Market Risk Management Research Articles

Nonlinearity and efficiency dynamics of foreign exchange markets: evidence from multifractality and volatility of major exchange rates

This study investigates the efficiencies of the exchange markets for four major currencies—the euro (EUR), the pound (GBP), the Canadian dollar (CAD) and the Japanese yen (JPY)—from 2005 to 2019 by using multifractal detrended fluctuation analysis (MF-DFA). This study also investigates the causes of these efficiencies. Significant multifractal properties are demonstrated by the four markets, and long-range correlation and fat-tail distribution properties are the main causes. We calculate and compare the multifractal degrees in three subsamples, which are classified based on their temporal relation to two economic events: the 2008 financial crisis and the announcement by the Federal Reserve of its withdrawal from the quantitative easing policy in 2014. Empirical results suggest that multifractal properties exist at different levels in the subsamples, thus showing that these events affect foreign exchange market efficiencies in terms of statistics and the fractal market. The JPY exchange market has the fewest multifractal properties, thus indicating that this exchange market has the highest market efficiency among these four exchange markets. The empirical results have implications for the nonlinear mechanism and efficiency in foreign exchange markets, which may help investors effectively manage market risks and benefit a stable global economy.

Averaged-Calibration-Length Prediction for Currency Exchange Rates by a Time-Dependent Vasicek Model

The mining business is extremely sensitive to market factors in price behavior. One of the main risk factors in the KGHM, one of the biggest mining companies in the world, is the currency exchange rates prices. Thus, one of the main problems from the market risk management perspective is to properly predict the dynamics of the currency exchange rate data in the long-term horizon. In this paper, we propose to model the data by the so-called extended Vasicek model, which is a natural generalization of the classical Vasicek model, also known as the Ornstein-Uhlenbeck process. The classical model is very popular in the financial data modeling, however, it does not capture the possible changes in the long-term mean and long-term variance. The extended model takes into consideration the fact that the dynamics of the data may change over time by using time-varying coefficients. Applying the extended Vasicek model, we demonstrate the problem of long-term prediction and propose a new approach in this context which is based on the averaging of the predictions obtained from different calibration sample lengths.

Vertical Coordination as an Opportunity for Market Risk Management in Agricultural Holdings in Bulgaria

The purpose of this article is to assess the impact of the Common Agricultural Policy on the potential of agricultural producers in Bulgaria to manage price risk through a vertical coordination strategy. A comparison was made between the established producer organizations in Bulgaria and other Member States of the European Union on the main indicators of the level of development - number of recognized organizations, organization rate and average number of members. It is concluded that the policy objective of reducing producer price volatility through vertical coordination along the supply chain has not been achieved at this stage. In order to make it possible for the market (including price) risk to be managed by farmers in Bulgaria in this way, it is necessary to seriously increase the share of farms that cooperate for the purpose of joint sale of products, as well as to increase the size of established producer organizations.

Extremal risk management: expected shortfall value verification using the bootstrap method

In this paper, the authors refer to the axiomatic theory of risk and investigate the problem of formal verification of the expected shortfall (ES) model based on a sample ES. Recognizing the infeasibility of parametric methods, they explore the bootstrap technique, which, unlike the current value-at-risk model-based (VaR model-based) Basel III testing framework, permits the creation of more powerful sample ES-based procedures. Their contribution to the debate on the possibilities of sample ES-based testing is twofold. First, the authors introduce a bootstrap test based on the idea of ES prediction corrected variables. In this way, they obtain a procedure that makes no distributional assumptions about the underlying returns process, and whose p-value computation does not assume any asymptotic convergence. Second, they provide a unifying framework for ES value verification, in which they compare alternative sample ES-based approaches: the residual-based procedures versus the ES prediction corrected tests as well as the VaR model-dependent approach versus the fixed failure rate tests. By examining its statistical properties and practical applicability, they find evidence that the proposed bootstrap procedure, based on ES prediction corrected variables, is superior to other methods. This provides important guidance for developing international standards of market risk management.

