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on Risk Management |
| By: | Zongxia Liang; Zhaojie Ren; Bin Zou |
| Abstract: | This paper studies an optimal insurance problem for a utility-maximizing buyer of insurance, subject to the seller's endogenous default and background risk. An endogenous default occurs when the buyer's contractual indemnity exceeds the seller's available reserve, which is random due to the background risk. We obtain an analytical solution to the optimal contract for two types of contracts, differentiated by whether their indemnity functions depend on the seller's background risk. The results shed light on the joint effect of the seller's default and background risk on the buyer's insurance demand. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.05672 |
| By: | Magomedov, Said; Fantazzini, Dean |
| Abstract: | The popularity of cryptocurrency exchanges has surged in recent years, accompanied by the proliferation of new digital platforms and tokens. However, the issue of credit risk and the reliability of crypto exchanges remain critical, highlighting the need for indicators to assess the safety of investing through these platforms. This study examines a unique, hand-collected dataset of 228 cryptocurrency exchanges operating between April 2011 and May 2024. Using various machine learning algorithms, we identify the key factors contributing to exchange shutdowns, with trading volume, exchange lifespan, and cybersecurity scores emerging as the most significant predictors. Since individual machine learning models often capture distinct data characteristics and exhibit varying error patterns, we employ a forecast combination approach by aggregating multiple predictive distributions. Specifically, we evaluate several specifications of the generalized linear pool (GLP), beta-transformed linear pool (BLP), and beta-mixture combination (BMC). Our findings reveal that the beta-transformed linear pool and the beta-mixture combination achieve the best performances, improving forecast accuracy by approximately 4.1% based on a robust H-measure, which effectively addresses the challenges of misclassification in imbalanced datasets. |
| Keywords: | forecast combination; exchange; bitcoin; crypto assets; cryptocurrencies; credit risk; bankruptcy; default probability |
| JEL: | C35 C51 C53 C58 G12 G17 G32 G33 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123416 |
| By: | Soane, Emma |
| Abstract: | Managers in many kinds of organizations encounter risks in their daily work. A key challenge involves finding ways to manage risks and prevent harm to individuals or organizations, while retaining risks to realize opportunities. These pressures create a tension between risk management and risk retention that prevails in many sectors and is especially consequential in organizations where failures to address it may be fatal. I use inductive analysis to explore qualitative data from 72 television production company managers whose work has potential for trauma, injury and death as well as success. I find the tension between risk management and risk retention can be understood in relation to perceptions and goals. I contribute to theorizing about organizational paradox by showing how perceptions of the tension differ at the individual level. Some managers perceive the tension as a trade‐off, focus on risk management and emphasize safety goals. Other managers perceive the tension as a paradox and emphasize wider performance goals that encompass safety and risk. These managers use their agency to foster empowerment and creativity. Doing so enhances to both risk management and risk retention, creating a dynamic equilibrium that reduces harm, realizes opportunities and enriches performance. |
| Keywords: | risk management; performance; goals; risk retention; paradox |
| JEL: | J50 |
| Date: | 2025–03–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126951 |
| By: | Maria Debora Braga (SDA Bocconi School of Management, Bocconi University, Milano, Italy - Department of Economics and Political Sciences, University of Aosta Valley, Aosta, Italy); Luigi Riso (Dipartimento di Politica Economica, DISCE, Università Cattolica del Sacro Cuore, Milano, Italy); Maria Grazia Zoia (Dipartimento di Politica Economica, DISCE, Università Cattolica del Sacro Cuore, Milano, Italy) |
| Abstract: | The theoretical properties of novel risk-based asset allocation approaches considering the portfolio kurtosis (proxied by the fourth root of the portfolio fourth moment) exclusively or combined with volatility in the reference risk measure are developed. The properties of this mixed risk measure are analyzed and its outcomes, when implemented in the typical risk-based allocation strategies, are compared with those from the standard polynomial goal programming (PGP), either in its standard form or in a novel version, specifically designed to account for the rationale of the risk-parity allocation approach. From this, an interesting and original interpretation of the PGP as a risk-based asset allocation approach can be learnt. The novel risk-based asset allocation approaches are then applied primarily in-sample to provide validation and secondarily out-of-sample to learn their “behavioural characteristics” when they are implemented within an equity investment universe using datasets of monthly and weekly returns from July 2002 to June 2022. This paper extends the existing literature by identifying and demonstrating analytically the clear hierarchy of portfolio kurtosis that, in an increasing order, starts with the Minimum Kurtosis strategy, goes through the Kurtosis-based Risk Parity and arrives to the Equally Weighted Strategy. |
