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Risk Management
Journal Prestige (SJR): 0.189
Citation Impact (citeScore): 1
Number of Followers: 16  
 
  Hybrid Journal Hybrid journal (It can contain Open Access articles)
ISSN (Print) 1460-3799 - ISSN (Online) 1743-4637
Published by Springer-Verlag Homepage  [2469 journals]
  • Do risk governance and effective board affect bank performance'
           Evidence from large banks worldwide

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      Abstract: Abstract Worldwide, recent corporate financial scandals have raised many questions in terms of risk management and governance of banks. This study examines the impact of risk management-related corporate governance mechanisms on bank performance. Focusing on a sample of large banks, we want to assess the effect of the board of directors and risk management committee features as well as the presence of a Chief Risk Officer (CRO) in the executive board on performance over the period 2006–2017. To examine this relation properly, we employ the system-GMM (Generalized Method of Moments). Results show the importance of the risk management committee in enhancing bank performance. We also find that the presence of a CRO in the bank’s executive board decreases performance and that the lower the number of meetings, women, and independent members, the better the banks’ performance. Most importantly, results show that establishing risk governance will make banks more profitable and sustainable for the future.
      PubDate: 2022-09-01
       
  • Oil tail-risk forecasts: from financial crisis to COVID-19

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      Abstract: Abstract The coronavirus outbreak has caused unprecedented volatility in oil prices. This paper extends previous studies on oil Value-at-Risk (VaR) by providing extra insights into Expected Shortfall (ES) forecasting over the last decade, including several oil crises. We introduce a conditional volatility model combined with the Cornish–Fisher expansion for ES forecasting. In comparison to the widely used volatility models and innovation distributions, this approach is superior for predicting the ES of long positions but overestimates VaR for short positions. Overall, the volatility model addressing leverage effects with skewed t innovation produces the most accurate joint VaR and ES forecasting. Moreover, the magnitude of ES relative to VaR varies across models and time, implying that ES should be used in conjunction with VaR to inform timely risk management decisions. The results would be of interest to the regulatory authorities, energy companies, and financial institutions for oil tail-risk forecasting.
      PubDate: 2022-08-27
       
  • Automated text mining process for corporate risk analysis and management

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      Abstract: Abstract The aim of this research is to introduce innovative automated text mining process to extract operation risks from accounting narratives and to further examine the association between these risk types and operating performance. Specifically, we perform topic modeling to decompose a large amount of unstructured textual disclosures into some topics and preserve these topics, which are relevant to business operation risk. Sequentially, we propose a measure for the degree of financial default, referred to as the “intensity of risk-word list,” by joint utilization of text mining and a statistical approach. The analyzed results are then fed into a support vector machine-based model to construct the forecasting model. The results show that the textual-based risk indicators are significantly and positively related to a corporate’s operation efficiency. This study also echoes the recent trend of financial reporting regulations to add a new section on risk factors in annual reports.
      PubDate: 2022-08-08
       
  • Changes in risk and entrepreneurship

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      Abstract: Abstract In this paper, we extend the existing literature on entrepreneurship by analyzing the effects of changes in risk on two decisions made by the entrepreneur: first, the decision to transit from paid and risk-free employment to risky entrepreneurship, and second, the decision regarding the size or scale of the venture for transitioned entrepreneurs. We provide the conditions that guarantee expected comparative static results under first- and second-order stochastic dominance shifts. We then apply our results to the case of hyperbolic absolute risk aversion preferences, which is a specific functional form commonly used in the economics of risk literature. Interesting results arise from the analysis, where relative risk aversion, risk tolerance, and the inverse of prudence play key roles in our results.
      PubDate: 2022-07-13
      DOI: 10.1057/s41283-022-00098-7
       
  • Systematic extreme potential gain and loss spillover across countries

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      Abstract: Abstract This paper investigates the existence of systematic extreme risks at a multi-country level that leads to gains and losses spillover. A measure of systematic risk that quantifies both the downside risk and the upside potential in the extreme is introduced. This measure is based on the Conditional-Value-at-Risk (CoVaR) measure and copulas to capture dependencies. Using our approach, we study the contagion effect between different financial markets in the extreme. We show that there is an asymmetric contagion effect from the US stock market to other international markets. The impact is higher when the US market is extremely bear than when it is extremely bull. This paper adds novel findings on the asymmetry between extreme losses and extreme gains and the differences among different countries’ reactions to shocks.
      PubDate: 2022-07-11
      DOI: 10.1057/s41283-022-00097-8
       
  • Default risk as a factor preventing companies from entering the sukuk
           market

