J. Risk Financial Manag., Volume 14, Issue 9 (September 2021) – 60 articles

The increasingly complex economic and financial environment in which we live makes the management of liquidity in payment systems and the economy in general a persistent challenge. New technologies make it possible to address this challenge through alternative solutions that complement and strengthen existing payment systems. For example, interbank balancing and clearing methods (such as real-time gross settlement) can also be applied to private payments, complementary currencies, and trade credit clearing to provide better liquidity and risk management. The paper defines the concept of a balanced payment system mathematically and demonstrates the effects of balancing on a few small examples. It then derives the construction of a balanced payment subsystem that can be settled in full and therefore that can be removed in toto to achieve debt reduction and payment gridlock resolution. Using well-known results from graph theory, the main output of the paper is the proof—for the general formulation of a payment system with an arbitrary number of liquidity sources—that the amount of liquidity saved is maximum, along with a detailed discussion of the practical steps that a lending institution can take to provide different levels of service subject to the constraints of available liquidity and its own cap on total overdraft exposure. From an applied mathematics point of view, the original contribution of the paper is two-fold: (1) the introduction of a liquidity node with a store of value function in obligation-clearing; and (2) the demonstration that the case with one or more liquidity sources can be solved with the same mathematical machinery that is used for obligation-clearing without liquidity. The clearing and balancing methods presented are based on the experience of a specific application (Tetris Core Technologies), whose wider adoption in the trade credit market could contribute to the financial stability of the whole economy and a better management of liquidity and risk overall. Full article

In the context of the dynamics of the modern external environment, the importance of risk management in general and the risks inherent in the processes of mergers and acquisitions has sharply increased. This is becoming one of the primary challenges in business, the solution of which will contribute to economic growth and development. In this article, based on a broad review of literature, the key risks of mergers and acquisitions are identified and classified, the level of their significance is assessed, the relevant management tools are selected for each risk and a computer program is developed that implements the selection of tools for each specific merger and acquisition transaction. A comprehensive automated methodology for the selection of risk management tools in the implementation of mergers and acquisitions can become an effective risk management tool for companies participating in such transactions. This will allow to identify and track risks in a timely manner, assess their significance, and, among other things, contribute to the adoption of effective management decisions regarding risk management. Full article

Threshold cointegration is introduced as an econometric technique to model the impact of trade disruptions on spatial price transmission in commodity markets so that market participants and policy makers can understand the global impact of trade disruptions on prices. The threshold cointegration technique that is employed is flexible in that it allows the number of thresholds and their location to be determined endogenously and the threshold variable to be exogenous to the system. We innovate on the threshold cointegration technique by selecting a measure of trade disruptions as the threshold variable. This innovation can be used for any commodity market that is spatially connected due to arbitrage; however, to illustrate its usefulness we apply the technique to trade disruptions for canola traded between Canada and China using weekly data between 2014 and 2019 and find that canola trade disruptions between Canada and China impacted global price transmission and resulted in market fragmentation. Full article

This is the first study to systematically assess the significance of the standard money multiplier vis-à-vis the bank credit transmission channel in the case of Pacific Island Economies, focusing on Papua New Guinea. The vector autoregressive model comprising six variables—interest rate, inflation rate, loans, deposits, reserve money, and real output—was estimated using quarterly data for the period 1980q1 to 2017q4. We applied the ordinary least squares (OLS) method to estimate the system of vector autoregressions (VARs). The estimation was conducted for the full and sub-sample periods. From the impulse response functions generated, the results suggest that the money multiplier does not hold and that the transmission to bank credit appears weak. It seems that the ability of the Central Bank to make loanable funds available through its conduct of monetary policy may not enhance private sector credit. On the other hand, there appears to be a significant and positive association between bank deposits and credit, suggesting that bank deposits and credit are endogenous and demand driven. Full article

