trends, such as advanced AI and machine learning, which could further revolutionize the approach to risk management in financial institutions. Keywords: Strategic Risk, Financial Institution, Regulatory, Compliance

Review of Appetite for Risk-What it is, Who has it and How I survived, by Robert R. Abbott.

Appetite for Risk is an autobiographical memoir of the author's life experiences. He vividly explains near-death experiences while maintaining humor, regaling about his escapades. It is thought-provoking to consider if human risky behavior is genetically predetermined.

Patent infringement litigation, executive team risk appetite and corporate innovation

ABSTRACT Comprehensively deepening the trial mechanism of patent infringement litigation is important for optimizing law environment for scientific and technological innovation. However, the growing frequency for patent infringement lawsuits significantly impacts the corporate innovation. The existing literature focuses on the direct relationship between patent infringement litigation and corporate innovation without exploring the mechanisms. Based on this, this paper analyzed the effect between patent infringement litigation and innovation and heterogeneity using a fixed effects model on the theoretical model basis. The study found that patent infringement litigation has a positive impact on innovation investment; patent infringement litigation promotes innovative activity through foreign direct investment; executive team risk appetite negatively moderates the relationship between patent infringement litigation and firms’ innovation investment. Patent infringement litigation has a more significant incentive effect on the innovation activities of state-owned enterprises, more open regions, and in the northeast and east regions. This paper not only reveals the mechanism that judicial litigation affects innovation activities but also provides a reference basis to solve patent disputes.

A two-step optimization model for virtual power plant participating in spot market based on energy storage power distribution considering comprehensive forecasting error of renewable energy output

As a complement to the medium and long-term market, the spot market plays an important role in maintaining the security and stability of the power grid. However, as spot trading is more proximate to the actual operation of the power system, the virtual power plant (VPP) is exposed to greater volatility in renewable energy output as well as market prices. To enhance its market competitiveness, this paper constructs a two-step optimization model for VPP participation in the spot market. Based on long-term transaction, the energy storage power is distributed based on the comprehensive forecasting error of renewable energy output. This makes the VPP obtain the maximum profit in the day-ahead market. The trading deviation penalty is reduced by adjusting the energy storage operation plan in the real-time market. The conditional value at risk is used to measure the risk of a trading strategy. The profit of VPP participation in the spot market is analyzed under different risk levels, thus providing a basis for decision makers with different risk appetites. The results show that: (1) The sensitivity of the growth rates of EtVaRαand EtCVaRα to risk level shows an opposite trend. And there is an excess of arbitrage power at low risk level. (2) Although the total cost decreases as the risk level increases, the actual profit in the spot market tends to increase and then decrease. The risk level of the VPP should be set at about 0.4 to make full use of energy storage and obtain the maximum market benefit. (3) The energy storage power can be distributed more accurately according to the forecasting error of renewable energy. This not only enhances its arbitrage ability, but also ensures its regulation ability, thus improving the overall benefit of VPP at different risk levels. (4) The sensitivity of the trend in the unit profit of traded quantity in the spot market to the trading proportion in the medium and long-term market is not monotonic.

Integrated demand response optimization strategy considering risk appetite under multi‐dimensional uncertain information

AbstractIntegrated demand response (IDR) is deemed as an effective tool to balance energy supply and demand. User’s uncertain information containing prior uncertain information and posterior uncertain information is a key factor affecting the implementation effectiveness of IDR, but existing studies fail to consider the two types of uncertain information, response risk caused by the uncertain information, and risk appetite comprehensively. Based on the principal‐agent theory of optimal incentive contract under uncertain information and Markowitz's mean‐variance portfolio theory, a new IDR model is established in this paper, and an IDR optimization strategy considering risk appetite under uncertain information is proposed. By proposing the user model considering multi‐dimensional uncertain information and the risk appetite‐based integrated energy service providers (IESP) model based on the principal‐agent theory and Markowitz's mean‐variance portfolio theory, we have achieved effective modelling of the user’s uncertain information and the risk borne by IESP. The arithmetic examples have verified advantages of the model in enhancing the accuracy of user’s actual response prediction and the superiority of incentive strategies, which is beneficial to reduce the cost of IESPs and enhance the benefit of users participating in IDR.

Uncertain Multilevel Programming Based on Hurwicz Criterion with Application to Resource Allocation

A number of uncertain multilevel programming models have been proposed and applied to decentralized decision-making problems. It is assumed that the models of uncertain multilevel problems involve uncertain variables. In these models, the chance constraints are used as constraints, and the objective functions vary according to the requirements of decision-makers. The objective functions in this paper are based on the Hurwicz criterion, which combines optimistic value and pessimistic value to find a balance between optimism and pessimism. To deal with situations in which decision-makers have this type of risk appetite, the uncertain Hurwicz multilevel programming model is proposed based on uncertainty theory and the Hurwicz criterion. Finally, two numerical examples and a case study on resource allocation are given to demonstrate the potential uses of this study.

Constructing a Risk Management Framework to Protect the Organization

Risk management is a critical activity for every organisation. It is important to consider risk in all operations and balancing risk with reward is an essential component of strategy for most companies, in the context of their environment and the current volatile conditions. This paper discusses the formulation of a risk management framework in order to address this important area, in a comprehensive, structured, planned method. A process for the construction of such a framework is proposed, based on practice. The requirement to scan the organisation’s horizon, discerning the ‘Risk Universe’, possibly using external consultants, is noted. A map of risk coverage should be formulated to ensure adequate protection and remove excessive risk provision. Risk champions can be recruited to disseminate good practice, creating a culture of risk awareness. The organisation’s appetite for risk must be ascertained and a positive contribution made, in respect of environmental issues. A review of the literature was performed and the key themes extracted. A semi-structured interview with a director of an international company was enacted. The main themes were selected, via an inductive approach. The research results were analysed and then utilised to form a proposed procedure for constructing a risk management framework.