| Keywords: | Kurtosis, Risk-Based Strategies, Risk parity, Risk diversification, Asset allocation, Polynomial Goal Programming |
| JEL: | G11 C10 C61 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ctc:serie5:dipe0044 |
| By: | Hanyue Huang; Qiguo Sun; Xibei Yang |
| Abstract: | Previous research on option strategies has primarily focused on their behavior near expiration, with limited attention to the transient value process of the portfolio. In this paper, we formulate Iron Condor portfolio optimization as a stochastic optimal control problem, examining the impact of the control process \( u(k_i, \tau) \) on the portfolio's potential profitability and risk. By assuming the underlying price process as a bounded martingale within $[K_1, K_2]$, we prove that the portfolio with a strike structure of $k_1 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.12397 |
| By: | Matthias R. Fengler (University of St. Gallen - SEPS: Economics and Political Sciences; Swiss Finance Institute); Winfried Koeniger (University of St. Gallen; CESifo (Center for Economic Studies and Ifo Institute); Center for Financial Studies (CFS); IZA Institute of Labor Economics; Swiss Finance Institute); Stephan Minger (University of St. Gallen) |
| Abstract: | We analyze the transmission of monetary policy to the costs of hedging using options order book data. Monetary policy transmits to hedging costs both by changing the relevant state variables, such as the value of the underlying, its volatility and tail risk, and by affecting option market liquidity, including the bid-ask spread and market depth. Our estimates suggest that during the peak of the pandemic crisis in March 2020, monetary policy decisions resulted in substantial changes in hedging costs even within short intraday time windows around the decisions, amounting approximately to the annual expenses of a typical equity mutual fund. |
| Keywords: | Liquidity, Monetary policy, Option order books, Option markets, COVID-19 pandemic |
| JEL: | G13 G14 D52 E52 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2503 |
| By: | Di Wu |
| Abstract: | Bitcoin, widely recognized as the first cryptocurrency, has shown increasing integration with traditional financial markets, particularly major U.S. equity indices, amid accelerating institutional adoption. This study examines how Bitcoin exchange-traded funds and corporate Bitcoin holdings affect correlations with the Nasdaq 100 and the S&P 500, using rolling-window correlation, static correlation coefficients, and an event-study framework on daily data from 2018 to 2025.Correlation levels intensified following key institutional milestones, with peaks reaching 0.87 in 2024, and they vary across market regimes. These trends suggest that Bitcoin has transitioned from an alternative asset toward a more integrated financial instrument, carrying implications for portfolio diversification, risk management, and systemic stability. Future research should further investigate regulatory and macroeconomic factors shaping these evolving relationships. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.09911 |
| By: | M\"ucahit Ayg\"un; Roger J. A. Laeven; Mitja Stadje |
| Abstract: | We introduce a model-free preference under ambiguity, as a primitive trait of behavior, which we apply once as well as repeatedly. Its single and double application yield simple, easily interpretable definitions of ambiguity aversion and ambiguity prudence. We derive their implications within canonical models for decision under risk and ambiguity. We establish in particular that our new definition of ambiguity prudence is equivalent to a positive third derivative of: (i) the capacity in the Choquet expected utility model, (ii) the dual conjugate of the divergence function under variational divergence preferences and (iii) the ambiguity attitude function in the smooth ambiguity model. We show that our definition of ambiguity prudent behavior may be naturally linked to an optimal insurance problem under ambiguity. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.13143 |
| By: | Bhattarai, Keshab; Prasuna, Asha; Kumar, SNV Siva |
| Abstract: | Primary survey data of Indian M&A transactions were used to test the hypotheses on latent risk factors. A structural equation model (SEM) model was estimated to assess the composite risk factors considering financial, non-financial, and sustainability risks. The results reveal that reforms in management and human resources can control up to 23 percent of overall risk. Ensuring appropriate technology will take away another 22 percent risk. Macroeconomic stability can reduce risks of the firms by 12 percent. Then sustainability factors reduce risk by 11 percent and another 11 percent of risk can be controlled by a sound financial sector. Thus overall novelty of this research is to critically evaluate the existing framework and propose a holistic M&A risk assessment model that captures contemporary technical, management and HR, economic issues underlying challenges of business enterprises in India. The research gap in assessing sustainability M&A risks is an extended version of the existing M&A synergy gain theory. |
| Keywords: | Rating and Rating Agencies, Financial Risk Management, Mergers & Acquisitions |
