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Estimation and Prediction of Commodity Returns Using Long Memory Volatility Models Risks Pub Date : 2024-04-23 Kisswell Basira, Lawrence Dhliwayo, Knowledge Chinhamu, Retius Chifurira, Florence Matarise
Modelling the volatility of commodity prices and creating more reliable models for estimating and forecasting commodity price returns are crucial. The body of research on statistical models that can fully reflect the empirical characteristics of commodity price returns is lacking. The main aim of this research was to develop a modelling framework that could be used to accurately estimate and forecast
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The Impact of Firm Risk and the COVID-19 Crisis on Working Capital Management Strategies: Evidence from a Market Affected by Economic Uncertainty Risks Pub Date : 2024-04-22 Hossein Tarighi, Grzegorz Zimon, Mohammad Javad Sheikh, Mohammad Sayrani
The present study aims to investigate the impact of the COVID-19 crisis and firm risk on working capital management policies among manufacturing firms listed on the Tehran Stock Exchange (TSE). The study sample consists of 1200 observations and 200 companies listed on the TSE over a six-year period from 2016 to 2021; furthermore, the statistical method used to test the hypotheses is ordinary least
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Optimising Portfolio Risk by Involving Crypto Assets in a Volatile Macroeconomic Environment Risks Pub Date : 2024-04-17 Attila Bányai, Tibor Tatay, Gergő Thalmeiner, László Pataki
Portfolio diversification is an accepted principle of risk management. When constructing an efficient portfolio, there are a number of asset classes to choose from. Financial innovation is expanding the range of instruments. In addition to traditional commodities and securities, other instruments have been added. These include cryptocurrencies. In our study, we seek to answer the question of what proportion
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Effect of Capital Structure on the Financial Performance of Ethiopian Commercial Banks Risks Pub Date : 2024-04-18 Seid Muhammed, Goshu Desalegn, Prihoda Emese
This study aimed to examine the effects of capital structure on the financial performance of Ethiopian commercial banks. The dependent variable, financial performance, is measured by Return on Assets (ROA), while factors such as loan-to-deposit ratio (LDR), asset-to-total equity ratio (ATER), total deposit-to-total asset ratio (TDTAR), capital adequacy ratio (CAD), and asset growth ratio (GA) were
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Determining Safe Withdrawal Rates for Post-Retirement via a Ruin-Theory Approach Risks Pub Date : 2024-04-19 Diba Daraei, Kristina Sendova
To ensure a comfortable post-retirement life and the ability to cover living expenses, it is of utmost importance for individuals to have a clear understanding of how long their pre-retirement savings will last. In this research, we employ a ruin-theory approach to model the inflows and the outflows of retirees’ portfolios. We track all transactions within the portfolios of retired clients sourced
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Risk Management in the Area of Bitcoin Market Development: Example from the USA Risks Pub Date : 2024-04-15 Laeeq Razzak Janjua, Iza Gigauri, Agnieszka Wójcik-Czerniawska, Elżbieta Pohulak-Żołędowska
This paper explores the relationship between Bitcoin returns, the consumer price index, and economic policy uncertainty. Employing the QARDL method, this study examines both short- and long-term dynamics between macroeconomic factors and Bitcoin returns. Our analysis of monthly time series data from January 2011 to November 2023 reveals that volatile US economic policy indicators, such as high economic
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Quantum Computing Approach to Realistic ESG-Friendly Stock Portfolios Risks Pub Date : 2024-04-12 Francesco Catalano, Laura Nasello, Daniel Guterding
Finding an optimal balance between risk and returns in investment portfolios is a central challenge in quantitative finance, often addressed through Markowitz portfolio theory (MPT). While traditional portfolio optimization is carried out in a continuous fashion, as if stocks could be bought in fractional increments, practical implementations often resort to approximations, as fractional stocks are
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Intangible Assets and Analysts’ Overreaction and Underreaction to Earnings Information: Empirical Evidence from Saudi Arabia Risks Pub Date : 2024-04-02 Taoufik Elkemali
