Risk Diversification Research Articles

Cryptocurrencies fall from grace: Snatched safe flight to which haven during Russia-Ukraine conflict?

The unprecedented upheaval in an economic and financial system facilitates herding behaviour and flight-to-safety (FTS) episodes from a riskier asset into a safer one. The Russia-Ukraine conflict shows that the financial market assets are still prone to external shock. In line with this, the study explores the inconclusive insights on an FTS from cryptocurrencies to US treasury securities. The paper employs dynamic conditional correlation – generalized autoregressive conditional heteroskedasticity (DCC-GARCH) to test the FTS episode for a period from February 24, 2022 to February 23, 2023. The findings hold a sizeable negative and significant volatility coefficient, particularly DCCα, which directs to support the notion of short-lived FTS from cryptocurrencies to treasury securities during the invasion period. Nevertheless, some evidence of the positive volatility effect points out the risk diversification benefits. The results also show flight-to-quality from BTC, ETH, USDT, BNB, ADA and MATIC to the US dollar index (USDX), however, for other cryptocurrencies, it acts as a diversifier. We unfolded several implications that could be interesting for a market participant looking for evidence on the behaviour of cryptocurrencies and govt. backed securities during times of market uncertainty in the future.

Inter- and intra-connectedness between energy, gold, Bitcoin, and Gulf Cooperation Council stock markets: New evidence from various financial crises

This study analyzes the inter-dependence of the oil, gold, Bitcoin (BTC), and Gulf Cooperation Council stock markets during the recent Russia–Ukraine and Israel–Palestine conflicts. The study found that these markets were less inter-connected during oil battles and the Russia–Ukraine conflict but more inter-connected during the COVID-19 crisis. Findings indicated that Oman, Kuwait, gold, and Qatar are the most significant spillover receivers, whereas the United Arab Emirates (UAE), Kingdom of Saudi Arabia, and West Texas Intermediate are the primary risk spillover transmitters in the Israel–Palestine conflict. Additionally, BTC and the UAE are significant transmitters, whereas Kuwait and Qatar are the highest-risk spillover receivers in the Russia–Ukraine war. Portfolio estimates revealed that gold, BTC, and/or oil are useful in various equity markets for portfolio diversification and hedging under different market conditions and time horizons. These data can guide managers in portfolio construction and risk diversification.

Risk Budgeting Allocation for Dynamic Risk Measures

Time-Consistent Diversified Portfolio Allocations Portfolio allocation problems typically involve diversification of risks, which can be achieved by risk budgeting strategies. Of additional importance is being time consistent—that is, ensuring that decisions about what to do in the future under certain outcomes remain optimal when those future outcomes are realized. In “Risk Budgeting Allocation for Dynamic Risk Measures,” Pesenti, Jaimungal, Saporito, and Targino develop time-consistent portfolio strategies, termed dynamic risk budgeting strategies, where the diversification is on the level of risk contribution of assets. The authors formalize the dynamic setting of risk budgeting strategies, recast dynamic risk budgeting strategies as solutions of sequences of convex optimization problems, and develop an efficient actor-critic deep reinforcement learning algorithm for estimating dynamic risk budgeting strategies. The algorithm and the dynamic risk budgeting strategies are illustrated on a complex simulation case study involving five assets and 12 time steps.

