Risk-averse Investors Research Articles

Investigation of Factors Influencing Risk-Averse Investor’s Perception: Fixed Deposit Vs. Mutual Funds (Debt-based)

In the present scenario, investing has become a complex activity because various financial products have a gamut of facets or traits. The present study analyzes risk, liquidity, time, and tax benefit based on demographic variables of investors preferring to invest their savings in mutual funds (Debt-based) and fixed deposits. The study unveils that the safety of principals concerning the marital status and brand image and family member opinion concerning education and monthly income have significant variance. Thus, the research study helps to understand contrasting potential factors of an investor who is prominently risk-averse or risk cautious and invests their maximum savings in mutual funds (debt-based) and fixed deposits. The study will help the marketers formulate strategies for risk-averse customers and spend every penny of their savings with caution. Similarly, it will also support various government agencies to develop multiple policies targeted at increasing investor awareness.

Dynamic spillovers and dependencies between iron ore prices, industry bond yields, and steel prices

We examine the spillovers and dependencies between iron ore prices, bond yields of mechanical equipment, infrastructure construction and housing, and car industries, and steel prices by using the spillover index and copula model over the period 2011–2021. Our results show that compared with bond yields, iron ore prices are primary contributors of price spillovers and highly comparable with China's steel prices. Notably, the magnitudes of correlations and risk transmissions from bond yields of related industries to steel prices shifts over the period before the implementation of China's policy to cut overcapacity in steelmaking, after the policy implementation and before the outbreak of coronavirus, and after the outbreak of coronavirus. Because of high price spillovers from iron ore to steel prices and iron ore-steel relationship, policymakers in the steel industry should consider more supply-side policies to mitigate market risks. Meanwhile, risk-averse investors should increase the share of bonds of related industries.

Nexus between Southeast Asian stock markets, bitcoin and gold: spillover effect before and during the COVID-19 pandemic

PurposeThis study aims to provide empirical evidence on the return and volatility spillover effects between Southeast Asian stock markets, bitcoin and gold in the periods before and during the COVID-19 pandemic. The interdependence among different asset classes, the two leading stock markets in Southeast Asia (Singapore and Thailand), bitcoin and gold, is analyzed for diversification opportunities.Design/methodology/approachThe vector autoregressive-Baba, Engle, Kraft, and Kroner-generalized autoregressive conditional heteroskedasticity model is used to capture the return and volatility spillover effects between different financial assets. The data cover the period from October 2013 to May 2021. The full period is divided into two sub-sample periods, the pre-pandemic period and the during-pandemic period, to examine whether the financial turbulence caused by COVID-19 affects the interconnectedness between the assets.FindingsThe stocks in Southeast Asia, bitcoin and gold become more interdependent during the pandemic. During turbulent times, the contagion effect is inevitable regardless of region and asset class. Furthermore, bitcoin does not provide protection for investors in Southeast Asia. The pricing mechanism and technology behind bitcoin are different from common stocks, yet the results indicate the co-movement of bitcoin and the Singaporean and Thai stocks during the crisis. Finally, risk-averse investors should ensure that gold constitutes a significant proportion of their portfolio, approximately 40%–55%. This strategy provides the most effective hedge against risk.Originality/valueThe mean return and volatility spillover is analyzed between bitcoin, gold and two preeminent stock markets in Southeast Asia. Most prior studies test the spillover effect between the same asset classes such as equities in different regions or different commodities, currencies and cryptocurrencies. Moreover, the time-series data are divided into two groups based on the structural break caused by the COVID-19 pandemic. The findings of this study offer practical implications for risk management and portfolio diversification. Diversification opportunities are becoming scarce as different financial assets witness increasing integration.

