Journal of Risk and Financial Management

Research

61 pages, 725 KiB

Open AccessArticle

The Great Game Will Never End: Why the Global Financial Crisis Is Bound to Be Repeated

by David Blake

J. Risk Financial Manag. 2022, 15(6), 245; https://doi.org/10.3390/jrfm15060245 - 31 May 2022

Cited by 5 | Viewed by 4524

This article re-examines key explanations of the Global Financial Crisis—product complexity, behavioural biases in decision making, systemic risk, and regulatory arbitrage and capture—and finds a common underlying cause, namely gaming by personnel at all levels in the banking sector and its regulators. This [...] Read more.

This article re-examines key explanations of the Global Financial Crisis—product complexity, behavioural biases in decision making, systemic risk, and regulatory arbitrage and capture—and finds a common underlying cause, namely gaming by personnel at all levels in the banking sector and its regulators. This has enabled banks to use highly leveraged, maturity-mismatched investment strategies, which were designed so that the banks retained the upside rewards, but transferred the downside risks to taxpayers, leading to the privatization of profits and the socialization of losses—behaviour that has been described as ‘banksterism’. Although governments have introduced some significant mitigatory measures, they will not be effective in preventing future financial crises, because they do not and, indeed, cannot provide the appropriate incentives to end the Great Game between bankers and taxpayers, which would involve making bankers, rather than taxpayers, personally liable for losses. Full article

(This article belongs to the Special Issue Financial Markets in Times of Crisis)

25 pages, 3072 KiB

Open AccessArticle

An Early Warning System for Currency Crises in Emerging Countries

by Lutfa Tilat Ferdous, Khnd Md Mostafa Kamal, Amirul Ahsan, Nhung Hong Thuy Hoang and Munshi Samaduzzaman

J. Risk Financial Manag. 2022, 15(4), 167; https://doi.org/10.3390/jrfm15040167 - 06 Apr 2022

Cited by 3 | Viewed by 3143

Abstract

In this study we develop an early warning system (EWS) to forecast currency crises in emerging countries in Asia and Latin America, using logit regression on monthly data from 1992 to 2011. We found that macroeconomic and institutional variables are valuable indicators for [...] Read more.

In this study we develop an early warning system (EWS) to forecast currency crises in emerging countries in Asia and Latin America, using logit regression on monthly data from 1992 to 2011. We found that macroeconomic and institutional variables are valuable indicators for forecasting crises. Our results show that a low level of export growth, current account surplus/GDP, GDP growth, a high level of real exchange rate growth, import growth, and short-term debt/reserves can explain the advent of a possible currency crisis. We found that a poor law and order scenario and high external conflict can lead to a currency crisis. Additional findings include high government stability and the absence of internal conflict, which contribute to an absence of democracy, ultimately leading to a currency crisis. The policy-makers can consider taking the effective pre-emptive actions to prevent the currency crises occurring in the future. Full article

(This article belongs to the Special Issue Financial Markets in Times of Crisis)

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42 pages, 2862 KiB

Open AccessArticle

Measures of Volatility, Crises, Sentiment and the Role of U.S. ‘Fear’ Index (VIX) on Herding in BRICS (2007–2021)

by Hang Zhang and Evangelos Giouvris

J. Risk Financial Manag. 2022, 15(3), 134; https://doi.org/10.3390/jrfm15030134 - 11 Mar 2022

Cited by 5 | Viewed by 27167

Abstract

We look into determinants (volatility, crises, sentiment and the U.S. ‘fear’ index) of herding using BRICS as our sample. Investors herd selectively to crises and herding is a short-lived phenomenon. Herding was highest during the global financial crisis (only China was affected). There [...] Read more.

