Risk Neutrality Research Articles

Study on the Systemic Risk of China’s Stock Markets under Risk-Neutral Conditions

Based on stochastic discount factor theory, this paper proposes a method to convert the traditional systemic risk measures of financial markets, such as VaR, ES, MES and SES, into risk-neutral measures. We proposed a novel way to neutralize the returns without relying on option price information. Then, we empirically analyzed and compared the systemic risks and changes between the A-shares in Shanghai and H-shares in Hong Kong before and after a stock market crash, and we found that systematic risk measures under risk neutrality could more accurately determine market system risks than traditional systemic risk measures. Moreover, these systemic risk measures have a certain market risk warning effect.

A new environmental governance cost prediction method based on indicator synthesis and different risk coefficients

Environment protection is important for the survival of residents, and the government must improve its governance model on environmental cost prediction methods to address the increasing level of environmental pollution. Therefore, a science-based investment scheme is of great significance. To improve the accuracy and effectiveness of environmental governance cost prediction method, it is important to consider the completeness of the indicators and their degree of contributions-both of which need to be studied further. Considering the influence of a decision-maker's subjectivity on an investment scheme, this paper proposes a prediction method accommodating the risk preferences of different decision-makers. The proposed method is based on the synthesis of evidential reasoning approach. An objective empowerment is carried out according to the standard deviation method of correlation coefficient to highlight the importance degree of different indicators. At the same time, to improve the practical usage of the synthetic cost prediction method, the future cost is predicted by combining the genetic programming models under different risk coefficients, namely, the risk preference, the risk neutrality, and the risk aversion. Finally, a case study involving environmental governance cost prediction of 29 provinces of China is presented. A comparison of the cost predictions and the actual value of different risk coefficients for the different methods are given to evaluate the effectiveness of the proposed method.

The semi-martingale equilibrium equity premium for risk-neutral investors

In this paper, we study the risk-neutral investor’s equilibrium equity premium in a semi-martingale market with arbitrary, normal, binomial and gamma jumps. We simulate graphs for discrete distribution of jump amplitudes in order to study the parameter effect. The equity premium for this investor remains the same regardless of [Formula: see text] and [Formula: see text] variations in the linear utility function. In fact, there is no optimal consumption for [Formula: see text]. For normal jumps, our results are consistent with the risk-averse investor’s power utility effect on the equity premium. However, the binomial and gamma amplitudes show significant variations between risk neutrality and risk aversion.

Uncertainty, Learning and International Environmental Agreements: The Role of Risk Aversion

This paper analyses the formation of international environmental agreements (IEAs) under uncertainty, learning and risk aversion. It bridges two strands of the IEA literature: (i) the role of learning when countries are risk neutral; (ii) the role of risk aversion under no learning. Combining learning and risk aversion seems appropriate as the uncertainties surrounding many international environmental problems are large, often highly correlated (e.g. climate change), but are gradually reduced over time through learning. The paper analyses three scenarios of learning. A key finding is that risk aversion can change the ranking of these three scenarios of learning in terms of welfare and membership. In particular, the negative conclusion about the role of learning in a strategic context under risk neutrality is qualified. When countries are significantly risk averse, then it pays them to wait until uncertainties have been largely resolved before joining an IEA. This may suggest why it has been so difficult to reach an effective climate change agreement.

MACHINE-BUILDING ENTERPRISES FINANCIAL RISKS MINIMIZATION MODELS BUILDING

The article is based on a financial condition indicators system, which assesses the financial risk of the enterprise, and their grouping according to the nature of the impact on the enterprise financial position. The following financial risks groups have been identified: the inappropriate capital structure, inefficient financial activity, liquidity decline, ineffective operating activities, the imbalances in cash flows and ineffective investment activities risks. Each group of indicators is selected by the "center of gravity"one representative method to construct a model for assessing the financial risk in the enterprise level. It is determined that representative indicators in identifying the financial risk in an enterprise level are: coefficient of autonomy, coefficient of turnover of capital, absolute liquidity ratio, return on sales, net cash flow ratio, total return on investment.At the next stage of constructing a model for enterprise financial risks minimizing using expert method, representative indicators are measured according to their informativity for assessing financial risk at the enterprise. Taking into account the indicators significance, a machine-building enterprises assessment financial risk model was constructed on the basis of the enterprise financial risk level indicators-representatives additive convolution with their significance weight coefficients correction.The functional dependencies between the indicators are determined given the direct and inverse nature of the link between the indicators that characterize the machine-building enterprises financial risk, using correlation-regression analysis. An optimization model for machine-building enterprises financial risks minimizing was built on the principle of limiting financial risks. Optimizing the model means getting the maximum integral index value of the financial risk neutralization level. To this end, the Kuhn-Tucker theorem is used. As a result of model optimization it was revealed that from the point of view the financial risks at machine-building enterprises level minimizing, the optimum values of financial indicators are: for the coefficient of autonomy — 0.41; for the capital turnover coefficient — 31,0; for the coefficient of absolute liquidity — 0,45; for a profitability ratio of sales — 0,29; for the coefficient of sufficiency of net cash flow — 0,60; for the coefficient of total return on investment — 0,28. The established norms of financial indicators provide financial risk minimization at machine-building enterprises.

