Higher Risk Aversion Research Articles

Channel and pricing strategies in a risk-averse dual-channel supply chain: portfolio trade credit financing and platform investment

ABSTRACT This paper considers a dual-channel supply chain where the supplier can distribute products through an online platform and a capital-constrained traditional offline retailer. The retailer needs to fund its business by a portfolio financing of trade credit and platform investment to enter the market. With the price-dependent market uncertain demand, the supplier faces choices among direct, traditional, and dual channels for product distribution. We use the CVaR criterion to formulate the retailer’s risk-averse behaviour. Then derive the optimal retail channel strategy in a Stackelberg game model where the platform leads by setting a revenue-sharing rate. Our results unveil a Pareto improvement region in revenue sharing rates within the portfolio financing scheme. As the slotting fee escalates, the supplier tends towards traditional channels. Conversely, with a modest slotting fee, a threshold emerges for the retailer’s risk aversion, delineating the optimal retail channel. High retailer risk aversion favours the dual channel, while lower aversion steers all members towards the direct channel. Theoretical findings are validated through numerical analysis.

On the sources of the aggregate risk premium: Risk aversion, bubbles or regime-switching?

We develop and estimate a consumption-based asset pricing model that uses historical US financial data and assumes recursive utility, allowing for priced regime-switching risk and intrinsic bubbles. We also estimate several restricted versions, including only a subset of these features. Priced regime-switching risk is essential to the equity risk premium, explaining more than fifty per cent of it. Furthermore, a model that does not consider regime switching would overestimate the public's risk aversion, mistakenly assigning the observed risk premium to high-risk aversion instead of priced regime-switching. We also find that intrinsic bubbles are statistically significant, and even though they are not crucial in explaining the risk premium, they substantially improve the model's fit at the end of the sample.

Optimal liquidation with high risk aversion and small linear price impact

We consider the Bachelier model with linear price impact. Exponential utility indifference prices are studied for vanilla European options in the case where the investor is required to liquidate her position. Our main result is establishing a non-trivial scaling limit for a vanishing price impact which is inversely proportional to the risk aversion. We compute the limit of the corresponding utility indifference prices and find explicitly a family of portfolios which are asymptotically optimal.

Robust CARA Optimization

Decision making under uncertainty involves both ambiguity and risk. In “Robust CARA Optimization,” Chen and Sim have developed innovative optimization models designed for ambiguity-averse decision makers whose risk preference is consistent with constant absolute risk aversion (CARA). The research delves into maximizing the worst-case expected exponential utility amid uncertainties from independent factors with ambiguous marginals. To enhance computational feasibility, the authors developed a series of approximations: starting with tractable concave functions in affinely perturbed cases, advancing to concave piecewise affinely perturbed scenarios, and culminating in novel multi-deflected linear decision rules for adaptive optimization. This comprehensive framework extends to a multi-period consumption model, ultimately forming an exponential conic optimization problem efficiently solvable with existing solvers. Practical applications demonstrated in project and multiperiod inventory management highlight the models’ potential to surpass existing stochastic optimization methods, especially under high risk aversion.

Health behavior profiles and association with mental health status among US active-duty service members.

This study investigated the clustering of health behaviors among US active duty servicemembers (ADSM) into risk profiles and explored the association between these profiles with ADSM sociodemographic characteristics and mental health status. This study utilized secondary data from the 2018 Health Related Behaviors Survey (HRBS), a Department of Defense (DoD) self-administered online survey. Health behaviors included physical activity, screen use, sleep habits, tobacco/substance use, alcohol drinking, preventive health care seeking and condom use at last sex/having multiple sexual partners. Past-year mental health status was measured using the Kessler Screening Scale for Psychological Distress (K6). Latent class analysis (LCA) on health behaviors was used to cluster ADSMs into risk profiles. Multivariable logistic model was used to examine whether ADSM characteristics and mental health status were associated with ADSMs' risk profiles. The LCA identified a four-class model that clustered ADSMs into the following sub-groups: (1) Risk Inclined (14.4%), (2) High Screen Users (51.1%), (3) Poor Sleepers (23.9%) and (4) Risk Averse (10.6). Over a tenth (16.4%) of ADSMs were categorized as having serious psychological distress. Being male, younger, less educated, in the Army, Marine Corps or Navy were associated with higher odds of being Risk Inclined (AOR ranging from 1.26 to 2.42). Compared to the reference group of Risk Adverse ADSMs, those categorized as Risk Inclined (AOR: 8.30; 95% CI: 5.16-13.36), High Screen Users (AOR: 2.44; 95% CI: 1.56-3.82) and Poor Sleepers (AOR: 5.26; 95% CI: 3.38-8.19) had significantly higher odds of having serious psychological distress. Study findings suggest opportunities to tailor behavioral and health promotion interventions for each of the distinct risk profiles. For example, ADSM described as Risk Inclined may benefit from preventive mental health services. Solutions for ADSM described as Poor Sleepers may include education on sleep hygiene; instituting duty schedules; and shifting military cultural norms to promote sleep hygiene as a pathway to optimal performance and thus military readiness. ADSM with low-risk behavior profiles such as those described as Risk Averse may prove beneficial in the roll-out of interventions as they act as peer-educators or mentors.