Developing Practical Investment Resilience

While seeking practical tools for resilient investors, a myopic ability for single-period decisions to reflect outcomes at multiple time horizons without dynamic programming is developed. It captures tail risk and, with multiple overlapping observations compounded at different frequencies, captures time-series properties as well. These benefits rely on pairing multilevel representation of the utility probability distribution with the use of Rubinstein utility—logarithmic in investor surplus. Other tools demonstrated for practical use include top-down hierarchical cluster analysis to provide qualitative information, simplified shrinkage of observed return means (but not covariances or higher moments), and better measures of potential tail risk. The resulting asset allocation examples drawn from 28 mutual funds and exchange-traded funds vary by investor risk aversion, degree of anticipation of different regimes, and whether they consider short, longer, or multiple time horizons. For single-horizon problems, resilient methods appear most helpful to conservative investors or those who trade infrequently. In contrast, multiple time horizons appear potentially helpful to all investors. <b>Key Findings</b> ▪ A toolset for investors seeking greater resilience against systemic risk stemming from nontraditional sources, such as pandemics, revolutionary technology, climate change, and political upheavals, is created, with an example based on the impact of poorly understood derivatives in the financial crisis of 2007–2009. ▪ Confronting the wavelike character of systemic disruptions with time stages that may include a sudden shock, rolling disruption, or gradual recovery as winners and losers are revealed leads to a method of making single-period allocations that reflect multiple time horizon outcomes while staying within a simple and easily implemented decision-theory framework. ▪ Other tools for resilient investing include top-down hierarchical cluster analysis, measures of tail risk customized by risk aversion, preserving more useful information by shrinking means but not covariances, and transparent open-source software.

Empirical determination of sustainable withdrawal rates considering historical yields and inflation rates in Germany

On account of the current low interest rate phase, which is most likely to continue in the coming years, the average yields to be achieved in the bond, time deposit and savings product sectors are declining, so that risk-averse investors in particular have few opportunities to generate return-oriented retirement provisions.This scientific article analyzes the level of a possible safe withdrawal rate for diversified pension portfolios, considering historical returns and inflation rates. Consequently, this article provides immediate practical added value for a possible retirement provision.The evaluation is based on the consideration of historical returns of the stock and bond market in Germany. To determine a safe withdrawal rate, the development of portfolios with different compositions and inflation-adjusted withdrawal rates are simulated over periods of 15 to 35 years. In this simulation, the risky part of the portfolio is represented by German equities, the low risk part by German government bonds.To sum up, the empirical results show a maximum safe withdrawal rate of 4%. The underlying portfolio is composed of 50% equities and 50% government bonds. Particularly due to the outlined demographic change in Germany as well as the ongoing low-interest phase, the empirical study can provide significant theoretical and practical insights.

Impact of uncertainty in technological cycle on circular economy: Bio-based jet fuel range alkenes and pentanediols production

In terms of circular economy (CE), the coproduction of biofuels and bio-based chemicals could be a feasible strategy to improve the biorefinery economics. However, this approach is significantly affected by the variation of the techno-economic parameters. Thus, we evaluated the techno-economic feasibility of an integrated strategy through deterministic and stochastic models for the coproduction of biofuels (jet fuel range alkenes (JFA)) and bio-based chemicals (pentanediols and pentane) to identify the impact of uncertainty in technological cycle on the CE action plan. The deterministic analysis estimated the minimum JFA selling price (MJSP) expressed per gasoline gallon equivalents (GGE) and led to the identification of six major techno-economic parameters having a significant impact on the economics. Stochastic analysis was performed based on the Monte Carlo simulation, leading to probabilistic results on the economic feasibility of the integrated strategy, taking into account the uncertainty in the six identified parameters. In five of the six scenarios developed considering each uncertainty, the chances of MJSP being lower than the maximum biofuel price (USD 3.10 GGE−1) in the last three years (2017–2019) were higher than 50% (53.2–88.1%), implying that, despite the uncertainties reflected in the major techno-economic parameters, the integrated strategy could be a risk-averse investment.

Investments with Heterogenous Risk Aversion

We address the problem of a fund manager pooling moneys from risk-averse investors and running a single portfolio of riskfree and risky assets in such a way that individual investors are not penalized for participating in this mutual fund. This problem has a well-known solution when the investors maximize their terminal expected utility of wealth using a power utility function with the same risk-aversion coefficient. We solve this problem in the case of investors having different risk-aversion coefficients. It turns out that the initial contributions of investors must follow a precise formula which depends on the various risk-aversion coefficients. We also apply our approach to the case of a single investor with risk aversion depending on the assets in the portfolio.

