Reallocation Of Risk Research Articles

Financial innovation intra Muslim capital markets and inter global counterparts: implications of differences

Purpose This study aims to investigate the implications for financial innovation and product development of differences between schools of jurisprudence (fiqh) pertaining across regional Muslim markets, and the consequences for global financial institutions. Design/methodology/approach The methodology is qualitative, drawing upon several sources. Firstly, differences in interpretation regarding the economic and moral responsibilities of financial institutions in Islamic and secular contexts. Secondly, contrasting tenets of schools of Islamic jurisprudence regarding the permissibility of products traded intra Muslim markets. Thirdly, characteristics of complex financial instruments traded in global secular markets prior to the credit crisis of 2007–2008. Findings Differences between Islamic and global secular interpretations regarding responsibilities of financial institutions militate against integrated markets across which products can be seamlessly traded. Global financial institutions should recognise that different Islamic schools of jurisprudence prioritise either legal form or substance of financial products, but not both simultaneously. This should be considered when designing new products for regional Muslim markets. Practical implications Global financial institutions which focus upon the legal (micro) form of new Islamic products should relate in investor prospectuses and marketing materials the extent to which these accommodate Islamic jurisprudence’s equal (macro) concern for public interest or maslahah. This may comprise the reallocation of risk from those unable to bear it to those willing to assume it for a price, reinforcing rather than compromising economic stability. Originality/value This study evaluates implications for product development and marketing for global financial institutions active in regional Muslim markets across which different Islamic schools of jurisprudence apply.

Credit Default Swaps and Credit Risk Reallocation

Credit Default Swaps and Credit Risk Reallocation

Credit Default Swaps and Credit Risk Reallocation

Using granular data on both debt and credit default swaps (CDS) exposures by French investors on non-financial corporations (NFC) and euro area banks on French NFCs, we study how CDS reallocate investors' exposure to credit risk. To guide our investigation, we propose a methodology to disentangle investors' strategies between speculators, hedgers, and arbitrageurs. We make three contributions. First, CDS reduce exposure concentration. Hedgers offset their most concentrated exposures while speculators use them as a substitute for debt. Second, speculators use CDS to reach for yield both between and within rating classes. This could pertain to relatively lower leverage constraints at lower ratings, or to the opacity advantage of CDS. Finally, CDS increase investment funds and dealers portfolio risk. Both reach for yield and exposure diversification contribute to this rise. Exposure diversification in the CDS market thus does not translate into return diversification.

Schumpeter’s creative destruction and the credit crunch of 2007–2008: an Islamic banking perspective

PurposeThis paper aims to compare products traded in secular and Islamic banking environments prior to the credit crunch of 2007–2008; to locate the comparison in a Schumpeterian model of creative destruction of dynamic innovation in the capital markets; and to evaluate the implications for diversity of investor product choice.Design/methodology/approachFinancial products are critiqued using qualitative criteria, including underestimation of risk implicit in mortgage-backed securities and securitisation, excessive speculative activity in credit default swaps and the magnification of leverage and volatility. Comparable Islamic products are considered for the extent to which they facilitate the same precursors of market crises.FindingsInnovation in secular financial markets has traditionally led to asset bubbles, underestimation of risks and market exuberance. Islamic banking constrains creativity by prohibiting risk transference and disconnection of financing activity from social context and economic purpose. As such, the latter reduces Schumpeterian creative destruction but at the cost of reduced investor choice and market liquidity. Restriction of the reallocation of risk between those who do not wish to hold it and those who do dampens innovation but would have prevented the trading of products which contributed to the credit crunch.Originality/valueThe constraining effect of Islamic banking upon creativity and innovation is considered alongside its capacity to reduce market volatility, speculation and systemic instability. Schumpeterian theory deepens the analysis in terms of the drivers of innovation and market collapse.

Defined benefit pension de‐risking and corporate risk‐taking

AbstractU.S. corporate sponsors of defined benefit (DB) pension plans in recent years have been de‐risking by paying premiums to transfer their pension plan assets and liabilities to the balance sheets of third‐party insurers. The passage of the Moving Ahead for Progress in the 21st Century Act (MAP‐21) in 2012 provided the pension funding relief necessary to make de‐risking a mainstream corporate activity. This study provides the first empirical analysis of plan and firm factors that cause a firm to de‐risk its DB pension plans. We find a positive association between de‐risking and aggregate corporate risk‐taking. The results also show that de‐risking, on average, has a stronger effect on corporate financing policy than investment policy, leading to an increase in credit risk reflected in a firm's credit rating and cost of debt. Also, we present suggestive evidence that the reallocation of pension risk increases firm idiosyncratic risk and excess returns.

