Covariance Risk Research Articles

Pricing Intellectual Capital in Asset Pricing Models: A study on Shanghai Stock Exchange

This study aims to examine the validity of intellectual capital as a priced risk factor in the asset pricing model. We have used the data of companies listed on the Shanghai Stock Exchange from 2000 to 2021. To test the models, time series as well as cross sectional analysis have been done using the Fama-MacBeth method. The results show that intellectual capital is a significant risk factor and after augmenting IC into asset pricing models improves the explanatory power to explain the variation in the stock returns. It further suggests that IC can be priced in the Chinese market, over and above what can be explained by covariance risk, size, value, investment and profitability factors.

Multivariate range Value-at-Risk and covariance risk measures for elliptical and log-elliptical distributions

In this article, we propose the multivariate range Value-at-Risk (MRVaR) and the multivariate range covariance (MRCov) as two risk measures and explore their desirable properties in risk management. To facilitate analytical analyses, we derive explicit expressions of the MRVaR and the MRCov in the context of the multivariate (log-)elliptical distribution family. Frequently-used cases in industry, such as normal, student-t, logistic, Laplace, and Pearson type VII distributions, are presented with numerical examples. As an application, we propose a range-based mean-variance framework for optimal portfolio selection.

Non-monotonicity of risk-expected return trade-off in pricing of equity securities: the case of premium board of Nigerian Stock Exchange

PurposeA stylized fact in finance literature is the belief in positive relationship between ex ante return and risk. Hence, a rational investor, by utility preference axiom can only consider committing fund in asset which promises commensurate higher return for higher risk. Questions have been asked as to whether this holds true across securities, sectors and markets. Empirical evidence appears less convincing, especially in developing markets. Accordingly, the author investigates the nature of reward for taking risk in the Nigerian Capital Market within the context of individual assets and markets.Design/methodology/approachThe author employed ex post design to collect weekly stock prices of firms listed on the Premium Board of Nigerian Stock Exchange for period 2014–2022 to attempt to answer research questions. Data were analyzed using a unique M Vec TGarch-in-Mean model considered to be robust in handling many assets, and hence portfolio management.FindingsThe study found that idea of risk-expected return trade-off is perhaps more general than as depicted by traditional finance literature. The regression revealed that conditional variance and covariance risks reveal minimal or no differences in sign and sizes of coefficients. However, standard errors were also found to be large suggesting somewhat inconclusive evidence of existence of defined incentive structure for taking additional risk in the market.Originality/valueIn terms of choice of methodology and outcomes, this research adds substantial value to body of knowledge. The adapted multivariate model used in this paper is a rare approach especially for management of portfolios in developing markets. Remarkably, the research found empirical evidence that positive risk-expected return trade-off, as known in mainstream literature, is not supported especially using a typical developing country data.

Crop index insurance as a tool for climate resilience: lessons from smallholder farmers in Nigeria

Crop farmers in arid and semi-arid regions face a covariate risk that is of paramount importance, namely, the threat of catastrophic crop loss triggered by natural disasters and climate hazards. Such an occurrence not only jeopardizes the livelihoods of these farmers but may also lead to persistent poverty. Promoting sustainable development requires control over climate-related shocks, which negatively affect the most vulnerable population in the developing world. This study investigates the option of choosing crop area-yield index insurance to mitigate the adverse effects associated with climate stress. In addition, we assessed the amount farmers are willing to pay for an insurance product that insures yields below 70% of the local average in the study area. Our results show that access to extension services and economic association membership offers farmers social capital and encourages their decision to purchase index insurance. We also find that the long-run welfare impact of index insurance policy on vulnerable households could be significant as an alternative insurance mechanism to traditional insurance. This study contributes to filling the gaps on the uptake of index insurance and provide guidance to policymakers in their approach to mitigating the effects of climate change on crop production in Nigeria.

Extreme illiquidity and stock returns: Evidence from Thailand market

Extreme illiquidity (EIL) is priced in the cross-section of stock returns in the Thailand market. The EIL premium permeates stock categories with various risk factor loadings and characteristics. EIL is persistent and has predictive power for expected stock returns to at least a one-year horizon. The Market for Alternative Investment (MAI) with a higher proportion of individual investors, who are more active in trading than institutional investors, carries a higher EIL premium than the Stock Exchange of Thailand (SET). While the tradable EIL factor captures an important source of risk missed by the conventional risk factors, EIL as a characteristic has higher explanatory power in the cross-section than EIL as a covariance risk.

