Risk Investment Research Articles

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

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.

The effects of policy uncertainty and risk aversion on carbon capture, utilization, and storage investments

Many model-based decarbonization pathways include substantial carbon capture, utilization, and storage (CCUS), and engineering cost estimates suggest that these technologies should be profitable to deploy under current incentives, such as the 45Q tax credits in the United States. However, CCUS investments have been slow to materialize. In this paper, we investigate the extent to which policy uncertainty and investor risk aversion may explain the limited buildout of CCUS infrastructure to date. To do so, we develop a two-stage stochastic programming model for optimal CCUS infrastructure network design that incorporates policy uncertainty and risk aversion as novel features. We then apply it to an empirically parameterized case study of the Texas-Louisiana Gulf Coast region. Our results show that the current 45Q incentive levels make a fair number of CCUS projects profitable even if they were to be discontinued after ten years. Moreover, while future policy uncertainty and risk aversion reduce CCUS development, the maximum effect size is only a 16% decline in expected total CO2 captured. We find policy uncertainty plays a more important role than investor risk aversion in the development of CCUS infrastructure, with increased uncertainty leading to reduced CO2 capture and investment.

Measuring Portfolio Gains: The Case of Earnings Announcement Trading Signals

ABSTRACT This study offers solutions to help address practical issues researchers generally overlook when assessing gains from a trading signal. Specifically, the methodologies used in previous research generally ignore investor risk aversion when forming portfolios, do not update portfolios as signals arrive, exploit look-ahead biases, do not assess the incremental gains of a new signal, and do not consider market frictions. We examine trading signals based on post-earnings announcement drift (PEAD), the earnings announcement premium (EAP), and earnings announcement rescheduling (RES). Using our proposed approach, we find that portfolios that incorporate the individual signals produce higher Sharpe ratios than equal-weighted portfolios; however, the gains for each signal are concentrated to a few days around the announcement. The EAP and RES signals do not provide incremental portfolio gains over the PEAD signal. After considering market frictions, portfolio performance rapidly attenuates and becomes similar to the SPY ETF as the portfolio size increases. JEL Classifications: G12; G14; G17.

Computational Modeling Interpretation Underlying Elevated Risk-Taking Propensity in the Dynamic Risky Investment Process of Non-Labor Income.

Money source influences risk-taking behaviors. Although studies consistently indicated that individuals demonstrate a higher propensity to make risky investments when utilizing non-labor income as opposed to labor income, explanations as to why non-labor income leads to continuously blowing money into risky investments are scarce. The current study leverages a computational modeling approach to compare the differences in the dynamic risk investment process among individuals endowed with income from different sources (ie, non-labor income vs labor income) to understand the shaping force of higher risk-taking propensity in individuals with non-labor income. A total of 103 participants were recruited and completed the Balloon Analogue Risk Task (BART) with an equal monetary endowment, either as a token for completion of survey questionnaires (representing labor income) or as a prize from a lucky draw game (representing non-labor income). We found that individuals endowed with non-labor income made more risky investments in BART compared to those with labor income. With computational modeling, we further identified two key differences in the dynamic risk investment processes between individuals endowed with labor and those with non-labor income. Specifically, individuals endowed with non-labor income had a higher preset expectation for risk-taking and displayed desensitization towards losses during risk investments, in contrast to individuals with labor income. This study contributed to a better understanding of the psychological mechanisms of why individuals make more risk-taking behaviors with non-labor income, namely higher preset expectations of risk-taking and desensitization towards losses. Future research could validate these findings across diverse samples with varying backgrounds and adopt different manipulations of labor and non-labor income to enhance the external validity of our study.

The factors influencing the selection of fund management companies by Malaysian retail investors in the context of islamic unit trust funds

The purpose of this study is to analyze the impact of fund management companies' past performance, fees, perceived religiosity, and perceived risk on Malaysian Muslim investors' attitude toward them. The moderating effects of investor risk aversion, price sensitivity, religiosity, and Islamic financial literacy are considered. A model based on the unified theory of acceptance and use of technology is built to analyze the impact of the variables considered. The study data were collected using a survey of 550 Malaysian retail investors. Our findings show that Muslim investor attitudes are negatively affected by the perceived risk of a fund management company and positively affected by a fund management company's perceived religiosity and past performance. Moreover, the perceived religiosity impact is positively moderated by an investor's Islamic financial literacy and negatively moderated by the investor's price sensitivity. Practical implications of the results and avenues for further investigation in future research are discussed.