Robust portfolio selection with subjective risk aversion under dependence uncertainty

This paper solves the robust portfolio decision problem with subjective risk aversion under dependence uncertainty. We use spectral risk measures to capture investors’ subjective risk aversion while constructing mixture R-vine copula uncertainty with R-vine copula change-point detection to characterize dependence uncertainty. We introduce worst-case spectral risk measures (WSRM) and formulate portfolio decision problems with WSRM as risk measures. We conduct an empirical study using eight global stock indices. The results demonstrate that our robust portfolio outperforms two other portfolios without incorporating dependence uncertainty or considering dependence uncertainty constructed only through common economic crisis information in static and dynamic investments encompassing the full out-of-sample period and crisis periods across different risk aversion levels. The performance of our dynamic robust portfolio increases with investors’ risk aversion levels. Our robust portfolio strategy can help investors with diverse risk preferences achieve substantial profits and enable those with high-risk aversion to reap the rewards of their risk aversion.

Effect of risk aversion on the performance of supply chain and carbon reducing initiatives under asymmetric information

AbstractThis paper considers a supply chain in which the risk‐averse manufacturer invests in carbon emission reduction (CER) technology and the risk‐averse retailer makes green sales efforts to reduce carbon footprint. The results show that when the information is symmetrical, the two‐part tariff contract can eliminate the double‐marginalization effect. Moreover, when the information is asymmetric, the manufacturer encourages retailer to report true market size and improve green sales effort by providing an incentive contract. This menu of contract ensures the manufacturer obtains more utilities with low carbon emissions. In addition, through the analysis of risk aversion coefficients, we find that under centralized decision, with the improvement of risk aversion awareness, both supply chain players will reduce the green efforts. However, under asymmetric information, compared with the manufacturer, the retailer's higher risk aversion will have an opposite effect on the equilibrium decision‐making, utilities, and carbon footprint of the supply chain.

Technical Note—Risk Sensitivity and Firm Power: Price Competition with Mean2-Variance Profit Objective Under Multinomial Logit Demand

Risk Sensitivity and Firm Power: Price Competition with Mean2-Variance Profit Objective Under Multinomial Logit Demand Firms with varying degrees of risk sensitivity perceive the same stochastic profit prospect differently. It is important to understand the equilibrium pricing behaviors under risk aversion and their implications on firms’ survival and market health. The authors identify a power index, which is the ratio of product attractiveness to risk sensitivity, and show that the set of profitable firms is power index ordered. Firms with a favorable power index value earn a positive profit in a price competition, and others are driven to zero profit. Interestingly, although high risk aversion handicaps a firm, this paper shows that moderate risk aversion may give a firm an advantage over an otherwise equivalent competitor that is less risk sensitive. The authors also establish that in an equilibrium with market entry and exit, the power index is generalized to the ratio of product attractiveness and an entry cost-adjusted risk sensitivity measure.

Restoring areas after a radioactive fallout: A multidisciplinary study on decontamination

