J. Risk Financial Manag., Volume 11, Issue 3 (September 2018) – 26 articles

A lot of strategies for Take Profit and Stop Loss functionalities have been propounded and scrutinized over the years. In this paper, we examine various strategies added to a simple MACD automated trading system and used on selected assets from Forex, Metals, Energy, and Cryptocurrencies categories and afterwards, we compare and contrast their results. We conclude that Take Profit strategies based on faster take profit signals on MACD are not better than a simple MACD strategy and of the different Stop Loss strategies based on ATR, the sliding and variable ATR window has the best results for a period of 12 and a multiplier of 6. For the first time, to the best of our knowledge, we implement a combination of an adaptive MACD Expert Advisor that uses back-tested optimized parameters per asset with price levels defined by the ATR indicator, used to set limits for Stop Loss. Full article

Given the contradiction between the current demands for sustainability and the way that the financial system works, this paper explored in a retrospective and a prospective view, Romanian Public Finance Sustainability, highlighting the major challenges and vulnerabilities. Relating to the retrospective part, we concentrated mainly on empirical tests on Romanian government solvency between the period 1990–2020, by applying un it root and co-integration tests. To gain a better, general understanding of the behavior of policy-makers, in the second part we used a scenario analysis of budgetary adjustment in the short and medium run under alternative hypotheses. The results provided formal proof that policy makers decisions face critical and complex questions, and the way in which they manage fiscal stimuli has a direct implication on the sustainability of the country and on the lax implementation of fiscal policy. Full article

This paper studies U.K. regional house prices across nine regions from January 2005 to December 2017 to identify regional versus national effects on house prices and potential house price bubbles. It uses a version of the Gordon dividend discount model, modelling house prices as the present value of imputed rents as a measure of fundamentals. It differentiates between long-term and short-term effect using pooled mean group (PMG) and mean group estimation (MG) to determine variations in regional house prices during different periods relating to the most recent financial crisis. The results confirm that the crisis had differentiating effects in the short term, but there is reversion back to long-run fundamentals. Regional trend analysis shows that the house price growth in the regions has been affected differently in the short run and each region has varying long-run fundamentals. Residential property values in London have shown strongest short-run momentum. Full article

We investigate three issues about the impact of insider trades and institutional holdings on seasoned equity offerings (SEOs). First, we test how insider trades affect the trading behavior of institutional investors in SEOs. Second, we test whose trading behavior, either insiders or institutional investors, has greater explanatory power for the performance of SEO firms after issuing new stocks. Third, we analyze the industry-wide spillover effects of insider trades and institutional holdings. Empirically, we find that insiders and institutional investors of SEO firms may utilize similar information in their transactions because insider trades induce similar trading behavior for institutional investors. In addition, insider trades, relative to institutional holdings, have greater explanatory power for SEO firm’s long-term performance. Finally, compared with insider trades, institutional holdings have a more significant spillover effect in the industry of SEO firms. Full article

In this paper, we let the data speak for itself about the existence of volatility feedback and the often debated risk–return relationship. We do this by modeling the contemporaneous relationship between market excess returns and log-realized variances with a nonparametric, infinitely-ordered, mixture representation of the observables’ joint distribution. Our nonparametric estimator allows for deviation from conditional Gaussianity through non-zero, higher ordered, moments, like asymmetric, fat-tailed behavior, along with smooth, nonlinear, risk–return relationships. We use the parsimonious and relatively uninformative Bayesian Dirichlet process prior to overcoming the problem of having too many unknowns and not enough observations. Applying our Bayesian nonparametric model to more than a century’s worth of monthly US stock market returns and realized variances, we find strong, robust evidence of volatility feedback. Once volatility feedback is accounted for, we find an unambiguous positive, nonlinear, relationship between expected excess returns and expected log-realized variance. In addition to the conditional mean, volatility feedback impacts the entire joint distribution. Full article

The symmetrical relationship between currency and equity markets has gained much attention among academicians and policy makers in the recent era. Many studies conducted on this relationship have concluded that there is short-run relationship between these variables and found less evidence about a long-run relationship. Moreover, all previous studies supposed the linear or symmetrical relationship between these variables. In this study, we use daily time series data from G8+5 countries and Pakistan for 2000–2016 and apply linear and non-linear autoregressive distributed lag (ARDL) to check the symmetrical and asymmetrical relationship between currency and equity markets. Results have shown that there are asymmetrical linkages between the currency and equity markets. Full article

We explore the relationship between the degree of financial risk disclosure and a firm’s financial attributes. Financial risk disclosure indices (FRDIs) are calculated based on a set of 30 disclosure identifiers through content analysis of the annual reports of 48 manufacturing companies over a six-year period (2010–2015) in Bangladesh. We find no common practice among the companies in disclosing financial risk by integrating a customized financial risk disclosure into their financial reporting process. The results indicate that firm size, financial performance, and auditor type are positively and significantly associated with the level of financial risk disclosure. Full article