The long-run risk premium in the intertemporal CAPM: International evidence

This study investigates whether long-run conditional covariance risk is linked to expected returns in the Intertemporal CAPM framework. We observe that the long-run value risk is positively associated with the expected returns on the global portfolios excluding the US. We also find that the long-run momentum risk is negatively related to the expected returns. In contrast, the long-run market risk is not associated with them, due to the low covariance variation across portfolios. Finally, we uncover that the long-run value premiums were strong for the global and European portfolios before the COVID-19 pandemic.

Is institutional common ownership commonly priced? Insights from the cost of equity capital

This study examines the effect of institutional common ownership on a firm's cost of equity capital. Recent literature on common ownership yields opposing predictions: increased strategic alliance in the product market could increase the non-diversifiable covariance risk of a firm's cash flows with other firms, leading to a higher cost of equity capital. However, reduced product market risk that is in part non-diversifiable could lead to a lower cost of equity capital. In both baseline and difference-in-differences settings, we document a negative and significant relation between common ownership and the cost of equity capital. We also provide direct evidence that common ownership reduces product market predation risk, distress risk, and overall risk while increasing stock liquidity. We do not find sufficient evidence that improved corporate governance drives the main findings. Overall, our findings indicate that institutional common ownership offers benefits to individual firms by reducing the cost of equity financing.

Spatio-temporal dengue risk modelling in the south of Thailand: a Bayesian approach to dengue vulnerability.

More than half of the global population is predicted to be living in areas susceptible to dengue transmission with the vast majority in Asia. Dengue fever is of public health concern, particularly in the southern region of Thailand due to favourable environmental factors for its spread. The risk of dengue infection at the population level varies in time and space among sub-populations thus, it is important to study the risk of infection considering spatio-temporal variation. This study presents a joint spatio-temporal epidemiological model in a Bayesian setting using Markov chain Monte Carlo (MCMC) simulation with the CARBayesST package of R software. For this purpose, monthly dengue records by district from 2002 to 2018 from the southern region of Thailand provided by the Ministry of Public Health of Thailand and eight environmental variables were used. Results show that an increasing level of temperature, number of rainy days and sea level pressure are associated with a higher occurrence of dengue fever and consequently higher incidence risk, while an increasing level of wind speed seems to suggest a protective factor. Likewise, we found that the elevated risks of dengue in the immediate future are in the districts of Phipun, Phrom Kili, Lan Saka, Phra Phrom and Chaloem Phakiat. The resulting estimates provide insights into the effects of covariate risk factors, spatio-temporal trends and dengue-related health inequalities at the district level in southern Thailand. Possible implications are discussed considering some anthropogenic factors that could inhibit or enhance dengue occurrence. Risk maps indicated which districts are above and below baseline risk, allowing for the identification of local anomalies and high-risk boundaries. In the event of near future, the threat of elevated disease risk needs to be prevented and controlled considering the factors underlying the spread of mosquitoes in the Southeast Asian region.

Sentiment and covariance characteristics

We propose a bridging model that connects risk-based factor models to sentiment models by using stock characteristics from the asset pricing literature. Investors use stock characteristics as information to form their biased view and hence creating mispricing in stock’s price from its fundamental value. Characteristics also serve as the proxy for the covariance risk to a latent factor. The α from our factor model of mispricing ranges from 0.70% to 1.38% monthly after controlling for other common factors and mispricing measures. Well-known anomalies are only represented in either underpriced or overpriced stocks but not in all the cross-section.