A Nash bargaining solution for a multi period competitive portfolio optimization problem: Co-evolutionary approach

This study focuses on proposing a Nash bargaining model to solve a novel multi-period competitive portfolio optimization problem for large investors in the stock market who want to maximize their terminal wealth while taking into account competitors' profits. In this study, a Competitive Portfolio Model (CPM) is developed in accordance with the Cournot competition principle for a static, non-cooperative, and non-zero-sum game with complete information. Transaction costs, risk-free assets and cash are also included to match real-world conditions. Also, three criteria including the average value at risk, the mean absolute semi-deviation, and entropy are considered to control the investment risk in the model. Moreover, due to common constraints between players (free floating shares of risky assets) in stock markets, this study falls into the category of Generalized Nash Equilibrium Problems (GNEP). Therefore, to overcome the problem, a Cooperative Co-evolutionary Algorithm (CCA) based on Particle Swarm Optimization (PSO) is customized and used. A few experimental tests and a numerical example with descriptive analytics (using real data from two large mutual funds who invest in the Iranian Stock Exchange market) are used to evaluate the feasibility of the proposed model and the efficiency of the design algorithm. After solving the model, for each time period, investors' trading strategies (trading signals and stock volume in their portfolio) are determined. The results show that the volume of transactions due to the market power of an investor has a significant effect on the terminal wealth of competitors. Also, the results of sensitivity analysis show that profit-making is inversely related to the degree of risk aversion of investors.

Stock portfolio selection based on investors’ risk preference

Stock portfolio investment gives investors the opportunity to engage in diversification among stocks which helps to achieve higher financial risk-adjusted return. A properly diversified stock portfolio should include stocks that have different economic variable such as interest rate, exchange rate and share price. It helps investors to achieve higher risk-adjusted return, nevertheless there are investors who love risk known as Risk Premium investors and Risk Averse investors who prefer lower risk. The risk value of stocks acts as an indicator in selecting stocks to be included in a portfolio. Risk value of stock portfolios is used in selecting stock portfolio that follows investors’ risk preference. This study forecast share price by using Geometric Brownian Motion and hence use the Variance Covariance to calculate Value at Risk of each stock and stock portfolio in future investment. The stock portfolios in this study are based on five sectors which are industrial-product, consumer, construction, technology, and trading and services. Thus, there are five stock portfolios that are produced for each type; Risk Averse and Risk Premium investors. Using the Value at risk of each stock portfolio, it is found that Stock portfolio from the Industrial Product Trading and Service sectors is the most suitable for Risk Averse and Risk Premium investors respectively. This study may serve as a guide for investors in creating and choosing stock portfolios for future investment based on their risk preference and also forecast its Value at Risk.

INVESTORS AWARENESS AND PERCEPTION TOWARDS MUTUAL FUND INVESTMENT:AN EXPLORATORY STUDY

Mutual Fund as an investment option gives a platform to risk averse investors who do not prefer to take high risk on their hard earned money. In India, Mutual Fund Industry is growing at a rapid pace and has emerged as a vital segment of the financial markets, specifically in channelizing and mobilizing the financial savings of hundreds of individuals in equity and debt instruments. Since investment in mutual funds is influenced by investors perception, the purpose of the present study is to examine investors awareness and perception towards mutual fund as a means of investment. The study is based on primary data collected though a questionnaire from 105 respondents residing in Delhi-NCR.Major reasons for investors preference for mutual fund investment were found to be tax benefit, security, liquidity, return and reliability. Research findings suggest that there is a significant relationship between gender and investors perception with respect to returns in mutual funds. Also, a significant relationship exists between age and investors perception with regard to higher tax shield provided by mutual funds.

An Investigation of Volatility Transmission and Hedging Opportunities of Cryptocurrencies towards other Financial Assets

Asset allocation towards a specific portfolio is solely based on the diversification property among financial as well as non-financial assets. This paper is an attempt to see the investibility and role of diversification of cryptocurrencies with other financial assets. The study is utilizing the extensive data on Bitcoins and GSPC-Index, MSCI-Global Index, MSCI-Currency Index, COMEX closing Gold Price, and OPEC Crude oil Prices. The investigation aims to assess the direction and swap capability of the cryptocurrency (Bitcoin) towards the other global financial assets. The hypothesis of the study is whether the volatility created by bitcoin is transmitted towards the other financial assets using multivariate BEKK-GARCH methodology. The results indicated that any shock that appeared in bitcoin is significantly decreasing the volatility of all selected assets except MSCI-Global Index returns. The study found that the use of cryptocurrencies into the portfolio would offer diversification benefits to investors. The results are more beneficial for the risk-averse investor, who wants to hedge their portfolio through the inclusion of the negatively correlated security.

