Template-Type: ReDIF-Article 1.0
Author-name: Joachim Klement
Title: Facts and Fantasies about Gold
Abstract: Due to the increasing popularity of gold as an investment the demand for effective risk management techniques for gold investments has increased as well. In this paper we analyze several drivers of the price of gold that have been proposed in the past. Our analysis indicates that short-term volatility of the price of gold remains rather unpredictable with many of the explanations like the fund flows in physical gold ETF either unreliable or unstable over time. Our analysis suggests that there is a stable non-linear relationship between the price of gold and changes in inflation rates or real interest rates that might be exploited for risk management purposes.
Classification-JEL: G12
Keywords: Gold, Inflation, Real Interest Rates, VIX, US Dollar, ETF Fund Flows
Journal: Journal of Risk & Control 
Pages: 1-12
Volume: 1
Issue: 1
Year: 2014
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/1_1_1-2/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:1:y:2014:i:1:p:1-12
Template-Type: ReDIF-Article 1.0
Author-name: Costas Siriopoulos
Author-name: Athanasios P. Fassas
Title: An Analysis of the Covered Warrants listed on the Athens Exchange
Abstract: The particular study is the first academic attempt to review a new financial instrument, the covered warrants, which were listed for trading in the Athens Exchange within the framework of the recapitalization of the three systematic Greek banks (Alpha Bank, National Bank of Greece and Piraeus Bank) in the summer of 2013. In particular, we discuss the basic characteristics of these instruments and we examine their pricing efficiency during the fifteen months of their listing. The empirical results suggest that the Greek warrants market is inefficient as the three listed contracts are systematically underpriced compared to their theoretical value based on the historic realized volatility of the underlying shares. Furthermore, a dynamic delta-hedged warrant portfolio yields significant cumulated gains that exceed the risk-free rate.
Classification-JEL: G13, G23
Keywords: Warrants, Cox-Ross-Rubinstein model, Greek banks, Implied volatility, Delta hedging
Journal: Journal of Risk & Control 
Pages: 13-30
Volume: 1
Issue: 1
Year: 2014
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/1_1_2-2/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:1:y:2014:i:1:p:13-30
Template-Type: ReDIF-Article 1.0
Author-name: Dar-Hsin Chen
Author-name: Leo Bin
Author-name: Chun-Yi Tseng
Title: Hedging Effectiveness of Applying Constant and Time-Varying Hedge Ratios: Evidence from Taiwan Stock Index Spot and Futures
Abstract: This paper investigates the market-risk-hedging effectiveness of the Taiwan Futures Exchange (TAIFEX) stock index futures using daily settlement prices for the period from July 21, 1998 to December 31, 2010. The minimum variance hedge ratios (MVHRs) are estimated from the ordinary least squares regression model (OLS), the vector error correction model (VECM), the generalized autoregressive conditional heteroskedasticity model (GARCH), the threshold GARCH model (TGARCH), and the bivariate GARCH model (BGARCH), respectively. We employ a rolling sample method to generate the time-varying MVHRs for the out-of-sample period, associated with different hedge horizons, and compare across their hedging effectiveness and risk-return trade-off. In a one-day hedge horizon, the TGARCH model generates the greatest variance reduction, while the OLS model provides the highest rate of risk-adjusted return; in a longer hedge horizon, the OLS generates the largest variance reduction, while the BGARCH model provides the best risk-return trade-off. We find that the selection of appropriate models to measure the MVHRs depends on the degree of risk aversion and hedge horizon.
Classification-JEL: F37, G13, G15
Keywords: Index Futures; Hedge Ratio; VECM model; GARCH model; Multivariate- GARCH model
Journal: Journal of Risk & Control 
Pages: 31-49
Volume: 1
Issue: 1
Year: 2014
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/1_1_3-2/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:1:y:2014:i:1:p:31-49
Template-Type: ReDIF-Article 1.0
Author-name: Eleftherios Spyromitros
Title: The link between transparency and independence of central banks
Abstract: This paper, using a standard model of monetary delegation, highlights the relationship between transparency and conservativeness of central banks. Precisely, we show that a lack of transparency about the output objective of central banks positively affects the optimal degree of conservativeness of the central bank. Empirical analysis confirms the theoretical link highlighted in this study.
