Low Risk Aversion Research Articles

Revisiting the pricing benchmarks for Asian LNG — An equilibrium analysis

This study investigates if the Japan-Korea-Marker (JKM) price is a feasible benchmark to replace the oil indexation in Asian liquified natural gas (LNG) trade. For this purpose, we propose an equilibrium pricing model for the LNG long-term contract (LTC) in Asia. Our model incorporates the risk-averse importer and exporter who optimize their risk-profit tradeoffs by deciding their LTC-spot trade portfolios. Using the model, we compare the pricing efficiency and the risk-profit tradeoff of an importer/exporter under different benchmarks (oil price versus JKM price). The results show that the JKM price is more efficient as an LTC pricing benchmark than the oil price. The JKM pricing benchmark is favored for both exporters and importers when they are low risk-aversion. In addition, we compare the performance of the JKM benchmark based on the CIF price term (i.e., the importer pays for freight charges) with that based on the FOB price term (i.e., the exporter pays for freight charges). We find that the freight liability has little effect on the pricing efficiency of the JKM benchmark.

Time in Office and the Changing Gender Gap in Dishonesty: Evidence from Local Politics in India

AbstractIncreasing the share of women in politics is often promoted as a means to reduce corruption. Recent studies indicate the importance of considering the gender gap in corruption as a dynamic, rather than static, phenomenon. Our study combines data from surveys and incentivized behavioral games among 400 inexperienced and experienced local politicians in West Bengal, India. We find no gender gap in attitudes toward corruption. However, in incentivized games, inexperienced female politicians are more honest than their male counterparts. No such gender gap exists among experienced politicians. Drawing on a theoretical discussion of four possible mechanisms, we find that the apparent increase in dishonest behavior among female politicians is associated with lower risk aversion and stronger political networks. Our findings indicate that women, like men, are socialized into their local political culture and that benefits from changing who is elected may be short‐lived unless that culture is also changed.

Optimal Debt and Risk Balancing Behavior of Rural Households in China: Evidence from a Discrete Choice Experiment

ABSTRACT Using an in-the-field discrete choice experiment on 336 farmers from rural China, this study aims to determine whether farmers optimize debt according to the optimal capital structure models and assess whether there is evidence of risk balancing behavior among Chinese farmers when they make financing decisions under risk constraints. Results suggest that farmers will increase leverage with greater profits, reduced interest rates, reduced business risk, lower risk aversion, and increasing prudence; they will reduce credit demand with increased collateral requirements, shorter repayment terms, and reduced loan usage flexibility. We also found significant heterogeneity among farmers and substantial differences across areas.

Practical Applications of Income Investing in a Low-Yield Environment

In <b><i>Income Investing in a Low-Yield Environment</i></b>, from the Winter 2021 issue of <b><i>The Journal of Wealth Management</i></b>, <b>David M. Blanchett</b> of <b>PGIM</b> addresses the lack of relevant investment strategies aimed at income-focused investors. Drawing on historical financial data regarding portfolio returns as well as bond and equity yields, he estimates optimal portfolio risk levels for investors focused on income return rather than price return. Although Blanchett notes that bond yields have exceeded dividend yields by approximately 1.5% on average historically, in market conditions where dividend yields equal or exceed bond yields—as is true in the current market—higher equity allocations are more favorable. This is particularly true for income-driven investors with a neutral or low risk aversion, as higher equity allocations increase portfolio risk. Thus, in a low-bond-yield environment, it may be appropriate for investors looking to generate income to consider increasing equity allocations.

Agricultural Supply Chain Financing Strategies under the Impact of Risk Attitudes

Bank and e-commerce financing strategies are the main ways for farmers to solve the problem of capital shortage. Aiming at the uncertainty risk of the output of the agricultural product supply chain, we consider the risk attitudes of farmers; construct the Stackelberg game model under different financing strategies to obtain the optimal decision of e-commerce and farmers; and explore the expected output factors, the degree of farmers’ risk aversion, e-commerce’s interest rates on the decision-making results. Our research found that farmers with low-risk aversion prefer to choose the e-commerce financing strategy when the e-commerce’s interest rates are lower. In addition, farmers’ risk-averse attitudes lead to lower equilibrium decision-making between farmers and e-entrepreneurs, which is not conducive to the interests of e-commerce and farmers. A higher expected output factor reduces farmers’ production inputs and e-commerce purchase price. When the expected output factor is low, the decision of whether e-commerce provides financing services to farmers is only affected by interest rates, and lower interest rates create more value for e-commerce.

