Risk Investment Research Articles

African sovereign risk premia and international market assets: A relook under the COVID-19 outbreak

Using the wavelet multiscale coherence technique, the paper examines the interdependences between global market assets, sovereign credit default swap (CDS) and yield-to-maturity on bond spread for African economies from January 2019 to March 2023. The empirical results primarily reveal a high level of coherence between global market assets and Africa's sovereign CDS and yield-to-maturity, although varying across countries and time-frequency domain. Notably, the high degree of coherence and the positive co-movement between sovereign CDS and global market assets are more concentrated at the medium and upper frequency bands. The observed intensity of co-movements between global market assets and sovereign CDS/yield-to-maturity (YTM) of bond spread, with global market assets broadly serving as leading variables, suggests that an increased global investor's risk aversion positively affects the yields on Africa market bonds. Among the global market assets, we identified that VIX (which is implied volatility of S&P500) has the dominant influence on Africa sovereign CDS/YTM compared to that emanating from Bitcoin and Godman Sachs Commodity Index. This is highly conceivable as VIX gauges bubbling global risks and uncertainties which considerably influences investor's risk aversion. The heterogeneous lead/lag dynamics also provide useful information to global investors, including by utilizing African markets to rebalance their portfolios for risk management purposes. The empirical findings thus provide further critical information to investors for hedging purposes, and to policymakers in formulating sovereign risk management policies oriented towards minimizing sovereign default risks.

Limitations of the investor information confirmation form in capturing investor risk propensity

The financial consumer protection laws in South Korea emphasize the principle of suitability to ensure the well-being of the financial consumer. To adhere to these regulations, financial institutions utilize the behavioral risk assessment (BRA) form to assess investors’ characteristics. This study evaluates the effectiveness of these forms in capturing investor risk propensities, using Economic Risk Attitude (ERA), Instrumental Risk-Taking (IRT), and Stimulating Risk-Taking (SRT) as comparative benchmarks. Unlike previous research focused mainly on financial risk attitudes, this study introduces a multidimensional approach that includes psychological factors like SRT, offering a more comprehensive understanding of investor behavior. Findings reveal that while BRA assessments correlate with ERA and IRT, they fail to capture the excitement-driven aspects of risk propensity represented by SRT, indicating that BRA forms may inadequately reflect investors' risk profiles. This underscores the need for refining BRA forms by integrating psychological risk factors, advocating for a multidimensional framework that enhances consumer protection and enables more tailored investment strategies. The study contributes actionable insights for financial consumer protection and sets the stage for integrating advanced technologies, such as AI, to further refine risk assessments.

Investment Strategies for Young Professionals: Exploring Different Investment Options and Strategies Tailored for Young Professionals

As the variety of offers and the constant changes on the financial markets progress, the young professionals notice that the right time to start investing is now and the further down the line, the harder it will be. Yet, for individuals just starting their careers the challenges of financial strategies may be overwhelming. This paper aims to examine different investment options and plans available to young professional and aspiring investors looking at their unique needs, goals, and volatility/ time horizons. It covers familiar forms of investments including stocks, bonds and mutual funds, new forms of investment like ETFs, real estates, and cryptocurrencies. This paper provides a clear and detailed explanation of the main benefits and drawbacks of every kind of investment, which can be useful for building an effective investment portfolio. Moreover, the study reveals a rich literature on financial planning and education, efficiency of automated investment instruments, and risk mitigation as crucial factors for successful investment. Based on this reasoning, the young professionals are pointed out as being in a favourable position enjoy a long investment horizon and therefore are able to explore higher risk investment opportunity. But it states that diversification and prudent risks management are crucial in order to minimize incidences of a loss. The final steps in the report provides an easily understandable guide for young professionals that shows how they can build an investment portfolio that will provide good returns and be favourable for the future.