Classification-JEL: E52, E58
Keywords: Central bank independence, conservatism, transparency
Journal: Journal of Risk & Control 
Pages: 51-60
Volume: 1
Issue: 1
Year: 2014
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/1_1_4/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:1:y:2014:i:1:p:51-60
Template-Type: ReDIF-Article 1.0
Author-name: Militiades N. Georgiou
Author-name: Nicholas Kyriazis
Author-name: Emmanouil M. L. Economou
Title: Democracy, Political Stability and Economic performance. A Panel Data Analysis
Abstract: In the present paper we undertake to link political stability under democracy with a set of indicators for economic freedom and financial crises, using panel data analysis. The sample covers annually the period 2000-2012 for selected European Union (EU) member-states, USA and Japan. The results support our main thesis, that political stability in democratic regimes is positively related to the set of economic freedom indicators and negatively to financial crises, because greater economic freedom influences positively investment and economic growth, while financial crises, which lead to austerity policies, which again lead to recession-depression, increase dissatisfaction among citizens with the workings of democracy and thus, to the rise of extremist parties. Our findings support the idea that political stability in democratic regimes is linked to economic stability and growth and vice-versa.
Classification-JEL: I2, C23, D31, E01
Keywords: democracy, economic freedom, financial crisis, panel data analysis.
Journal: Journal of Risk & Control 
Pages: 1-18
Volume: 2
Issue: 1
Year: 2015
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/democracy-political-stability-and-economic-performance-a-panel-data-analysis/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:2:y:2015:i:1:p:1-18
Template-Type: ReDIF-Article 1.0
Author-name: Efstathios Magerakis
Author-name: Costas Siriopoulos
Author-name: Athanasios Tsagkanos
Title: Cash Holdings and Firm Characteristics: Evidence from UK Market
Abstract: This paper investigates the determinants of UK corporate cash holdings during the period 1980-2012. The global and long term phenomenon of corporate cash pilling has drawn significant attention from researchers. Similarly, this study aims at shedding light on the empirical relationship between cash holding and specific firm characteristics. The empirical findings suggest that cash holdings are positively related to investment opportunity, as R&D and market to book ratio. Cash ratio is also positively related to industry cash flow volatility and negatively affected by cash flow, net working capital, capital expenditures, leverage, tax expenses, age and size. Regarding the development of the determinants of cash holdings, the study indicates that three major variables influenced cash holdings over the years of analysis. In particular, leverage, tax regime and capital expenditures significantly affect the corporate liquidity in UK market. Furthermore, the results suggest that cash holdings are mostly defined by trade off theory. Indeed, our findings offer stimulating insights on the factors that determine the firms’ cash holdings during the past three decades.
Classification-JEL: G34, L20, L25
Keywords: Cash holdings, trade-off model, pecking order theory, free cash flow theory, liquid assets.
Journal: Journal of Risk & Control 
Pages: 19-43
Volume: 2
Issue: 1
Year: 2015
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/cash-holdings-and-firm-characteristics-evidence-from-uk-market/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:2:y:2015:i:1:p:19-43
Template-Type: ReDIF-Article 1.0
Author-name: Iliana G. Chatzi
Author-name: Mihail N.Diakomihalis
Author-name: Evangelos ?. Chytis
Title: Performance of the Greek banking sector pre and throughout the financial crisis
Abstract: This study provides an in depth comparative analysis among Greek Commercial Bank institutions listed in Athens Stock Exchange Market, during time period from 2006 to 2012. The analysis is based on CAMEL methodology. The period 2007 to 2009 is characterized by high profitability, liquidity and high capital adequacy. However, the eruption of the economic crisis in Greece during 2009 and its ominous impacts is revealed on the bank financial statements and reports. The results derived from the CAMELS evaluation have been cross-tested using the Fixed Effects Model in a panel data analysis, which verify that before crisis the traditional ratios of are statistically significant, while the Sensitivity and Liquidity variables appeared to be the only rating components that provide insights into the banks financial situation during the crisis period. We conclude that changes in the economic environment and the emergence of new risks should be considered from both, bank managers and regulators, by the implementation and evaluation of Banks’ rating system.