Cross-country cultural and economic freedom influences on the relationship between economic policy uncertainty and ADR mispricing

Extending the findings by Grossmann and Ngo (2020) that ADR mispricing is higher upon heightened U.S. economic policy uncertainty (EPU), we document that culture and economic freedom differences moderate the relationship between EPU and ADR mispricing. In line with a combined flight to safety and familiarity argument, an increase in U.S. EPU is associated with higher mispricing for ADRs from countries with cultures and economic freedom similar to the U.S. The mispricing of these ADRs is also impacted by domestic EPU considering cultural differences. This is especially the case for cultures perceived to have lower risk aversion or home bias and might be explained by the familiarity argument as well as domestic investors’ flight toward domestic stocks that have, according to the product market spill over hypothesis, more of a global exposure (e.g., cross-listed stocks). The main findings are not altered by the Covid-19 period or other robustness checks.

Can Investors Benefit from Hedge Fund Strategies? Utility-Based, Out-of-Sample Evidence

We report systematic, out-of-sample evidence on the benefits to an already well-diversified investor that may derive from further diversification into various hedge fund strategies. We investigate dynamic strategic asset allocation decisions that take into account investors’ preferences, realistic transaction costs, return predictability, and the parameter uncertainty that such predictability implies. Our results suggest that not all hedge fund strategies benefit a long-term investor who is already well-diversified across stocks, government and corporate bonds, and REITs. However, when parameter uncertainty is accounted for, the best performing models offer net positive economic gains to investors with low and moderate risk aversion. Most of the realized economic value fails to result from mean-variance-type enhancements in realized performance but comes instead from an improvement in realized higher-moment properties of optimal portfolios.

Should I Play or Should I Go? Individuals’ Characteristics and Preference for Uncertainty

This paper presents an incentivized experiment analyzing the role of demographic characteristics in individual decision-making under uncertainty. Reactions to a natural source of uncertainty, payoffs in a TV game show, were measured using Fuzzy-set Qualitative Comparative Analysis (fsQCA), allowing us to identify multiple configurations of causal conditions that are sufficient for individuals to prefer an uncertain payoff to a sure gain, and, thus, lower risk aversion. This paper found evidence of preference for uncertainty, measured as willingness to play for an uncertain payoff, in individuals with characteristics most commonly present in the literature: being male; young; childless; with studies in finance or similar areas. This paper also shows that conditions that would not justify the preference for uncertainty according to the literature (an older individual or having children), when combined with other conditions, change contestants’ behavior regarding preference for uncertainty. Individuals that are both older and single, and individuals that have children combined with education in finance, show an inverse effect on preference for uncertainty.

How Effective Are Social Media Influencers Recommendations The Effect of Message Source on Purchasing Intention and e-Word of Mouth (WOM) from a Para-Social Interaction Perspective

Purpose –The aim of this study was to eplainhow the source credibility, attitude homophily, interactivity, and para-social interaction are related and affect the attitude toward the post. Following this, the effect of this attitude on buying and e-WOM intention and the moderating role of risk aversion levels in this relationship also has been investigated. Design/methodology/approach –Data were collected from 570 followers of an influencer who mainly share content related to experience products on Instagram. The research model was tested with SEM and multi group comparison analysis using AMOS. Findings –This study revealed that para-social interaction of consumers with influencers results in the generation of a positive attitude towards the recommendation post of the influencer. Also, once a positive attitude towards the post has been generated, it results in the generation of purchase intention and e-WOM engagement. Relationships examined in the context of experience products showed that attitude homophily and influencer's interactivity were the most influential among the antecedents (influencer's credibility, attitude homophily, interactivity) examined in the formation of para-social interaction. In the study, it was also determined that the risk aversion levels of consumers have a moderating effect on the attitude-purchase intention relationship, and even in the context of experience products that are perceived as inherently risky, consumers with low risk aversion tended to make purchases by considering the influencer's share.Discussion –Today, where influencer marketing is used extensively by businesses, it is possible for these activities to create the desired effect by choosing the right influencer. It is crucial to determine what is necessary to ensure that the followers buy the product and have positive word-of-mouth communication that are among the ultimate goals of the influencer's posts. For experience products where the purchasing decision is relatively risky, it can be said that for the success of influencer marketing, the influencer's expertise, the attitude homophily, and the willingness of the influencer to interact are essential at the point of establishing para-social interaction. In order to ensure that consumers with high risk aversion levels buy the product, it can be recommended to pay great attention to the content shared and provide helpful information that reflects the truth.

