Market Risk Perception Research Articles

Volatility Juxtaposition: Deciphering Market Risk Perceptions Between Bitcoin and Copper Options

Volatility Juxtaposition: Deciphering Market Risk Perceptions Between Bitcoin and Copper Options

Do Changes in Risk Perception Predict Systemic Banking Crises?

This paper examines if incorporating changes in financial market risk perception improves the predictive power of an early-warning system for systemic banking crises. In explaining systemic banking crises, the existing literature identifies inflating stock and real estate bubbles, credit booms, and surges in net capital inflows as the common drivers. Employing panel logit models to predict the postwar systemic banking crises in advanced economies to occur within three–four years, the paper’s key finding is that, even after controlling for the effects of surges in asset and credit markets and net capital inflows that are above the long-run trends for an extended period, market participants’ increasing underestimation of downside risks is a significant predictor of these crises. Incorporating changes in risk perception improves the prediction accuracy of the model significantly. This finding is robust across alternative prediction horizons, systemic crisis definitions, and risk-perception measures. Consistent with the recent theoretical developments in the form of the diagnostic expectations hypothesis for financial markets, the interpretation is that recent recurring good news about financial markets and the broader economic trends for sufficiently long periods lead to growing neglect of tail risks and riskier financial transactions, raising systemic risk and the likelihood of a financial crisis. The finding suggests monitoring financial market risk perception, in addition to the conventional indicators, to predict and avert systemic banking crises.

Sustainable Agriculture in the Face of Climate Change: Exploring Farmers’ Risk Perception, Low-Carbon Technology Adoption, and Productivity in the Guanzhong Plain of China

Agriculture is a significant contributor to global greenhouse gas emissions, and reducing carbon emissions in this sector is essential for mitigating global warming. To achieve China’s targets of carbon peak by 2030 and carbon neutrality by 2060, promoting low-carbon agricultural technology (LCAT) is fundamental. This study examines the impact of farmers’ risk perception on LCAT adoption behavior and its productivity effects with the Ordered Probit regression method, using micro survey data from 531 farmers in Shaanxi Province, China. The results show that farmers with stronger risk perceptions were more likely to adopt LCAT, based on their loss aversion characteristics. Additionally, farmers’ perceptions of yield, market, and climate risks positively influence the adoption of LCAT, with market risk perception having the strongest effect. Adopting LCAT has significant production and spillover effects, improving the output rate of farmers’ operating farmland and neighboring plots by 2.4% and 1.2%, respectively, for each additional measure adopted. This study contributes to the perception and loss aversion literature by examining farmers’ adoption of low-carbon agricultural practices. This study sheds light on the importance of risk perception in the adoption of sustainable agricultural practices and can inform policies aimed at promoting the adoption of LCAT for achieving sustainable agriculture and mitigating climate change, highlighting the crucial role of sustainable environmental management in the agricultural sector.

Effects of risk perception and agricultural socialized services on farmers' organic fertilizer application behavior: Evidence from Shandong Province, China.

The application of organic fertilizer is an important measure to control agricultural non-point source pollution, improve the quality of cultivated land and enhance the degree of agricultural green development. Based on the survey data of sample farmers in Shandong Province, China, the binary Probit model is used to analyze the influence of risk perception and agricultural socialized services and their interaction on farmers' organic fertilizer application behavior, and further analyze the difference of influence between groups of risk perception and agricultural socialized services on farmers' organic fertilizer application behavior with different characteristics. We found that risk perception has a significant negative impact on farmers' organic fertilizer application behavior. Farmers with stronger technical risk perception and market risk perception are less likely to apply organic fertilizer. Agricultural socialized services have a significant positive impact on farmers' organic fertilizer application behavior, and can effectively alleviate the inhibitory effect of risk perception on farmers' organic fertilizer application behavior. The roles of risk perception and agricultural socialized services vary greatly among different farmer groups. For older generation, large-scale and pure agricultural farmers, agricultural socialized services can more effectively alleviate the inhibitory effect of risk perception on organic fertilizer application behavior.

The Determinants of Grape Storage: Evidence from Grape Growers in China

Storage of high-value agricultural products is essential to increase their added value. Exploring growers’ storage strategies for high-value agricultural products is helpful in developing the agricultural industry. In this paper, we analyzed the factors affecting growers’ storage decisions using Probit and Tobit models based on field data from 1026 grape growers in China. We conclude that the in-season price has a negative effect on growers’ storage decisions. Expected price, market risk perception and grape quality have a positive effect on storage decisions. Borrowing behavior has a positive effect on the storage decisions of large-scale growers. In addition, the higher the expected price and the greater the market risk perception, the more growers prefer long-term storage; and the better the quality of the grapes, the more growers tend to store grapes in the short term.