Several prior studies indicate that financial analysts exhibit systematic underreaction to information; others illustrate systematic overreaction. We assume that cognitive biases influence analysts’ behavior and that these misreactions are not systematic, but they depend on the nature of news. As cognitive biases intensify in situations of high ambiguity, we distinguish between bad and good news and
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Asymptotic Methods for Transaction Costs Risks Pub Date : 2024-04-04 Eberhard Mayerhofer
We propose a general approximation method for the determination of optimal trading strategies in markets with proportional transaction costs, with a polynomial approximation of the residual value function. The method is exemplified by several problems, from optimally tracking benchmarks and hedging the log contract to maximizing utility from terminal wealth. Strategies are also approximated by practically
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A Comparison of Generalised Linear Modelling with Machine Learning Approaches for Predicting Loss Cost in Motor Insurance Risks Pub Date : 2024-03-31 Alinta Ann Wilson, Antonio Nehme, Alisha Dhyani, Khaled Mahbub
This study explores the insurance pricing domain in the motor insurance industry, focusing on the creation of “technical models” which are essentially obtained after combining the frequency model (the expected number of claims per unit of exposure) and the severity model (the expected amount per claim). Technical models are designed to predict the loss costs (the product of frequency and severity,
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COVID-19 and Excess Mortality: An Actuarial Study Risks Pub Date : 2024-03-30 Camille Delbrouck, Jennifer Alonso-García
The study of mortality is an ever-active field of research, and new methods or combinations of methods are constantly being developed. In the actuarial domain, the study of phenomena disrupting mortality and leading to excess mortality, as in the case of COVID-19, is of great interest. Therefore, it is relevant to investigate the extent to which an epidemiological model can be integrated into an actuarial
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The Effect of Corporate Governance on the Degree of Agency Cost in the Korean Market Risks Pub Date : 2024-03-27 Younghwan Lee, Ana Belén Tulcanaza-Prieto
This study examines the relationship between corporate governance (CG) and agency costs using Korean market data, particularly for chaebol firms. The final sample includes 660 firm-year observations between 2016 and 2020 for Korean non-financial firms listed on the Korean Composite Stock Price Index (KOSPI). This study employs an ordinary least-squares panel data regression model using two proxies
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Two-Population Mortality Forecasting: An Approach Based on Model Averaging Risks Pub Date : 2024-03-27 Luca De Mori, Pietro Millossovich, Rui Zhu, Steven Haberman
The analysis of residual life expectancy evolution at retirement age holds great importance for life insurers and pension schemes. Over the last 30 years, numerous models for forecasting mortality have been introduced, and those that allow us to predict the mortality of two or more related populations simultaneously are particularly important. Indeed, these models, in addition to improving the forecasting
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The Impact of Village Savings and Loan Associations as a Financial and Climate Resilience Strategy for Mitigating Food Insecurity in Northern Ghana Risks Pub Date : 2024-03-25 Cornelius K. A. Pienaah, Isaac Luginaah
In semi-arid Northern Ghana, smallholder farmers face food insecurity and financial risk due to climate change. In response, the Village Savings and Loan Association (VSLA) model, a community-led microfinance model, has emerged as a promising finance and climate resilience strategy. VSLAs offer savings, loans, and other financial services to help smallholder farmers cope with climate risks. In northern
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Adding Shocks to a Prospective Mortality Model Risks Pub Date : 2024-03-20 Frédéric Planchet, Guillaume Gautier de La Plaine
This work proposes a simple model to take into account the annual volatility of the mortality level observed on the scale of a country like France in the construction of prospective mortality tables. By assigning a frailty factor to a basic hazard function, we generalise the Lee–Carter model. The impact on prospective life expectancies and capital requirements in the context of a life annuity scheme