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      Abstract: Abstract The international sukuk market is represented by a limited number of issuers. One of the factors preventing companies from entering the market is, apparently, elucidating the true default risk of the potential sukuk issuance and related risk-minimization tools, such as guarantees and ratings. The article focuses on the default risk the potential sukuk issuer should consider. The research methodology includes a comparison between the theoretical maxims of sukuk, described by scholars and standard setters, and the existing market practice. To evaluate the potential impact of defaults and near defaults on the issuer’s reputation, a poll was conducted among the market practitioners. The results show that sukuk largely continue to imitate the bond market as per the default risk, and the path dependence of the industry on the ill-formed sukuk dominating the market impedes the revert to the initial concept of sukuk as an investment instrument. Certain steps are suggested for a potential issuer to minimize the default risk.
      PubDate: 2022-07-07
      DOI: 10.1057/s41283-022-00096-9
       
  • Heterogeneity in cyber loss severity and its impact on cyber risk
           measurement

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      Abstract: Abstract We use the world’s largest publicly available dataset of operational risk to model cyber losses and show that the Tweedie model best fits the cyber loss severity in the financial industry. Three key determinants of loss severity are firm size, contagion risk and legal liability. We also measure the size of risk based on the estimation results and show a large degree of heterogeneity across financial firms. The results are particularly relevant with respect to the recent discussion on simplifying operational risk capital requirements and reiterate the importance of considering individual firm characteristics when modelling operational losses.
      PubDate: 2022-06-06
      DOI: 10.1057/s41283-022-00095-w
       
  • Revisiting the value of a statistical life: an international approach
           during COVID-19

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      Abstract: Abstract Although the employment of the value of a statistical life (VSL) is a cornerstone of USA governmental risk analysis, many argue that the VSL is flawed when evaluating proposed regulations. The VSL is only an estimate of the willingness to accept wage versus risk, which may be inaccurate for policies that mitigate large risks in pandemics, such as COVID-19. The VSL is revisited using a different approach and utilized in measuring the total value of loss from deaths caused by COVID-19 for 48 selected countries. The modified theory of the demand for health by Gary Becker is utilized to measure the VSL resulting from consumer optimization of utility, subject to constraints and investments in health made to change their survivorship at different ages. Estimates show that the VSL for an average American is around $7.2 million compared to the world VSL of about $1.3 million. Switzerland has the highest VSL of approximately $9.4 million. The total value of loss from deaths caused by COVID-19 is around 6.1% of the USA GDP, compared to the global loss of 1.2% of the world's GDP, while Belgium has the highest value of loss with 9.7% of its GDP. The best possible data and procedures are necessary to make robust and reliable public health decisions while responding to the COVID-19 pandemic. The VSL measure introduced here can be applied to a specific individual, group, or population. It is comprehensive, straightforward, generalizable, and provides a consistent measure with the most popular methods. More importantly, it provides an added value to the existing methods that enable us to break down the VSL into two main components, one that accounts for working time. The other accounts for leisure time and different diminishing consumption and discount rates.
      PubDate: 2022-04-19
      DOI: 10.1057/s41283-022-00094-x
       
  • Political, economic, and financial country risks and the volatility of the
           South African Exchange Traded Fund market: A GARCH-MIDAS approach

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      Abstract: Abstract Despite the soaring popularity of Exchange Traded Funds (ETFs) in South Africa, country risk may have a minimal or no effect on ETFs because ETF investors can use a wide variety of market timing activities to minimize their exposure to country risks. This study investigated the effect of political, economic, and financial components of country risk on the volatility of the South African ETF market. A GARCH-MIDAS approach was employed to analyse a sample of South African ETFs from November 2000 to December 2019. The ETF market was segregated into a market of ETFs with domestic benchmarks and a market of ETFs with international benchmarks. The findings suggest that country risk components are significant sources of volatility in ETF markets except for financial risk which does not significantly impact ETFs with international benchmarks suggesting that these ETFs can be used to minimize an investor’s exposure to financial risk. Overall, this study provides new insight into the use of ETFs to diversify an investor’s exposure to different country risk components.
      PubDate: 2022-04-07
      DOI: 10.1057/s41283-022-00093-y
       
  • Correction to: Prioritizing interdependent drivers of financial, economic,
           and political risks using a data‑driven probabilistic approach

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      PubDate: 2022-03-14
      DOI: 10.1057/s41283-022-00092-z
       