RISK FINANCING AND PERFORMANCE OF SELECTED DEPOSIT MONEY BANKS IN NIGERIA

Business leaders no longer view risks as a mere hazard to be avoided but also as opportunities that should be exploited. Thus, risk itself is not bad, but the bad things are risks that were mismanaged, misunderstood, misplaced, or unintended. This study was carried out to examine the influence of risk financing on the financial performance of banking institutions in Nigeria. Risk financing was examined through the lens of risk transfer proxy as insurance, risk hedging, and risk diversification while performance was measured using profitability (Return on Asset), liquidity (liquidity ratio), and shareholder’s value (Return on Equity). The study adopted an ex post facto research design. The focused on deposit money banks licensed with international authorization by the Central Bank of Nigeria due to their wide range of expertise and experience. These banks are 8 in number and they were all observed in the study. Panel data was drawn from the financial statements of the selected banks for the period of 12 years (2012 – 2022). The Autoregressive Distributive Lag (ADRL) regression analysis was employed to analyze the data after the test for stationarity using the Panel Unit root test methods indicated a mix of stationarity. The study presented a long-run and short-run effect of all three risk financing mechanisms on the financial performance of selected banks in Nigeria. It was observed from the study among others that the risk transfer mechanism using insurance has a negative long-run influence on the financial performance of banks in Nigeria and recommends that alternative means of risk financing should be explored.

FINANCIAL TURBULENCE AND RECOVERY IN STOCK MARKETS AMONG INDIA AND ITS MAJOR ASIA-PACIFIC COUNTERPARTS: AN ANALYTICAL STUDY DURING THE GLOBAL FINANCIAL CRISIS PERIOD AND POST-FINANCIAL CRISIS PERIOD

Understanding stock market correlations is essential for gauging financial integration, identifying risk diversification potential, and supporting investment management especially during economic downturns in a globally connected landscape. This paper presents a comprehensive correlation analysis among India (S&P BSE SENSEX) and ten prominent Asia-Pacific countries— China (SSE Composite), Israel (TA-125), Japan (Nikkei), Hong Kong (Hang Seng), Taiwan (TSEC), Indonesia (Jakarta Composite), South Korea (KOSPI), Australia (S&P/ASX 00), Singapore (FTSE), and Russia (MOEX Russia)—across two pivotal phases: the global financial crisis period, spanning from August 7, 2007, to April 16, 2009 and post-financial crisis period, from April 20, 2009, to December 30, 2019. Using a combination of descriptive statistics and correlation analysis on the calculated returns from daily adjusted market closing series of these indices, the study assesses the degree of association among the indices of India and the ten economies, with normality diagnostics guiding the selection of the appropriate correlation methodology. The normality tests indicate that none of the return series follow normal distribution and validate the use of the non-parametric Spearman Rank Correlation method. Results reveal persistently weak correlations among the S&P BSE SENSEX and other indices, suggesting scope for minimal co-movement across the indices in both periods. Although correlation among returns from Indian and ten Asia-Pacific indices grew from the crisis to the post-crisis period, no strong association emerged, showing only modest inter-market linkages in both intervals.

Stock, foreign exchange and commodity markets linkages: Implications for risk diversification and portfolio management

We analyze connectedness for a system composed of 111 financial markets from January 3, 2011, to December 29, 2023. Stock, foreign exchange, and commodity markets are included in the sample. Using a two-stage approach based on Principal Component Analysis to remove common global factors affecting financial market returns, we employ a LASSO-VAR model to estimate the global network of financial markets. Our results reveal that financial markets are closely linked. Common global factors intensify spillovers between financial markets. After being removed, financial markets transmit significant idiosyncratic shocks that are not explained by systemic variations. Our results also allow us to accurately identify the markets that are idiosyncratically less vulnerable to liquidity shocks, and those that are most relevant transmitting this kind of disturbances. These findings are relevant for investment decisions, risk management, and financial regulators.

Financial Constraints and Firm Innovation Decision: The Roles of Corporate Governance and Risk Diversification

ABSTRACT Firm innovation decision is subject to the influence of financial constraints, but the mechanism through which this impact occurs remains unclear. Using a nationwide representative survey data set of private firms in China in 2016, we first identified the strengthening effect of financial constraints on firm innovation decision, and further demonstrated the influence of corporate governance and risk diversification on such a relationship. The results show that firms tend to increase investment in innovation to improve operations when facing tighter financial constraints. Firms with suboptimal corporate governance and better conditions of risk diversification tend to adopt riskier innovation strategy to cope with tighter financial constraints.