Classification-JEL: G01, G21, G3, M1
Keywords: Camels, Economic crisis, Greece, Banking sector, Efficiency analysis
Journal: Journal of Risk & Control 
Pages: 45-69
Volume: 2
Issue: 1
Year: 2015
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/performance-of-the-greek-banking-sector-pre-and-throughout-the-financial-crisis/?download=attachment.pdf
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Handle: RePEc:rmk:rmkjrc:v:2:y:2015:i:1:p:45-69
Template-Type: ReDIF-Article 1.0
Author-name: Lianqian Yin
Author-name: Yaqiong Li
Title: The contagious effects analysis of Chinese Equity Market to South Asia’s emerging financial markets
Abstract: To study the contagious effects of financial risks in South Asia’s emerging stock markets, the main stock indexes from China, Thailand, India, Vietnam and Malaysia are chosen during the period from 2006 and 2014. The paper used the dynamic conditional correlation GARCH model to examine the dynamic relevance, and introduced the dummy variable in order to test whether the structure change had occurred after the global financial crisis. The results showed that the degree of relevance of China, Thailand, India and Malaysia stayed in the high level. However, the Vietnam hardly had a dynamic relevance with other emerging markets. This indicated that the Vietnam stock market has apparent market segmentation with other markets, no matter which aspects we considered the dynamic correlation or the financial crisis contagion. At last we build models to analyze the relations between the dynamic conditional correlation of BSE & SSEC and macro-economic. The main reason is to understand which aspects may impact correlation.
From the test results, we realize the India GDP and total export-import volume has a positive relation with the correlation, while China’s corresponding indexes has a negative impact on it. In the end, according to the results we got, the investors should pay more attention to the relevance between emerging countries, so that the idiosyncratic risks can be avoided. As for the supervision department, they should reinforce the stock market
which has a higher correlation in order to guarantee the stable development of financial markets.
Classification-JEL: G15, C30
Keywords: Emerging markets; Risk contagion; Equity indexes
Journal: Journal of Risk & Control 
Pages: 1-15
Volume: 3
Issue: 1
Year: 2016
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/the-contagious-effects-analysis-of-chinese-equity-market-to-south-asias-emerging-financial-markets/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:3:y:2016:i:1:p:1-15
Template-Type: ReDIF-Article 1.0
Author-name: Zura Kakushadze 
Author-name: Willie Yu 
Title: Statistical Industry Classification
Abstract: We give complete algorithms and source code for constructing (multilevel) statistical industry classifications, including methods for fixing the number of clusters at each level (and the number of levels). Under the hood there are clustering algorithms (e.g., k-means). However, what should we cluster? Correlations? Returns? The answer turns out to be neither and our backtests suggest that these details make a sizable difference. We also give an algorithm and source code for building "hybrid" industry classifications by improving off-the-shelf "fundamental" industry classifications by applying our statistical industry classification methods to them. The presentation is intended to be pedagogical and geared toward practical applications in quantitative trading.
Classification-JEL: G00 
Keywords: ?ndustry classification, clustering, cluster numbers, machine learning, statistical risk models, 
industry risk factors, optimization, regression, mean-reversion, correlation matrix, factor loadings, 
principal components, hierarchical agglomerative clustering, k-means, statistical methods, multilevel.
