Degree Of Risk Tolerance Research Articles

Behavioral preferences and contract choice in the residential solar PV market

AbstractGreater adoption of renewable energy technologies by households is a key component of decarbonization and energy transition goals. Although existing literature has examined how sociodemographic characteristics, “green” preferences, and peer effects impact adoption of new energy technology, the role of behavioral preferences has not been adequately studied. In this paper, we examine the effect of two types of behavioral preferences, namely the degree of risk tolerance (risk preference) and attitude toward delayed reward (time preference) on the contract decision to lease or own a solar photovoltaic (PV) system. We develop a theoretical framework to show that the effect of risk and time preferences on the relative utilities from the two contracts is monotonic: Lower risk aversion and lower discount rate (more patience) imply a higher chance of solar PV ownership. To test these predictions empirically, we first estimate preference parameters (risk aversion and discount rate) from laboratory data collected from solar PV adopters. We then combine the parameter estimates with data on actual solar PV contract choice to examine the relationship between solar PV adopters' time and risk preferences and their lease‐versus‐own choice. Our regression results confirm that less risk averse individuals have a higher tendency to choose the ownership option, whereas more patient individuals are (weakly) more likely to own their solar PV systems. These findings contribute to a greater understanding of the role of behavioral factors in household decisions related to energy technologies.

Local risk preference and corporate policies: evidence from M&A

ABSTRACT This article examines whether and how the firms’ mergers and acquisitions (M&A) policies are influenced by the risk preference of local community where the firms’ headquarters are located. By utilizing the different preferences towards risk-taking from the county-level religiosity-based measure, we document a significantly positive relation between the local risk preference and the likelihood of firms’ M&A. Firms whose headquarters are located in the counties with a higher degree of risk tolerance are more likely to engage in takeovers or acquire riskier targets. Local risk preference also results in wealth transfer during M&A that reduces acquirers’ equity value. When interacting with firm CEOs’ career concern and financial compensation, we find that managerial risk-taking incentive can be significantly affected by the local risk preference, suggesting an important economic interplay between the social norms and financial decision-making.

Solidarity and Implications of a Leaderless Movement in Hong Kong

In 2019, what began in Hong Kong as a series of rallies against a proposal to permit extraditions to mainland China grew into a raft of anti-authoritarian protests and challenges to Beijing’s grip on the city. Given the gravest political crisis confronting Hong Kong in decades, this research investigates why the protests have lacked centralized leaders and why the solidarity among the peaceful and militant protesters has been immense. This article also examines the strengths and limitations of this leaderless movement with different case studies. The authors argue that serious threats to the commonly cherished values in Hong Kong, amid the absence of stable and legitimate leaders in its democracy movement, underpinned the formation of a multitude of decentralized decision-making platforms that orchestrated the protests in 2019. Those platforms involved both well-known movement leaders organizing conventional peaceful protests and anonymous activists crafting a diversity of tactics in ingenious ways, ranging from economic boycotts, human chains around the city, artistic protests via Lennon Walls, to the occupying of the international airport. The decentralized decision-making platforms, while having generated a boon to the movement with their beneficial tactical division of labor, also produced risks to the campaign. The risks include the lack of legitimate representatives for conflict-deescalating negotiations, rise in legitimacy-sapping violence, and susceptibility to underestimating the risks of various tactics stemming from a dearth of thorough political communication among anonymous participants who had different goals and degrees of risk tolerance. In short, Hong Kong’s anti-extradition movement in 2019 sheds light on the basis of leaderless movements, and on both the strengths and risks of such movements.

Person Perception, Attractiveness, and Assessment of Men with Tendency to Take Risks: Evolutionary Aspects

The male behavioural strategy associated with physical risk is one of the universal foundations on which the ideas of masculinity established in society are based. Risk-taking propensity in general can signal a man's greater competitiveness, and physically risky actions can be perceived as "courageous" behavior and evidence of strength and athleticism. The results of a number of experimental studies and observations recorded sexual differences in risky behavior. In particular, young men are more likely to take physical risks than women. Evolutionary scientists have suggested that these differences may be a result of male competition for access to sexual partners. In this study we present an analysis of male and female physical risk assessments of men in the Russian sample (n = 701). Men and women were offered vignettes describing men who differed in risk-taking propensity. Respondents needed to assess the attractiveness of men in the context of long-term romantic and short-term (so-called "one night stand") relationships, as well as to assess their competitiveness, tendency to aggression, provisioning quality and a tendency to dangerous health behavior (alcohol abuse, unprotected sex, etc.). The degree of risk tolerance was significant in the evaluation of all the proposed parameters. Men who demonstrate an average degree of risk-taking propensity received the highest ratings for attractiveness for short-term relationships. Low-risk men were found to be more attractive in long-term relationships and able to provide the best quality of life. Men who choose a type of activity associated with constant physical risk and danger were assessed as the most aggressive and competitive. In addition, high risk propensity was associated with a higher propensity for unhealthy lifestyles and bad habits. Thus, male risk-taking behaviour affects men's social perception, attractiveness and quality assessment, and a high degree of risk-taking is not always perceived as a positive quality.