What drives the systemic banking crises in advanced economies?

This paper examines the drivers of post-war “systemic” banking crises in advanced economies. Using binary response models and a balanced panel of data, we show that persistently large departures from the long-run trend in housing and stock markets best predict the crises. Similar deviations in credit markets do not add to the explanatory power of the model that combines housing and stock market dynamics. Indicators capturing financial market risk perception also have high explanatory power. These findings indicate that extrapolative forecasts and neglect of tail risk drive asset market boom-bust cycles and systemic banking crises. Cycles in credit markets are driven by cycles in real-estate and stock markets before the crises. Additionally, capital inflow bonanzas fuel the stock and credit booms that spark systemic crises.

MACROPRUDENTIAL SUPERVISION AND AGENTS’ INFORMATION: WHAT STRESS TESTS REALLY TELL THE MARKETS

Central bank’s macroprudential supervisory activities have to fulfill three distinct tasks: (i) assessing the banking system’s vulnerability to exogenous adverse turbulence, (ii) evaluating the risk of systemic crisis originating from idiosyncratic shocks, and (iii) measuring financial market’s sensitivity to policy stimuli. Given that macroprudential stress tests are the centerpiece of this policy approach, it is important to establish whether they are up to the task. We study how the 2011–2018 European Banking Authority stress tests affected market risk perception and show that they provided agents with valuable information on the policy stances and the vulnerabilities of the banking system, carrying out the above tasks successfully, especially the second and third tasks.

Early Warning Signs of Financial Market Turmoils

Volatility clustering and fat tails are prominently observed in financial markets. Here, we analyze the underlying mechanisms of three agent-based models explaining these stylized facts in terms of market instabilities and compare them on empirical grounds. To this end, we first develop a general framework for detecting tail events in stock markets. In particular, we introduce Hawkes processes to automatically identify and date onsets of market turmoils which result in increased volatility. Second, we introduce three different indicators to predict those onsets. Each of the three indicators is derived from and tailored to one of the models, namely quantifying information content, critical slowing down or market risk perception. Finally, we apply our indicators to simulated and real market data. We find that all indicators reliably predict market events on simulated data and clearly distinguish the different models. In contrast, a systematic comparison on the stocks of the Forbes 500 companies shows a markedly lower performance. Overall, predicting the onset of market turmoils appears difficult, yet, over very short time horizons high or rising volatility exhibits some predictive power.

Fast & furious: Do psychological and legal factors affect commodity price volatility?

AbstractThe present study explores to what extent policy insecurity and the changes in the US legal financial infrastructure have affected commodity price volatility. In addition to macroeconomic fundamentals, the study introduces two ‘psychological’ factors proxied by the economic policy uncertainty index and the perception of price risk within specific commodity markets, plus an institutional (de)regulatory factor constructed as a dichotomous variable. The latter mirrors the period of financial deregulation experienced under the Commodity Futures Modernization Act and the period of regulation registered under the Dodd‐Frank Act. The results reveal that price volatility is a complex phenomenon generated by the joint effect of a plethora of drivers. Both economic policy uncertainty and highly deregulated financial markets exert an influence on price dynamics and produce higher price volatility. Similarly, higher market risk perception leads to higher price fluctuations. Exchange rate, financial wealth and crude oil further explain price rises and falls. The study indicates that government decisions influence commodity markets and a financial system grounded on a sound legal basis is essential for its orderly functioning. A transparent financial structure should be able to generate checks and balances for the market, spawn vibrant policies and prevent the negative consequences of intense price volatility.

Modelling the iron ore price index: A new perspective from a hybrid data reconstructed EEMD-GORU model

As iron ore is the fundamental steel production resource, predicting its price is strategically important for risk management at related enterprises and projects. Based on a signal decomposition technology and an artificial neural network, this paper proposes a hybrid EEMD-GORU model and a novel data reconstruction method to explore the price risk and fluctuation correlations between China’s iron ore futures and spot markets, and to forecast the price index series of China’s and international iron ore spot markets from the futures market. The analysis found that the iron ore futures market in China better reflected the price fluctuations and risk factors in the imported and international iron ore spot markets. However, the forward price in China’s iron ore futures market was unable to adequately reflect the changes in the domestic iron ore market, and was therefore unable to fully disseminate domestic iron ore market information. The proposed model was found to provide better market risk perceptions and predictions through its combinations of the different volatility information in futures and spot markets. The results are valuable references for the early-warning and management of the related enterprise project risks.