Research On Bond Market in Risk Management

With a focus on the acquisition and disposal of bonds and other fixed-income instruments, the bond market is a significant division of the financial markets. This article focuses on the definition and classification of bond risk and evaluates the impact of bond risk on investors and the market by first analyzing the history of the bond market and its role for investors. In addition, this paper discusses some strategies and case studies that people use to avoid, transfer, or reduce risks in the bond market, through some integrated risk management strategies, such as hedging strategies, risk diversification, and credit enhancement, by studying typical cases, investors can understand the main risks in the bond market, master how to distinguish and manage risks and strategies, analyze the more complex bond market, and analyze the complex integrated risks are summarized and recommended to maximize returns. Ultimately, readers may gain a deeper understanding of the bond market.

Pricing Model Construction and Empirical Research on Catastrophe Bond Pricing for Three Major Crops in China

Agricultural disaster risks are significant for the sector's development, and existing risk management tools have limitations.This paper introduces a nationwide catastrophe bond for wheat, maize, and rice , offering broad coverage for China's agriculture. The paper utilizes marginal distribution and Copula function fitting to model the disaster losses of the three major crops from 1990 to 2022. It employs Monte Carlo simulation to generate a 10,000-year event set and rank correlation to align simulated data with real data. The bond price is then calculated using the Wang model, addressing the challenge of data scarcity and providing an innovative approach to catastrophe bond design. The study finds that bond prices increase with the coverage period and risk level, with interest-risk bonds offering higher returns and risks than principal-and-interest risk bonds. Catastrophe bonds present a more stable risk diversification method compared to reinsurance, both in terms of returns and potential losses.To further the development of agricultural catastrophe bonds, the paper recommends optimizing the issuance environment and establishing a robust market infrastructure.

Does Innovation Sustainability Attract Retail Investors? The Clientele Effect in China

Innovation sustainability is essential for businesses to maintain their competitive edge and ensure long-term growth. This not only benefits individual companies but also entire industries. Despite its importance, research on retail investors’ preferences for innovation sustainability remains limited. To address this gap, we analyzed unique data on shareholder numbers in listed Chinese companies from 2007 to 2020. We differentiate between institutional and retail investors to analyze the latter’s preferences. This finding indicates that retail investors prefer to invest in companies with higher innovation sustainability. This preference stems from their limitations in capabilities of information collection, analytical skills, and risk diversification. The clientele effect is more pronounced when companies face a poor innovation environment, an opaque information environment, and a weak political connection. This study contributes to the existing literature by providing empirical support for the clientele effect and shedding light on retail investors’ preferences and investment behavior. By focusing on company fundamentals, our study extends the examination of the clientele effect to the corporate governance level. These insights have significant implications for promoting sustainable development, impacting both companies and the capital market.

Principles behind investors’ consideration of investing in emerging markets

Investors are showing a growing interest in emerging economies due to several compelling characteristics that make these countries attractive for investment. The objective of this study is to examine the factors that motivate individuals to invest in emerging markets. This study employed a quantitative research methodology, specifically utilizing a survey method and online questionnaires to collect data from asset managers in South Africa due to their investment expertise. This group is specifically for a limited number of investors and/or asset managers who have the ability to provide the required information. Data analysis entailed the application of descriptive statistics. The findings revealed multiple justifications for investing in emerging economies, such as higher returns, risk diversification, capitalizing on emerging markets, expanding prospects, maintaining a well-balanced investment portfolio, hedging money, and ensuring anonymity. Among these arguments, only four are crucial when contemplating investment in emerging economies: augmented returns, risk diversification, capitalizing on emerging markets, and expanding prospects.

Risk Factors for Disease Aggravation in Older Patients With Non-communicable Diseases: Interpretive Structural and Hierarchical Holographic Modelling.