An Excursion towards Multi-frequency-Prediction Based Flexible Asset Allocation System

The study probes the flexibility dimension underpinning the asset allocation strategy and develops a system which has the capability to adapt itself dynamically to the changing preferences of the investors and the uncertainties of the market and at the same time can leverage technology to make better foresight into the complex realities. The need of such a system has been accelerated by the ever-increasing competition to out-perform the market in an environment contaminated by fear from the trailing crisis and anxiety about the future sustainability. The authors engineered a multi-resolution convergence divergence indicator in the light of multi frequency trading behaviour of the heterogeneous agents and used the same in a recurrent neural network based non-linear autoregressive with exogenous input model to conditionally predict the future movements. The predictions are subsequently used in a flexible asset allocation system to manage dynamically both the exposure to the risky asset and the degree of risk tolerance. To ascertain the reliability of the model an out-of-the sample validation test is conducted and the model is compared with its peer and the market by back-testing the same on the testing data set. A multitude of relevant risk and performance measures are used for evaluating the proposed model. The outcome of the study reveals that the proposed system outperforms its peer and the market by a reasonable margin.

White Paper Report of the 2012 RAD-AID Conference on International Radiology for Developing Countries: Planning the Implementation of Global Radiology

The RAD-AID Conference on International Radiology for Developing Countries is a yearly forum addressing global shortages of radiology that contribute to health care disparity. In this paper, the authors present key issues and consensus positions related to the planning, analyzing, implementing, and monitoring of radiology in limited-resource areas on the basis of presentations at the 2012 RAD-AID conference, to advocate for (1) economic development to build health care capacity, (2) multidisciplinary educational strategies, (3) innovative epidemiologic and infrastructural solutions tailored to community needs, (4) advanced technical solutions leveraging the widespread use of wireless telecommunications and phone-based portable devices, and (5) improved dialog across radiology and public health institutions for coordinating global health strategies.

Risk management and climate change

Climate change studies rarely yield consensus on the probability distribution of exposure, vulnerability, or possible outcomes, and therefore the evaluation of alternative policy strategies is difficult. This Perspective highlights the importance of decision-making tools designed for situations where generally agreed-upon probability distributions are not available and stakeholders show different degrees of risk tolerance.

Strategic Asset Allocation in Stochastic Environment and Incomplete Markets: Evidence on Horizon and Hedging Effects

The paper analyzes optimal portfolio choice when the investment opportunity set is driven by multi-stochastic factors, namely; stochastic interest rates, stochastic volatility and stochastic inflation. The analysis is implemented in an incomplete market setting, where the number of risk sources is larger than the number of risky assets. The model segregates the effect of inflation from the other two state variables by deriving the dynamics in real wealth. The derived optimal portfolio shows that inflation plays a significant role in forming investors’ hedging demand through the correlation structure between inflation and assets held in the portfolio. The correlation structure among assets seems to determine the speculation demand rather than the hedging demand. Empirically, the paper calibrates the optimal portfolio choice for different classes of investors distinct by the degree of risk tolerance and investment horizon length in an attempt to mimic the popular financial planners’ advice. Calibration results show that the joint inclusion of stochastic interest rates, stochastic volatility and stochastic inflation introduces a plausible simultaneous resolution for both Samuelson puzzle and asset allocation puzzle of Canner, Mankiw, and Weil (1997).

Risk tolerance and a retailer's pricing and ordering policies within a newsvendor framework

This paper evaluates the pricing and ordering policies of a retailer, facing a price-dependent stochastic demand, within a newsvendor framework, under different degrees of risk tolerance and under a variety of optimizing objectives. These are (i) maximizing expected profit, for a retailer who may be risk-seeker, risk-averse or risk neutral; (ii) deriving a maximin strategy of maximizing a minimum guaranteed profit and (iii) modeling the probability of exceeding a target profit, as a constraint or as an objective. Some analytical properties and numerical examples illustrate the main features of the models and provide some comparative policy analysis across the model.

Risk Transfer Arrangements as a Hedging Device with Evidence from the Kuwaiti Dinar-British Pound Market

An operational hedging technique is proposed to shift some of the foreign exchange risk from the importer to the exporter when the currency of invoicing is the base currency of the exporter. This technique, which may be resorted to when financial hedging is not feasible or expensive, requires an arrangement for the conversion of cash flows at a range of exchange rates calculated as some weighted average of the rates used under a risk sharing arrangement and a currency collar. The problem of negotiating the dimensions of the arrangement when the exporter and importer have different degrees of risk tolerance can be resolved by fine tuning the weights in such a way as to eliminate the sensitivity of the base currency value of the cash flow to the value of the risk sharing threshold parameter. The theory is subsequently illustrated by using monthly observations on the exchange rate between the Kuwaiti dinar and the British pound.

The rule and method of risk allocation in project finance

The nature of project finance is risk allocation. Effective risk allocation can improve project performances. The rule of effective risk allocation in project finance is that risk is mostly allocated to the participants whose risk tolerance is high. However, during the risk allocation of actual project finance, the participants’ degree of risk tolerance is very abstract and difficult to be measured. According to the elements of risk allocation, the method and procedure of risk allocation is put forward in this study based on the rule of risk allocation in project finance. The rule and method of risk allocation proposed in this paper could serve as a guide for the development of project finance on theory and practice in China.