Optimal Liver Acceptance for Risk-Sensitive Patients

To be eligible for a cadaveric liver transplant in the United States, a patient must join a waiting list maintained by UNOS, which allocates livers using a complex priority system. When a liver offer is made, each patient must decide whether to accept the offer. Although a vast majority of patients are known to be risk-sensitive when making health-related decisions, earlier work on organ-acceptance decisions assumes that patients are risk-neutral and maximize life expectancy. We extend previous research by including patient risk preferences in modeling patient decision making. They illustrate that for a given health state (or liver quality), the best decision is to accept an offer if liver quality (or health state) is higher (or worse) than a certain threshold level and that these threshold levels depend on the risk preferences of the patient. Numerical studies reveal that assuming risk neutrality may lead to substantial losses in expected utility, particularly when a sicker patient receives a lower-quality liver offer. The insight for decision makers: Because of patient risk preferences, a life expectancy-maximizing liver-acceptance policy is not necessarily the best policy; it may actually cause significant losses in expected utility.

A data-driven bi-level program for knowledge-based signal control system under uncertainty

A data-driven knowledge based system (DDKS) is considered for urban signal control with hazardous material (hazmat) transportation. A data-driven bi-level program (DDBP) is presented to determine generalized travel cost for hazmat carriers and regular traffic flows. A risk-averse (RA) signal control is developed for DDKS with uncertain risk in the presence of hazmat transportation. Since DDBP is generally non-convex, a stochastic program using two-stage approach is proposed to find local optimal solutions. Numerical computations using a real-data city network are made and good results are obtained. As compared with conventional signal controls such as delay-minimizing (DM) and risk-neutral (RN) signal control, the proposed RA exhibits considerable advantage on mitigation of public risk exposure whilst incurred less cost loss as compared to other data-driven alternatives in all cases.

An outranking approach using a risk attitudinal assignment model involving Pythagorean fuzzy information and its application to financial decision making

The aim of this paper is to develop a novel outranking method using a risk attitudinal assignment model under complex uncertainty based on Pythagorean fuzzy (PF) sets and interval-valued Pythagorean fuzzy (IVPF) sets. Additionally, this paper applies the proposed methodology to address financial decision-making problems to investigate its applicability and effectiveness in the real world. These developed methods and techniques can provide a new viewpoint for capturing the amount of information conveyed by PF and IVPF values and can fully take into account the decision maker’s attitude towards risk-taking in the face of high uncertainty. Considering the diverse attitudes toward risk neutrality, risk seeking, and risk aversion, this paper introduces novel measures of risk attitude-based score functions within the PF/IVPF environments and investigates their desirable and useful properties. These properties provide a means of establishing linear orders and admissible orders in the PF/IVPF contexts. This means that the proposed measures can overcome some drawbacks and ambiguities of the previous techniques through score and accuracy functions and can address incomparable PF/IVPF information more effectively. As an application of the risk attitude-based score functions, this paper develops novel risk attitudinal assignment models to establish a useful outranking approach for solving multiple criteria decision-making problems. Two algorithms for PF and IVPF settings are developed based on the concepts of a precedence frequency matrix and a precedence contribution matrix for conducting multiple criteria evaluation and the ranking of alternatives. A financing decision on aggressive/conservative policies of working capital management is presented to demonstrate the applicability of the proposed outranking approach in real situations. Moreover, a comparison to the technique of risk attitudinal ranking methods is investigated to validate the advantages of the proposed methodology. Furthermore, a comparative analysis with a newly developed outranking method, the IVPF-ELECTRE (for the elimination and choice translating reality), is conducted via an application to the investment problem of software development projects. Compared with these benchmark approaches, the proposed methods can produce a more reasonable and persuasive result for ranking the order relationships of alternatives in the highly uncertain context. The practical studies and comparative discussions demonstrate an excellent performance of the developed methodology that is effective and flexible enough to accommodate more-complex decision-making environments.