Impact of Financial Risk Management Practices on Financial Performance: Evidence from Commercial Banks in Botswana

The study examined the impact of financial risk management practices on the financial performance of commercial banks in Botswana. The study used Return on Asset and Return on Equity to measure financial performance. Inflation, Interest rates, total debt to total assets, total debt to total equity, total equity to total assets and loan deposit ratios were used as proxies for financial risk management. The research population was all the 10 commercial banks in Botswana and the study covered a period of 8 years from 2011 to 2018. This descriptive study sourced monthly secondary data from Bank of Botswana Financial Statistics database. Descriptive statistics, correlation and regression analyses were applied to analyze the data. The results from regression analysis showed that interest rates had a negative and significant impact on return on assets and on return on equity. On the other hand, total debt to total assets showed a negative and insignificant effect on return on assets. However, total debt to total assets, revealed a positive and insignificant effect on return on equity. The loan deposit ratio indicated a negative and significant impact on return on assets and on return on equity. Findings suggest that banks should strike a proper balance between financial risk management practices and financial performance by engaging in appropriate market, credit, and liquidity risk management practices that will ensure safety for their banks and yield positive profits.

How agricultural practices managing market risk get attributed to climate change? Quasi-experiment evidence

Abstract Whereas adaptations to climate change in the agriculture sector are well studied, non-climatic drivers thereof are considerably less explored. This is particularly true for market related factors. Every change in farming practices is attributed to climate change. This article presents new evidence of how adaptations to market risks may be incorrectly attributed to climate change risk because of causal attribution bias emerging from poorly structured survey instrument and response inducing questions. Through a quasi-experiment administered on 400 rural farming households from four districts of Pakistan, we demonstrate that when farmers are not sensitized about climate change prior to questions on adaptations they assign market factors such as availability of new market opportunities, improved purchasing power, and net profitability as major reason for changes in sowing date, growing new crop verity and use of fertilizers. To be exact, less than 2% and 1% of farmers indicated climate change as the reason behind the change in crop variety and use of fertilizers respectively. Similarly, only 10% of farmers associated late sowing with climate change. Findings of the study imply a stronger role of the market-related factors in changing agricultural practices over the time asking policymakers to design better market-based interventions and incentives for increasing the adaptation in the agriculture community. Findings have also implications for mix method research and can be generalized for all research fields involving survey design.

Trends and risks of modern insurance

The article is devoted to the analysis of trends in the development of the insurance market and the risks that accompany it. The factors of influence are investigated, the classification of risks of insurers on development of appropriate management measures is given. The specific nature of the risks associated with the digitalization of information in the insurance industry and the various options for protection against them are considered. Any activity of enterprises in the domestic market can be characterized by an increased degree of state or systematic risks, the influence of which in the modern world is compounded by the new risks for business of translating information into digital form. The functional purpose of an insurance business is to protect other entities from the possible risks, but the insurance business itself is also exposed to certain risk factors that may impede the performance of insurance activities. The functioning of the insurance market at the present stage is accompanied by new risks that may affect the effectiveness of insurers. It is this that raises the relevance and importance of this issue on the systematization of insurance business risks and the recommendations for managing them. The purpose of this article is to review the trend of development of the modern insurance market, to systematize risk factors and to develop recommendations for risk management of the insurance market at the present stage. The main reasons for which risk situations arise in the operation of insurance companies are external factors, namely the actions of competitors, insurers, business partners. Exacerbation of competition increases the dependence of performance indicators of the insurer on the level of competitiveness of the institution or its services.

Agricultural Insurance as a Tool of Marketing Risk Management in Agriculture

The aim of the study is to assess the current state of agricultural insurance with state support as one of the components of the development mechanism of the agricultural sector and determine the vectors of its development. It is concluded that such insurance has not yet become a financial tool to minimize economic risks for most farmers. According to the results of the study, the main sources, causes and risk factors for reducing the stability of the agricultural insurance system were identified; the results of changes in the relevant legislation on agricultural insurance are evaluated; a set of measures has been formulated to transform the current agricultural risk insurance system aimed at developing and improving the efficiency of this sector of the insurance market of the Russian Federation.