This paper examines the role of inflation expectations in Solomon Islands, a Pacific Island Country, using the Hybrid New Keynesian Phillips Curve model. The study applies the Generalized Method of Moments to estimate the Hybrid New Keynesian Philips Curve model using quarterly time series data for the period 2003–2017. The study confirms the existence of a Hybrid New Keynesian Philips Curve for Solomon Islands and finds that both backward-looking and forward-looking processes matter for inflation. Fuel prices and output gap are important indicators of current inflation. The study highlights key areas to further investigate including the weak monetary transmission mechanism and to examine the exchange rate pass through effect onto domestic prices. Studies on the role of inflation expectations in small, open, economies of the Pacific, such as Solomon Islands, is limited. This paper fills this void in literature by using quarterly time-series data to build a Hybrid New Keynesian Philips Curve model for Solomon Islands. Full article

Cross-sectional data show Global North countries export higher quality products at a point in time. Product-level panel data can address if countries improve their export quality over time. The literature has addressed this practically relevant panel question only in small samples over the short term. We addressed it for a large sample, over the long run, focusing on the hitherto overlooked endogeneity between export quality and factor accumulation and the role of export composition. We utilized a two-tiered panel: the panel of countries and the panel of products each country trades. We found some evidence that middle-income countries often upgrade export quality within the same product, but that high- and low-income countries do this less often. Our results appear to support product cycle theory: some countries climb the value ladder, others are competed off from the ladder’s top, and new countries enter markets. Technology appears to be a potential basis for consolidating trade competitiveness over time, as skill accumulation becomes more widespread across countries and loses significance as an explanatory variable. Our results provide some explanation of why Global North countries might resist sharing technology. This research is timely with deadlocked multilateral trade negotiations and looming trade wars. It attempts to contribute to an evidence-based guide to trade policy. Full article

Green bonds are a new financial tool that has developed rapidly in the context of climate change risks. Their proceeds are used to finance only environmentally friendly projects. This paper aims to examine the determinant factors of the green bonds issue in the context of the European Union countries. Using linear regression, we explore the impact of environmental, social, governance, and macroeconomic indicators on the level of green bond issues in the period 2014–2019. The results reveal that rating, ESG index; fiscal balance, inflation rate, and population have a significant impact and lead to a higher volume of green bond issuances. Our findings provide valuable insights into the development of the green bond market. Full article

Even efficient financial markets may break down under periods of prolonged stress, especially when the ramification of an event is unclear. Political violence is such an event, sending immediate signals about possible impact on firm valuations but unclear information about the future viability of existing institutions. This paper examines the effect of political violence in 19th century Russia on its stock market; using a battery of unit root and variance ratio tests, the evidence is that Russian financial markets were mostly efficient in processing short-term information from political violence. However, when violence was at its peak between the assassination of the Tsar in 1881 and the 1905 revolution, large deviations from efficiency can be detected, as markets were unsure about the viability of the existing rules of the game. Full article

This study examines the price transmission between cotton prices in U.S., Indian, and Chinese futures markets. We focus on studying the long-run price movements using cointegration and alternate causality tests. The empirical results indicate the following: (a) the U.S. cotton futures market continues to be the most dominant market, and it leads price changes in India and China; (b) the cotton prices in India also impacts the cotton prices in China as we report a unidirectional relationship flowing from India to China; (c) there is duality of direction of price transmission for U.S. and Chinese commodity markets as we document bi-directional causality between U.S. to Chinese cotton futures for the entire period and uni-directional causality from U.S. to Chinese markets for the two sub-periods; (d) the long-term relationship between the three markets has seen a significant shift as documented by the absence of cointegration which may be due to changes in government policy, especially in India and China specifically after 2014. Overall, results provide support for further reforms especially for Indian and Chinese commodity exchanges so that they can play a vital role in the price discovery process especially for commodities that are largely produced or consumed in these economies. Full article

Equity studies are conducted by professionals, who also provide buy/hold/sell recommendations to investors. Nowadays, target prices determined by financial analysts are publicly available to investors, who may decide to use them for investment purposes. Studying the accuracy of such analysts’ forecasts is, thus, of paramount importance. Based upon empirical data on 50 of the biggest (larger capitalisation) European stocks over a 15-year period, from 2004 to 2019, and using a panel data approach, this is the first study looking at overall accuracy in European stock markets. We find that Bloomberg’s 12-month consensus target prices have no predictive power over future market prices. Our panel results are robust to company fixed effects and subperiod analysis. These results are in line with the (mostly US-based) evidence in the literature. Extending common practice, we perform a comparative accuracy analysis, comparing the accuracy of target prices with that of simple capitalisations of current prices. It turns out target prices are not better at forecasting than simple capitalisations. When considering individual regressions, accuracy is still very low, but it varies considerably across stocks. By also analysing the relationship between both measures—target prices and capitalised prices—we find evidence that, for some stocks, capitalised prices partially explain how target prices are determined. Full article