Reform of the tax on reversions of excess pension assets

AbstractThis study quantifies the possible consequences to stakeholders of reforms to the excise tax on reversions of excess pension assets. Under the US Pension Protection Act (PPA) of 2006, funding in defined benefit (DB) plans is likely to improve significantly. Many plans may become overfunded over time, owing to the shortfall amortizations mandated by the PPA, as well as to precautionary contributions by sponsors and to plan investment returns. This analysis shows that a more moderate excise tax rate together with a reasonable funding threshold for asset reversions would not only enable sponsors to spend the excess funds on other corporate needs, thereby lowering the cost of sponsorship of DB plans, but also would open a considerable revenue source for the government, with only a small increase in bankruptcy cost for the PBGC. Plan participants could also gain in an alternative reform, which would require a partial transfer of excess assets to them along with a still-lower reversion tax rate. These findings also hold for plan sponsors with various degrees of risk tolerance or only making the PPA-required minimum contributions.

Does Islamic banks' securitization involvement restrain their financing activity?

Purpose – The purpose of this paper is to validate the concern that banks' increasing involvement in securitization activity restrains banks' lending, as well as their degree of risk tolerance. Theoretical frameworks claim that securitization reduces risk, hence decreasing banks' degree of risk aversion. Subsequently, banks would be motivated to increase their percentage of assets devoted to risky activities, which is lending to economic sectors. However, banking statistics dictates that banks' lending is on the decline while banks' securitization activities are on the rise.Design/methodology/approach – The paper refers specifically to the Malaysian Islamic commercial banks and utilizes standard panel data analysis.Findings – Supportive evidence was found that banks' involvement in securitization activity do restrain their lending activity. In addition, banks tend to have a riskier portfolio composition following their involvement in securitization activity. Taken together, this signals that banks' involv...

Reform of the Tax on Reversions of Excess Pension Assets

This study quantifies the possible consequences to stakeholders of reforms to the excise tax on reversions of excess pension assets. Under the U.S. Pension Protection Act of 2006 (PPA), funding in defined benefit plans is likely to improve significantly. Many plans may become overfunded over time, owing to the shortfall amortizations mandated by the PPA, as well as to precautionary contributions by sponsors and to plan investment returns. This analysis shows that a more moderate excise tax rate together with a reasonable funding threshold for asset reversions would not only enable sponsors to spend the excess funds on other corporate needs, thereby lowering the cost of sponsorship of defined benefit plans, but also would open a considerable revenue source for the government, with only a small increase in bankruptcy cost for the PBGC. Plan participants could also gain in an alternative reform, which would require a partial transfer of excess assets to them along with a still-lower reversion tax rate. These findings also hold for plan sponsors with various degrees of risk tolerance or only making the PPA-required minimum contributions.

A bargaining approach to currency collars

A bargaining approach is followed to examine the operational hedging technique of currency collars. By working out the Nash equilibrium in a bargaining game involving two firms with different degrees of risk tolerance, some simulation results are presented to show the process determining the threshold of risk sharing. It is found that as long as one of the firms is more risk averse than the other, both firms gain from a currency collar. The simulation results also reveal that, for a given degree of risk aversion, the risk sharing threshold parameter increases with the standard deviation of the underlying exchange rate.

Arbitrage pricing theory-based Gaussian temporal factor analysis for adaptive portfolio management

Ever since the inception of Markowitz's modern portfolio theory, static portfolio optimization techniques were gradually phased out by dynamic portfolio management due to the growth of popularity in automated trading. In view of the intensive computational needs, it is common to use machine learning approaches on Sharpe ratio maximization for implementing dynamic portfolio optimization. In the literature, return-based approaches which directly used security prices or returns to control portfolio weights were often used. Inspired by the arbitrage pricing theory (APT), some other efforts concentrate on indirect modelling using hidden factors. On the other hand, with regard to the proper risk measure in the Sharpe ratio, downside risk was considered a better substitute for variance. In this paper, we investigate how the Gaussian temporal factor analysis (TFA) technique can be used for portfolio optimization. Since TFA is based on the classical APT model and has the benefit of removing rotation indeterminacy via temporal modelling, using TFA for portfolio management allows portfolio weights to be indirectly controlled by several hidden factors. Moreover, we extend the approach to some other variants tailored for investors according to their investment objectives and degree of risk tolerance.

Market reaction to anticipated announcements

Abstract In this paper we analyze how anticipating a forthcoming public announcement affects the market reaction to the announcement by altering investors' incentives to acquire private information. Specifically, we study price change, volume, and information asymmetry at the time of the announcement. We also investigate how information acquisition, information asymmetry, price, and volume are influenced by the quality of prior knowledge, the marginal cost of gathering information, the degree of risk tolerance, and noise. Finally, we compare market reactions to anticipated announcements of known precision with the response to announcements that are either unanticipated or of uncertain quality.