Effect of Risk Management Practices On Corporate Investment of Financial Institutions in Rwanda: A Case Study of Selected Commercial Banks


 
 
 Risk management practices are currently a subject of interest and a novel impression beneath research and application by diverse organizations. Nevertheless, there seems much to be debated on this subject in terms of a general strategic risk management practices statement. There is uncertainty like, when there should be a declaration for each principal risk category the organization experiences or should exist a general risk management practices for the organization. A risk management practice is about achieving corporate goals. For many financial institutions (FIs), dual goals exist such as the social and economic perspectives. This study sought to analyze the effect of strategic risk management practices on corporate investment of selected financial institutions in Rwanda. The study aimed at establishing the effect of operational risk management practices, market risk management practices, compliance risk management practices and governance risk management practices on corporate investment in selected commercial banks in Rwanda. The study adopted descriptive research design. The study targeted 95 managers from finance, internal audit, risk compliance and operations departments. The sample size was 77 respondents. The research was conducted using primary and secondary data, which includes survey forms (questionnaires), interviews as well as reports of the targeted institutions. Information for the research were gathered utilizing organized surveys forms that were distributed to the targeted respondents. Narrative information obtained from interviews and open-ended questions in the questionnaire were analyzed using qualitative approaches. Validity and reliability of the instruments were tested using the Cronbach Alpha test retest methods. With the aid of Statistical Package for Social Science version 21.0, both descriptive statistics such as the means, modes, standard deviation, variances and inferential statistics were analyzed. The research revealed that management of operational risk has a constructive effect financial outcomes performance of financial institutions in Rwanda. The study found that there is a correlation between both operational risk management and market risk management and performance of the financial institutions. The research findings revealed that operational risk management (r=0.096, p<0.01), market risk management (r=0.506, p<0.01) and compliance risk (r=0.612, p<0.01) on corporate investments.
 
 

The effect of symmetric and asymmetric information on volatility structure of crypto-currency markets

Purpose This paper aims to examine whether the crypto-currencies’ market returns are symmetric or asymmetric informative, through analysing the daily logarithmic returns of bitcoin currency over the period of 2011-2017. Design/methodology/approach In doing so, the symmetric informative analysis is estimated by applying the generalised auto-regressive conditional heteroscedasticity (GARCH) (1,1) model, whereas asymmetric informative or leverage effects analysis is estimated by exponential GARCH (1,1), asymmetric power ARCH (1,1) and threshold GARCH (1,1) models. In addition, the generalized autoregressive conditional heteroskedasticity in mean (GARCH-M (1,1)) was applied to examine whether the risk-return trade-off phenomenon was persistent in crypto-currencies market. Findings The main findings indicate that bitcoin market return or volatility is symmetric informative and has a long memory to persist in the future. Furthermore, the sympatric volatility is found to be more sensitive to its past values (lagged) than to the new shock of the market values. However, asymmetric informative response of volatility to the negative and the positive shocks do not exist in the bitcoin market or, in other words, there is no leverage effect. This suggests that the bitcoin market is in harmony with the efficient market hypothesis (EMH) with respect to the asymmetric information and violated the EMH with regard to the symmetric information. Hence, the market price or return of bitcoin currency could not be predicted by simply exercising such past market information in the short-run investment. In addition, the estimated coefficient of conditional variance or risk premium (λ) in the mean equation of CHARCH–M (1,1) model is positive however, statistically insignificant. This indicates the absence of risk-return trade-off, in which case the higher market risk will not essentially lead to higher market returns. This paper has proposed that an investment in the crypto-currency market is more appropriate for risk-averse investors than risk takers. Originality/value The findings of the study will provide investors with necessary information about the bitcoin market price efficiency, hedging effectiveness and risk management.

The Purdue Center for Commercial Agriculture Crop Basis Tool

The Purdue Center for Commercial Agriculture Crop Basis Tool is an open-access web-based tool that provides members of the grain industry with access to weekly historical and contemporaneous corn and soybean basis data for local market regions in the eastern Corn Belt. Previously unavailable to most producers in the region, the information the Crop Basis Tool provides has the potential to greatly improve producers' marketing risk management decisions through improved basis forecasts. In addition, there are a myriad of opportunities for Extension personnel to incorporate the Crop Basis Tool in their marketing risk management education and outlook programming.

An Analysis of China's Onshore and Offshore Exchange Rates-Adjusted Thermal Optimal Path Approach Based on Pruning and Path Segmentation.