This paper compares the finite sample performance of three non-parametric threshold estimators via the Monte Carlo method. Our results indicate that the finite sample performance of the three estimators is not robust to the position of the threshold level along the distribution of the threshold variable, especially when a structural change occurs at the tail part of the distribution. Full article

Bitcoin is an exciting new financial product that may be useful for inclusion in investment portfolios. This paper investigates the implications of replacing gold in an investment portfolio with bitcoin (“digital gold”). Our approach is to use several different multivariate GARCH models (dynamic conditional correlation (DCC), asymmetric DCC (ADCC), generalized orthogonal GARCH (GO-GARCH)) to estimate minimum variance equity portfolios. Both long and short portfolios are considered. An analysis of the economic value shows that risk-averse investors will be willing to pay a high performance fee to switch from a portfolio with gold to a portfolio with bitcoin. These results are robust to the inclusion of trading costs. Full article

In this paper, we apply the wavelet methods in the popular Augmented Dickey-Fuller and M types of unit root tests. Moreover, we provide an extensive comparison of the wavelet based unit root tests which also includes the recent contributions in the literature. Moreover, we derive the asymptotic properties of the wavelet based unit root tests under generalized least squares detrending mechanism. We demonstrate that the wavelet based M tests exhibit better size performance even in problematic cases such as the presence of negative moving average innovations. However, the power performances of the wavelet based unit root tests are quite similar to each other. Full article

This paper examines the effect of financial development on countries’ production efficiency levels. By applying a probabilistic framework it develops robust (Order-m) time-dependent conditional nonparametric frontier estimators in order to measure 87 countries’ production efficiency levels over the period 1970–2014. In order to examine the effect of time and domestic credit on countries’ production efficiency levels, a second-stage nonparametric econometric analysis is performed. Specifically, generalized additive models with tensor products and cubic spline penalties are applied in order to investigate the potential nonlinear behavior of financial development on countries’ production efficiency levels. The results reveal that the effect of financial development on production efficiency is nonlinear. Specifically, the effect is positive up to a certain credit level after which it becomes negative. Finally, the evidence suggests that the effect is influenced by a country’s financial system, institutional, and development characteristics. Full article

This paper examines the steady state properties of the Threshold Vector Autoregressive model. Assuming that the trigger variable is exogenous and the regime process follows a Bernoulli distribution, necessary and sufficient conditions for the existence of stationary distribution are derived. A situation related to so-called “locally explosive models”, where the stationary distribution exists though the model is explosive in one regime, is analysed. Simulations show that locally explosive models can generate some of the key properties of financial and economic data. They also show that assessing the stationarity of threshold models based on simulations might well lead to wrong conclusions. Full article

This paper develops a nonparametric method to estimate a conditional quantile function for a panel data model with an additive individual fixed effects. The proposed method is easy to implement, it does not require numerical optimization and automatically ensures quantile monotonicity by construction. Monte Carlo simulations show that the proposed estimator performs well in finite samples. Full article

This study examines whether state-owned banks face political pressure and whether the improvement in political institutions alleviates this pressure. The theory of political benefits argues that politicians use state-owned banks for political purposes such as obtaining and maintaining political support. We reviewed extant empirical research and found that the existing evidence is mixed; some studies support while others reject the theory. In this backdrop, we analyzed a sample of 185 state-owned banks from 51 developing countries over the period 1998–2012 and provide renewed evidence supporting the theory. Specifically, we found that state-owned banks face significant political pressure in developing countries; that is, they lend more and earn less in election years. Next, we observed that the political pressure is prevalent only in the countries with weak political institutions. Strong political institutions in the form of higher constraints on policy change decisions of incumbent government and higher democratic accountability are helpful in eliminating political pressure on state-owned banks in developing countries. Full article

This paper explores the implications of a housing market bubble for three critical elements of mortgage contract design: difference between term to maturity and amortization period; prepayment options; and, lender recourse in the event of default. Using an extension of classical immunization theory, this paper provides equilibrium conditions demonstrating the risk reduction benefits of shorter term to contract maturity at origination for lenders of long amortization mortgage contracts. In addition, the risks of underpricing prepayment and no recourse default options in the mortgage contract when compared with full recourse mortgage contracts having yield maintenance prepayment penalties are explored by contrasting the ability of US and Canadian mortgage funding systems to withstand a housing market bubble collapse that might occur. Full article