A new fuzzy random multi-objective portfolio model with different entropy measures using fuzzy programming based on artificial bee colony algorithm

PurposeThis paper proposes a fuzzy random multi-objective portfolio model with different entropy measures and designs a hybrid algorithm to solve the proposed model.Design/methodology/approachBecause random uncertainty and fuzzy uncertainty are often combined in a real-world setting, the security returns are considered as fuzzy random numbers. In the model, the authors also consider the effects of different entropy measures, including Yager's entropy, Shannon's entropy and min-max entropy. During the process of solving the model, the authors use a ranking method to convert the expected return into a crisp number. To find the optimal solution efficiently, a fuzzy programming technique based on artificial bee colony (ABC) algorithm is also proposed.Findings(1) The return of optimal portfolio increases while the level of investor risk aversion increases. (2) The difference of the investment weights of the optimal portfolio obtained with Yager's entropy are much smaller than that of the min–max entropy. (3) The performance of the ABC algorithm on solving the proposed model is superior than other intelligent algorithms such as the genetic algorithm, differential evolution and particle swarm optimization.Originality/valueTo the best of the authors' knowledge, no effect has been made to consider a fuzzy random portfolio model with different entropy measures. Thus, the novelty of the research is constructing a fuzzy random multi-objective portfolio model with different entropy measures and designing a hybrid fuzzy programming-ABC algorithm to solve the proposed model.

An analysis of impact of personality traits and mindfulness on risk aversion of individual investors

An analysis of impact of personality traits and mindfulness on risk aversion of individual investors

Is the index efficient? A worldwide tour with stochastic dominance

We conduct a broad study of stochastic dominance efficiency on financial markets. We show that in the long run the vast majority of 17 equity market indices across the globe are inefficient at order two relative to their industry components. In the short run, the past stochastic dominance relation between the index and sub-indices predicts future dominance. Trading rules accounting for the predictability of stochastic dominance improve the out-of-sample certainty equivalents of risk-averse investors. The gains are especially pronounced for European and developing markets, while no consistent outperformance of alternative strategies is found for the S&P 100 and Nikkei 225 indices.

Using regime-switching models in Sharia-compliant stocks: performance assessment of investors with discriminated risk-appetite

Purpose The paper aims to assess the performance of investors that are discriminated based on their risk-appetite who intend to invest in listed Sharia-compliant (SC) stocks to maximize their portfolios’ wealth through two different models (i.e. regime-switching [RS] and non-RS). Design/methodology/approach Study period (i.e. November 18, 2015–May 31, 2019), well described in two distinct volatility-related bull-regime and bear-regime, is divided into in-sample and out-sample where Rs. 1.00 is invested on the out-sample start date. Each investor’s cumulated wealth forecasted through different models is checked daily throughout the out-sample period, and then, analyzed based on investors’ cumulated ending wealth, and Sharpe ratio (SR) is obtained through different models. Findings The ending wealth of risk-averse and risk-neutral investors obtained through RS-models increased 5.27 times while that of risk-taker investors increased 5.13 times. However, ending wealth obtained through non-RS models remained far low. The SR remained unchanged among investors. However, the SR of RS models (i.e. 1.0867) is higher than that of non-RS models (i.e. 0.8681). Overall, RS model-based investments outperformed in all categories of investors. Practical implications The study helps the investor during the process of portfolio diversification in their asset(s) selection and limited capital apportionment decisions. It also helps market regulators in formulating regulations and the policymakers in articulating/implementing policies that may protect the stakeholders form consequent disasters, particularly when market switches regimes. Originality/value The uniqueness stems from its focus on risk-appetite discriminated investors’ portfolio wealth maximization issue examined through technical analysis using two completely distinct models in the emerging market’s listed SC stocks.