The study of the lead-lag relationship between the Hong Kong offshore Renminbi (CNH) spot market and onshore (CNY) spot market is of great importance for its wide application in market risk management. In this paper, we study the correlation between the CNH and CNY spot markets in the contexts of daily closing price change and the 2011–2016 Bid-Ask spread (BAS). We test the existence of causality relation between CNH/CNY pairwise change and BAS by using the conventional method of vector auto-regression (VAR) model in the observation period. Furthermore, we detect the local lead-lag dependence relationships between CNH/CNY pairwise change and BAS by using a non-parametric approach-adjusted Thermal Optimal Path (TOP) method. Through introducing a Pruning and Path segmentation algorithm, we address the problem of computation infeasibility that may be encountered in application of the existing TOP method for the detection of lead-lag relationship between two time series with long time duration. Theoretical analyses and simulation results are presented to verify validity of adjusted TOP method in the setting of big time-series data set. This study also provides some interesting findings: (1) the offshore CNH market is informationally integrated with the onshore CNY market from two aspects of closing price change over two consecutive single days and BAS used as a proxy for market liquidity; (2) Local dependency between the two markets changes with economic conditions changing, which would facilitate both investor and policy maker decision making.

Practical Applications of A Best Practice Protocol for the Risk Measurement of a Portfolio of Hedge Funds

<h3>Practical Applications Summary</h3> In <b><i>A Best Practice Protocol for the Risk Measurement of a Portfolio of Hedge Funds</i></b>, from the Winter 2019 issue of <b>the <i>Journal of Alternative Investments</i></b>, authors <b>Shubeur Rahman</b> and <b>Ranjan Bhaduri</b> review the limitations of current risk measurement practices for funds of hedge funds. They describe and formalize an emerging best practice approach for risk measurement and enhancements for market and operational risk management. <b>TOPICS:</b>Real assets/alternative investments/private equity, portfolio construction, risk management

Rational Behavior of an Enterprise in the Energy Market in a Circular Economy

In order to ensure their market sustainability, it is essential for energy-intensive industrial companies to address the issues of efficient energy use. Companies that are prepared to embrace tariff hikes, structural changes in fuel and energy markets, and a shortage of energy resources have a wider range of options to respond to the new challenges posed by the external environment and to reduce their risks. This task becomes particularly relevant in the context of the development of the circular economy that is aimed at resource optimization, energy conservation, zero-waste manufacturing, and business models that are based on maximum operational efficiency. This study aims to develop a methodology for rational behavior of the energy consumer in the context of the circular economy. The concept of “rational behavior” is defined by the authors as the intention to make the maximum use of the advantages and potential of energy markets in order to reduce the cost of energy supply, increase the level of electrification in industrial production, and use the capabilities of their own energy business. The article describes the main principles of rational behavior that serve as the foundation for effective implementation of various strategies (that of the seller, buyer, or both) in a company. A link is shown between rational behavior and energy market potential management in a company as a mix of technological, economic, and organizational activities performed by the energy consumer in a competitive market and effective market risk management. Forms of off-grid power supply and conditions for their application in manufacturing, for example, mini-combined heat and power (CHP) plants and quadgeneration plants at large metallurgical facilities were analyzed.

Quantile coherency networks of international stock markets

This paper uses the novel quantile coherency approach to examine the tail dependence network of 49 international stock markets in the frequency domain. We find that geographical proximity and state of market development are important factors in stock markets networks. Both the short- and long-run connectedness significantly increased after the global financial crisis and spillover is higher during bearish market states, highlighting the possibility of contagion effect mainly among developed markets. Frontier and emerging markets are relatively less connected. These findings have implications for international equity market diversification and risk management.

Improving volatility forecasting based on Chinese volatility index information: Evidence from CSI 300 index and futures markets

This paper investigates whether iVX, the newly launched implied volatility index in China contains incremental information about volatility forecasting. We use high frequency data of Chinese CSI 300 stock index and futures to calculate realized volatility, then estimate various constant coefficients and time-varying coefficients HAR models (TVC-HAR), and finally adopt one-step and smooth multi-step rolling forecasting methods to evaluate the forecasting errors. Our analysis confirms that iVX does have significant influence to the realized volatility forecasting. Both the in-sample and out-of-sample forecasting errors indicate that iVX plays a crucial role to volatility forecasting, combining both continuous volatility, jump volatility and iVX information leads to best performance. TVC-HAR models outperform HAR models for multi-step ahead forecasting while with iVX as regressor perform best for one-step ahead forecasting. TVC-HAR models with iVX as driven factor is more suitable for index while models with time as the driven factor perform better for futures. MCS test further confirms the superiority of the selected models in volatility forecasting. Our study is important for financial market risk management and the healthy development of derivatives market in China.