The aim of this paper is to investigate whether different market regimes affect bidding behavior in housing auctions. Taking advantage of special circumstances in the Norwegian housing market in 2015 and 2016, we conduct a survey involving 1803 respondents in three of Norway’s largest cities, Oslo, Stavanger and Trondheim. In the Norwegian housing market 90 percent of dwellings are sold after an English auction. Norway has a rather homogeneous market, with the same laws, traditions, interest rates and approximately the same tax rates applying across the country. However, in December 2016, the two-year nominal house price increase was 34.8 percent in Oslo and 14.8 percent in Trondheim, whereas prices fell 7.8 percent over the same period in Stavanger. We find that households in booming housing markets appear to believe that a more aggressive bidding strategy is advisable to obtain a dwelling at the lowest possible price, compared with households in bust markets. Evidence suggesting that bidders in booming markets are less likely to decide on a maximum price limit before an auction commences substantiates this finding. In addition, we find that bidders in booming markets have a weaker reliance on real estate agents. Full article

The current discussion about a “risk culture” in financial services was triggered by the recent series of financial crises. The last decade saw a long list of hubris, misconduct and criminal activities by human beings on a single or even a collective basis in banks, in the industry or in the whole economy. As a counter-reaction, financial authorities called for a guidance by a “new” risk culture in financial institutions based on a set of abstract, formal, and normative governance processes. While traditional risk research in economics and in banking was focused on the statistical aspects of risk as the probability of loss multiplied by the amount of loss, culture is a paraphrase for the behavior in collectives and dynamics of organization found in human societies. Therefore, a “risk culture” should link the normative concepts of risk with the positive “real-world” decision-making in financial services. This paper will describe a novel view on “risk culture” from the perspective of human beings interacting in dynamical and intertemporal commercial relations. In this context “risk” is perceived by economic agents ex−ante as the consequence of the time lag between the present and the uncertain future development (compared to a probability distribution calculated by observers ex−post). For all those individual decisions—to be made under uncertainty—future “risk” includes the so-called “normal accidents”, i.e., failures that will happen at some uncertain point in time but are inevitable, and the only questions are when failure will happen and how to maintain function in the first line of defense. Finally, the shift from an abstract definition of “risk” as a probability distribution to a role model of “honorable merchants” as a benchmark for significant individual decision-making with individual responsibilities for the uncertain future outcome provides a new framework to discuss the responsibilities in the financial industry. Full article

This study aims to offer a new estimate of the hedonic price function of residential areas in Japanese metropolitan areas, focusing on the reasons for residential preferences. More specifically, it introduces two new explanatory variables—‘regional vulnerability’ and ‘accessibility to destination stations’—and determines their usefulness. Based on the evaluation done in this study, the hedonic price function mentioned above showed 60% interpretability (as compared to 52% interpretability by hedonic price function using only conventional explanatory variables.) In addition, the significance level of both the explanatory variables was low, and the land price changed by 9% as the regional vulnerability changed by 1 grade. Furthermore, residents placed great emphasis on both variables. This made it evident that the introduction of the two explanatory variables that reflect the reasons for residential preferences specific to Japanese metropolitan areas was reasonable. Full article

In this paper, we examine the effect of emissions, as measured by carbon dioxide (CO${}_2$), on economic growth among a set of OECD countries during the period 1981–1998. We examine the relationship between total factor productivity (TFP) growth and emissions using a semiparametric smooth coefficient model that allow us to directly estimate the output elasticity of emissions. The results indicate that there exists a monotonically-increasing relationship between emissions and TFP growth. The output elasticity of CO${}_2$ emissions is small with an average sample value of 0.07. In addition, we find an average contribution of CO${}_2$ emissions to productivity growth of about 0.063 percent for the period 1981–1998. Full article

A new comprehensive approach to nonlinear time series analysis and modeling is developed in the present paper. We introduce novel data-specific mid-distribution-based Legendre Polynomial (LP)-like nonlinear transformations of the original time series $\left\{Y\right(t\left)\right\}$ that enable us to adapt all the existing stationary linear Gaussian time series modeling strategies and make them applicable to non-Gaussian and nonlinear processes in a robust fashion. The emphasis of the present paper is on empirical time series modeling via the algorithm LPTime. We demonstrate the effectiveness of our theoretical framework using daily S&P 500 return data between 2 January 1963 and 31 December 2009. Our proposed LPTime algorithm systematically discovers all the ‘stylized facts’ of the financial time series automatically, all at once, which were previously noted by many researchers one at a time. Full article