Covariance Risk Premium and Expected Stock Returns

Covariance Risk Premium and Expected Stock Returns

Insuring against droughts: addressing issues of trust, transparency and liquidity in the demand for livestock index insurance

ABSTRACT Pastoralists in sub-Saharan Africa are particularly vulnerable to changing climatic conditions and heavily affected by an increasing frequency of severe droughts. To increase drought resilience, livestock index insurance constitutes a promising tool that is aligned to mitigate covariate risks. Uptake rates for these products are, however, relatively low. This article uses choice-experimental data collected in Northern Kenya to analyse preferences for hypothetical livestock index insurance contracts among pastoralists. Results show that pastoralists prefer lower strike levels as well as transparency in the form of regular radio announcements and text messages informing the policyholder about the location-specific index readings. Highly valued are trust enhancing features such as an index certification. We do not find any indication that the option to split the premium payment into two instalments as a way to relax potential liquidity constraints could lead to higher demand.

The impact of needle location on clinical outcome of radiofrequency rhizotomy for trigeminal neuralgia.

Radiofrequency thermocoagulation trigeminal rhizotomy (RT-TR) through the foramen ovale is a minimally invasive treatment for trigeminal neuralgia. Navigation of magnetic resonance imaging (MRI) and CT fusion imaging is a well-established method for cannulation of the Gasserian ganglion. In this study, we use the inline measurements from fusion image to analyze the anatomical parameters between the actual and simulation trajectories and compare the short- and intermediate-term outcomes according to determinable factors. The study included thirty-six idiopathic neuralgia patients who had undergone RT-TR with MRI and CT fusion image as a primary modality or repeated procedures. Among thirty-six treated patients, the inline length of the trigeminal cistern was longer for the simulated trajectory (8.4 ± 2.4 versus 6.5 ± 2.8 mm; p < 0.05), and the predominant structure at risk extrapolated from the inline trajectory was the brainstem, which signified a more medially directed route, in contrast with the equal weighting of temporal lobe and brainstem for the actual trajectory. The preoperative visual analogue scale (VAS) was 9.3 ± 1.0, which decreased to 2.5 ± 2.6 and 2.9 ± 3.1 at first (mean, 3 months) and second (mean, 14 months) postoperative follow-up, respectively. The postoperative VAS scores at the two follow-ups were not statistically significant without a covariate analysis. After adjustment for covariate risk factors, the second follow-up sustained therapeutic benefit was evident in patients with no prior history of related treatment, an ablation temperature greater than 70 °C, and needle location within or adjacent to the trigeminal cistern. This preliminary study demonstrated that the needle location between cistern and ganglion also plays a significant role in better intermediate-term results.

Group lending with covariate risk

Group-based lending with joint liability has been a major tool microfinance institutions (“MFIs”) have employed to improve lending feasibility. The related theoretical literature typically assumes borrowers face independent risk. This paper examines how covariate risk affects the usefulness of joint liability lending, in the hidden-information setting of Stiglitz and Weiss (1981) and Ghatak (2000). In a benchmark setting where all agents face the same degree of covariate risk, greater correlation renders group lending less effective; this is because the effective rate of joint liability is reduced when borrowers are more likely to fail together. We focus on a setting where the extensive and intensive margins are distinguished: some agents face independent risk while others face correlated risk. We find that an intermediate prevalence of correlated risk can lead to lower outreach than both a low and a high prevalence. Thus, reaching a market with mixed covariate risk profiles, e.g. farmers and micro-entrepreneurs, can be harder than reaching markets with a single profile of either kind. Assuming limited ability of lenders to use information on borrower correlatedness, we find that higher outreach is often achievable by separately servicing correlated and non-correlated borrowers. This can help explain the existence of specialized institutions such as agricultural banks versus standard microenterprise-focused MFIs.

Multivariate tail covariance risk measure for generalized skew-elliptical distributions

In this paper, the multivariate tail covariance (MTCov) for generalized skew-elliptical distributions is considered. Some special cases for this distribution, such as generalized skew-normal, generalized skew student-t, generalized skew-logistic and generalized skew-Laplace distributions, are also considered. In order to test the theoretical feasibility of our results, the MTCov for skewed and non skewed normal distributions is computed and compared. Finally, we give a special formula of the MTCov for generalized skew-elliptical distributions.

Is Economic Uncertainty a Valid Intertemporal CAPM State Variable?