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Shareholders in the Driver’s Seat: Unraveling the Impact on Financial Performance in Latvian Fintech Companies Risks Pub Date : 2024-03-18 Ramona Rupeika-Apoga, Stefan Wendt, Victoria Geyfman
Fintech companies are relatively young and operate in a rapidly evolving and ever-changing industry, which makes it important to understand how different factors, including shareholder presence in management roles, affect their performance. This study investigates the impact of shareholder presence in director and manager positions on the financial performance of Latvian fintechs. Our investigation
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Capital Structure Models and Contingent Convertible Securities Risks Pub Date : 2024-03-18 Di Meng, Adam Metzler, R. Mark Reesor
We implemented a methodology to calibrate capital structure models for banks that have issued contingent convertible securities (CoCos). Typical studies involving capital structure model calibration focus on non-financial firms as they have lower leverage and no contingent convertible securities. From a theoretical perspective, we found that jumps in the asset value process were necessary to obtain
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Assessing Financial Stability in Turbulent Times: A Study of Generalized Autoregressive Conditional Heteroskedasticity-Type Value-at-Risk Model Performance in Thailand’s Transportation Sector during COVID-19 Risks Pub Date : 2024-03-13 Danai Likitratcharoen, Lucksuda Suwannamalik
The Value-at-Risk (VaR) metric serves as a pivotal tool for quantifying market risk, offering an estimation of potential investment losses. Predominantly employed within financial sectors, it aids in adhering to regulatory mandates and in devising capital reserve strategies. Nonetheless, the predictive precision of VaR models frequently faces scrutiny, particularly during crises and heightened uncertainty
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A Quantitative Comparison of Mortality Models with Jumps: Pre- and Post-COVID Insights on Insurance Pricing Risks Pub Date : 2024-03-14 Şule Şahin, Selin Özen
Population events such as natural disasters, pandemics, extreme weather, and wars might cause jumps that have an immediate impact on mortality rates. The recent COVID-19 pandemic has demonstrated that these events should not be treated as nonrepetitive exogenous interventions. Therefore, mortality models incorporating jump effects are particularly important to capture the adverse mortality shocks.
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Value-at-Risk Effectiveness: A High-Frequency Data Approach with Semi-Heavy Tails Risks Pub Date : 2024-03-13 Mario Ivan Contreras-Valdez, Sonal Sahu, José Antonio Núñez-Mora, Roberto Joaquín Santillán-Salgado
In the broader landscape of cryptocurrency risk management, this study delves into the nuanced estimation of Value-at-Risk (VaR) for a uniformly weighted portfolio of cryptocurrencies, employing the bivariate Normal Inverse Gaussian distribution renowned for its semi-heavy tails. Utilizing high-frequency data spanning between 1 January 2017 and 25 October 2022, with a primary focus on Bitcoin and Ethereum
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Unveiling Outperformance: A Portfolio Analysis of Top AI-Related Stocks against IT Indices and Robotics ETFs Risks Pub Date : 2024-03-13 Ali Trabelsi Karoui, Sonia Sayari, Wael Dammak, Ahmed Jeribi
In this study, we delve into the financial market to compare the performance of prominent AI and robotics-related stocks against traditional IT indices, such as the Nasdaq, and specialized AI and robotics ETFs. We evaluate the role of these stocks in diversifying portfolios, analyzing their return potential and risk profiles. Our analysis includes various investment scenarios, focusing on common AI-related
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What Matters for Comovements among Gold, Bitcoin, CO2, Commodities, VIX and International Stock Markets during the Health, Political and Bank Crises? Risks Pub Date : 2024-03-04 Wajdi Frikha, Azza Béjaoui, Aurelio F. Bariviera, Ahmed Jeribi
This paper analyzes the connectedness between gold, wheat, and crude oil futures, Bitcoin, carbon emission futures, and international stock markets in the G7, BRICS, and Gulf regions with the outbreak of exogenous and unexpected shocks related to health, banking, and political crises. To this end, we use a wavelet-based method on the returns of different assets during the period 2 January 2019, to