We look into determinants (volatility, crises, sentiment and the U.S. ‘fear’ index) of herding using BRICS as our sample. Investors herd selectively to crises and herding is a short-lived phenomenon. Herding was highest during the global financial crisis (only China was affected). There was no herding during the European debt crisis and COVID. With regard to the relationship between volatility and CSAD (cross sectional absolute deviation)/herding, a lower CSAD (movement in a specific direction) brings about less volatility. However, a high volatility amplifies herding (reduces CSAD), especially in China. Russia and South Africa are unresponsive to volatility levels (low/high) and herding. We also observe volatility heterogeneity. Different volatility measures have different effects on different markets. There is limited evidence to suggest that sentiment (based on principal component) Granger causes herding/CSAD. Herding is a period and market variant and unrelated to crises. The U.S. ‘fear’ index has a short-lived, limited effect on CSAD/herding (during COVID only) for all countries except China. In addition, Granger causality analysis indicates a two-way relationship between the U.S. ‘fear’ index and CSAD/herding, unrelated to crises. Full article

(This article belongs to the Special Issue Financial Markets in Times of Crisis)

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27 pages, 1293 KiB

Open AccessArticle

A Comparative Analysis of the Nature of Stock Return Volatility in BRICS and G7 Markets

by Lorraine Muguto and Paul-Francois Muzindutsi

J. Risk Financial Manag. 2022, 15(2), 85; https://doi.org/10.3390/jrfm15020085 - 18 Feb 2022

Cited by 10 | Viewed by 4014

Abstract

Through globalization and financial market liberalization, the opening up of markets has increased cross-border investments as investors search for higher risk-adjusted returns. This ability to invest internationally has raised the attention given to emerging markets that offer higher risk-adjusted returns relative to developed [...] Read more.

Through globalization and financial market liberalization, the opening up of markets has increased cross-border investments as investors search for higher risk-adjusted returns. This ability to invest internationally has raised the attention given to emerging markets that offer higher risk-adjusted returns relative to developed markets. However, despite the growing importance of emerging markets, the literature on the nature of volatility in global markets is typified by generalizations of findings from developed markets. To fill this gap, this study comparatively examined the nature of stock return volatility in developed G7 and emerging BRICS markets. Broad market index data and GARCH models over the period 2003:01–2020:08 were employed. The study found evidence of volatility persistence, asymmetry, mean reversion and weak evidence of a risk premium in both emerging and developed markets. There was also evidence of significant differences in the nature of volatility within the two sets of markets. These volatility patterns in both groups cast doubt on the assertion that developed markets are more informationally efficient than emerging markets. Thus, markets in the same group may not always have the same nature of volatility, especially in the wake of structural events such as the COVID-19 global pandemic. Full article

(This article belongs to the Special Issue Financial Markets in Times of Crisis)

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24 pages, 2191 KiB

Open AccessArticle

Impact of COVID-19 on the Stock Market by Industrial Sector in Chile: An Adverse Overreaction

by Pedro Antonio González and José Luis Gallizo

J. Risk Financial Manag. 2021, 14(11), 548; https://doi.org/10.3390/jrfm14110548 - 12 Nov 2021

Cited by 4 | Viewed by 3969

Abstract

This paper studies the reaction of share prices in the Chilean securities market at the sectoral level to the arrival of COVID-19 in the country. The following question is answered: Did the Chilean market act efficiently before the arrival of COVID-19? To answer [...] Read more.

This paper studies the reaction of share prices in the Chilean securities market at the sectoral level to the arrival of COVID-19 in the country. The following question is answered: Did the Chilean market act efficiently before the arrival of COVID-19? To answer this question, an event study using a 10-day investment return window was applied to the industrial sectors that make up the IPSA (Selective Stock Price Index). To obtain the abnormal returns (AR) and cumulative abnormal returns (CAR) for the event window, three models were used: (1) adjusted average return, (2) adjusted market return, and (3) the market model. The results of the study show an overreaction to market losses, except in the utilities industry, causing greater losses after the event, which shows that information is slow to be incorporated in the previous stage and suggests that the prices of the assets do not reflect all the information available in the market. A significant finding is that the Chilean stock market responded inefficiently in the face of the arrival of the pandemic. This information is useful for investors in the formation of portfolios and/or investment strategies with a view to the long term. Full article

(This article belongs to the Special Issue Financial Markets in Times of Crisis)

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17 pages, 1173 KiB

Open AccessArticle

The Impact of Unsystematic Factors on Bitcoin Value

by Zvonko Merkaš and Vlasta Roška

J. Risk Financial Manag. 2021, 14(11), 546; https://doi.org/10.3390/jrfm14110546 - 11 Nov 2021

Cited by 3 | Viewed by 2975

Abstract

The results of empirical analyses confirm that analysed unsystematic factors, the Stock-to-Flow index (S2F), and information on the Bitcoin (BTC) are directly correlated with BTC values. These results are expected and in line with the economic theory; however, this research paper aimed to [...] Read more.

