nep-rmg New Economics Papers
on Risk Management
Issue of 2007‒07‒27
eight papers chosen by
Stan Miles
Thompson Rivers University

  1. Lost in Transmission? Stock Market Impacts of the 2006 European Gas Crisis By Oberndorfer, Ulrich; Ulbricht, Dirk
  2. Cyclical Dynamcis in Three Industries By Hao Tan; John A. Mathews
  3. How do Croatian Companies make Corporate Risk Management Decisions: Evidence from the Field By Danijela Miloš
  4. A review of the rationales for corporate risk management: fashion or the need? By Danijela Miloš; Metka Tekavčič; Željko Šević
  5. Fundamentals, Market Timing, and Seasoned Equity Offerings By Harry DeAngelo; Linda DeAngelo; René M. Stulz
  6. Asian Currency Crises: Do Fundamentals still Matter? A Markov-Switching Approach to Causes and Timing By J L Ford; Bagus Santoso; N J Horsewood
  7. Neoclassical Factors By Long Chen; Lu Zhang
  8. The Canadian Business Cycle: A Comparison of Models By Frédérick Demers; Ryan Macdonald

  1. By: Oberndorfer, Ulrich; Ulbricht, Dirk
    Abstract: Around the turn of the year 2005/2006, the Russian freezing of natural gas exports to the Ukraine led to a European gas crisis. Using event study technique, we first investigate whether the Russian announcement of suspension of gas deliveries, this suspension itself as well as its withdrawal, had an effect on unsystematic volatility of European energy stocks. Secondly, we measure event effects on stock returns, taking volatility into account. Our results suggest that the announcement of the crisis and therefore a rise of Western Europe’s energy cost and risk tended to increase market expectations with respect to energy-related firms. In contrast, market uncertainty increased when Russia reopened its valves. One reason for these findings could be windfall profits of energy-related companies due to increasing resource and electricity prices. The existence of event-induced volatility confirms our methodological approach in order to test for abnormal returns.
    Keywords: energy security, event study, gas crisis
    JEL: G14 Q41 Q43
    Date: 2007
  2. By: Hao Tan; John A. Mathews
    Abstract: In this paper we offer a procedure to identify the industry cycles, and apply the procedure to the industrial data of three industries, namely semiconductors, PCs and FPDs. The identified cycles enable us to conduct two comparison analyses: (1) comparing the cycles with those suggested by industry experts in the corresponding industries; (2) comparing the industry cycles across the three industries. Moreover, we examine the factors possibly contributing to the cyclical dynamics of the industries built on three lines of explanations in the literature. Our vector auto regression (VAR) models establish that the dynamics of aggregate economy and capacity are among the most significant drivers in our semiconductor industry cycle.
    Keywords: Industry cycle; business cycle; technology cycle; business dynamics; VAR model
    JEL: L60 L63
    Date: 2007
  3. By: Danijela Miloš (Faculty of Economics and Business, University of Zagreb)
    Abstract: According to the Capital Asset Pricing Model and the Modigliani-Miller theorem, corporate risk management is irrelevant to the value of the firm. However, it is apparent that managers are constantly engaged in hedging activities that are directed at the reduction of corporate risks. As an explanation for this clash between theory and practice, imperfections in the capital market are used to argue for the relevance of corporate risk management function. This paper analyses corporate risk management practices and decision to hedge in large Croatian non-financial companies. It explores if decision to hedge corporate risks in the analysed companies is a function of several firm’s characteristics that have been proven as relevant in making risk management decisions.
    Keywords: corporate risk management decision, hedging rationales, shareholder value maximisation, managers’ private utility maximisation, large Croatian non-financial companies
    JEL: G32 G39
    Date: 2007–07–11
  4. By: Danijela Miloš (Faculty of Economics and Business, University of Zagreb); Metka Tekavčič; Željko Šević
    Abstract: This paper presents the extensive literature survey based both on theoretical rationales for hedging as well as the empirical evidence that support the implications of the theory regarding the arguments for the corporate risk management relevance and its influence on the company’s value. The survey of literature presented in this paper has revealed that there are two chief classes of rationales for corporate decision to hedge - maximisation of shareholder value or maximisation of managers’ private utility. If corporate hedging decisions are capable of increasing firm values, they can do so by reducing the volatility of cash flows. The literature survey presented in this paper has revealed that, by hedging financial risks firms can decrease cash flow volatility, what leads to a lower variance of