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The Regime-Switching Structural Default Risk Model Risks Pub Date : 2024-03-04 Andreas Milidonis, Kevin Chisholm
We develop the regime-switching default risk (RSDR) model as a generalization of Merton’s default risk (MDR) model. The RSDR model supports an expanded range of asset probability density functions. First, we show using simulation that the RSDR model incorporates sudden changes in asset values faster than the MDR model. Second, we empirically implement the RSDR, MDR and an extension of the MDR model
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The Role of Longevity-Indexed Bond in Risk Management of Aggregated Defined Benefit Pension Scheme Risks Pub Date : 2024-03-06 Xiaoyi Zhang, Yanan Li, Junyi Guo
Defined benefit (DB) pension plans are a primary type of pension schemes with the sponsor assuming most of the risks. Longevity-indexed bonds have been used to hedge or transfer risks in pension plans. Our objective is to study an aggregated DB pension plan’s optimal risk management problem focusing on minimizing the solvency risk over a finite time horizon and to investigate the investment strategies
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Robust Estimation of the Tail Index of a Single Parameter Pareto Distribution from Grouped Data Risks Pub Date : 2024-03-01 Chudamani Poudyal
Numerous robust estimators exist as alternatives to the maximum likelihood estimator (MLE) when a completely observed ground-up loss severity sample dataset is available. However, the options for robust alternatives to a MLE become significantly limited when dealing with grouped loss severity data, with only a handful of methods, like least squares, minimum Hellinger distance, and optimal bounded influence
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Navigating Inflation Challenges: AI-Based Portfolio Management Insights Risks Pub Date : 2024-03-01 Tibor Bareith, Tibor Tatay, László Vancsura
After 2010, the consumer price index fell to a low level in the EU. In the euro area, it remained low between 2010 and 2020. The European Central Bank has even had to take action against the emergence of deflation. The situation changed significantly in 2021. Inflation jumped to levels not seen for 40 years in the EU. Our study aims to use artificial intelligence to forecast inflation. We also use
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Market Equilibrium and the Cost of Capital with Heterogeneous Investment Horizons Risks Pub Date : 2024-02-29 Moshe Levy, Haim Levy
Expected returns, variances, betas, and alphas are all non-linear functions of the investment horizon. This seems to be a fatal conceptual problem for the capital asset pricing model (CAPM), which assumes a unique common horizon for all investors. We show that under the standard assumptions, the theoretical CAPM equilibrium surprisingly holds with the 1-period parameters, even when investors have heterogeneous
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Climate Change-Related Disaster Risk Mitigation through Innovative Insurance Mechanism: A System Dynamics Model Application for a Case Study in Latvia Risks Pub Date : 2024-02-28 Maksims Feofilovs, Andrea Jonathan Pagano, Emanuele Vannucci, Marina Spiotta, Francesco Romagnoli
This study explores how the System Dynamics modeling approach can help deal with the problem of conventional insurance mechanisms by studying the feedback loops governing complex systems connected to the disaster insurance mechanism. Instead of addressing the disaster’s underlying risk, the traditional disaster insurance strategy largely focuses on providing financial security for asset recovery after
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When to Hedge Downside Risk? Risks Pub Date : 2024-02-18 Christos I. Giannikos, Hany Guirguis, Andreas Kakolyris, Tin Shan (Michael) Suen
Hedging downside risk before substantial price corrections is vital for risk management and long-only active equity manager performance. This study proposes a novel methodology for crafting timing signals to hedge sectors’ downside risk. These signals can be integrated into existing strategies simply by purchasing sector index put options. Our methodology generates successful signals for price corrections
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In Memory of Peter Carr (1958–2022) Risks Pub Date : 2024-02-18 Giuseppe Campolieti, Arash Fahim, Dan Pirjol, Harvey Stein, Tai-Ho Wang, Lingjiong Zhu
The editors of this special issue and several of the contributing authors have known Peter for a long time. We thought that the special issue will be enriched by adding a few personal notes and recollections about our interactions with Peter.