This paper studies the presence of the day-of-the-week (DOW) effect in the financial contagion process observed on individual economic sectors from the Post-Communist East European markets. The only markets that provide national-specific sector indices determined throughout the 2008 financial crisis are Poland, Romania and Russia. The novel methodology combines two existing perspectives from financial literature, by employing a GJR-GARCH framework on a dummy regression model that accounts for both the crisis period and the weekdays. All indices show the presence of the DOW effect during the crisis and/or non-crisis periods, thus signaling their low level of market efficiency. However, the contagion process affects only eight of these indices: the banking, IT and oil and gas sectors from Poland, the chemical, telecommunication and transport sectors from Russia and energy sectors from Russia and Romania. All of them show signs of the DOW effect in contagion: five exhibit higher spillovers on crisis Mondays, while the other three show other weekday patterns. The findings suggest that the DOW effect is not specific to certain countries or certain economic sectors. Full article

This paper studies the impacts of COVID-19 on the performance of the Vietnamese Stock Market—a rapidly growing emerging market in a country that has to date successfully controlled the disease outbreak. The study uses a random-effect model (REM) on panel data of stock returns of 733 listed companies on both HOSE (the Ho Chi Minh Stock Exchange) and HNX (the Hanoi Stock Exchange) from 2 January 2020 to 13 December 2020. The study shows that the number of daily COVID-19 confirmed cases in Vietnam has a negative impact on stock returns of listed companies in the market. The impacts were more severe for the pre-lockdown and second-wave period, compared to impact for the lockdown period. The impacts also differed across sectors, with the financial sector being the most affected. With significant government control and influence over the bank-dominated financial system, the financial sector was expected to absorb some of the negative shocks hitting the real sector. Such expectations were reflected in the stock market movement during the pandemic. Full article

We investigate any similarity and dependence based on the full distributions of cryptocurrency assets, stock indices and industry groups. We characterize full distributions with entropies to account for higher moments and non-Gaussianity of returns. Divergence and distance between distributions are measured by metric entropies, and are rigorously tested for statistical significance. We assess the stationarity and normality of assets, as well as the basic statistics of cryptocurrencies and traditional asset indices, before and after the COVID-19 pandemic outbreak. These assessments are not subjected to possible misspecifications of conditional time series models which are also examined for their own interests. We find that the NASDAQ daily return has the most similar density and co-dependence with Bitcoin daily return, generally, but after the COVID-19 outbreak in early 2020, even S&P500 daily return distribution is statistically closely dependent on, and indifferent from Bitcoin daily return. All asset distances have declined by 75% or more after the COVID-19 outbreak. We also find that the highest similarity before the COVID-19 outbreak is between Bitcoin and Coal, Steel and Mining industries, and after the COVID-19 outbreak is between Bitcoin and Business Supplies, Utilities, Tobacco Products and Restaurants, Hotels, Motels industries, compared to several others. This study shed light on examining distribution similarity and co-dependence between cryptocurrencies and other asset classes. Full article

We investigated the impacts of president longevity and the geographic orientation of owners on team performance and on the effectiveness of dismissing the leader. In addition, we considered their impacts on the effectiveness of not dismissing the leader while the same organisation fires them at another time for a similar performance. We also tested the impact of dismissing the leader or not on performance. We explored the aforementioned risk-taking relationships in the first tier of French men’s football over the 1994–2016 period (n = 4918 observations). To do so, we used a counterfactual based on the evolution of the team position over the last three games leading to the leader change and estimate linear regression models with fixed team effects. Our findings show that performance improves either after a leader dismissal or not in the same situation, and both president longevity and the geographic orientation of owners impact the effectiveness of dismissing the leader or not. In particular, global- and local-oriented ownerships have a positive impact on the effectiveness of the decision to dismiss the leader or not compared to national-oriented ownership. Practical implications stem from the research, e.g., how organisations with national-oriented ownership can overcome their competitive disadvantage. Full article