Banks’ portfolio of government debt and sovereign risk: From safe havens to stormy seas

We analyse domestic, foreign, and central banks holdings of public debt for 31 countries for the period of 1989–2022, applying panel regressions and quantile analysis. We conclude that contrarily to what we observe before 2010, we found that after 2010 an increase in sovereign risk raises the share of domestic banks’ portfolio of public debt and reduces the percentage holdings in the case of central banks. Better sovereign rations also increase (decrease) the share of commercial (central) banks holdings. Furthermore, the effects of an increment in the risk for domestic investors have increased since the 2010 financial crisis.11We thank the Editor and two anonymous referees for the useful comments. We thank João Santos Silva for clarifications on the Stata quantile procedure. This work was supported by the FCT (Fundação para a Ciência e a Tecnologia) [grant number UIDB/05069/2020]. The opinions expressed herein are those of the authors and do not necessarily reflect those of the authors’ employers. Any remaining errors are the authors’ sole responsibility.

Can Chinese investors manage climate risk domestically and globally?

Climate risk is increasing and poses a risk for investors in China’s traditional stock market. In this paper, we construct a TVP-VAR-DY model and use benchmark regression and asset portfolio to explore the impact of climate risk on the Chinese stock market and whether assets with risk aversion attributes or green and low-carbon features can effectively manage climate risk. In particular, we compare China’s climate risk with global climate risk and explore transition and physical risks separately. The results show that climate risk does affect the Chinese stock market and that Chinese climate risk has a greater impact on the stock market than global climate risk. However, the good news is that the metal assets, as well as the equity-type and bond-type green assets, are effective in reducing cross-market spillovers under China’s climate risk, indicating that these assets can provide diversification benefits against climate-driven risks domestically. We also find that the metals and the equity-type assets could dampen the spillover effect against global transition risk, and the bond-type ones serve this function against global physical risk. The results further show that, for China’s stock market investors, adding green bonds to their portfolios could reduce the downside risk, regardless of climate risk type or origin. In addition, we can infer that investors are suggested to use traditional safe-haven assets and bond-type green ones to manage climate risk.

Monetary policy and equity returns: The role of investor risk aversion

AbstractThis article examines the role of investor risk aversion in the transmission of monetary policy to stock returns based on U.S. data. Our results show that following an expansionary monetary policy shock, investor risk aversion falls, leading to a decrease in the equity risk premium and an increase in equity returns. Moreover, the returns of high‐beta stocks increase much more than those of low‐beta stocks. Finally, we investigate the mechanism through mutual fund flows. We find that high‐beta funds attract greater inflows in response to lower interest rates, and there is a positive relationship between fund returns and flows. Our findings have policy implications for financial stability.

Investment in CCUS under technical uncertainty considering investor's risk aversion: An exotic compound real-options approach

Carbon capture, utilization, and storage (CCUS) technology is effective and value-adding solution for reducing emissions. However, the development and commercialization of these technologies are challenging due to high investment costs and several uncertainties. This study develops a novel comprehensive real-options-based model to evaluate investment in CCUS projects considering the technical risk and the investor's risk aversion. This study proposed an exotic compound real options model that combines American and barrier options. First, applying the Poison process, the technical risk is explicitly modeled. Secondly, the investor's risk aversion is defined as a barrier level for the barrier option part of the proposed model. Thirdly, the value of the project is evaluated through the exotic compound real option. Finally, we assess the economic viability of the project under multiple scenarios. The results of implementing the model for a real case show that the integrated technical risk assessment and the barrier option appropriately address investors' risk aversion. Furthermore, the comparison indicates that the proposed compound real options model is more effective than the traditional NPV (Net Present Value). Regarding policymaking, the results reveal that setting an appropriate carbon tax that considers the costs of carbon capture would be more beneficial. Further, the model provides investors helpful guidance to make proper investment decisions for CCUS technology projects under uncertainties.