This study aimed to analyse and determine the risk factors of disease aggravation faced by older patients with non-communicable diseases (NCDs) and their interwoven correlations. We employed a descriptive and cross-sectional study, which followed the STROBE guidelines for reporting. We conducted a semi-structured in-depth interview with 26 older patients with NCDs from a hospital in Qingdao, China between July and August 2022 on the basis of the literature review. Then, we analysed data using the directed content analysis and determined risk factors through a focus group discussion and the Delphi consultation. Afterward, we combined interpretive structural modelling and hierarchical holographic modelling to construct a hierarchical structure model and drew relationship framework diagrams to exhibit diversified risk factors and complex interwoven correlations. We identified 30 risk factors from individual, interpersonal, organisational, community and policy levels. The hierarchical structure model constructed by interpretive structural modelling demonstrated a four-layer structure, and the individual and interpersonal levels were at the highest layer. The relationship framework diagrams demonstrated the identification process of risk factors and interwoven correlations at individual and organisational levels. Risk factors causing disease aggravation amongst older patients with NCDs are diverse. To delay the progression of NCDs, we should comprehensively explore risk factors, interpret the root causes and effects of risks from multiple perspectives and consider the interaction amongst multi-level risk factors to develop precise measures related to risk control. Controlling risk factors is an effective measure to postpone disease aggravation. Through this study, we provide a scientific and comprehensive basis for clinical risk screening so that healthcare providers can sense potential risk factors for disease aggravation in older patients' surroundings and formulate targeted nursing measures according to the risk factors faced by different patients. Patients participated in interviews to supplement risk factors included in our study. Experts provided opinions on the inclusion, exclusion and modification of risk factors.

Identifying optimal funding allocations for public water infrastructure improvements under uncertainty

Diversified and locally managed funding strategies bring substantial benefits to water infrastructure investments across financial, social, institutional, and political spheres. However, these strategies often occupy a secondary role in the public sector's capital allocation process. We outline optimal funding strategies for water infrastructure by zeroing in on communities' specific needs and navigating two types of uncertainty—historical and priority uncertainty—across both long-run (multi-decade) and short-run (recent years) timeframes. Employing Modern Portfolio Theory (MPT), our approach pinpoints optimal funding distribution both across and within categories (namely, individual counties) based on their funding needs. By comparing these distributions with Tennessee's Clean Water State Revolving Fund's historical funding approach, we benchmark how risk and socioeconomic factors influenced past decisions. This analysis yields optimal allocations that inform which counties should be given priority by public funding agencies, moving toward portfolios that adeptly balance risk with funding necessity. Our methodology is executed in two stages, each bearing distinct implications. The initial stage seeks to prioritize groups of counties based on their funding needs, considering both immediate and long-term contexts, in line with what government agencies might aim to achieve. The subsequent stage refines the equilibrium between risk and need at a more detailed level within these groups, facilitating risk diversification that effectively addresses both short- and long-term funding requirements.

Financial incentive instruments of regional economy’ «green» transformation

Transformation and development of the economy towards greening is an important measure for different regions to address the global challenges of climate change and rising pollution levels, and a necessary pathway to achieve sustainable development. Whether it is modernization and transformation of green technologies in traditional industries or green management of the public environment, external financial support is needed to compensate for the insufficient investment of micro-economic actors. The purpose of the study is to analyze the key financial instruments that stimulate the green transformation of the regional economy, as well as an attempt to determine the directions of using these instruments to increase the effective supply of green funds and ensure their increasing role in promoting economic transformation on the path of building an ecological civilization. The methodological basis of the study was formed by analytical and comparative methods, as well as relevant works of scientists devoted to the study of the problems of stimulating environmentally-oriented transformation processes, primarily in the regional context. The results of the analysis show that, given the important supporting role of finance in the green transformation of the economy and the fact that the relevant research is still at the initial stage, the systemic mechanism of financial stimulation of the regional economy’ green transformation should be based on three elements: financial support, capital allocation and risk diversification. It is demonstrated that the development of green economy cannot be separated from the increasing innovation dynamics of "green" financial products, so it is necessary to increase efforts in the field of development and implementation of financial innovations, to provide priority financial support to key sectors of the green economy.