Land remediation is an important part of restoration measures after a radioactive fallout containing long-lived fission products such as 137Cs. In this multidisciplinary study, we focused on three main issues related to remediation of contaminated urban areas. First, we assessed how much decontamination contributes to reducing resident radiation exposure and how much this reduction depends on the timing of implemented measures. Second, we calculated direct and indirect costs of decontamination in an industrialized country such as Sweden. Finally, in a survey study, we considered reactions of Swedish citizens to being given the hypothetical option of moving to a site decontaminated after radioactive fallout and how this predicted response might influence the design of contingency plans.The main findings are that clean-up operations must be done within the first few years after a fallout to contribute significantly to reducing residual dose. If conducted within 1–2 years, large-scale decontamination can, on average, avert 20–200 manSv per km2 residential area and unit ground deposition of 137Cs (1 MBq). The estimated direct costs (in 2020 purchasing power) would amount to 100 million Euro per km2 decontaminated residential area (comparable to Japanese estimates after the Fukushima accident), generating 39,000 m3 of radioactive waste on average, mainly in the form of 137Cs-contaminated topsoil. In our survey study of 2291 Swedish respondents about their willingness to return to decontaminated homes, women, families with resident children, and high-income earners exhibited more skepticism about returning, even if authorities were to deem it safe. The demographic pattern in attitudes was similar to that found among evacuees in the Fukushima prefecture after 2011.We conclude that predefined ranges of measured 137Cs ground deposition can be used as guidance for rescue leaders in the early post-accident phase in long-term planning for affected areas. This planning should include timing and intensity of decontamination measures, duration of evacuation, and risk communication to citizens. Because some citizens expressed both high risk perception and risk aversion, however, timely and dialogic communication is unlikely to limit a shift after the incident to an older and more male-dominated population composition. There is a risk that those who can afford to do so will move away, whereas people whose wealth is locked in property (houses or businesses) will feel stuck. Perceptions of unfairness may fray the social fabric and complicate resettlement, which in some cases may mean inefficient outlay of decontamination costs. We believe that the issue of monetary compensation to affected residents requires priority in future work.

How Should Diverse Stakeholder Interests Shape Evaluations of Complex Water Resources Systems Robustness When Confronting Deeply Uncertain Changes?

AbstractRobustness analysis can support the design and operation of large‐scale water infrastructure projects confronting deeply uncertain futures. However, diverse actors, contextual specificities, sectoral interests, and risk attitudes make it difficult to identify an appropriate robustness metric to rank decision alternatives under deep uncertainty. Here, we clarify how methodological choices affect robustness evaluation using the multi‐actor, multi‐sector Inchampalli‐Nagarjuna Sagar water transfer megaproject in Southern India. We compare a suite of water transfer strategies discovered using evolutionary multi‐objective direct policy search (EMODPS), a strategy proposed by regional authorities and the status quo of no water transfer. We stress‐test these strategies across scenarios that capture climatic and socioeconomic uncertainties and rank them using robustness metrics representing sectoral perspectives and priorities of different actors with varying risk attitudes. Results show a considerable impact of metric choices on robustness rankings of strategies, with compromise solution discovered via EMODPS as robust. The no‐transfer strategy results in the worst water supply robustness with an average volumetric deficit of 17% of total historical demands but emerges as a robust alternative for 6 out of 12 combinations of actor‐sectors with high risk aversion. Also, changes in the amplitude of the Indian Summer Monsoon is identified as the most important uncertain factor determining the failure of strategies. Our findings highlight that the selection of robust solutions should be guided by an understanding of how assumed risk attitudes shape stakeholders' perceptions of vulnerabilities. These findings are generalizable to large infrastructure projects with diverse stakeholders and multisectoral impacts.

Should I invest or not? Investigating the role of biases and status quo

PurposeThe purpose of this study is to examine the behaviour of retail investors while making an investment decision and how it gets affected by the behavioural biases of the investors using a moderated-mediation framework.Design/methodology/approachA mixed method approach has been used to fulfil the objectives of the study. In the first study, a qualitative analysis of the interviews with 15 retail investors was conducted. As part of the quantitative study, a total of 201 responses from Indian retail investors were collected using systematic sampling and analysed using structural equation modelling and Process Macro.FindingsThe results indicate that anchoring bias, availability bias, herding bias, switching cost, sunk cost, regret avoidance and perceived threat have a significant effect on retail investors’ investing intention. The attitude of the investors towards investing decisions mediates the effects of behavioural bias and the status quo on investment intention. The results of the moderated-mediation analysis indicate that mediating effect of attitude varied at the low and high-risk aversion of investors.Practical implicationsThe findings of this study will help regulators and retail investors to understand the critical behavioural biases which affect the investors’ investing intention.Originality/valueThe paper contributes to the literature on investors’ behaviour, status quo bias theory (SQB) and behavioural bias. This study uniquely proposes a moderated-mediation framework to understand the effects of biases on retail investors’ investment intention.

Optimal reinsurance contract and investment strategy for multiple competitive-cooperative insurers and a reinsurer

Abstract Accepted by: Giorgio Consigli In this article, we consider a reinsurance contract design by taking into account the joint interests of multiple insurers and a reinsurer. The reinsurance contract consists of optimal reinsurance strategies and reinsurance prices. The former are chosen by the competitive–cooperative insurers and the latter are determined by a reinsurer. Both insurers and the reinsurer can invest in the common risk-free asset and one different risky asset. The optimal time-consistent reinsurance–investment strategies of the insurers and the optimal reinsurance prices and investment strategy of the reinsurer are derived analytically. Numerical experiments are carried out to illustrate the influences of model parameters on the optimal reinsurance contract and optimal investment strategies. We find that the establishment of the reinsurance contract is affected by the correlation between the claim sizes of insurers as well as that of claim numbers. The results reveal that competition and cooperation will lead to a decrease and increase of the reinsurance price, respectively, showing the importance of opting for cooperation among insurers. Both competition and cooperation are beneficial to insurers, especially for those with high risk aversion.