Measuring the Impact of Risk Preference on Land Valuation: Evidence from Forest Management

Given the extended rotation length of growing trees, price uncertainty and risk preference of forestland owners both play key roles in forest management and should be studied together. However, most existing studies have simply overlooked the varying risk preferences among forestland owners when dealing with price uncertainty. In this study, a heuristic harvest decision approach incorporating varying risk preference was constructed and evaluated. The results indicate that a properly selected level of risk preference may lead to better management performance compared to methods assuming risk neutrality, and the impact of risk preference on forest management varies as market conditions change.

RISK ADJUSTMENT OF THE CREDIT-CARD AUGMENTED DIVISIA MONETARY AGGREGATES

While credit cards provide transactions services, as do currency and demand deposits, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities, such as credit card balances, to assets, such as money. However, economic aggregation theory and index number theory measure service flows and are based on microeconomic theory, not accounting. Barnett et al. derived the aggregation and index number theory needed to measure the joint services of credit cards and money. They derived and applied the theory under the assumption of risk neutrality. But since credit card interest rates are high and volatile, risk aversion may not be negligible. We extend the theory by removing the assumption of risk neutrality to permit risk aversion in the decision of the representative consumer.

Modeling and Validating Public–Private Partnerships in Disaster Management

This paper applies game theory and expected utility theory models to study the optimal public–private partnerships (PPPs) in disaster preparedness considering the uncertain consequences of the disasters, the investment costs, and the private sector’s potential risk attitudes, including risk-seeking behavior, risk aversion, and risk neutrality. We study the private sector’s best response and the subgame perfect Nash equilibrium solutions. Our results show that the public sector provides the least amount of subsidy to the risk-averse private sector and the highest amount of subsidy to the risk-seeking private sector. On the contrary, the risk-averse private sector invests the most, and the risk-seeking private sector invests the least. Finally, we validate the model results using a two-stage experiment with 91 participants. This paper provides insights into how to construct win–win PPPs in disaster preparedness with considerations of the private sector’s risk behavior.

A Two-Parameter Family of Socio-Economic Health Inequality Indices: Accounting for Risk and Inequality Aversions

This paper proposes a two-parameter family of socio-economic health inequality indices. First, these indices allow a Boolean risk factor to be associated to other health dimensions. Second, multidimensional health distributions can be compared thanks to a stochastic dominance rule, which includes the attitude of the social planner with respect to the risk factor (risk neutrality, risk aversion and extreme risk aversion). Third, each order of stochastic dominance is also associated to the intensity of possible health transfers occurring between individuals, that is, the degree of inequality aversion of the social planner. This approach is a multidimensional extension of Yitzhaki's Gini indices accounting simultaneously for risk and redistribution.

Security as an Object of Public Administration

Subject . Security is an essential element of the public (public) sector of the economy, the maintenance of which accounts for a significant amount of budgetary resources. In this area, a large number of employees are involved, implementing functions relevant to this industry and providing services. The purpose of the article is to substantiate security as a sector of the public sector, to identify the internal links with other sectors of the public sector — education, health, culture, etc. Methodology . On the basis of summarizing the statistics of employment in the security sector, the author has formulated the trends in the public sector in recent years. The article summarizes the experience in the execution of this function by the authorities of certain foreign countries. Results . It is determined that the security system is extremely centralized and institutionalized mainly in containment mode, focusing mainly on the neutralization of the direct impact factors (terrorism, fires, technological accidents, etc.). But the factors of indirect influence (economic and social disparities, the violation of the rule of law and equality, physical health of the population and so on.) have not received the proper institutional design. Conclusions . The article concludes that to ensure effective security, one should not create a single center of responsibility, since the function of risk neutralization is of no less importance in other branches of the public sector. One of the most promising ways of counteracting global risks is the mechanisms of internal selforganization of society.

Contracting with Moral Hazard, Adverse Selection and Risk Neutrality: When Does One Size Fit All?