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Analyzing Size of Loss Frequency Distribution Patterns: Uncovering the Impact of the COVID-19 Pandemic Risks Pub Date : 2024-02-18 Shengkun Xie, Yuanshun Li
This study delves into a critical examination of the Size of Loss distribution patterns in the context of auto insurance during pre- and post-pandemics, emphasizing their profound influence on insurance pricing and regulatory frameworks. Through a comprehensive analysis of the historical Size of Loss data, insurers and regulators gain essential insights into the probabilities and magnitudes of insurance
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Do US Active Mutual Funds Make Good of Their ESG Promises? Evidence from Portfolio Holdings Risks Pub Date : 2024-02-18 Massimo Guidolin, Monia Magnani
We investigate the occurrence of greenwashing in the US mutual fund industry. Using panel regression methods, we test whether there exist differences in the portfolio investment behaviors of active equity funds that are self-declared to be driven by ESG motives when compared to all other funds. In particular, we focus on two aspects of funds’ portfolio allocation decisions, i.e., the actual implied
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An Objective Measure of Distributional Estimability as Applied to the Phase-Type Aging Model Risks Pub Date : 2024-02-13 Cong Nie, Xiaoming Liu, Serge B. Provost
The phase-type aging model (PTAM) is a class of Coxian-type Markovian models that can provide a quantitative description of the effects of various aging characteristics. Owing to the unique structure of the PTAM, parametric inference on the model is affected by a significant estimability issue, its profile likelihood functions being flat. While existing methods for assessing distributional non-estimability
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Dynamic Liability-Driven Investment under Sponsor’s Loss Aversion Risks Pub Date : 2024-02-13 Dong-Hwa Lee, Joo-Ho Sung
This paper investigates a dynamic liability-driven investment policy for defined-benefit (DB) plans by incorporating the loss aversion of a sponsor, who is assumed to be more sensitive to underfunding than overfunding. Through the lens of prospect theory, we first set up a loss-aversion utility function for a sponsor whose utility depends on the funding ratio in each period, obtained from stochastic
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Discrete-Time Survival Models with Neural Networks for Age–Period–Cohort Analysis of Credit Risk Risks Pub Date : 2024-02-03 Hao Wang, Anthony Bellotti, Rong Qu, Ruibin Bai
Survival models have become popular for credit risk estimation. Most current credit risk survival models use an underlying linear model. This is beneficial in terms of interpretability but is restrictive for real-life applications since it cannot discover hidden nonlinearities and interactions within the data. This study uses discrete-time survival models with embedded neural networks as estimators
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Robust Portfolio Optimization with Environmental, Social, and Corporate Governance Preference Risks Pub Date : 2024-02-05 Marcos Escobar-Anel, Yiyao Jiao
This study addresses the crucial but under-explored topic of ambiguity aversion, i.e., model misspecification, in the area of environmental, social, and corporate governance (ESG) within portfolio decisions. It considers a risk- and ambiguity-averse investor allocating resources to a risk-free asset, a market index, a green stock, and a brown stock. The study employs a robust control approach rooted
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Quantitative Modeling of Financial Contagion: Unraveling Market Dynamics and Bubble Detection Mechanisms Risks Pub Date : 2024-02-08 Ionuț Nica, Ștefan Ionescu, Camelia Delcea, Nora Chiriță
This study explored the complex interplay and potential risk of financial contagion across major financial indices, focusing on the Bucharest Exchange Trading Investment Funds Index (BET-FI), along with global indices like the S&P 500, Nasdaq Composite (IXIC), and Dow Jones Industrial Average (DJIA). Our analysis covered an extensive period from 2012 to 2023, with a particular emphasis on Romania’s
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Determinants of Life Insurance Consumption in OECD Countries Using FMOLS and DOLS Techniques Risks Pub Date : 2024-02-05 Maheswaran Srinivasan, Subrata Mitra
This paper aims to examine the determinants of life insurance consumption in 30 OECD countries using panel data from 1996 to 2020. This study uses GDP per capita, Life expectancy, Urbanization, School education, and Health expenditure as the determinants to measure the OECD countries’ life insurance consumption. Insurance density is used as a proxy for life insurance consumption. Fully Modified Ordinary