Rogue traders

Investing on behalf of a firm, a trader can feign personal skill by committing fraud that with high probability remains undetected and generates small gains, but with low probability bankrupts the firm, offsetting ostensible gains. Honesty requires enough skin in the game: if two traders with isoelastic preferences operate in continuous time and one of them is honest, the other is honest as long as the respective fraction of capital is above an endogenous fraud threshold that depends on the trader’s preferences and skill. If both traders can cheat, they reach a Nash equilibrium in which the fraud threshold of each of them is lower than if the other one were honest. More skill, higher risk aversion, longer horizons and higher volatility all lead to honesty on a wider range of capital allocations between the traders.

The predictability of skewness risk premium on stock returns: Evidence from Chinese market

Skewness risk premium is the difference between realized skewness and implied skewness. This paper provides empirical evidence of the predictive power of skewness risk premium for the stock returns both from cross-sectional and time series. We find that the skewness risk premium exists in the Chinese market and is positively correlated with future index excess returns, as evidenced by both in-sample and out-of-sample analyses. From a cross-sectional perspective, we find stocks with high exposure to the skewness risk premium yield higher average excess returns. When controlling for common risk factors, the forecasting power of the skewness risk premium remains robust. In addition, this paper also examines the impact of investor sentiment and risk aversion on the predictability of skewness risk premium. We find the risk-return relation is weaker during high investor sentiment and low risk aversion.

Who’s afraid of immigration? The effect of economic preferences on tolerance

This paper suggests that intergenerationally transmitted ancestral characteristics have a significant impact on attitudes toward immigration. Using a sub-population of second-generation immigrants from the European Social Survey (ESS), we find that historical and linguistic factors that contributed to weaker long-term orientation and higher risk aversion are associated with a greater concern, especially among medium- and low-skilled workers, about the economic consequences of immigration and the admission of poorer immigrants. The results are robust to alternative sample definitions, estimation methodology, a rich set of geographical controls, and several potential confounding factors at the country of origin level.

Factors Affecting Commercial Bank’s Net Interest Margin: Study Case in Indonesia, Thailand, and Philippines.

The aim of this research is to investigate determinants factors of Commercial Banks’s net interest margin in Indonesia, Thailand, and Philippines. This study uses quarterly panel data from 2010 until 2020. The OLS Equation Model was used to analyze the macroeconomic factors and banks' specific factors towards Net Interest Margin (NIM). The result showed that inflation rate as the only one factor from Macroeconomic factors and Overheard cost is one from Bank Specific factors which significantly affect Net Interest Margin in all of these countries. Other than that, valuable findings from this research show that determinants factors which have significant impact from bank specific characteristics in each country are different. In Indonesia, Higher Size of operations, Risk Aversion and Income Diversification are determinants factor that can lower net interest margin. Bank in Indonesia have to manage their credit risk well, because this factor can potentially lead to higher NIM. Commercial Banks in Thailand and Philippines show opposite result. Larger size of operations and higher risk aversion will lead to higher NIM. Market concentration plays a critical role to minimize NIM in Philippines. So, regulators should maintain this condition. Because higher competition potentially led to higher NIM in Philippines’s bank.DOI: 10.26905/jkdpv27i2.9598

Dynamic analysis of a low-carbon maritime supply chain considering government policies and social preferences