The results of empirical analyses confirm that analysed unsystematic factors, the Stock-to-Flow index (S2F), and information on the Bitcoin (BTC) are directly correlated with BTC values. These results are expected and in line with the economic theory; however, this research paper aimed to investigate the impact of unsystematic factors on the value of decentralised virtual cryptocurrency BTC. Its aim was also to analyse the reasons for significant oscillations of market values in relation to the S2F and S2FX model and thus confirm the reliability of these models in the estimation of BTC value. The research further confirms the strong influence of non-technical information directly linked with the BTC. The limitations of this paper are the lack of possibilities for examining the impact of non-technical information affecting the Bitcoin price deviation regarding the S2F model. In addition to all mentioned limitations, the research results indicate the relevance of the S2F and S2FX models and show a strong impact of (half) the information on the value of cryptocurrencies. Full article

(This article belongs to the Special Issue Financial Markets in Times of Crisis)

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5 pages, 368 KiB

Open AccessCommunication

A Balanced Portfolio Can Have a Higher Geometric Return Than the Risky Asset

by Miriam Arden and Tiemen Woutersen

J. Risk Financial Manag. 2021, 14(9), 409; https://doi.org/10.3390/jrfm14090409 - 01 Sep 2021

Cited by 1 | Viewed by 1604

Abstract

In the U.S., the geometric return on stocks has been higher than the geometric return on bonds over long periods. We study whether balanced portfolios have a larger geometric return (and expected log return) than stock portfolios when the risk premium is low. [...] Read more.

In the U.S., the geometric return on stocks has been higher than the geometric return on bonds over long periods. We study whether balanced portfolios have a larger geometric return (and expected log return) than stock portfolios when the risk premium is low. We use a theoretical model and historical data and find that this is the case. This low-risk premium is often observed in other developed countries. Further, in the past two decades, a balanced portfolio with 70% or 90% invested in the U.S. stock market (with the remainder invested in U.S. government bonds) performed better than a 100% stock or bond portfolio. The reason for this is that a pure stock portfolio loses a large fraction of its value in a downturn. We show that this result is not driven by outliers, and that it occurs even when the returns are log normally distributed. This result has broad policy implications for the construction of pension systems and target-date mutual funds. Full article

(This article belongs to the Special Issue Financial Markets in Times of Crisis)

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22 pages, 3947 KiB

Open AccessArticle

COVID-19 and Islamic Stock Index: Evidence of Market Behavior and Volatility Persistence

by Adil Saleem, Judit Bárczi and Judit Sági

J. Risk Financial Manag. 2021, 14(8), 389; https://doi.org/10.3390/jrfm14080389 - 20 Aug 2021

Cited by 14 | Viewed by 3299

Abstract

The aftermath of the COVID-19 pandemic is not limited to human lives and health sectors. It has also changed social and economic aspects of the world. This study investigated the Islamic stock market’s reaction and changes in volatility before and during this pandemic. [...] Read more.

The aftermath of the COVID-19 pandemic is not limited to human lives and health sectors. It has also changed social and economic aspects of the world. This study investigated the Islamic stock market’s reaction and changes in volatility before and during this pandemic. The market model of event study methodology was employed to analyze Islamic stock market reactions in nine different markets around the globe. To examine changes in volatility and persistence of risk, the generalized autoregressive conditional heteroscedasticity (GARCH) method was used. Nine Islamic stock indices were selected for this study from the Thomson Reuters data stream. The results suggest that, in the short run, the Islamic Australian stock index and Islamic GCC stock index remained stable for the first 15 days following news of the pandemic. The Islamic stock indexes of Qatar, UAE, ASEAN, MENA, MENASA, and Bahrain were significantly affected by the outbreak in the short-term. On the other hand, the volatility of Islamic stock indices was substantially amplified after the global health crisis was declared by the WHO. Moreover, volatility shocks tended to persist for a longer period after COVID-19. Full article