Expected Utility Theory on General Affine GARCH Models

ABSTRACT Expected utility theory has produced abundant analytical results in continuous-time finance, but with very little success for discrete-time models. Assuming the underlying asset price follows a general affine GARCH model which allows for non-Gaussian innovations, our work produces an approximate closed-form recursive representation for the optimal strategy under a constant relative risk aversion (CRRA) utility function. We provide conditions for optimality and demonstrate that the optimal wealth is also an affine GARCH. In particular, we fully develop the application to the IG-GARCH model hence accommodating negatively skewed and leptokurtic asset returns. Relying on two popular daily parametric estimations, our numerical analyses give a first window into the impact of the interaction of heteroscedasticity, skewness and kurtosis on optimal portfolio solutions. We find that losses arising from following Gaussian (suboptimal) strategies, or Merton's static solution, can be up to and 5%, respectively, assuming low-risk aversion of the investor and using a five-years time horizon.

Resilience capacities as perceived by European farmers

CONTEXTThe ability of a farm to cope with challenges is often conceptualised as resilience. Although improving resilience of farms is a major policy goal in the European Union, the current state of resilience is often unknown. Previous resilience assessments have been based either on pre-defined indicators or on perceptions. In particular, empirical research of perceived resilience is still limited and usually restricted to one specific resilience capacity, one challenge, or one function. OBJECTIVEWe investigate how European farmers perceive resilience capacities of their farms. Extending beyond previous research, we cover all three resilience capacities (robustness, adaptability, and transformability), consider a broad range of short-term shocks and long-term stresses, and include multiple functions. Furthermore, we analyse farms from diverse farming systems across Europe and investigate whether farms and farmers with similar perceived resilience capacities share characteristics. METHODSWe address the complex nature of resilience capacities by accounting for multiple scales formulated as analytical steps of a resilience assessment framework. More specifically, these are ‘resilience of what’ (farms and farming systems), ‘resilience to what’ (challenges), ‘resilience for what purpose’ (functions), and ‘what enhances resilience’ (resilience attributes). These steps guided the development of a survey with farmers across eleven European farming systems. Based on three indices for each farmer indicating perceived robustness, adaptability, and transformability of their farms, we identified two classes of farmers with particularly strong and weak resilience profiles respectively. Using nonparametric Mann-Whitney U tests, we furthermore compared other parameters collected via the survey across the identified classes. RESULTS AND CONCLUSIONSOur data sample outputs two classes of similar size characterised by all three perceived resilience capacities being above (below) regional average. This finding suggests that the perceptions of robustness, adaptability, and transformability are mutually dependent. Furthermore, we found that farmers who perceive their resilience above the regional averages are characterised by lower risk aversion, greater focus on providing public goods, a higher number of implemented risk management strategies, more active involvement in networks, and greater openness to innovation. SIGNIFICANCEThe revealed links between particular characteristics of farms and farmers and different levels of perceived resilience capacities can support policy-makers in developing more targeted resilience-enhancing strategies, as well as in understanding farmers' responses to challenges. Finally, our results can serve as a basis for further research, e.g., for formulating and testing hypotheses on causal effects between perceived resilience and its components, and on links between perception- and indicator-based resilience assessments.

Optimal strategy in managing product quality risk for a risk‐averse manufacturer: Prevention or mitigation?