Abstract This paper evaluates whether economic uncertainty is consistent with the Merton (1973) intertemporal CAPM (ICAPM) theory. The economic uncertainty index of Jurado, Ludvigson and Ng (2015) consistently predicts a significant increase in stock market volatility. However, its innovation carries a statistically insignificant price of covariance risk in the cross-section, thereby failing to satisfy the Maio and Santa-Clara (2012) sign restrictions associated with the ICAPM. I also find robust evidence by using the level of the economic uncertainty index (JEL G10, G11, G12). Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Development of allergic rhinitis in early life: A prospective cohort study in high-risk infants.

Allergic rhinitis (AR) is the most common allergic disease in children. The development process of AR in early childhood, however, is not well understood. We prospectively investigated the process in regard to not only the nasal symptoms and sensitization but also the nasal cytology, in relation to recurrent wheeze in a high-risk cohort. Infants under 2years of age with atopic dermatitis (AD) and/or food allergy (FA) symptoms were recruited and followed prospectively for 2years. The phenotype of perennial AR was classified based on the presence/absence of (1) persistent nasal symptoms, (2) nasal eosinophils, and (3) HDM sensitization, the most common allergen for perennial AR in Japan. AR-like phenotypes were defined as positive for at least two of those three categories. High-risk recurrent wheezer was diagnosed based on the Japanese guidelines and Global Initiative for Asthma. Cox proportional hazards regression analyses for high-risk recurrent wheeze and the AR-like phenotype, adjusting for known covariate risk factors for asthma. A total of 299 children were enrolled, and 237subjects (78%) completed the 2-year observation. The prevalence of eosinophilia in nasal secretions increased from 18.5% to 69.9%, while HDM-specific IgE≥0.35kUA /L increased from 30.6% to 74.8%. AR-like phenotypes increased from 18.4% to 65.0%. The AR-like phenotype at 2years was associated with development of high-risk recurrent wheezer (HR 2.062; 95% CI 1.005-4.796). The prevalence of an HDM-related AR-like phenotype was markedly increased during infancy in infants with AD/FA and was associated with high-risk recurrent wheezer.

A tail-revisited Markowitz mean-variance approach and a portfolio network centrality

A measure for portfolio risk management is proposed by extending the Markowitz mean-variance approach to include the left-hand tail effects of asset returns. Two risk dimensions are captured: asset covariance risk along risk in left-hand tail similarity and volatility. The key ingredient is an informative set on the left-hand tail distributions of asset returns obtained by an adaptive clustering procedure. This set allows a left tail similarity and left tail volatility to be defined, thereby providing a definition for the left-tail-covariance-like matrix. The convex combination of the two covariance matrices generates a “two-dimensional” risk that, when applied to portfolio selection, provides a measure of its systemic vulnerability due to the asset centrality. This is done by simply associating a suitable node-weighted network with the portfolio. Higher values of this risk indicate an asset allocation suffering from too much exposure to volatile assets whose return dynamics behave too similarly in left-hand tail distributions and/or co-movements, as well as being too connected to each other. Minimizing these combined risks reduces losses and increases profits, with a low variability in the profit and loss distribution. The portfolio selection compares favorably with some competing approaches. An empirical analysis is made using exchange traded fund prices over the period January 2006–February 2018.

The impact of the COVID‐19 pandemic on respiratory morbidity during infancy: A birth‐cohort study

To evaluate the incidence of wheezing and overall respiratory morbidity in healthy infants born during the first peak of the coronavirus disease-2019 (COVID-19) pandemic, compared with infants born during the preceding year. This was a single-center retrospective birth cohort study to compare a cohort of children born between February and March 2020 (COVID-19 group) to a control group of children born between February and March 2019 (pre-COVID-19 group). At 1 year of age, we collected respiratory data using parental and telephone questionnaires. wheezing incidence and/or bronchodilator use. recurrent wheezing, emergency-room visits, hospital admissions, pneumonia diagnosis, and admissions due to lower-respiratory-tract-infections (LRTI). We included the following covariate risk factors in the logistic regression models; atopy, daycare attendance, breastmilk feeding, parental smoking, C-section, siblings, and gestational age. We enrolled 588 infants, 294 in each group (48% males). Demographic, perinatal, and atopic characteristics were similar between the groups. Compared to the pre-COVID-19 group, infants born during the COVID-19 period were significantly less likely to report wheezing and/or bronchodilator use (adjusted-odds ratio [OR], 0.4; 95% confidence interval [CI] 0.28-0.59), systemic steroid use, (adjusted-OR, 0.47; 95% CI 0.24-0.91), emergency-room visits (adjusted-OR, 0.36; 95% CI 0.17-0.72), LRTI admissions (adjusted-OR, 0.2; 95% CI 0.05-0.74), or pneumonia diagnosis (adjusted-OR, 0.22; 95% CI 0.09-0.53). This study investigated wheezing and respiratory morbidity over the first year of the COVID-19 pandemic in infants born during the first peak of COVID-19. The study demonstrated a significant decrease in most aspects of respiratory morbidity. A longitudinal follow-up study to explore the subsequent impact of these findings is warranted.