(This article belongs to the Special Issue Financial Markets in Times of Crisis)

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29 pages, 2277 KiB

Open AccessArticle

Risk Spillover during the COVID-19 Global Pandemic and Portfolio Management

by Mohamed Yousfi, Abderrazak Dhaoui and Houssam Bouzgarrou

J. Risk Financial Manag. 2021, 14(5), 222; https://doi.org/10.3390/jrfm14050222 - 14 May 2021

Cited by 18 | Viewed by 4532

Abstract

This paper aims to examine the volatility spillover, diversification benefits, and hedge ratios between U.S. stock markets and different financial variables and commodities during the pre-COVID-19 and COVID-19 crisis, using daily data and multivariate GARCH models. Our results indicate that the risk spillover [...] Read more.

This paper aims to examine the volatility spillover, diversification benefits, and hedge ratios between U.S. stock markets and different financial variables and commodities during the pre-COVID-19 and COVID-19 crisis, using daily data and multivariate GARCH models. Our results indicate that the risk spillover has reached the highest level during the COVID-19 period, compared to the pre-COVID period, which means that the COVID-19 pandemic enforced the risk spillover between U.S. stock markets and the remains assets. We confirm the economic benefit of diversification in both tranquil and crisis periods (e.g., a negative dynamic conditional correlation between the VIX and SP500). Moreover, the hedging analysis exhibits that the Dow Jones Islamic has the highest hedging effectiveness either before or during the recent COVID19 crisis, offering better resistance to uncertainty caused by unpredictable turmoil such as the COVID19 outbreak. Our finding may have some implications for portfolio managers and investors to reduce their exposure to the risk in their portfolio construction. Full article

(This article belongs to the Special Issue Financial Markets in Times of Crisis)

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16 pages, 936 KiB

Open AccessArticle

Month-End Regularities in the Overnight Bank Funding Markets

by Ahmed S. Baig and Drew B. Winters

J. Risk Financial Manag. 2021, 14(5), 204; https://doi.org/10.3390/jrfm14050204 - 03 May 2021

Cited by 1 | Viewed by 1816

Abstract

The money market rates in the United States exhibit various calendar patterns that are grounded in institutional and regulatory factors. In this paper, we document a new regularity in the overnight fed funds market. Specifically, we identify patterns of decreased volatility along with [...] Read more.

The money market rates in the United States exhibit various calendar patterns that are grounded in institutional and regulatory factors. In this paper, we document a new regularity in the overnight fed funds market. Specifically, we identify patterns of decreased volatility along with consistent and significant month-end rate drops in the fed fund rates. Our findings suggest that short-term liquidity requirements of the Basel III reforms are, in part, responsible for the regularity in fed funds. Full article

(This article belongs to the Special Issue Financial Markets in Times of Crisis)

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18 pages, 397 KiB

Open AccessArticle

Relative Stock Market Performance during the Coronavirus Pandemic: Virus vs. Policy Effects in 80 Countries

by Richard C. K. Burdekin and Samuel Harrison

J. Risk Financial Manag. 2021, 14(4), 177; https://doi.org/10.3390/jrfm14040177 - 12 Apr 2021

Cited by 11 | Viewed by 3132

Abstract

This paper examines relative stock market performance following the onset of the coronavirus pandemic for a sample of 80 stock markets. Weekly data on coronavirus cases and deaths are employed alongside Oxford indices on each nation’s stringency and government support intensity. The results [...] Read more.

This paper examines relative stock market performance following the onset of the coronavirus pandemic for a sample of 80 stock markets. Weekly data on coronavirus cases and deaths are employed alongside Oxford indices on each nation’s stringency and government support intensity. The results are broken down both by month and by geographical region. The full sample results show that increased coronavirus cases exert the expected overall effect of worsening relative stock market performance, but with little consistent impact of rising deaths. There is some evidence of significantly negative stock market effects arising from lockdowns as reflected in the Oxford stringency index. There are also positive reactions to government support in March and December in the overall sample—combined with some additional pervasive effects seen in mid-2020 in Latin America. Full article

(This article belongs to the Special Issue Financial Markets in Times of Crisis)

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