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The Impacts of CAP Subsidies on the Financial Risk and Resilience of Hungarian Farms, 2014–2021 Risks Pub Date : 2024-02-03 Péter Szálteleki, Gabriella Bánhegyi, Zsuzsanna Bacsi
The present paper empirically analyzes the efficiency of European Union (EU) subsidies for farms in the Southern Great Plain region of Hungary between 2014 and 2021. The aim of this analysis was to explore whether the subsidies increased the resilience of farms, enhancing their profitability, liquidity and solvency, and economic efficiency, measured by the usual financial indicators of farm performance
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L1 Regularization for High-Dimensional Multivariate GARCH Models Risks Pub Date : 2024-02-04 Sijie Yao, Hui Zou, Haipeng Xing
The complexity of estimating multivariate GARCH models increases significantly with the increase in the number of asset series. To address this issue, we propose a general regularization framework for high-dimensional GARCH models with BEKK representations, and obtain a penalized quasi-maximum likelihood (PQML) estimator. Under some regularity conditions, we establish some theoretical properties, such
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Features of the Association between Debt and Earnings Quality for Small and Medium-Sized Entities Risks Pub Date : 2024-02-03 José Sequeira, Cláudia Pereira, Luís Gomes, Armindo Lima
The main source of financing is bank loans for Portuguese small and medium-sized entities (SMEs), which implies several constraints to obtaining additional funds. Relying on the argument of Positive Accounting Theory (PAT) that accounting choices are not neutral and on Agency Theory that information asymmetry prevails between insiders and outsiders, we analyzed the impacts of debt on earnings quality
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Model for Technology Risk Assessment in Commercial Banks Risks Pub Date : 2024-02-01 Wenhao Kang, Chi Fai Cheung
As the complexity of banking technology systems increases, the prevention of technological risk becomes an endless battle. Currently, most banks rely on the experience and subjective judgement of experts and employees to allocate resources for technological risk management, which does not effectively reduce the frequency of technology-related incidents. Through an analysis of mainstream risk management
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Bounds for the Ruin Probability in the Sparre–Andersen Model Risks Pub Date : 2024-02-02 Sotirios Losidis, Vaios Dermitzakis
We obtain the upper and lower bounds for the ruin probability in the Sparre–Andersen model. These bounds are established under various conditions: when the adjustment coefficient exists, when it does not exist, and when the interarrival distribution belongs to certain aging classes. Additionally, we improve the Lundberg upper bound for the ruin probability.
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Pricing Life Contingencies Linked to Impaired Life Expectancies Using Intuitionistic Fuzzy Parameters Risks Pub Date : 2024-02-02 Jorge de Andrés-Sánchez
Several life contingency agreements are based on the assumption that policyholders have impaired life expectancy attributable to factors, such as lifestyle, social class, or preexisting health issues. Quantifying two crucial variables, augmented death probabilities and the discount rate of projected cash flows, is essential for pricing such agreements. Information regarding the correct values of these
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Enhancing Sell-Type Home Reversion Products for Retirement Financing Risks Pub Date : 2024-01-29 Koon Shing Kwong, Jing Rong Goh, Ting Lin Collin Chua
Loan-type reverse mortgage plans and sell-type home reversion plans for retirement financing are two well-known equity release plans that entitle homeowners not only to release cash from their properties but also to allow them to age in place. Recently, a new hybrid equity release plan was proposed to incorporate the home reversion plan’s features with an option of staying in the property for a fixed
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A Generalized Linear Model and Machine Learning Approach for Predicting the Frequency and Severity of Cargo Insurance in Thailand’s Border Trade Context Risks Pub Date : 2024-01-30 Praiya Panjee, Sataporn Amornsawadwatana