Cultural and Creative Industries (CCIs) are increasingly recognized as part of the global economy and of growing importance for sustainable local development. However, the exploitation of their full potential depends on several issues concerning their entrepreneurial dimension and the context where they operate. The paper deals with these issues having the scope to investigate the main determinants of CCIs’ sustainability in peripheral areas, to understand what kind of policy could better support the survival of CCIs and development in these areas, according to an end-user perspective. The research is part of an Interreg Greece-Italy project carried out from mid-2018 until the end of 2020 with specific reference to CCIs in Apulia (IT) and Western Greece (EL). A two-step mixed methodology has been used to figure out regional specializations and the specific aspects of the entrepreneurial structure and business sustainability in the cultural and creative sector (CCs). In the end, the paper shows and discusses the main determinants considered crucial for CCI sustainability, suggesting guidelines for local authorities supporting their economic development. Full article

We provide evidence on leverage and debt maturity targeting in a large international setting. There are key differences in the relative importance of institutional factors in explaining actual as opposed to target capital structures. Targets and target deviations are plausibly influenced by the institutional environment. Firms from countries with strong legal institutions target lower leverage and higher long-term debt, whereas better-functioning financial systems result in lower target leverage and long-term debt. Financial crisis has shifted the desired structure of the securities toward shorter maturities and has led to more prevalent target deviations. Better institutions significantly decrease the likelihood of target deviations. Full article

We address how independent variables of inherently different sizes across units, e.g., small vs. large industries, in panel regression is an advantage interpretively. Analyzing a Norwegian industry panel, we find that wage inequality is a function of industry size, particularly size increase, in an absolute number of firms. A possible reason is that specialized skilled employees negotiate higher wages when there are many legal entities. The findings can also imply that wage inequality is more sensitive to random change, particularly an increase, in large rather than small industries. We conclude that particularly large industries are positive carriers of wage inequality and discuss potential underlying causal mechanisms such as monopolistic competition. Full article

The risk society has profoundly changed our way of life. Among the social phenomena most affected by its effects is undoubtedly political participation and the degree of trust in institutions. This work aims, through the construction of two different indices, to answer the question “How does the risk society influence conventional participation and trust in institutions?”. The Indagine Multiscopo sulle famiglie and the Benessere Equo Sostenibile surveys provide a complete set of indicators to assess specific aspects of Italian daily life and well-being. This work uses a series of data from these surveys to analyze political participation and trust in institutions in Italy in 2019 at regional level using two composite indices obtained through the application of the MPI method. The result of this paper shows no particular effects of the risk society on conventional forms of political participation. Instead, the effects of the risk society are fully visible on levels of trust in institutions. Full article

The purpose of this study is to address the critical issue of optimal credit allocation. Predicting a borrower’s probability of default is a key requirement of any credit allocation system but turning it into labeled classes leads to problems in performance measurement. In this paper the connection between the probability of default and optimal credit allocation is established through a conceptual construct called the Kelly criterion. Conflicting performance measures in dichotomous classification are replaced with coherent criteria for judging the performance of credit allocation decisions. Extensive testing on peer-to-peer lending data shows that the Kelly strategy enables consistent outperformance and efficiency in processing information relative to alternative credit allocation approaches. Full article

With the rapid advancement in technology, Taiwan’s integrated circuit (IC) design companies have made a mark in the international semiconductor industry but are unable to independently develop the key core technologies they need. Therefore, strategic alliances, competition and cooperation have become a means for enterprises to quickly obtain patents and capture the market. However, listed companies upstream and downstream of Taiwan’s supply chain have been facing patent infringement lawsuits in recent years. This research mainly aims to provide investors with investment strategies when companies face patent litigation, analyze the abnormal returns on the underlying stocks through the event research method, and use the cross-sectional multiple regression model to explore the changes in different factors based on the results. The empirical results show that positive abnormal returns are generated before and after a company faces patent litigation and the cumulative abnormal rewards are all positive and significant after the incident, which indicates that the company may still have an opportunity to make a profit when facing patent litigation, which can be used as a reference for investors. Full article