The development of reproductive management practices in New Zealand: what will the future hold in a consumer-focused, environmentally-conscious, export-driven marketplace?

The New Zealand (NZ) economy and its dairy industry are sensitive to global consumer perception of farming practices used to generate milk products because milk exports account for >25% of national export earnings and >90% of milk produced is exported as products. Astute management of product image and market risk is, therefore, important for the viability of the industry and country. More than 95% of milk produced in NZ comes from strictly seasonal, pasture-based systems, with associated constraints on reproductive performance. Increasing herd sizes, operational changes and genetic selection priorities have further challenged dairy farmers to achieve optimal levels of herd fertility. Reproductive management practices have developed to address the need to maintain a 365-day inter-calving interval, essentially through maximizing the number of cyclic cows during the breeding period and minimizing the duration of the seasonal calving period. Aspects of the hormonal interventions developed and routinely used to achieve these objectives have been the subject of product quality and market risk concerns forcing the industry to explore alternative ways of achieving reproductive performance goals. One approach has been to exploit the inherently high level of fertility in NZ dairy herds. This approach has seen the inclusion of fertility-related traits in the national genetic evaluation system to prevent further decline in genetic fertility. More recently, a nationally coordinated extension program has been adopted to support farmers and their advisors to identify, prioritize and improve on key management areas for incremental gains in herd reproductive performance. Advances in automation and bio-sensing are yet to make a significant impact, but remain potentially valuable additions in supporting the dairy farmer to manage the areas having the largest effects on reproductive performance.

Financialization, fundamentals, and the time-varying determinants of US natural gas prices

Increasing empirical evidence shows that natural gas prices have decoupled from oil prices. Yet there remains an open question as to what are the determining factors of natural gas prices following the demise of oil-indexation. This paper aims to address this question using a dynamic model averaging (DMA) approach. DMA can help identify key/important price determinants, and importantly, does so within a time varying framework allowing us to document how the set of determinants has evolved in response to key market changes. Using time series data between 2001 and 2018, we demonstrate a clear declining role of oil prices in the natural gas pricing mechanism, verifying the demise of indexation. Market or fundamental factors, such as weather, demand and supply conditions, have at the same time become more important. In addition, our results illustrate an increasing role from financial markets, captured by speculation related variables, providing empirical evidence to support the recent literature on commodity market financialization. The rising impact of speculation to natural gas prices introduces questions over how to balance market efficiency and risk management in the post-indexation regime.

The Speculative Petro-State: Volatile Oil Prices and Resource Populism in Ecuador

In petro-states, the governance of flows of oil and oil money is vital to state legitimacy (e.g., regulations, contracts with companies, social compensation in sites of oil extraction). This article explores how contemporary oil price volatility shapes oil governance and the terms of petro-state legitimacy in Ecuador. In recent years, a technocratic, populist regime, led by President Rafael Correa, promised to return national oil resources to “the people” and inaugurate a “postneoliberal” era of sovereign, oil-driven development. The performance of this promise, through augmented public spending, was contingent on international oil prices. We track the emergence of what we call a speculative petro-state, in which state actors claimed to successfully gamble on volatile markets on behalf of the nation, as an emergent strategy for cultivating popular legitimacy. Such claims took the form of petro-populist discourses and practices. First, the Correa administration characterized new contractual relations with oil companies and capital as evidence of Correa’s leadership in complex oil markets, seeking political legitimacy for the state through perceptions of Correa’s personal capacity to manage market risk. Second, as prices surged, the Correa administration channeled rents into building spectacular public works or “petro-populist landscapes,” as material verification of Correa’s petro-leadership in volatile markets. We track how market risk management became one key organizing factor of populist rule in Ecuador and we analyze how this case illuminates relations between populist politics and economic spheres. Key Words: Ecuador, governance, oil price, resource populism, volatility.

Market Risk Management in Agricultural Finance in Cameroon

In this article, we are dealing with the notion of risk management in the agricultural finance in Cameroon. The paper starts by defining what the risk is, then the different types of risks, and finally the risk management process. At the center of the paper, it is all about market risk and how to measure with the help of the method of Value-at Risk. The paper also explains how to manage the market risk after we studied the financing by the African Development Bank to the Institute for Agricultural Research and Development in Cameroon (IRAD) and how the African Development Bank manage the market risk specially when it finances Institute for Agricultural Research and Development in the African continent.