The study compares model approaches in predictive modeling for claim frequency and severity within the cross-border cargo insurance domain. The aim is to identify the optimal model approach between generalized linear models (GLMs) and advanced machine learning techniques. Evaluations focus on mean absolute error (MAE) and root mean squared error (RMSE) metrics to comprehensively assess predictive performance
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Quadratic Unconstrained Binary Optimization Approach for Incorporating Solvency Capital into Portfolio Optimization Risks Pub Date : 2024-01-29 Ivica Turkalj, Mohammad Assadsolimani, Markus Braun, Pascal Halffmann, Niklas Hegemann, Sven Kerstan, Janik Maciejewski, Shivam Sharma, Yuanheng Zhou
In this paper, we consider the inclusion of the solvency capital requirement (SCR) into portfolio optimization by the use of a quadratic proxy model. The Solvency II directive requires insurance companies to calculate their SCR based on the complete loss distribution for the upcoming year. Since this task is, in general, computationally challenging for insurance companies (and therefore, not taken
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Stochastic Claims Reserve in the Healthcare System: A Methodology Applied to Italian Data Risks Pub Date : 2024-01-29 Claudio Mazzi, Angelo Damone, Andrea Vandelli, Gastone Ciuti, Milena Vainieri
One of the challenges in the healthcare sector is making accurate forecasts across insurance years for claims reserve. Healthcare claims present huge variability and heterogeneity influenced by random decisions of the courts and intrinsic characteristics of the damaged parties, which makes traditional methods for estimating reserves inadequate. We propose a new methodology to estimate claim reserves
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Impact Assessment of Climate Change on Hailstorm Risk in Spanish Wine Grape Crop Insurance: Insights from Linear and Quantile Regressions Risks Pub Date : 2024-01-26 Nan Zhou, José L. Vilar-Zanón
There is growing concern that climate change poses a serious threat to the sustainability of the insurance business. Understanding whether climate warming is a cause for an increase in claims and losses, and how this cause–effect relationship will develop in the future, are two significant open questions. In this article, we answer both questions by particularizing the geographical area of Spain, and
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Responsible Innovations as Tools for the Management of Financial Risks to Projects of High-Tech Companies for Their Sustainable Development Risks Pub Date : 2024-01-27 Elena G. Popkova, Muxabbat F. Xakimova, Marija A. Troyanskaya, Elena S. Petrenko, Olga V. Fokina
This paper is devoted to the resolution of the problem of risk management in a high-risk market environment. The goal of this paper was to study the experience of and prospects for the use of responsible innovations as tools for managing the financial risks of high-tech companies’ projects for their sustainable development (using the example of companies in Russia’s IT sphere in 2022–2023). We used
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The Role of Artificial Intelligence Technology in Predictive Risk Assessment for Business Continuity: A Case Study of Greece Risks Pub Date : 2024-01-23 Stavros Kalogiannidis, Dimitrios Kalfas, Olympia Papaevangelou, Grigoris Giannarakis, Fotios Chatzitheodoridis
This study examined the efficacy of artificial intelligence (AI) technologies in predictive risk assessment and their contribution to ensuring business continuity. This research aimed to understand how different AI components, such as natural language processing (NLP), AI-powered data analytics, AI-driven predictive maintenance, and AI integration in incident response planning, enhance risk assessment
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Analyzing the Impact of Carbon Risk on Firms’ Creditworthiness in the Context of Rising Interest Rates Risks Pub Date : 2024-01-22 Aimee Jean Batoon, Edit Rroji
Carbon risk, a type of climate risk, is expected to have a crucial impact, especially on high-carbon-emitting, “polluting” firms as opposed to less carbon-intensive, “clean” ones. With a rising number of actions and policies being continuously proposed to mitigate these concerns and an increasing number of investors demanding more climate adaptation initiatives, this transition risk will certainly
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Risk Management in Islamic Banking: The Impact of Financial Technologies through Empirical Insights from the UAE Risks Pub Date : 2024-01-23 Mohamed Al Hammadi, Juan Antonio Jimber-Del Río, María Salomé Ochoa-Rico, Orlando Arencibia Montero, Arnaldo Vergara-Romero