  • Sparsity and stability for minimum-variance portfolios

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      Abstract: Abstract The popularity of modern portfolio theory has decreased among practitioners because of its unfavorable out-of-sample performance. Estimation risk tends to affect the optimal weight calculation noticeably, especially when a large number of assets are considered. To overcome these issues, many methods have been proposed in recent years, but only a few address practically relevant questions related to portfolio allocation. This study therefore uses different covariance estimation techniques, combines them with sparse model approaches, and includes a turnover constraint that induces stability. We use two datasets of the S&P 500 to create a realistic data foundation for our empirical study. We discover that it is possible to maintain the low-risk profile of efficient estimation methods while automatically selecting only a subset of assets and further inducing low portfolio turnover. Moreover, we find that simply using LASSO is insufficient to lower turnover when the model’s tuning parameter can change over time.
      PubDate: 2022-03-11
      DOI: 10.1057/s41283-022-00091-0
       
  • Market and model risks: a feasible joint estimate methodology

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      Abstract: Abstract The increasing complexity of stochastic models used to describe the behavior of asset returns along with the practical difficulty of defining suitable hedging strategies are relevant factors that compromise the soundness and quality of risk measurement models. In this paper we define the risk model as the mispricing a consequence of using an inadequate model to describe asset behavior and we develop a least-squares Monte Carlo methodology to estimate market and model risk simultaneously. The results show that at different confidence levels and time horizons the proposed methodology to estimate the market and model risks has a greater joint explanatory power than the isolated estimate of market risk.
      PubDate: 2022-03-01
      DOI: 10.1057/s41283-022-00090-1
       
  • Prioritizing interdependent drivers of financial, economic, and political
           risks using a data-driven probabilistic approach

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      Abstract: Abstract Financial, economic, and political risks pose a significant threat to the development and progress of countries as such risks can impact all spheres of life including education, healthcare, logistics, transportation, and safety among others. Although these risks seem quite distinct, they are mutually influenced by multidimensional interdependent factors such as internal and external conflict, socioeconomic conditions, corruption, law and order, and bureaucratic quality among others. In this paper, we utilize a data-driven approach to explore dependencies among factors influencing financial, economic, and political risks and establish their relative importance in a network setting while capturing the entire distribution of individual factors. A probabilistic network-based model was developed using the data by the International Country Risk Guide, which revealed significant differences between the conventional and the proposed schemes for prioritizing drivers of political, economic, and financial risks. Internal conflict and socioeconomic conditions were considered as the most critical factors in terms of reducing and enhancing the network-wide risk exposure, respectively. The two prioritization schemes relative to the vulnerability and resilience impact of individual factors are not correlated and therefore, policy-makers need to focus on both schemes while developing risk mitigation strategies.
      PubDate: 2022-02-01
      DOI: 10.1057/s41283-022-00089-8
       
  • Feed price risk management for sheep production in Spain: a composite
           future cross-hedging strategy

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      Abstract: Abstract Extensive livestock farming is a relevant activity in Spain, and lamb production is particularly important in the Autonomous Community of Extremadura, where feed supplementation is the main cost of production. In addition to facing climate risks which increases feed quantity needs, producers are also exposed to exogenous price volatility because feed components are settled in international markets. However, there are no traded futures contracts to directly hedge feed price, raising the question if a composite hedge can be used. With that aim, this paper tests different cross-hedging strategies with feed components that have contracts traded in international markets such as corn, soybean meal, wheat, and others. Employing a multi-regression model that solves the expected mean–variance utility problem maximization under the assumption of risk aversion, up to 65% of feed price risk can be hedged by constructing a cross hedge. Putting the strategy into practice showed that using the proposed hedge during 2012–2020 reduced price volatility and reported a benefit of € 27,498.61 in a representative farm, equivalent to 7.6% of period’s total feed expenditure.
      PubDate: 2022-01-07
      DOI: 10.1057/s41283-021-00088-1
       
  • Linkages and systemic risk in the European insurance sector. New evidence
           based on Minimum Spanning Trees

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      Abstract: Abstract This paper is part of the research on the interlinkages between insurers and their contribution to systemic risk on the insurance market. Our work constitutes an answer to the recommendations contained in the 2017 report of the European Insurance and Occupational Pensions Authority (EIOPA), an independent EU advisory body to the European Parliament, the Council of Europe and the European Commission, which shows that when analysing systemic risk in the insurance sector, one should take into account, among others, the dynamics of interconnectedness between institutions. The present article is another study of the authors in this subject. Its main purpose is to present the results of the analysis of linkage dynamics and systemic risk in the European insurance sector using hybrid models combining statistical-econometric tools with network modelling and predictive analysis tools. These networks are based on dynamic dependence structures modelled using a copula. Then, we determine the Minimum Spanning Trees. Finally, the linkage dynamics is described by means of the time series of selected topological network indicators.
      PubDate: 2021-11-30
      DOI: 10.1057/s41283-021-00087-2
       