Multilateral Contracting with Manipulation

Abstract We study multi-lateral risk sharing when the state of nature is unverifiable, so that contracts are conditioned on a state-dependent signal (e.g., net earnings in a financial report). A subset of the agents can manipulate the signal’s realisation at some cost and, as a result, Pareto-optimal reallocation of risk is precluded. The agents can write additional side contracts that can be used to incentivise one of the parties to manipulate the signal. Using a novel stability notion that takes into account agents’ beliefs about contemporaneous deviations initiated by their counterparties, we explore the limits of risk sharing and risk bearing.

Information Disclosure and Financial Stability

This paper studies how disclosure of bank-specific information can mitigate systemic bank runs by reallocating systemic risk across different banks. We find that disclosure of information about vulnerability to systemic risk loads more of the constant aggregate systemic risk to less vulnerable ones. This improves the survival probability of all banks. Thus, the optimal disclosure should maximize informational heterogeneity there, provided that all banks are run simultaneously if inevitable. However, disclosure of other bank-specific information does not generate heterogeneity in such vulnerability, making the reallocation of systemic risk and thus the disclosure unbeneficial.

Loan Guarantees, Bank Lending and Credit Risk Reallocation

Loan Guarantees, Bank Lending and Credit Risk Reallocation

Loan Guarantees, Bank Lending and Credit Risk Reallocation

We investigate whether government credit guarantee schemes, extensively used after the onset of the Covid-19 pandemic, led to substitution of non-guaranteed with guaranteed credit rather than fully adding to the supply of lending. We study this issue using a unique euro-area credit register data, matched with supervisory bank data and establish two main findings. First, guaranteed loans were mostly extended to small but comparatively creditworthy firms in sectors severely affected by the pandemic, borrowing from large, liquid and well-capitalized banks. Second, guaranteed loans partially substitute pre-existing non-guaranteed debt. For firms borrowing from multiple banks, the substitution arises from the lending behavior of the bank extending guaranteed loans, whose drop in non-guaranteed lending is about 9 times larger than for other banks that lend to the same firm. Substitution was highest for funding granted to riskier and smaller firms in sectors more affected by the pandemic, and borrowing from larger and stronger banks. Overall, the evidence indicates that government guarantees contributed to the continued extension of credit to relatively creditworthy firms hit by the pandemic, but also benefited banks’ balance sheets to some extent.

Defined Benefit Pension De-Risking and Corporate Investment Policy

U.S. corporate sponsors of defined benefit (DB) pension plans in recent years have been de‐risking by paying premiums to transfer their pension plan assets and liabilities to the balance sheets of third‐party insurers. The passage of the Moving Ahead for Progress in the 21st Century Act (MAP‐21) in 2012 provided the pension funding relief necessary to make de‐risking a mainstream corporate activity. This study provides the first empirical analysis of plan and firm factors that cause a firm to de‐risk its DB pension plans. We find a positive association between de‐risking and aggregate corporate risk taking. The results also show that de‐risking, on average, has a stronger effect on corporate financing policy than investment policy, leading to an increase in credit risk reflected in a firm's credit rating and cost of debt. Also, we present suggestive evidence that the reallocation of pension risk increases firm idiosyncratic risk and excess returns.

Warehouse receipt financing for smallholders in developing countries: Challenges and limitations

AbstractA warehouse receipt is a document issued by a warehouse operator as evidence that a specified commodity of stated quantity and quality has been deposited at a particular warehouse by a named depositor. When backed by an appropriate legal and regulatory framework, a warehouse receipt becomes a formal financial instrument that allows the depositor to confer a security interest in the stored commodity to another party without requiring physical delivery, allowing the warehouse receipt to serve as possessory collateral for a loan. Warehouse receipt financing, in theory, permits smallholders farmers in developing countries to store their surplus safely in a modern warehouse to sell at a later date when prices are higher, while allowing them to use the stored commodity as collateral to secure a loan to finance household consumption and investment needs in the interim. However, in practice, warehouse receipt financing generally has not been embraced by smallholders in developing countries in which it is available. Here, we develop and analyze a formal stochastic dynamic model of seasonal commodity marketing that exposes the transaction cost and risk reallocation problems that undermine the benefits of warehouse receipt financing to smallholders.

Ownership and control rights in democratic firms – a republican approach

Workplace democracy is often defined, and has recently been defended, as a form of intra-firm governance in which workers have control rights over management with no ownership requirement on their part. Using the normative tools of republican political theory, the paper examines bargaining power disparities and moral hazard problems resulting from the allocation of control rights and ownership to different groups within democratic firms, with a particular reference to the European codetermination system. With various qualifications related to potentially mitigating factors, such as workforce and shareholder composition or risk aversion and reallocation, the paper contends that forms of workplace democracy in which workers control and own the firm, such as cooperativism, are preferable to other forms, such as codetermination, in which ownership and control rights are formally separated.