Public participation and NGO activity in nature-based solutions in urban areas of China

This paper analyses the degree and types of public participation in Nature-Based Solutions (NBS) projects in China. The paper is based upon the premise that NBS affect multiple aspects of the city as a place for the daily lives and activities of citizens and that NBS implementation can benefit from citizen and stakeholder involvement. NBS thus offer a platform for stimulating engagement between the local government and the public. Case studies are examined through a literature review, site visits, and interviews with researchers, local officials and NGOs in China. The paper indicates that there has been significant progress since the 1990s in formal requirements of public participation through Chinese legislation promoting the inclusiveness of the public in environmental and NBS decision-making, and acknowledgment of the importance of NGOs, however actual implementation of soliciting public opinion and involvement in NBS project design has been more limited. The case studies suggest that the level of involvement of the public in NBS activities and decision-making is the reciprocal of the size of the project, where there is a high-level of involvement in the smaller local projects, but minimal involvement in larger-scale NBS projects. We find that Public Private Partnerships (PPPs) have a significant potential to help finance NBS projects providing the project can forecast low risk and positive revenue for investors, therefore this model would merit further exploration. However, PPPs may also involve limited public participation by citizens and stakeholders beyond private companies and may therefore require targeted efforts to address local communities’ needs and interests. Local people are the most important (and willing) actors and opinionators in projects that directly affect their lives, livelihoods and well-being. The findings highlight the important role of NGOs in promoting and facilitating public participation, and accompanying co-benefits, in several of the Chinese case studies. Our study also suggests that symbiosis between local governments and the citizens could be invoked by local community-based organisations (e.g. Community Resident Committees or similar) that can act as a liaison point and catalyst to public participation in NBS projects, although significant training would also be required.

Analysis of Problems and Countermeasures in Chinese Stock Market

Chinas stock is one of the most popular trading platforms with high global attention, it plays an important role in Chinese economy and global economy. With the rapid development of Chinese economy, Chinas stock market has also achieved significant achievements. It not only provides a vital platform to finance, but also optimize resource allocation. Whats more, it decreases the investors risk of the investment, and makes it is possible for government to carry out macro-economic policies through market stock. it boosts the development of Chinas financial system, and increases the ability of the Chinas financial system to anti-risks. However, there are also some problems existing in Chinese stock market, for example, the less reasonable structure of investors, serious disadvantages in the small and medium-sized GEM market governance, and frequent problems occur in the stock market trading mechanism and exchange system. This paper will as these three problems basis of starting the topic, and put forward countermeasures and strategies, which will have significant role in solving the existing problems efficiently in Chinese stock market.

Artificial intelligence investments reduce risks to critical mineral supply

This paper employs insights from earth science on the financial risk of project developments to present an economic theory of critical minerals. Our theory posits that back-ended critical mineral projects that have unaddressed technical and non-technical barriers, such as those involving lithium and cobalt, exhibit an additional risk for investors which we term the “back-ended risk premium”. We show that the back-ended risk premium increases the cost of capital and, therefore, has the potential to reduce investment in the sector. We posit that the back-ended risk premium may also reduce the gains in productivity expected from artificial intelligence (AI) technologies in the mining sector. Progress in AI may, however, lessen the back-ended risk premium itself by shortening the duration of mining projects and the required rate of investment by reducing the associated risk. We conclude that the best way to reduce the costs associated with energy transition is for governments to invest heavily in AI mining technologies and research.

Determinants of Investments Decisions in Economics and Business Faculty Students at Pelita Bangsa University

The present study endeavors to undertake an in-depth analysis of the impact of financial literacy, overconfidence, and risk tolerance on investment decisions in a structured manner by employing the conceptual framework of prospect theory. The research methodology is based on quantitative research utilizing primary data obtained through the distribution of questionnaires to all the students of the business economics faculty at Pelita Bangsa University. A sample of 101 respondents was used in the research, and the data was processed using the smart-pls 3 software program with a partial least squares approach. The research findings indicate that financial literacy has a significant positive influence on investment decisions, whereas overconfidence has a positive but insignificant influence on investment decisions. Furthermore, risk tolerance has a positive and significant effect on making investment decisions. The most prominent implication of the study is found in the financial literacy section, which suggests that a deeper understanding of financial literacy can lead to more accurate investment decisions. Additionally, an investor's overconfidence and risk tolerance also play a role in making investment decisions.