| JEL: | G34 O53 |
| Date: | 2024–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123385 |
| By: | Georges Prat (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Remzi Uctum (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This paper contributes to the literature on crude oil risk premiums by providing ex-ante measures of these premiums using survey oil price expectations over an extended period. These ex-ante premiums are uncorrelated with ex-post premiums commonly used in existing studies, whereas they are more relevant as they directly influence investors' decision-making. Utilizing a portfolio choice model, we explain the ex-ante premium as the product of the price of risk and the expected variance, both varying over time and across horizons. We estimate this relationship using a multivariate state-space framework. From our estimated risk prices we find, on average, that investors exhibit risk-seeking behaviour in the short term and risk aversion in the long term. It follows that the term structure of oil risk premiums are prominently upward-sloping. Additionally, consistent with the prospect theory, investors are found to be predominantly risk averse in a context of expected gains and risk-seeking in a context of expected losses. Finally, the dynamics of risk prices are shown to be driven by identifiable economic, financial, and oil market-related factors. |
| Keywords: | Oil price expectations, Ex-ante oil risk premium, Survey data, Prospect theory, D81, G11, Q43 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04873466 |
| By: | Sockin, Jason (Cornell University); Sockin, Michael (University of Texas at Austin) |
| Abstract: | Firms differ in the extent to which they use variable pay. Using U.S. employeeemployer matched data on variable pay from Glassdoor, we document such dispersion and find workers are exposed to firm-level shocks through variable pay. Credit rating downgrades from investment to speculative grade, negative shocks to financial or operational performance, and greater exposure to a financial crisis, as proxied for by the collapse of Lehman Brothers, induce firms to shift compensation toward base pay. Increased use of variable pay is associated with greater earnings variance for workers but less volatile growth for firms. We rationalize these findings in a model of risk sharing between a risk-averse firm and workers with limited commitment. |
| Keywords: | risk sharing, bonuses, firm-specific shocks, employment volatility, layoffs |
| JEL: | J33 E24 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17644 |
| By: | Ryan Niladri Banerjee; Julián Caballero; Enisse Kharroubi; Renée Spigt; Egon Zakrajsek |
| Abstract: | Natural language text analysis of 80, 000 company financial statements published by 14, 000 non-financial firms in the euro area, United Kingdom and United States shows that around 50% of firms with variable rate debt hedge their interest rate risk. Firms that hedge interest rate risk tend to be larger and have smaller cash buffers and lower equity valuations. When interest rates rise, firms that hedge their interest rate risk experience a smaller negative impact on their interest coverage ratios and market valuations. They are also better able to maintain the size of their workforce. Our analysis highlights the importance of, and the challenges in, getting a comprehensive overview of hedging activity among non-financial firms. |
| Date: | 2023–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:81 |
| By: | Keon Vin Park |
| Abstract: | Optimizing portfolio performance is a fundamental challenge in financial modeling, requiring the integration of advanced clustering techniques and data-driven optimization strategies. This paper introduces a comparative backtesting approach that combines clustering-based portfolio segmentation and Sharpe ratio-based optimization to enhance investment decision-making. First, we segment a diverse set of financial assets into clusters based on their historical log-returns using K-Means clustering. This segmentation enables the grouping of assets with similar return characteristics, facilitating targeted portfolio construction. Next, for each cluster, we apply a Sharpe ratio-based optimization model to derive optimal weights that maximize risk-adjusted returns. Unlike traditional mean-variance optimization, this approach directly incorporates the trade-off between returns and volatility, resulting in a more balanced allocation of resources within each cluster. The proposed framework is evaluated through a backtesting study using historical data spanning multiple asset classes. Optimized portfolios for each cluster are constructed and their cumulative returns are compared over time against a traditional equal-weighted benchmark portfolio. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.12074 |
| By: | Boris Hofmann; Ko Munakata; Tom Rosewall; Damiano Sandri |
| Abstract: | The global economy is on track for a soft landing, but the outlook has become more uncertain as new challenges loom. The lingering effects of the rise in the cost of living, large fiscal deficits, heightened policy uncertainty and a stronger US dollar pose risks to the landing. In such a complex environment, risk management considerations and clear communication are key for central banks to complete the disinflation process while supporting economic activity. |
| Date: | 2025–01–16 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:97 |