This paper studies the historical time-varying dynamics of risk for individual stocks in the U.S. market. Total risk of an individual stock is decomposed into two components, systematic risk and idiosyncratic risk, and both components are studied separately. We start from the historical trend in the magnitude of risk and then turn to the relation between idiosyncratic risk and stock returns. The result shows that both components of risk for individual stocks are changing over time. They increased from the 1960s to the 1990s/2000s and then declined until today. This paper also studies the risk-return tradeoff by investigating the relation between idiosyncratic risk and stock return in the long run. Stocks are sorted into portfolios for analysis and the whole sample period is further decomposed into decades for subgroup analysis. Multivariable regressions are used to study this relation as we control for beta, size, book-to-market ratio, momentum and liquidity. From a historical point of view, we show that the relation between idiosyncratic risk and stock return is time-varying, and it did not exist in certain decades. The results indicate that the risk-return tradeoff also varied in history. Full article

The paper aims to assess the relationship between Azerbaijani and Kazakhstani exchange rates and crude oil prices volatility. The study applies the structural vector autoregressive (SVAR) model. The paper concentrates on Azerbaijan and Kazakhstan, the post-Soviet countries considered as some of the most oil-dependent countries in the Caspian Sea region. The impulse response functions suggest that the rise of crude oil prices is associated with the exchange rates decrease and thus with an Azerbaijani manat and Kazakhstani tenge appreciation against the U.S. dollar. Moreover, the results suggest that an oil price increase leads to the rise of Azerbaijani international reserves. However, the results are insignificant for the Kazakhstani foreign exchange reserves. Additionally, the study reveals a negative and significant relationship between crude oil prices and USD/KZT in both pre-crisis and the COVID-19 crisis periods. We reveal that the correlation has been stronger during the COVID-19 pandemic. However, the relationship is not significant in the case of the Azerbaijani manat. The USD/AZN exchange rate has been stable since 2017, and the first phase of the COVID-19 pandemic has not caused a change in the exchange rate and a weakening of the Azerbaijani currency, despite significant drops in crude oil prices. Full article

Subsidies in the form of direct transfers from the government to citizens constitute a powerful mechanism for crisis mitigation and for the alleviation of economic inequalities. However, the connection between direct transfers of cash assistance to selected individual beneficiaries and the prosperity of their immediate surrounding local economy has not been sufficiently explored. This paper presents a case study which analyzes the effects of allocating cash assistance in the form of a local currency. It shows that, under certain conditions, such a transfer not only provides the beneficiaries with additional purchasing power to satisfy their needs but also that the monetary injection benefits local SMEs by generating additional turnover. Using transactional data from the system, some indicators are proposed to analyze the properties of the system, namely, user satisfaction, total and average income generated by local businesses, the local multiplier, the recirculation of the local currency, and the velocity of its circulation. Our findings indicate that cash assistance provided in the REC local currency could contribute to local economic development and financial stability by sustaining local commerce, while preserving most of the original positive effects of cash assistance in a legal tender. Full article

In this paper, we estimate the dynamic impact of unconventional monetary policy in the US on international REITs. Unlike existing studies which are limited to conventional policy tools and undertake a static approach, we use an event study approach and estimate a time-varying parameter model to investigate the dynamic impact of forward guidance (FG) and large-scale asset purchases (LSAP) shocks on the international REIT returns. We also compare the effects of these unconventional tools with the effects of conventional federal funds rate (FFR) shocks. The results show that the response of international REITs to unconventional policy shocks depends on the time under consideration. FG shocks have greater time-variation in the impact on REIT returns compared to LSAP shocks, particularly with Australia, Belgium, and the US REIT markets. Furthermore, FG shocks broadly have a negative impact on REITs while the results for LSAP effects are mixed. We also find that in most countries, REITs time-varying response of FG shocks is related to changes in gold prices and financial conditions. Full article

The capital structure appears to be one of the most researched and the most controversial areas in modern corporate finance. Prior literature on determinants of capital structure has concentrated on firm and country level factors by employing static modeling. Static modeling has certain limitations, which do not allow companies to establish an optimum capital structure in line with economic uncertainty. This study makes a worthy contribution to the existing body of knowledge by filling the gap in the evolution of capital structure by employing a dynamic framework of the financial sector of Pakistan. In addition, the study brings into focus sectors’ importance in determining the firm’s financial behavior. Based on secondary financial sector data from 2006–2019, the article addresses the issues by employing two-step system generalized method of moments (GMM). The findings of the study validated the existence of dynamic capital structure across the financial sector of Pakistan and reinforced the substantial impact of sectors’ unique environment on leverage mechanism. The results are robust under alternative estimation approaches and offer useful policy implications. Full article