Analisis Hubungan Literasi Keuangan Investor, Pengetahuan Investor, Risk Tolerance Investor Dan Regret Aversion Bias Investor Dengan Keputusan Investasi

Data of Otoritas Jasa Keuangan (OJK) result that the number of Single Investor Identification (SID) in Indonesia has increased from 2019 to May 2022. Most of these SID investors come from millennials who were born from 1980 to 2000. Investors in Bali SID also experienced an increase, especially in Denpasar City and Badung Regency. The aim of the research is to analyze the relationship between investor of financial literacy, investor knowledge, risk tolerance and regret aversion bias with stock investment decisions in Bali. The sampling technique uses the Slovin formula to obtain a minimum sample size. The data source was obtained from primary data by distributing a 5 Likert scale questionnaire to respondents via Google Form to BNI Securities and Mandiri Securities. Based on the research sample criteria, 129 research samples were obtained. Partial Least Square (PLS) - Structural Equation Modeling (SEM) is used for data analysis. The results are 1) investor financial literacy is significantly positively related to investment decisions, which means hypothesis 1 is accepted, 2) investor knowledge is significantly positively related to investment decisions, which means hypothesis 2 is accepted, 3) investor risk tolerance is significantly positively related to investment decisions so that Hypothesis 3 is accepted, 4) investor regret aversion bias is significantly positively related to investment decisions, which means hypothesis 4 is accepted.

Investment Portfolio with Convex Optimization and Risk Adjustment Using Multi-Factor Model and Multi-Armed Bandit Algorithm

This paper examines the creation of investment portfolios through convex optimization, multifactor models, and the multi-armed bandit (MAB) algorithms, focusing on the KL-UCB strategy to optimize decisions in uncertain settings. It explores the impact of systematic risk factors using the Fama-French three-factor model, estimating the influence of market, size, and value premiums via linear regression. The use of Monte Carlo simulation is detailed for generating potential asset allocations and calculating their expected returns, volatility, and Sharpe ratios. The optimize minimize function from the SciPy library is employed to construct an efficient frontier and determine optimal asset allocation, aiming to maximize returns or minimize volatility across various risk levels. The findings suggest that the strategy of dynamic weight adjustments combined with the KL-UCB algorithm enhances portfolio returns, particularly during market volatility. The research also reveals a portfolio inclination towards large-cap growth stocks due to the negative impacts of size and value premiums. It concludes that dynamic weight adjustment strategies offer significant potential in optimizing portfolio performance in complex market conditions, though leveraging increases risk and should be carefully managed according to investor risk tolerance.

High‐beta stock valuation around macroeconomic announcements

AbstractWe document a dramatic swing of high‐beta stock returns around pre‐scheduled macroeconomic announcements—from being negative on the day before, to positive on the day of, and negative again on the day after the announcements. A feasible long‐short strategy of betting against beta (BAB) and betting on beta (BOB) yields annualized 25.28% return over the 3‐day announcement window. We explore potential explanations based on liquidity, risk, and investor risk appetite. Our results show that changes in liquidity, risk, and investor risk appetite around the announcements at best partially account for variations in high‐beta stock returns. The finding of our study highlights the dynamic effect of macroeconomic announcements on asset prices.

Mutual fund illiquidity, selling pressure, and left-tail risk in stocks

We examine whether mutual fund illiquidity introduces fragility into stock prices. The results show that stocks held by more illiquid funds subsequently experience higher left-tail risk and more outflows-induced mutual fund selling. Specifically, this positive effect is almost entirely concentrated during periods of high economic policy uncertainty and bear market. Finally, we confirm that stocks’ liquidity commonality and asymmetric information do not explain our findings. Our research has important implications for fund managers in liquidity management and for regulatory authorities in preventing the risk of investor runs.