Do contemporary antiretrovirals increase the risk of end-stage liver disease? Signals from patients starting therapy in the North American AIDS Cohort Collaboration on Research and Design.

Despite effective antiretroviral therapy, rates of end-stage liver disease (ESLD) remain high. It is not clear whether contemporary antiretrovirals contribute to the risk of ESLD. We included patients from cohorts with validated ESLD data in the North American AIDS Cohort Collaboration on Research and Design. Patients had to initiate antiretroviral therapy after 1 January 2004 with a nucleos(t)ide backbone of either abacavir/lamivudine or tenofovir/emtricitabine and a contemporary third (anchor) drug. Patients were followed until a first ESLD event, death, end of a cohort's ESLD validation period, loss to follow-up or 31 December 2015. We estimated associations between cumulative exposure to each drug and ESLD using a hierarchical Bayesian survival model with weakly informative prior distributions. Among 10 564 patients included from 12 cohorts, 62 had an ESLD event. Of the nine anchor drugs, boosted protease inhibitors atazanavir and darunavir had the strongest signals for ESLD, with increasing hazard ratios (HR) and narrowing credible intervals (CrI), from a prior HR of 1.5 (95% CrI 0.32-7.1) per 5 year's exposure to posterior HRs respectively of 1.8 (95% CrI 0.82-3.9) and 2.0 (95% CrI 0.86-4.7). Both backbones and efavirenz showed no signal. Hepatitis C coinfection was the most important covariate risk factor (HR 4.4, 95% CrI 2.6-7.0). While contemporary antiretrovirals pose less risk for ESLD than hepatitis coinfection, atazanavir and darunavir had a toxicity signal. We show how hierarchical Bayesian modelling can be used to detect toxicity signals in cohort event monitoring data even with complex treatments and few events.

Effect of parental arterial stiffness in offspring: the Kailuan study.

The aim of this study was to examine effect of parental arterial stiffness in offspring. The individuals who participated in the second or subsequent follow-up and had parent-offspring relationship and completed measurements of brachial-ankle pulse wave velocity (baPWV) from the Kailuan study were recruited. The individuals were divided into groups by the 10-year intervals and sex. Arterial stiffness was defined as the 75th percentiles in each age category. Multivariable generalized estimating equations was used to analyse the effect of parental baPWV and blood pressure in offspring. Multivariable logistic regression using generalized estimating equations was used to analyse the effect of parental arterial stiffness in offspring. A total of 4514 parents and offspring who met the inclusion criteria, including 1785 paternal offspring and 625 maternal offspring was recruited. Mean age of paternal offspring and maternal offspring were 36.26 (SD 7.86) and 36.42 (SD 7.57) years, while their mean baPWV were 1294.40 (SD 225.32) and 1270.74 (SD 241.42) cm/s, respectively. In multivariate linear regression analyses, after adjusted for the covariate risk factors, an increase of 1 cm/s in the paternal and maternal baPWV of resulted in an increase of 0.05 and 0.30 cm/s in offspring, respectively. In multivariate logistic regression analyses, the risk of arterial stiffness in the offspring of paternal and maternal arterial stiffness increased by 50 and 77%, respectively. Paternal and maternal baPWV are linear positively correlated with baPWV in offspring. Parental arterial stiffness is a risk factor for arterial stiffness of offspring and is independent of traditional risk factors of offspring arterial stiffness.