  • Three-factor model of Enterprise Risk Management implementation:
           exploratory study of non-financial companies

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      Abstract: Abstract This study has been motivated by the fact that organizations embracing Enterprise Risk Management (ERM) face different design problems with little guidance on the methods of implementing it successfully. To explore whether the implementation of ERM in companies differs from the prevailing COSO ERM framework, we conducted a survey regarding the implementation of the important ERM characteristics that were derived from a thorough literature review and their connections to COSO (Enterprise risk management integrating with strategy and performance. Executive summary, American Institute of Certified Public Accountants, New York, 2017). The results of exploratory factor analysis indicate the existence of three factors relevant for ERM implementation—strategic, operational, and oversight—suggesting a discrepancy between implementing ERM in practice and the COSO Framework. The descriptive statistics indicates that operational and oversight aspects are implemented in a lesser degree than the strategic aspects. This leads to the conclusion that companies need guidance in operational aspects of the ERM implementation, and that it is necessary to enhance ERM oversight and corporate governance mechanisms. This article can contribute to ERM literature by raising a discussion on practical aspects of implementing ERM and on the possible reasons for companies’ preferences to easier solutions. This study may be useful to companies that are in the process of ERM implementation or enhancement.
      PubDate: 2021-11-20
      DOI: 10.1057/s41283-021-00086-3
       
  • Dynamic selection of Gram–Charlier expansions with risk targets: an
           application to cryptocurrencies

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      Abstract: Abstract This paper implements a procedure for dynamically selecting the Gram–Charlier approximation that best fits the empirical distribution of cryptocurrency returns at any point in time. The endogenous selection of the Gram–Charlier expansion length exploits its property for approximating frequency distributions through a flexible number of parameters that allows capturing changes at the tails provoked by new extreme events. The procedure is based on the differences between the cumulative distribution function of Gram–Charlier distributions with a particular focus on the fitting of the distribution left tail for risk assessment purposes. The method is tested through backtesting techniques for a group of major cryptocurrencies. The results show that the selection of the Gram–Charlier expansion order on the basis of cumulative distribution function dynamics, provides, in most cases, a significant improvement for conditional coverage compared to the use of fixed-order Gram–Charlier expansions. The method seems to be a useful tool for risk management purposes, especially for highly volatile assets such as cryptocurrencies.
      PubDate: 2021-10-01
      DOI: 10.1057/s41283-021-00084-5
       
  • The influence of organizational climate, incentives and knowledge sharing
           on misconduct and risk-taking in banking

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      Abstract: Abstract This study aims to establish whether a focused type of organizational climate, misconduct and risk climate (M&R climate), contributes to preventing misconduct risk and excessive risk-taking in banking. It also explores the effects on the relationship between organizational M&R climate and perceived organizational performance of incentives associated with compensation, promotion and knowledge-sharing practices, transmitted via employee training and cross-functional collaboration. The study develops and validates measurement scales for these factors, using structural equation modeling to investigate the relationships among them on the basis of data collected from a sample of 110 bank employees in Spain. The results support the previous literature regarding the influence of organizational climate and reveal how, along with incentives and knowledge-sharing practices, it influences employees’ perceptions of organizational performance in addressing misconduct and risk-taking.
      PubDate: 2021-09-20
      DOI: 10.1057/s41283-021-00083-6
       
  • Correction to: Achieving financial stability during a liquidity crisis: a
           multi‑objective approach

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      PubDate: 2021-08-27
      DOI: 10.1057/s41283-021-00082-7
       
  • Is the ESG portfolio less turbulent than a market benchmark portfolio'

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      Abstract: Abstract Given that there is no consensus on the fact that ESG portfolios are characterized by very high returns and very low risks compared to conventional portfolios, this study aims to empirically verify whether the series of returns of an ESG portfolio is less volatile than the returns of a benchmark market portfolio. To verify this hypothesis, we used the Markov-switching GARCH models in order to model the process of the series of daily returns of the ESG portfolio “MSCI USA ESG Select,” as well as those of the market benchmark portfolio daily returns series “S&P 500,” during the period June 01, 2005 to December 31, 2020 as well as that excluding the COVID19 crisis and from June 1, 2005 to October 29, 2019. It can be concluded that the ESG portfolio “MSCI USA ESG Select” is relatively less turbulentcompared to the market benchmark portfolio “S&P 500.”
      PubDate: 2021-06-25
      DOI: 10.1057/s41283-021-00077-4
       
 
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