Financial Market Risk Perceptions and the Macroeconomy*

Abstract We provide evidence that financial market risk perceptions are important drivers of economic fluctuations. We introduce a novel measure of risk perceptions: the price of volatile stocks (PVSt), defined as the book-to-market ratio of low-volatility stocks minus the book-to-market ratio of high-volatility stocks. PVSt is high when perceived risk directly measured from surveys and option prices is low. Using our measure, we show that high perceived risk is associated with low risk-free interest rates, a high cost of capital for risky firms, and future declines in output and real investment. Perceived risk as measured by PVSt falls after positive macroeconomic news. These declines are predictably followed by upward revisions in perceived risk, indicating that fluctuations in investor risk perceptions are not fully rational.

Communication and financial supervision: How does disclosure affect market stability?

Abstract The impact of authorities’ information disclosure on social welfare and market stability has become a widely debated topic since the contribution of Morris and Shin (2002). Despite several theoretical works, this strand of literature remains void of empirical contributions. By assessing how disclosure of stress test results influences market risk perception, we provide factual evidence on how authorities’ enhanced communication affects financial markets’ stability. Our results provide empirical evidence to support Faria-e-Castro et al.’s (2017) theoretical findings, demonstrating that severe stress tests, if enacted in countries with credible fiscal capacity such as the U.S., can lead agents to revise their risk estimations downwards for all banks, notwithstanding their performance in the exercise.

To cluster or not to cluster farmers? Influences on network interactions, risk perceptions, and adoption of aquaculture practices

Over the course of just a few years, shrimp farming has become a major aquaculture production system in coastal areas of several developing countries across the globe. However, farmers are facing a variety of risks related to disease, market, and climate, which influence risk management strategies and adoption of new technologies. This paper looks at three practices related to pond management: (1) water quality management to ensure a good environment for shrimp growth; (2) adequate feed input; and (3) disease control practices in order to mitigate the risk of disease outbreak in the pond. We investigated adoption of these three practices in smallholder shrimp farms in the Mekong Delta, by exploring how and whether membership into a producer's cluster influences access to knowledge and perception of risk in the adoption process. The results show that, after controlling for farm characteristics, farm clustering has a positive relationship with the adoption of water quality management, feed inputs, and disease control practices. Results also indicate that increasing interaction frequency with public sector and private sector's actors, as well as the perceived degree of market risk, positively influences the adoption of the three pond management practices under study. Mediation analyses show that being a member of a farmer cluster influences adoption of farming practices via two underlying processes: frequency of interaction with public and private sector's actors, and perception of market risk, both of which ultimately promote the adoption of practices. We conclude that clustering is a promising avenue for fostering interactions between farmers and key supporting actors in aquaculture, and impacts both the formation of specific aqua-related risk perceptions and subsequent practice adoption. As such, clusters – by fostering linkages and facilitating interactions between different knowledge sources – can promote adoption of practices toward sustainable intensification. However, to more effectively deploy a cluster approach a key policy and practice implication is to take into consideration local idiosyncrasies defined by their social interactions, risk perception and spatial dimensions in order to better facilitate local linkages between farms (horizontal coordination) and a better integration with the value chain (vertical coordination).

Learning from Trees: A Mixed Approach to Building Early Warning Systems for Systemic Banking Crises

Banking crises can be extremely costly. The early detection of vulnerabilities can help prevent or mitigate those costs. We develop an early warning model of systemic banking crises that combines regression tree technology with a statistical algorithm (CRAGGING) to improve its accuracy and overcome the drawbacks of previously used models. Our model has a large set of desirable features. It provides endogenously-determined critical thresholds for a set of useful indicators, presented in the intuitive form of a decision tree structure. Our framework takes into account the conditional relations between various indicators when setting early warning thresholds. This facilitates the production of accurate early warning signals as compared to the signals from a logit model and from a standard regression tree. Our model also suggests that high credit aggregates, both in terms of volume and as compared to a long-term trend, as well as low market risk perception, are amongst the most important indicators for predicting the build-up of vulnerabilities in the banking sector.