Bitcoin, as the first decentralized cryptocurrency, pioneers the cryptocurrency markets, both in terms of market capitalization and scientific interest. In this paper, we performed a comprehensive bibliometric study of the Bitcoin-related literature. Using the Scopus database, we created a sample that comprises 4495 documents written in the 2011–2020 period. Furthermore, we provided insights about dimensions such as the change in the number of publications over the course of years, the main research areas, types of published documents, most important platforms and sources of Bitcoin publications, highly cited studies, productive authors, author’s countries, and finally main funders of Bitcoin-related research. Lastly, our bibliometric study manifests the current state and future path of Bitcoin literature from distinct perspectives. Full article

The main objective of this article is to identify and analyze the use of mobile payments in two countries, Poland and Turkey. The data for the study were collected with the application of the CAWI method in March 2021. The survey covered nearly 650 respondents in total. The basis for comparisons was populations from two culturally distinct countries, Poland and Turkey, which are at a similar level of development as regards the use of the Internet. The studies were carried out simultaneously in both countries and examined the group of young people aged 18–25. The research surveyed the population, which included the most active Internet users who are taking full advantage of the benefits of globalization, which is facilitated by the development of the Internet worldwide. The survey was translated into the respondents’ native languages, initially validated during the pilot studies and then distributed and circulated among the study participants. The obtained findings were subject to comparison, and the differences between the samples were analyzed and commented on to verify the hypotheses formulated in the study. The main limitation of the conducted study was the selection of a random group—the research sample consisted only of members of the academic community. The study presented in the article fills the research gap regarding international comparisons of the use of m-payments in the period of the COVID-19 pandemic. The obtained results indicate the undoubted fact of increased interest in the use of m-payments in e-commerce and e-banking, and even more importantly, differences concerning 40% of the criteria/attributes applied to assess the use of m-payments in both countries. The findings can be used by business practitioners dealing with the development of m-payments. Another potential application is to attempt to bridge the gaps between countries, which may be supported by globalization processes. Full article

We consider a sovereign wealth fund that invests broadly in the international financial markets. The influx to the fund has stopped. We adopt the life cycle model and demonstrate that the optimal spending rate from the fund is significantly less than the fund’s expected real rate of return. The optimal spending rate ensures that the fund will last “forever”. Spending the expected return will deplete the fund with probability one. Moreover, this strategy is inconsistent with optimal portfolio choice. Our results are contrary to the idea that it is sustainable to spend the expected return of a sovereign wealth fund. Full article

Based on a database of 200 listed firms from the Growth Enterprise Market of China, this paper employs regression models to investigate the significance of IPO capital expenditure to firms’ operating performance. It suggests that a vast majority of pre-IPO money is spent on business development to promote operating performance in order to meet IPO requirements. After the IPO, most of the money is transferred to equity investments in order to increase the firms’ market value quickly, which leads to operating performance decline and deterioration. Full article

Conventional wisdom suggests that non-local buyers usually pay a premium for home purchases. While the standard contract theory predicts that non-local buyers may pay such a price premium because of the higher cost of gathering information, behavioral economists argue that the premium is due to buyer anchoring biases in relation to the information. Both theories support such a price premium proposition, but the empirical evidence is mixed. In this study, we revisit this conundrum and put forward a critical test of these two alternative hypotheses using a large-scale housing transaction dataset from Hong Kong. A novel machine-learning algorithm with the latest technique in natural language processing where applicable to multi-languages is developed for identifying non-local Mainland Chinese buyers and sellers. Using the repeat-sales method that avoids omitted variable biases, non-local buyers (sellers) are found to buy (sell) at a higher (lower) price than their local counterparts. Taking advantage of a policy change in transaction tax specific to non-local buyers as a quasi-experiment and utilizing the local buyers as counterfactuals, we found that the non-local price premium switches to a discount after the policy intervention. The result implies that the hypothesis of anchoring biases is dominant. Full article