AbstractWe explore a single‐period manufacturing system in which component quality is random and a risk‐averse manufacturer decides whether to procure these components from an upstream supplier. We find that product recall insurance could significantly relieve financial pressure for a manufacturer with a high or medium risk aversion. Interestingly, as external failure cost becomes larger, the manufacturer should invest more in inspecting components than enlarging the coverage of insurance. Conversely, when component quality level becomes higher, the manufacturer would purchase an insurance with a larger coverage and set a smaller inspection level. We also find that product recall insurance and incoming inspection are substitutes when the manufacturer has a low risk aversion. While, for a manufacturer with a medium risk aversion, product recall insurance and incoming inspection become complements if the cost of product recall insurance is high.

Optimal strategies for a capital constrained contract-farming supply chain with yield insurance

We consider a capital-constrained contract-farming supply chain with a risk-averse farmer and a risk-neutral agro-dealer, where the farmer faces some yield uncertainty that can be covered by insurance. Using the Stackelberg model, we derive the optimal strategies on the insured level, production and wholesale price. The result shows that farmers with low risk aversion tend not to be insured, while those with high risk aversion tend to insure. Further analysis indicates that, as the degree of the farmer’s risk aversion increases, the farm size decreases, but the yield per unit area and the wholesale price of the agricultural product increases. In addition, yield insurance and premium subsidies can lead to a decrease of the yield per unit area. However, the expansion of the farm size can compensate for the inhibitory effect of the decrease of yield per unit area on the total yield, and thus the total yield increases. We also find that when the premium subsidy rate is low, the yield insurance’s value to farmers is negative. Moreover, the yield insurance’s value to farmers increases with respect to the bank’s interest rate.

Health insurance, risk attitudes, and household financial behavior.

Medical expenditure risk is widely believed to reduce households' willingness to bear other risks and in turn alter their behavior. In this paper, we investigate the role of health insurance in household financial decision. To this end, we consider a double-multinomial discrete-factor model of insurance choice and portfolio allocation. Using data from a Chinese household survey, we find that enrolling in a health insurance scheme with better policies is associated with a higher probability of owning risky assets. This positive effect is stronger for households with lower risk aversion. Our findings suggest that risk attitudes could indirectly influence portfolio outcomes through affecting households' responsiveness to changes in medical expenditure risk.

Does religion affect cost stickiness? Evidence from China

ABSTRACT Using Chinese A-share listed industrial firms between 2009 and 2016, we find that greater religious influence is negatively associated with firm cost stickiness. This negative association is more significant for firms displaying higher agency costs, lower risk aversion, and a higher probability of corruption. Our findings highlight the importance of informal institutions such as religion on corporate behaviours such as cost stickiness.

Replicating Business Cycles and Asset Returns with Sentiment and Low Risk Aversion

This paper develops a real business cycle model with eight fundamental shocks and one “equity sentiment shock” that captures belief-driven fluctuations. I solve for the time series of shock realizations that allow the model to exactly replicate the observed time paths of U.S. macroeconomic variables and asset returns over the past six decades. The representative agent’s perception that movements in equity value are partly driven by sentiment is close to self-fulfilling. The model-identified sentiment shock is strongly correlated with other fundamental shocks and implies “pessimism” relative to fundamental equity value in steady state. Counterfactual scenarios show that the sentiment shock and shocks that appear in the law of motion for capital (representing financial frictions) have large impacts on the levels of macroeconomic variables and the size of the equity risk premium. Other shocks have large impacts on the growth rates of macroeconomic variables. Four of the model-identified shocks help to predict the equity risk premium or the bond term premium in the next quarter. Overall, the results support a narrative in which a large number of correlated shocks have combined to deliver the historical outcomes observed in U.S. data.

Breeding dairy goats for disease resistance is profitable in smallholder production systems