IMPACT OF ACCOUNTING DISCLOSURE STANDARDS ON MORTGAGE BACKED SECURITIES RISK(S) WITH A FOCUS ON SFAS 140

ABSTRACT The purpose of this study is to examine the market risk perception as represented by launch spreads of accounting disclosures on newly issued private label Mortgage-Backed Securities (MBS). The study specifically focuses on SFAS 140 disclosures. Regressing the MBS spreads before and after implementation of SFAS 140 on disclosure variables and control variables suggest that the disclosures provide relevant information that is essential to assess the risk of newly issued MBS to market participants. The results also suggest that the degree of impact varies for different variables. We conclude that the disclosures required by SFAS 140 are value relevant to investors, provide useful information in evaluating risk and result in reduced spreads on newly issued private label MBS. Keywords Disclosures, SFAS 140, Securitization, Mortgage-Backed Securities (MBS), Fixed Income

Innovation in risky markets: ownership and location advantages in the UK regions

This article analyses the relationship between firm’s perception of market risk and engagement in innovation. We conceptualise this relationship by integrating insights from the management literature on innovation barriers with those derived from the international business and economic geography perspectives on the interplay of ownership and location advantages. By exploiting a firm-level panel dataset based on the UK Innovation Survey for the period 2002–2008, we test the relationship between perception of market risk and innovation behaviour in relation to firm ownership—i.e. multinational enterprises (MNEs) versus single domestic enterprises—and location—across regional contexts characterised by different degrees of technological dynamism. Our main results show that ownership advantages operate as a moderator by fundamentally affecting the direction of the relationship: while MNEs react positively to risk perception, single domestic firms reduce their innovation engagement as a strategy to cope with market uncertainty. Yet, ownership advantages play a pivotal role only in relatively inert or stable contexts, as in technologically dynamic regions differences between domestic firms and MNEs disappear.

Farmers’ risk preference and the adoption of risk management strategies in Northern Ghana

The study used the hypothetical lottery-choice questions to measure risk aversion and a detailed survey collected data on input use, farm production and non-farm activities to specifically assess whether risk aversion, risk perceptions, and socioeconomic factors affect the risk management strategies of farm households in Northern Ghana. Risk aversion significantly increases crop diversification strategies of households but marginally reduces herbicide use by households. Market risk significantly increases the use of improved seed varieties and the application of inorganic fertiliser but reduces diversification into livestock production. Production risk largely increases diversification into livestock production. Farmers’ risk management strategies are affected by socioeconomic variables such as access to extension services, area cultivated, age and gender. Policy effort focused on building pliable on-farm crop related risk management strategies should aim at considering the risk aversion and the perception of market risk whilst those focused on livestock should focus on production risk.

Does Investors’ Fear Gauge in a Mature Market Matter? Evidence from the MENA Region

This article examines the notion that less developed markets may be deemed safe havens for international investors. It tests the effect of mature markets’ fear on risk and return in less developed markets. The study employs multivariate VAR-GARCH methodology to test for volatility spillover between the U.S. market risk perception index (VIX) and 12 Middle East and North African (MENA) stock markets. It examines volatility spillover before, during, and after the global financial crisis to assess fear spillover during stable and turbulent periods. Results reveal that MENA stock markets’ own volatility spillover is predominant. The authors find weak volatility transmission between mature and emerging markets around the global financial crisis; however, no evidence of volatility spillover during the same period exists. This study encourages international investors to evaluate new diversification opportunities in MENA markets that may not be available in major markets.

The Effect of Myopic Behavior on Stock Market Risk Perception

We investigate whether myopic behavior influences respondents’ risk perception of future stock market returns. Using the 2012 wave of the Health and Retirement Study, we find that investors who are myopic (follow the stock market “very closely” or “somewhat closely”) are more likely to be in a higher subjective probability group that believes the market for blue chip stocks will drop by 20 percent or more next year. In addition, we find that older cohorts have a more accurate perception of future stock market returns compared to younger cohorts. Financial planning implications are provided.

Surprise, Surprise: What Drives the Rand/U.S. Dollar Exchange Rate Volatility?

This paper investigates possible drivers of volatility in the South African rand since the onset of the global financial crisis. We assess the role played by local and international economic surprises, commodity price volatility, global market risk perceptions, and local political uncertainty. As a measure of rand volatility, the study uses a market-based implied volatility indicator for the rand / U.S. dollar exchange rate. Economic surprises—the difference between market expectations and data prints—are captured by Citi’s Economic Surprise Index which is available for South Africa and its main economic partners. The results suggest that rand volatility is mainly driven by commodity price volatility, and global market volatility, as well as domestic political uncertainty. In addition, economic surprises originating in the United States matter, but not those originating from South Africa, Europe, or China.