The Impact of The Sovereign Credit Rating on The Possibility of Financing External Loans to The Iraqi Economy

External loans are a source of credit revenue. The process of obtaining it requires determining the degree of credit risk by predicting the financial solvency of the economy to judge its financial ability to pay the principal and interest dues of the loan at the specified maturity date. Considering that ability is a determinant of the creditworthiness of his economy, the extent to which financing can continue with this external credit source and its cost. The government of Iraq faced the difficulty of financing external loans from the international capital markets with its high return due to the lack of a sovereign credit rating that measures the risk of default through a process to determine the degree of that risk for investors of external lending funds. Therefore, the research came to show the effect of determining the sovereign credit rating on the extent to which the Government of Iraq can finance foreign loans, whether from capital markets or foreign governments and the impact of this classification on the credit facilities granted. The research concluded that the economy of Iraq got a sovereign credit rating within the degree of creditworthiness according to the classification of speculation to reflect the possibility of default in payment due to the dependence of the financial solvency of its economy on oil revenues, as the credit risks rise due to the inability to pay in the event of a decline in prices in the foreign market. However, relative stability within the short term enabled the Iraqi government to obtain foreign loans, with the requirement that Iraq provide guarantees by foreign governments and institutions in exchange for this source of credit.

Entrepreneurial Management: Risk Investment and New Terminology

Entrepreneurial Management: Risk Investment and New Terminology

Risk Preference and Asset Allocation Strategy Analysis in Financial Market

In the financial market, risk appetite is the key factor of investors decision-making, which determines investors acceptance of risk and investment behavior. The importance of risk appetite is that it affects asset allocation, investment strategy selection, and risk management. In financial markets, risk appetite is measured by psychological tests and questionnaires, analysis of historical trading data, and consideration of an investor s life cycle. The adjustment of asset allocation strategy needs to be reviewed and adjusted regularly to respond to market changes and adopt corresponding coping mechanisms when investors risk appetite changes.

Leverage ratio and corporate performance: Do marginal cost and marginal benefit of debt matter

This study examines leverage ratio and firm performance considering marginal benefits and marginal costs of debt to a firm. A total of 16 non-financial firms over a 15 year period (2001-2015) were randomly selected for the study. The panel data were subjected to Panel Least Square, Fixed Effects, and Random Effects regression estimations to test the formulated models in the study. Also the study employed Hausman Test to ascertain whether random effects model is the appropriate model or if fixed effects model is the appropriate model. The results shows that long term debt ratio (LTDR) have positive and significant influence on performance of Nigerian firms measured by Return on Asset (ROA) and Return on Equity (ROE). Short term debt ratio (STDR) on the other hand, established negative and significant effect on ROA, and negative and insignificant impact on ROE. STDR accounting for 75% mean value of the total debt ratio of the sampled firms, the researcher therefore, infer that financial structure has negative and significant influence on the performance of Nigerian firms. This outcome is attributed to mismatch of funds and high risk investment (asset substitution effect) resulting to marginal benefits of monitoring and bonding activities less than the marginal costs as noted by agency cost theory. The study therefore concludes that debt is valuable in reducing the agency costs of equity in professionally managed firm but at the same time debt is costly as it increase the agency cost of debt.

A model for optimizing an investment portfolio in modern conditions

Subject. This article discusses the issues of improving the methodology for optimizing an investment portfolio in modern conditions. Objectives. The article aims to develop a model for optimizing the investment portfolio, taking into account the investor's risk profile and the limited budget. Methods. For the study, I used a comparative analysis, mathematical modeling in economics, machine learning methods, genetic algorithms, and the Python programming language. Results. The article presents the author-developed model of optimizing the investment portfolio of an enterprise, based on the symbiosis of individual elements and principles of the most effective methods of optimizing the investment portfolio, algorithms for their implementation, mathematical model and practical recommendations. Conclusions and Relevance. The combination of classical methods of investment portfolio optimization and machine learning in the model helps improve the accuracy of assessing the future return of assets and determine their weights in the investor's portfolio. The theoretical significance of the work lies in the fact that the scientific provisions that actualize the task of improving existing or developing new approaches to optimizing the investment portfolio are proved. The practical significance of the study lies in the fact that the presented model is of an applied nature, taking into account the risk profile of the investor, tactical and strategic goals of investment, and budget constraints. The results of the study may be of interest to novice stock market participants, experienced investors, IT specialists engaged in the creation of programs and robots for trading on the stock market using machine learning tools.