A common component of Fama and French factor variances

This is the first study that explicitly explores the risk of the Fama and French equity factors in terms of their realized variances. Our results show that realized factor variances exhibit strong power-law behavior. A striking commonality is that the power-law exponents are close to α ≈ 2 regardless of which factor variance is analyzed. Notably, our novel joint test designed to test Mandelbrot’s infinite variance hypothesis in the cross-section of realized factor variances shows that the null hypothesis of α = 1.9 cannot be rejected, which further corroborates the evidence that (a) there exist a common component governing factor variance risk, and (b) factor variance risk is statistically undefined. Further evidence derived from co-fractality analysis shows that (c) risk diversification appears to be very limited as factor variances tend to exhibit power-law behavior coincidently. We argue that our study has several theoretical and practical implications—especially due to the fact that factor investing reached $5 trillion in assets under management.

The Impact of Cross-Border Banking on Financial Stability

The globalization of financial markets has ushered in an era of interconnectedness, where financial institutions increasingly operate across national borders. This phenomenon, known as cross-border banking, has both potential benefits and risks for financial stability. While it can enhance risk diversification and promote economic growth, it also poses challenges such as contagion effects and regulatory coordination issues. This study aims to comprehensively investigate the impact of cross-border banking on financial stability, particularly within the European Union (EU). By examining the costs and benefits, developing metrics to measure optimal integration, and applying these metrics to EU countries, this research seeks to provide policymakers and regulators with valuable insights into the management of cross-border banking activities. The study begins by analysing the costs and benefits of cross-border banking. While it can offer advantages like risk spreading and increased credit stability, it also introduces risks such as contagion and regulatory challenges. The research explores the interplay between these factors and their implications for financial stability. To quantify the optimal level of cross-border banking integration, the study develops forward-looking indicators. These metrics aim to measure the extent to which a country's banking system is integrated into international markets while minimizing risks. By applying these indicators to EU countries, the research identifies which countries are more susceptible to systemic risks and which ones demonstrate optimal practices. Furthermore, the study investigates the systemic risks associated with cross-border banking, particularly the risk of financial contagion. It examines how the interconnectedness of financial institutions can facilitate the spread of shocks across borders and explores the role of regulatory coordination in mitigating these risks. The research also evaluates the trade-off between cross-border banking integration and local financial stability. While integration can provide diversification benefits, it can also increase vulnerability to external shocks. The study seeks to determine the optimal level of integration that allows countries to benefit from international markets without compromising domestic stability. Finally, the study provides policy recommendations based on its findings. By identifying countries with imbalances or low diversification, the research offers guidance on how to improve financial stability through targeted interventions. The recommendations aim to enhance the resilience of cross-border banking systems and contribute to a more stable and efficient global financial landscape.

Bitcoin, Fintech stocks and Asian Pacific equity markets: a dependence analysis with implications for portfolio management

PurposeThis study aims to provide empirical evidence on the return and volatility spillover structures between Bitcoin, Fintech stocks and Asian-Pacific equity markets over time and during different market conditions, and their implications for portfolio management.Design/methodology/approachWe use Time-varying parameter vector autoregressive and quantile frequency connectedness approach models for the connectedness framework, in conjunction with Diebold and Yilmaz’s connectivity approach. Additionally, we use the minimum connectedness portfolio model to highlight implications for portfolio management.FindingsRegarding the uncertainty of the whole system, we show a small contribution from Bitcoin and Fintech, with a higher contribution from the four Asian Tigers (Taiwan, Singapore, Hong Kong and Thailand). The quantile and frequency analyses also demonstrate that the link among assets is symmetric, with short-term spillovers having the largest influence. Finally, Bitcoins and Fintech stocks are excellent diversification and hedging instruments for Asian equity investors.Practical implicationsThere is an instantaneous, symmetric and dynamic return and volatility spillover between Asian stock markets, Fintech and Bitcoin. This conclusion should be considered by investors and portfolio managers when creating risk diversification strategies, as well as by policymakers when implementing their financial stability policies.Originality/valueThe study’s major contribution is to analyze the volatility spillover between Bitcoin, Fintech and Asian stock markets, which is dynamic, symmetric and immediate.