Financial technology (fintech) innovations are transforming banking globally. Their adoption poses new opportunities and risks for Islamic banks with unique requirements. This study examines fintech’s implications for risk management effectiveness in United Arab Emirates Islamic banks. A conceptual model incorporates factors like fintech adoption, emerging capabilities, digital maturity, and IT security
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Stochastic Modeling of Wind Derivatives with Application to the Alberta Energy Market Risks Pub Date : 2024-01-23 Sudeesha Warunasinghe, Anatoliy Swishchuk
Wind-power generators around the world face two risks, one due to changes in wind intensity impacting energy production, and the second due to changes in electricity retail prices. To hedge these risks simultaneously, the quanto option is an ideal financial tool. The natural logarithm of electricity prices of the study will be modeled with a variance gamma (VG) and normal inverse Gaussian (NIG) processes
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Multivariate Spectral Backtests of Forecast Distributions under Unknown Dependencies Risks Pub Date : 2024-01-17 Janine Balter, Alexander J. McNeil
Under the revised market risk framework of the Basel Committee on Banking Supervision, the model validation regime for internal models now requires that models capture the tail risk in profit-and-loss (P&L) distributions at the trading desk level. We develop multi-desk backtests, which simultaneously test all trading desk models and which exploit all the information available in the presence of an
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Invariance of the Mathematical Expectation of a Random Quantity and Its Consequences Risks Pub Date : 2024-01-18 Pierpaolo Angelini
Possibility and probability are the two aspects of uncertainty, where uncertainty represents the ignorance of a given individual. The notion of alternative (or event) belongs to the domain of possibility. An event is intrinsically subdivisible and a quadratic metric, whose value is intrinsic or invariant, is used to study it. By subdividing the notion of alternative, a joint (bivariate) distribution
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Maximum Pseudo-Likelihood Estimation of Copula Models and Moments of Order Statistics Risks Pub Date : 2024-01-18 Alexandra Dias
It has been shown that, despite being consistent and in some cases efficient, maximum pseudo-likelihood (MPL) estimation for copula models overestimates the level of dependence, especially for small samples with a low level of dependence. This is especially relevant in finance and insurance applications when data are scarce. We show that the canonical MPL method uses the mean of order statistics, and
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The Moderating Role of Corporate Governance in the Relationship between Leverage and Firm Value: Evidence from the Korean Market Risks Pub Date : 2024-01-15 Ana Belén Tulcanaza-Prieto, Younghwan Lee, Wendy Anzules-Falcones
This study examines the moderating function of corporate governance (CG) to the relationship between leverage and firm value (FV) using Korean market data. The study employs ordinary least-squares panel data regressions and two methods to manage endogeneity problems. The findings show a meaningful negative relationship between leverage and FV. This relationship, however, disappears, when the interaction
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A Hybrid Model for Forecasting Realized Volatility Based on Heterogeneous Autoregressive Model and Support Vector Regression Risks Pub Date : 2024-01-16 Yue Zhuo, Takayuki Morimoto
In this study, we proposed two types of hybrid models based on the heterogeneous autoregressive (HAR) model and support vector regression (SVR) model to forecast realized volatility (RV). The first model is a residual-type model, where the RV is first predicted using the HAR model, and the residuals are used to train the SVR model. The residual component is then predicted using the SVR model, and the
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Centrality-Based Equal Risk Contribution Portfolio Risks Pub Date : 2024-01-02 Shreya Patki, Roy H. Kwon, Yuri Lawryshyn
This article combines the traditional definition of portfolio risk with minimum-spanning-tree-based “interconnectedness risk” to improve equal risk contribution portfolio performance. We use betweenness centrality to measure an asset’s importance in a market graph (network). After filtering the complete correlation network to a minimum spanning tree, we calculate the centrality score and convert it