This paper studies a principal-agent model in which the principal and agent are risk-neutral, there are two actions, adverse selection, moral hazard and limited liability. When the two actions are subject to moral hazard, there is no distortion at the top, the optimal action profile is downward distorted for everyone else and the optimal menu of contract exhibits the one-size-fits-all property; that is, each ability type receives the same contract. The optimal contract pays a bonus when the outcome with the highest likelihood ratio is observed and the limited liability otherwise. When one of the actions is contractible and the other is subject to moral hazard, there is no distortion at the top, the non-contractible action is downward distorted for everyone else, the contractible action can be either upward or downward distorted. The optimal contract no longer exhibits the one-size-fits-all property. The one-size-fits-all property sheds light why we rarely observe menus of contracts in market that use franchising, credit and labor markets, and in regulated industries.

The effect of risk aversion on the outcomes of inspection games

In this work, we study how risk aversion behavior affects the final outcomes of inspection games. We formulate two nonzero-sum parametric games between an inspector and an agent, which are distinguished by the players’ risk behaviors: risk aversion or risk neutrality. Both games are solved efficiently, and closed-form equilibria solutions are provided. The solutions of the two games are compared with each other and with a third game where both players are risk neutral. Analysis of the results reveals that the risk aversion of the agent has a stronger effect than that of the inspector, since the equilibrium strategies and utilities of both players depend on the risk aversion of the agent, whereas only the agent’s equilibrium strategies and the inspector’s equilibrium utility depend on the risk aversion of the inspector. Analysis of an incomplete information game version, when the agent has a private risk attitude, reveals that in order to know how to act in equilibrium, the inspector must know the probability that the agent is risk averse.

Managing Risk Aversion for Low-Carbon Supply Chains with Emission Abatement Outsourcing.

Reducing carbon emissions, including emission abatement outsourcing at the supply-chain level, is becoming a significant but challenging problem in practice. Confronting this challenge, we therefore break down the practice to focus on a low-carbon supply chain consisting of one supplier, one manufacturer and one third-party emission-reducing contractor. The contractor offers a carbon reduction service to the manufacturer. In view of the increasing proportion of Greenhouse Gases (GHG) emissions and absence of carbon reduction policies in developing countries, we adopt the prospect of consumers’ low-carbon preferences to capture the demand sensitivity on carbon emission. By exploiting the Mean-Variance (MV) model, we develop a supply chain game model considering risk aversion. Comparing the supply chain performances of the cases under risk neutrality and risk aversion, we investigate the impact of the risk aversion of the supplier and the manufacturer on the low-carbon supply chain performances, respectively. We show that the risk aversion of chain members will not influence the relationship underlain by the profit-sharing contract between the manufacturer and contractor, whereas they may extend the supplier’s concerning range. Although the manufacturer’s risk aversion has a positive impact on the wholesale price, interestingly, the supplier’s impact on the wholesale price is negative. Furthermore, we propose a contract to coordinate the risk-averse low-carbon supply chain by tuning the aversion levels of the supplier and the manufacturer, respectively. Through numerical study, we draw on managerial insights for industrial practitioners to adopt a low carbon strategy potentially by managing the risk attitudes along the supply chain channel.

Government liabilities for disaster risk in industrialized countries: a case study of Australia

ABSTRACTThis paper explores sovereign risk preferences against direct and indirect natural disasters losses in industrialized countries. Using Australia as a case study, the analysis compares expected disaster losses and government capacity to finance losses. Utilizing a national disaster loss dataset, extreme value theory is applied to estimate an all-hazard annual loss distribution. Unusually but critically, the dataset includes direct as well as indirect losses, allowing for the analysis to consider the oft-ignored issue of indirect losses. Expected annual losses (direct, and direct plus indirect) are overlaid with a risk-layer approach, to distinguish low, medium and extreme loss events. Each risk layer is compared to available fiscal resources for financing losses, grounded in the political reality of Australian disaster financing. When considering direct losses only, we find support for a risk-neutral preference on the part of the Australian government for low and medium loss levels, and a risk-averse preference in regard to extreme losses. When indirect losses are also estimated, we find that even medium loss levels are expected to overwhelm available fiscal resources, thereby violating the available resources assumption underlying arguments for sovereign risk neutrality. Our analysis provides empirical support for the assertion that indirect losses are a major, under-recognised concern for industrialized countries. A risk-averse preference in regard to medium and extreme loss events recommends enhanced investment in both corrective and prospective risk reduction in relation to these risks level, in particular to reduce indirect losses.