Impact of capacity mechanisms and demand elasticity on generation adequacy with risk-averse generation companies

While on-going and future developments will likely increase the short-term elasticity of the electricity demand, capacity markets are often put forward as a possible remedy to ensure generation adequacy. In this paper, we provide a model formulation of a stochastic non-cooperative capacity planning problem reflecting short-term elastic energy demand, risk-averse investors, and a capacity market. The Conditional-Value-At-Risk is used as a coherent risk-measure. For solving the model, we deploy an Alternating Direction Method of Multipliers. We analyze the impact of short-term demand elasticity on the social welfare, agents’ surpluses, and Loss-of-Load-Expectation of an energy-only market and a market complemented by a capacity market. Moreover, we consider the impact of set capacity targets. For the energy-only market, we show that short-term demand elasticity even amplifies the negative effect of risk aversion on social welfare. A capacity market can be used to hedge against the negative effects of risk aversion, even if the capacity target is not set ideally. Furthermore, we show that a capacity market can be used to mitigate welfare transfer to investors and lower the loss-of-load-expectation induced by scarcity times.

Bitcoin and Portfolio Diversification: A Portfolio Optimization Approach

This study investigates the performance of Bitcoin as a diversifier under different constraining portfolio optimization frameworks. The study employs different constraining optimization frameworks that seek to maximize risk-adjusted returns (Sharpe ratio) of the portfolio by optimizing allocations to each asset class (asset allocation). The performance attributes are evaluated by comparing the portfolios both with and without Bitcoin under frameworks ranging from equal-weighted, risk-parity, and semi-constrained to unconstrained. This study suggests that Bitcoin, due to its exotic nature, unwavering appeal, and unknown set of drivers, could act as a diversifier in normal market conditions, and it might also have some borderline hedge to safe haven properties. The results further suggest that while Bitcoin may be a potential diversifier for a risk-seeking investor, the risk-averse investor must exercise caution by limiting their exposure to Bitcoin in their portfolios, as unnecessary exposure may increase the probability of losses in extreme market conditions.

Is this time really different? Flight-to-safety and the COVID-19 crisis.

During periods of market stress, risk-averse investors reallocate their investments from stocks to gold in a bid to hedge risks. Market participants interpret the induced gold price increase as an indication of safe-haven purchases and a signal of increased uncertainty in the general economic and financial conditions, thereby causing higher gold price volatility. The aim of this paper is to analyze whether this flight to safety effect can be observed during the COVID-19 crisis, which is considered to be a one-of-a-kind crisis and obviously of different origin compared to previous (financial) crises. By examining the interactions between the (option-implied) volatilities of the stock market (VIX) and of the gold (GVZ) and oil (OVX) markets, the main findings indicate that there is a granger causality in general between the equity market and the gold as well as the oil market. During the COVID-19 crisis, a stronger influence of the equity market on the oil market can be observed. Based on symmetric causality tests that are typically employed in the literature, this cannot be observed for the gold market. However, once we control for asymmetric causal interactions, we find that positive shocks in VIX cause positive shocks in GVZ. Hence, the typical flight to safety effect, similar to the one observed during other (financial) crises can also be identified for the COVID-19 crisis. The causality between the equity and oil market is triggered by political factors as well as the economic impact of the crisis which induces a sharp drop in demand for oil.

Addressing infrastructure investor risk aversion: Can project delivery resilience ratings help?

Risk aversion is a core characteristic of investor decision-making, especially with respect to new asset classes, such as infrastructure. Contracting authorities in need of delivering projects have been keen to address investors' concerns by providing guarantees and other support. This approach has had an impact on projects' economic viability and their effective delivery. This paper proposes the use of Transport Infrastructure Resilience Ratings by investors and other stakeholders to complement existing information of projects’ financial risks resulting in a more holistic understanding of their likely outcomes. This potential is demonstrated through examples of projects in the European transport sector.

Can Bitcoin hedge Belt and Road equity markets?

We use the Belt and Road Initiative (BRI) economies to assess whether co-movements between individual BRI countries’ equity markets and Bitcoin, can optimize portfolio composition. The dynamic correlations between these two asset classes persist up to 21 days out-of-sample. During the Covid-19 pandemic, a simple hedging strategy could have improved high risk-averse investors’ utility, while still yielding positive returns after controlling for transaction costs. The distribution of hedge ratios and portfolio performance of a Bitcoin-BRI country hedged portfolio flattens after the country joins the BRI, indicating further research is needed to identify the underlying mechanism at work.