Investor behavior around monetary policy announcements: Evidence from the Korean stock market

Using the Korean stock market data between 2000 and 2017, this paper examines the order imbalances of different investors around monetary policy announcements. In line with the temporary reallocation of risk hypothesis, individual investors sell significantly on the day before the U.S. Federal Open Market Committee (FOMC) interest rate announcements, while the proprietary accounts of domestic institutions correspondingly take a long position. On the announcement day, foreign investors engage in substantial buying. Our main finding, particularly with regards to institutional investors’ proprietary accounts, appears to be consistent with temporary reallocation of risk between investors rather than being informationally motivated.

Financial Analysis of Risk Reallocation in PPP Projects - Focusing on the Transactions between Private Investors in Korea -

Financial Analysis of Risk Reallocation in PPP Projects - Focusing on the Transactions between Private Investors in Korea -

How Central is Central Counterparty Clearing? A Deep Dive into a European Repo Market During the Crisis

Repo markets offering central counterparty (CCP) clearing and anonymized trading were remarkably resilient during the recent crises. We use the full transaction level dataset on all repo trades on Eurex Repo, including identifiers for market participants, to provide a detailed description of the market's development and microstructure during the crises and under different monetary policy interventions. Overall, we find high excess liquidity being associated with lower private liquidity provision in this market. Cross-segment arbitrage and market making is limited but growing steadily. The reallocation of liquidity risk across banks within this market varies substantially with the general market conditions.

What if Dutch investors started worrying about flood risk? Implications for disaster risk reduction

Increasingly, roles and responsibilities of the public sector in flood risk management are receiving attention in research and policy. Part of the debate suggests that allocating risk to the private sector increases efficiency as it promotes individual adaptation, thereby reducing the impact if a disaster occurs. In this paper, we analyse the macroeconomic effects as risk-averse investors take flood risk into account in their investment decisions. Our case study is the large Rotterdam area in the Netherlands. Using a spatial computable general equilibrium model, we find that the decrease in investments in risky areas leads to a reduction in capital and production in the large Rotterdam area, leading to a reduction in potential monetary disaster losses, but not to a reduction in population. The reallocation of risk reduces the long-term impacts from a flood on government tax revenues, but it also leads to welfare losses among households residing in risky regions.

Intergenerational Risk Trading

From a life cycle theory perspective, both young and old individuals may gain from a reallocation of equity and wage risk exposure between each other. However, current financial markets do not offer wage growth-linked securities and borrowing against labor income without collateral is difficult. To improve intergenerational risk reallocation, we propose a market-based voluntary risk trading arrangement between coexisting generations via an innovative swap market where participants trade equity-related returns for wage-linked returns, and vice versa. The maturity of the swap contract is restricted to one year to address the collateral issue. We find there is always a market for equity-wage swaps and the market-clearing premium will vary depending on multiple state variables (economy, demographics, and human and financial capital). This innovative swap market is effective at improving the welfare of all generations because the trading of wage-linked returns leads to a more complete market, enabling individuals to realize a more preferred risk exposure over their life cycles.

Апостериорная интеграция вероятностей. Элементарная теория

Предлагается подход к апостериорной интеграции вероятностных распределений, служащих независимыми априорными моделями наблюдаемого элементарного события из заданного конечного набора элементарных событий. Под апостериорной интеграцией понимается уточнение сведений, доставляемых априорными вероятностями. В основу подхода положено понятие апостериорного события в произведении вероятностных пространств, отвечающих априорным вероятностям. Условная вероятность на пространстве-произведении, задаваемая апостериорным событием, естественным образом определяет вероятность на множестве исходных элементарных событий; последняя принимается за результат апостериорной интеграции априорных моделей. Указываются условия, при которых интеграция повышает информативность априорных вероятностей; исследуются алгебраические свойства интеграции как бинарной операции на множестве вероятностей; рассматривается вопрос об интегральной сходимости бесконечных последовательностей вероятностей.

Study on Risk Allocation and Management Performance Measurement of Construction Project

Recently, risk allocation (RA) has become a research focus as a pre-variable for its damaging to the improvement of project management performance (PMP), but the related measured operations were absence. Based on the theory of incomplete contract, firstly, this paper mapped the initial contract,renegotiation and contract efficiency into the whole process of project RA, constructed a three-stage theoretical models including initial risk allocation (IRA) for contracting , project management performance (PMP) and risk reallocation for contract performance, and depicted their measuring dimensions. Secondly, this paper developed RA measure scale based upon questionnaire design and empirical analysis, and the reliability and validity were analyzed. The research guided significance for contractual arrangements for the project RA and exploring relevance to other variables.

Study on Risk Reallocation Routes of Construction Contract Based on Bills of Quantity of 2013

The risks weren’t negotiated before the contracts signature would be the barrier of contract enforcement. It would lead to low project management performance, and risks reallocation after the signature is an important method to settle the problems above. The article analyzed the regulations of 2013 Bills of Quantities about risk allocation, together with the discussion on contract enforcement mechanism that caused by incomplete contract based on risks reallocation. It is shown that one of the important means to make the contract optimize is to introduce condition compensation into the flexible terms. The owner could select proper method accordingly to control the risks of investment and improve performance of project management.