With the goal of achieving carbon peak and neutrality, the government and enterprises are trying their best to speed up the decarbonization process in the shipping industry. To analyze the long-term game behaviors of a port, a shipping company, and a forwarder under simultaneous effects of government policies and social preferences, this paper considers a three-echelon maritime supply chain with carbon abatement investment and low-carbon service investment (LCMSC). We focus on constructing a dynamic Stackelberg game model with heterogeneous expectations. Based on nonlinear dynamics theory, the dynamic evolution of the game and the influences of government policies, social preferences, and cost-sharing behaviors are investigated. The results indicate that: (1) Bifurcations and chaos caused by dynamic adjustment of the port and the shipping company will lead to the disorder of the pricing system and the effect of chaos on the development trend of expected profits and social welfare varies under different paths of the LCMSC system into chaos. (2) Government subsidies for carbon abatement technology not only significantly improve greenness and expected profits of all parties, but also improve the stability of the LCMSC system. The carbon emission quota for the port has nothing to do with LCMSC members' optimal strategy and the evolution of the LCMSC system's stability. However, it indirectly affects the decision strategy of multiple stakeholders through the variation of the carbon price. (3) Excessive fairness concerns and the port's risk-aversion awareness have negative impacts on greenness, social welfare and the system's stability, while high risk-aversion awareness of the shipping company and the forwarder play opposite roles. (4) The shipping company can promote a tripartite-wins situation for LCMSC and improve the stability of decision-making by appropriately sharing the carbon abatement cost of the port. This study expands the application scenario of nonlinear dynamics theory in the LCMSC. It also provides theoretical guides for the government to formulate policies to encourage the promotion of green shipping.

The effect of fraud experience on investment behavior

Given the recent increases in fraud targeted at households, we examine the effect of household-level fraud experience on investment behavior for a representative sample of Chinese households. Using a difference-in-differences approach with matching, we find that households exposed to fraud are less likely to invest in high-risk assets such as stocks and derivatives and allocate less of their portfolio to high-risk assets. We find that the relationship between fraud experience and investment behavior is driven by households with high risk aversion and not low trust.

Risk Aversion and Perception of Farmers about Endogenous Risks: An Empirical Study for Maize Producers in Awi Zone, Amhara Region of Ethiopia

Agriculture is a risky business that is subject to endogenous risks. Endogenous risks caused by input utilization, input affordability and input availability may prove detrimental to the production potential of farmers. The study was aimed at examining the risk perception, risk aversion and risk management strategies of maize producers in Awi zone, which is found in the northwest part of Ethiopia. The study involved 343 respondents who produced maize under risk. Descriptive statistics, a seven-point Likert scale, the observed economic behaviour method, factor analysis and a seemingly unrelated regression model were used to process the data. The results showed that farmers have different perceptions of the endogenous risk associated with input availability and input affordability which has a different probability of occurrence and severity of damage. The observed economic behaviour method showed that farmers in the area also have different risk aversion behaviours: about 7.29% of the respondents in the study area have high risk aversion attitudes, while about 30.61% have medium risk aversion attitudes and 62.10% of them have low risk aversion attitudes. The seemingly unrelated regression model output showed that farmers’ economic, social, demographic and institutional factors, as well as their risk behaviour, determine the risk management strategies that they employ. Maize farmers in the area applied human risk management strategies, production risk management strategies, diversification, financial risk management strategies and marketing risk management strategies to tackle the endogenous risks in the area. It was deduced that maize farmers have a risk averse behaviour even if their risk aversion levels differ based on the scope of the management strategies that they employ to combat risk. Following the finding of the study, a holistic approach to risk management that encompasses all actors, such as farmers, researchers, extension services and financial institutions should be involved to make the appropriate interventions.

Assessing the incentives and financial compensation of agroforestry considering the uncertainty of price and yield

Factors such as invasive species, agricultural expansion, and climate change have resulted in global biodiversity loss. When engaging in agricultural expansion, private landowners often choose to plant crops with higher returns than forests provide. However, planting crops leads to the land with low plant coverage, negatively affecting the ecology and reduce biodiversity. Therefore, agroforestry has been one of the recent agricultural policy measures to induce the ecological benefits of farmlands. This study aims to access the payments for ecosystem services (PESs) and economic compensation for agroforestry considering three land use options (i.e., planting rice, corn, and the Taiwan Acacia) under the uncertainty of price and yield with and without support policies. Firstly, the estimated frequency distribution was generated by using the Monte Carlo simulation; then annual income, net present value, annuity, and the PESs at various levels of risk aversion (i.e., strong, moderate, and none) were calculated; and finally, the amounts of economic compensation were assessed. On the basis of Harry Markowitz’s modern portfolio theory, this study evaluated the economic compensation for converting planting a single-type crop to a portfolio of rice, corn, and the Taiwan Acacia; and determined their optimal weights with the minimal risk. The results showed that for farmers with different risk aversion levels, the minimum willingness to accept for economic compensation is approximately $ 657–2,134 ha/yr for rice and $ 667–2,955 ha/yr for corn. The farmers with higher risk aversion are willing to accept lower economic compensation. Regarding the portfolio, farmers with strong risk aversion had incentives to plant trees on less than 15 % of their land, and could receive up to $1,641 as the percentage increased; and farmers with a lower initial investment in the land had more incentives to plant trees.