Temperature fluctuations, climate uncertainty, and financing hindrance

AbstractUndesirable temperature fluctuations pose significant financial risks for enterprises. By merging fine‐grained meteorological data with a panel of publicly listed firms, we delve into the relationship between temperature volatility and financing constraints. Our analysis reveals a positive correlation between temperature fluctuations and increasingly stringent financing limitations. State‐owned or large‐scale enterprises endowed with greater resources and risk diversification mechanisms are more likely to counteract the adverse effects of temperature volatility. Furthermore, we furnish evidence indicating that temperature fluctuations exert a substantial influence on corporate labor productivity. In response, companies tend to expand their workforce and elevate wages during the fiscal year. Faced with dwindling income and escalating operational costs, enterprises significantly amplify their insurance expenditures. The pronounced escalation in default risk and borrowing costs could undermine investors' sanguine profit expectations, subsequently prompting declines in firms' price‐to‐earnings and price‐to‐book ratios. Our study underscores the imperative for executive management teams to prudently account for climate change‐induced financing constraints when devising investment and production strategies.

Analysis The Effect Of Volatility On Potential Losses Mutual Fund Investments Using The ES-GARCH Method

Investing in mutual funds has become a popular choice for investor who looking to participate in the capital markets with more diversified risk. However, the success of mutual fund investments depends on investors understanding the potential losses and opportunities that may arise during the investment period. Analyzing the risk of mutual fund investments is fundamental in helping investors comprehend potential losses. Therefore, research is conducted to understand potential losses by estimating asset price volatility and determining the maximum possible losses. The Expected Shortfall (ES) method proves useful in measuring downside risk and extreme loss potential in investments, but it is less effective in addressing nonlinear trends and the complexity of volatility patterns. Hence, a combination of the Expected Shortfall (ES) and Generalized Autoregressive Conditional Heteroskedasticity (GARCH) methods is employed to measure the risk of mutual fund investments. The research findings indicate that volatility has a positive impact on Value at Risk (VaR), and the potential maximum losses (ES) increase with higher volatility, indicating a greater risk.

Research on Risk Management of Equity Pledge in Listed Companies: A Case Study of Guirenniao

In the present financial market, the financial needs of listed companies are expanding rapidly. Equity pledge, as a commonly used means of financing for listed companies, is becoming increasingly significant. As an emerging form of guarantee, equity pledge allows listed companies to pledge their own equity as collateral to obtain financing from external financial institutions. Equity pledge has many advantages, such as universality, fast financing speed, strong security, and effective risk diversification. However, equity pledge not only meets the financing needs of listed companies, but also brings corresponding risks to them. this paper selects the classic case of Guirenniao Co., Ltd. as the research object and adopts the literature analysis method to review relevant research on equity pledge both domestically and internationally. Based on the leverage cycle theory, PBC (Private Benefits of Control) theory, and asymmetric information theory, the article analyzes the risks associated with equity pledge and identifies excessive pledge by Guirenniao as an important factor contributing to the failure of company operation. Finally, based on the research findings, risk response measures are proposed from the main aspects of external information disclosure, internal supervision and control, enhancement of enterprise value, and dynamic monitoring of business operations. It aims to raise awareness among other listed companies and their stakeholders, prevent risks, effectively supervise the equity pledge behavior of listed companies, and ensure the sustainable development of equity pledge.