Determinants of Rice Farmers’ Risk-attitudes in Rural Ghana: An Operational Domain Scale Approach

Production of rice in Ghana has been marred by various production risks which reduce the yield potentials of farmers. The introduction of agricultural insurance presents an opportunity to mitigate these risks. However, individual preferences for risk-mitigating strategies are dependent on their risk attitudes. And this is affected by a broad spectrum of characteristics. This study, therefore analysed the determinants of the risk attitudes of rice farmers in the Greater Accra region of Ghana. Their risk-attitudes were obtained using an operational domain-scaled statement set. Majority of the respondents (96.14%) were found to be risk averse. The gender, household size, land tenure system and the ratio of non-farm income to rice farm income were found to significantly affect the probability of risk neutrality whiles marital status, land tenure system and the probability of failure to achieve target yields were observed to significantly influence the probability of being risk-loving. Further study is recommended to identify the relationship between these risk attitudes and adoption of crop insurance.

Forward Unbiasedness in the Short End of the Interest Rate Market

Forward rate unbiasedness postulates that the forward rate is an unbiased estimator or predictor of the future spot rate. This case of risk neutrality has been tested extensively especially in the foreign exchange market. This paper departs from this line of research and studies unbiasedness at the short end of the interest rate market. Although, a priori, an investment of 6 months and an investment of three months rolled over for an additional 3 months are commonly believed to be riskless at first approximation, our results show otherwise. The precision of our estimators unveil a small but statistically significant risk premium. The latter has two components, a constant risk premium and a time-variable one. The constant risk premium is estimated to be 14.4 basis points. The time-variable risk premium ranges between a maximum of 184.6 basis points, and a minimum of -123.2 basis points, and averages 5.4 basis points. The methodology in this paper is amenable and adaptable, with little adjustments, to other maturities. This is an agenda for the future.

УПРАВЛІННЯ ПОДАТКОВИМИ РИЗИКАМИ У СУЧАСНІЙ СИСТЕМІ ФІНАНСОВОЇ БЕЗПЕКИ УКРАЇНИ

Introduction . Permanent reformation of Ukrainian tax system, which is carried out under crisis conditions of economic and social instability, political confrontation and military conflict, leads to the tax risks increase. The significance of tax risks impact on the financial security of both the state and taxpayers necessitates the modernization of the system for their identification, evaluation and neutralization. It caused the relevance of further investigation of tax risk management issues . Purpose . The research aims at the modernization of the conceptual foundations of tax risks management in the modern system of financial security of Ukraine. Methods. Method of theoretical analyses is used. Results. The theoretical basis of tax risks management and normative and methodical support for the implementation of its separate components in Ukraine are considered. The issues of tax risk and its main elements have been further developed. The classification of tax risks has been modernized. The conceptual foundations of tax risks management have been updated in the aspect of providing financial security at the macro and micro levels. The author's approach to the cost estimation of the consequences of tax risks and author's vision of the modern system of tax risks management are proposed. The most effective methods for neutralization of tax risks in modern conditions are determined. Originality. Conceptual basis of tax risks management have been modernized in terms of financial security of Ukraine at the macro and micro level. There were developed issues of tax risk and its components including subject, object and source. Depending on subjective composition object and source of tax risks have been clarified. Depending on the reasons of tax risks their classification has been updated. The cost estimation of the tax risks consequences for both the state treasury and taxpayers has been proposed. Key elements of the modern system of the tax risks management in Ukraine have been defined. Conclusion . The risky social, economic and legal environment in Ukraine caused by permanent social and economic crises, political instability and military confrontation is the source of a significant number of large-scale tax risks that threaten the normal financial and economic activity of both the entities and individuals, but also threaten the performance of the state functions due to the lack of proper financial support. Therefore, tax risks become the newest paradigm for building Ukrainian tax system and modernization of the taxation process. Research of tax risks must become the scientific basis for modernization of the financial security system in the field of taxation. In this aspect there will be a need for further research of tax risks and their management system in order to improve the methods for identification, estimation and neutralization of tax risks. Positive experience of European tax risk management also must be researched in terms of its possible use in Ukraine.