Abstract We tested hypothesis that inclusion of the disease resistance indicator traits in a dairy goats’ breeding goal would result to increased profitability of smallholder farmers. Deterministic simulation was used to compare responses for breeding schemes without (Scheme I) and with (Schemes II, III and IV) disease resistance in the breeding goal. Faecal egg count (FEC) and somatic cell score (SCS) were used as the indicator traits for helminthosis and mastitis in goats, respectively. We also investigated the effect of risk aversion among the smallholder farmers on response to selection. The breeding structure consisted of a two-tier closed nucleus system, with recording and genetic evaluations being undertaken in the nucleus. Breeding schemes differed on the number of traits in the selection criteria and number of records used to estimate breeding values. In Scheme I, traits in the breeding goal included milk yield (MY), live weight (LW), average daily gain (ADG), doe mature weight (DMW), number of kids weaned (NKW) and survival rate (SR). Scheme II was similar to Scheme I, but included records of FEC and SCS measured immediately after weaning and during early lactation, respectively. Scheme III was similar to II, but with additional information on SCS recorded at mid-lactation, while Scheme IV was similar to III with more SCS information recorded in late-lactation. Our findings indicate that schemes that included disease resistance indicator traits in the selection criteria (Schemes II, III and IV) were 28, 24 and 19%, respectively superior in profitability to Scheme I. Profitability for Scheme II was 3.5 and 7.6% higher than for Schemes III and IV, respectively. The response to selection was maximized when the nucleus consisted of 4–5% of the does’ effective population size and 20% of them were phenotyped for SCS. High risk aversion tended to result in low profits. This suggests that use of economic values obtained using low risk aversion models could overestimate the economic worth of a breeding program especially in smallholder production systems where farmers are risk averse.

Natural disaster shock, risk aversion and corn farmers’ adoption of degradable mulch film: evidence from Zhangye, China

PurposeDegradable mulch film (DMF) is a potential alternate to polyethylene (PE) mulching. In this regard, the purpose of this paper is to explore the effects and paths of natural disaster shock and risk aversion influencing farmers’ DMF adoption.Design/methodology/approachThis research is conducted by collecting cross-sectional data of corn farmers in Zhangye, China. First, by using the Tobit model, the paper attempts to explore the effects of natural disaster shock and risk aversion influencing farmers’ DMF adoption. Second, IV-Tobit model is applied to deal with endogenous problems between risk aversion and DMF adoption. Additionally, the researchers used a moderating model to analyze feasible paths of natural disaster shock and risk aversion impacting farmers’ DMF adoption.FindingsThe outcomes show that natural disaster shock and risk aversion significantly and positively affect farmers’ DMF adoption. Though risk aversion plays a significant moderating effect in influencing farmers’ DMF adoption by natural disaster shock, the moderating effect has a serious disguising effect. By considering the heterogeneity of risk aversion, the paper further confirms that if the intensity of natural disaster shock is increased by one unit, the intensity of MDF adoption by farmers with high-risk aversion also tends to increase by 15.85%.Originality/valueThis study is the pioneer one, which is evaluating the intensity of farmers’ DMF adoption from adoption ratio, investment amount, labor input and adoption time. Additionally, the research provides important guidelines for policymakers to motivate medium and low-risk aversion farmers to adopt DMF.

Pricing Climate Change as a Mortal Threat

Mitigation of global warming and aggregate consumption are chosen to maximize the product of expected lifetime and population. Constant relative risk aversion (CRRA) utility is parameterized using a panel of annual NASA and World Bank data covering 220 countries from 1990 to 2018. Optimal CO2 taxes are proportional to consumption per capita and, therefore, vary substantially from poor to rich countries. Assuming equilibrium climate sensitivity of 2.5°, base case worldwide social costs start at $10/tCO2 in 2020 and rise to $125/tCO2 in 2100 in a “2° world”, and to $162/tCO2 in 2100 in a “3° world”. The latter rises to $291/tCO2 under high risk aversion and falls to $136/tCO2 under low risk aversion, all in 2020USD.

Risk Aversion Propagation: Evidence from Financial Markets and Controlled Experiments

While the time variation in investor risk appetite is widely examined, there is scant research on how investor risk appetite may respond in an international context. We study risk aversion (RA) propagation from US to other major developed economies. Using daily financial market and news data between 2000 and 2017, we identify US risk aversion events - both high and low - and show that the international pass-through of US high RA events is significantly higher (61%) than that of US low RA events (43%), suggesting asymmetric US risk aversion propagation. Next, in our lab experiment, non-US subjects when primed with a US financial bust shock exhibited asymmetrically lower positive emotion, higher negative emotion and higher risk aversion than those primed with a US boom shock. The foreign nature of bust shocks may change emotions more than that of boom shocks, hence resulting in asymmetric risk aversion propagation. Our evidence shows that such an emotion''-related mechanism explained up to 20% of the propagation asymmetry.