We constructed forecasts of earnings forecasts using data on 406 firms and forecasts made by 5419 individuals with on average 25 forecasts per individual. We verified previously found predictors, which are the average of the most recent available forecast for each forecaster and the difference between the average and the forecast that this forecaster previously made. We extended the knowledge base by analyzing the unpredictable component of the earnings forecast. We found that for some forecasters the unpredictable component can be used to improve upon the predictable forecast, but we also found that this property is not persistent over time. Hence, a user of the forecasts cannot trust that the forecaster will remain to be of forecasting value. We found that, in general, the larger is the unpredictable component, the larger is the forecast error, while small unpredictable components can lead to gains in forecast accuracy. Based on our results, we formulate the following practical guidelines for investors: (i) for earnings analysts themselves, it seems to be the safest to not make large adjustments to the predictable forecast, unless one is very confident about the additional information; and (ii) for users of earnings forecasts, it seems best to only use those forecasts that do not differ much from their predicted values. Full article

In the current turbulent market, firms spend lots of tangible and intangible resources to gain competitive advantage and superior performance. Prior studies have discussed several determinants of competitive advantage and performance, particularly in developed economies, whereas small- and medium-sized enterprises (SMEs) in emerging economies have received minor attention. This study examines the mediating role of competitive advantage between enterprise risk management practices and SME performance and the moderating role of financial literacy between enterprise risk management practices and competitive advantage. A structured questionnaire is used to collect data from 304 SMEs operating in the emerging market of Pakistan. The hypotheses of the proposed study are tested through Structural Equation Modeling (SEM) in Analysis of a Moment Structures (AMOS). The results indicate that enterprise risk management practices significantly influence competitive advantage and SME performance. Competitive advantage partially mediates the relationship between enterprise risk management practices and SME performance. Additionally, financial literacy significantly moderates the relationship between enterprise risk management practices and competitive advantage. Firms are advised to implement formal enterprise risk management practices to gain competitive advantage and superior performance. Top managers need to have enough financial education that they will be able to perform risk management practices in an efficient way to gain a competitive position in the market. Implications for practices have been discussed in detail. Full article

In this paper, we analyse the response of Japan’s foreign exchange and stock markets to the outcomes of the Brexit referendum and the U.S. presidential election. We estimate the changes in returns of the daily exchange rates of the yen (JPY), the daily closing price index of the Nikkei and the dynamic conditional correlation (DCC) coefficients between the JPY and the Nikkei caused by both events. The empirical findings showed a significant change in the daily logarithmic returns of exchange rates of the JPY and the closing price index of the Nikkei, as well as their time-varying comovement (DCC) after both events. In general, the impact of the U.S. elections on financial markets and their dynamic correlation was stronger than the impact of the Brexit referendum. Full article

Risk management has been gaining tremendous fame for the last couple of years. Firms in developed and developing countries are facing a variety of risks, i.e., foreign exchange risk, interest rate risk, commodity price risk, and equity risk. It calls for such hedging techniques that mitigate this risk level, thus, allowing corporations to enjoy a solid return. This paper draws attention to a new determinant of hedging, i.e., the role of ownership concentration in risk management using derivative instruments. For this purpose, a sample data of 101 non-financial firms listed on the Pakistan Stock Exchange (PSX) for six years, ranging from 2010–2016, is used. The Mann-Whitney test for difference in users and no-users is applied along with logistic regression to check the effect of ownership concentration on derivative usage. The finding of this study reveals that concentrated owners are less likely to use derivatives for hedging purposes due to concentrated owners’ interests (top five shareholders & largest shareholder, family owners). Whereas, executives are more likely to engage in the use of derivatives to increase the value of their stocks. However, associated companies are significantly less involved in hedging activities. These results are extremely advantageous for policymakers in corporations to create a more stable corporate environment. Full article

This study analyzes the determinants of stock market co-movement between Pakistan and Asian emerging economies for the period 2001 to 2015. Augmented Dickey and Fuller (ADF) and Philips-Perron (PP) tests are applied to check co-integration between their stock markets. Results of this study reveal that there is long-term integration between the stock market of Pakistan and the stock markets of China, India, Indonesia, Korea, Malaysia and Thailand. This study reports the driving forces of the co-movement between the Pakistan and Asian emerging markets where co-integration is found. Results of the panel data reveal that there are significant underlying forces of integration between Pakistan and each Asian emerging stock market. The findings of this study have significant implications for policy makers in Pakistan who are designing strategies for macroeconomic harmonization and stability of the country’s economy against financial shocks. Full article

Extensive research results in inconsistent findings regarding the advantages and risks of exchanging management control information in collaborative relationships between buyers and suppliers. This inconsistency is due, in part, to ignoring whether the information shared is useful. This study analyzes the influence of transaction characteristics (asset specificity, opportunistic behaviors, and resource control) on the usefulness of the format and the content of such sharing. Samples of purchasing and sales managers differ in how their assessment of this usefulness reflects the influence of transactional characteristics, as well as the format (timeliness, aggregation, and integration) and content (scope and symmetry) of the management control information itself. Full article