firm value. This means that not only a firm value is moving less, but that the probability of occurring low values is smaller than without hedging. Reduced volatility of cash flows results in decreased costs of financial distress and expected taxes, thereby enhancing the present value of expected future cash flows. Additionally, it reduces the costs associated with information “asymmetries” by signalling management's view of the company's prospects to investors, or it reduces agency problems. In addition, reducing cash flow volatility can improve the probability of having sufficient internal funds for planned investments eliminating the need either to cut profitable projects or bear the transaction costs of obtaining external funding. However, it needs to be emphasised that there is no consensus as to what hedging rationale is the most important in explaining risk management as a corporate policy. It can be concluded that, the total benefit of hedging is the combination of all these motives and, if the costs of using corporate risk management instruments are less than the benefits provided via the avenues mentioned in this paper, or any other benefit perceived by the market, then risk management is a shareholder-value enhancing activity.
    Keywords: corporate risks, rationales of risk management
    JEL: G32 G39
    Date: 2007–07–11
  5. By: Harry DeAngelo; Linda DeAngelo; René M. Stulz
    Abstract: Firms conduct SEOs to resolve a near-term liquidity squeeze, and not primarily to exploit market timing opportunities. Without the SEO proceeds, 62.6% of issuers would have insufficient cash to implement their chosen operating and non-SEO financing decisions the year after the SEO. Although the SEO decision is positively related to a firm's market-to-book (M/B) ratio and prior excess stock return and negatively related to its future excess return, these relations are economically immaterial. For example, a 150% swing in future net of market stock returns (from a 75% gain to a 75% loss over three years) increases by only 1% the probability of an SEO in the immediately prior year. Strikingly, most firms with quintessential "market timer" characteristics fail to issue stock and a non-trivial number of mature firms do issue stock, with current and former dividend payers raising more than half of all issue proceeds.
    JEL: G31 G32 G35
    Date: 2007–07
  6. By: J L Ford; Bagus Santoso; N J Horsewood
    Abstract: This paper examines the extent to which the Asian currency crises can be accounted for by the macroeconomic fundamentals suggested by first and second generation models, exclusive of the ideas of the third generation models. In doing so we extend the literature on the earlier models by using GARCH and Path Independent Markov-Switching GARCH models to explain the market pressure on the exchange rate, and the probability of the timing of a crisis. In addition, we account for appreciations of the exchange rate. Our empirical estimates for Indonesia, South Korea, Malaysia and Thailand confirm that macroeconomic variables can explain the crises and the probability of occurrence at any time, dominating the conventionally used logit model.
    Keywords: Currency crisis, macroeconomic fundamentals, Markov-switching, volatile sate, stable state, probability of a crisis, logit model
    JEL: F31 F40
    Date: 2007–07
  7. By: Long Chen; Lu Zhang
    Abstract: The cross section of returns can largely be summarized by the market factor and mimicking portfolios based on investment-to-assets and earnings-to-assets motivated from neoclassical reasoning. The neoclassical three-factor model can capture average return variations related to momentum and financial distress anomalous to traditional factor models. The model also captures the relations of average returns with earnings-to-price, cash flow-to-price, book-to-market, dividend-to-price, long-term past sales growth, long-term prior returns, and market leverage.
    JEL: G11 G12 G14 G24 G31 G32
    Date: 2007–07
  8. By: Frédérick Demers; Ryan Macdonald
    Abstract: This paper examines the ability of linear and nonlinear models to replicate features of real Canadian GDP. We evaluate the models using various business-cycle metrics. From the 9 data generating processes designed, none can completely accommodate every business-cycle metric under consideration. Richness and complexity do not guarantee a close match with Canadian data. Our findings for Canada are consistent with Piger and Morley's (2005) study of the United States data and confirms the contradiction of their results with those reported by Engel, Haugh, and Pagan (2005): nonlinear models do provide an improvement in matching business-cycle features. Lastly, the empirical results suggest that investigating the merits of forecast combination would be worthwhile.
    Keywords: Business fluctuations and cycles; Econometric and statistical methods
    JEL: C32 E37
    Date: 2007

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