Journal: Journal of Risk & Control 
Pages: 17-65
Volume: 3
Issue: 1
Year: 2016
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/statistical-industry-classification/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:3:y:2016:i:1:p:17-65
Template-Type: ReDIF-Article 1.0
Author-name: Zura Kakushadze 
Title: On Origins of Bubbles
Abstract: We discuss – in what is intended to be a pedagogical fashion – a criterion, which is a lower bound on a certain ratio, for when a stock (or a similar instrument) is not a good investment in the long term, which can happen even if the expected return is positive. The root cause is that prices are positive and have skewed, long-tailed distributions, which coupled with volatility results in a long-run asymmetry. This relates to bubbles in stock prices, which we discuss using a simple binomial tree model, without resorting to the stochastic calculus machinery. We illustrate empirical properties of the aforesaid ratio. Log of market cap and sectors appear to be relevant explanatory variables for this ratio, while price-to-book ratio (or its log) is not. We also discuss a short-term effect of volatility, to wit, the analog of Heisenberg’s uncertainty principle in finance and a simple derivation thereof using a binary tree. 
Classification-JEL:  G00
Keywords: Bubble, Skewed Distribution, Stock Price, Volatility, Return, Dividends, Buybacks, Binomial Tree, Brownian Motion, Uncertainty Principle, Market Cap, Price-To-Book, Sectors, Time Ordering.
Journal: Journal of Risk & Control 
Pages: 1-30
Volume: 4
Issue: 1
Year: 2017
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/on-origins-of-bubbles/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:4:y:2017:i:1:p:1-30
Template-Type: ReDIF-Article 1.0
Author-name: Zi-Yi Guo
Title: Heavy-tailed Distributions and Risk Management of Equity Market Tail Events
Abstract: Traditional econometric modelling typically follows the idea that market returns follow a
normal distribution. However, the concept of tail risk indicates that the distribution of
returns is not normal, but skewed and has heavy tails. Thus, a heavy-tailed distribution,
which accurately estimates the tail risk, would significantly improve quantitative risk
management practice. In this paper, we compare four widely used heavy-tailed
distributions using the S&P 500 daily returns. Our results indicate that the Skewed t
distribution in Hansen (1994) has the superior empirical performance compared with the
Student’s t distribution, the normal reciprocal inverse Gaussian distribution and the
generalized hyperbolic distribution. We further showed the Skewed t distribution could
generate the VaR estimates closest to the nonparametric historical VaR estimates
compared with other heavy-tailed distributions.
Classification-JEL: C46; C58; G10
Keywords: Tail risk; Value at Risk; Goodness of fit.
Journal: Journal of Risk & Control 
Pages: 31-41
Volume: 4
Issue: 1
Year: 2017
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/heavy-tailed-distributions-and-risk-management-of-equity-market-tail-events/?download=attachment.pdf
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Handle: RePEc:rmk:rmkjrc:v:4:y:2017:i:1:p:31-41
Template-Type: ReDIF-Article 1.0
Author-name: Michael Day
Author-name: Mark Diamond
Author-name: Jeff Card
Author-name: Jake Hurd
Author-name: Jianping Xu
Title: GARCH model and fat tails of the Chinese stock market returns - New evidences
Abstract: The Chinese stock market is unique in which it is moved more by individual retail
investors than institutional investors. Therefore, for economic and political stability it is
more important to efficiently manage the risk of the Chinese stock market. We investigate
its volatility dynamics through the GARCH model with three types of heavy-tailed
distributions, the Student’s t, the NIG and the NRIG distributions. Our results show that
estimated parameters for all the three types of distributions are statistical significant and
the NIG distribution has the best empirical performance in fitting the Chinese stock
market index returns.
Classification-JEL: C22; C52; G17
Keywords: generalized hyperbolic distribution, GARCH model, SHA
Journal: Journal of Risk & Control 
Pages: 43-49
Volume: 4
Issue: 1
Year: 2017
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/garch-model-and-fat-tails-of-the-chinese-stock-market-returns-new-evidences/?download=attachment.pdf
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Handle: RePEc:rmk:rmkjrc:v:4:y:2017:i:1:p:43-49
Template-Type: ReDIF-Article 1.0
Author-name: Vasilios Sogiakas
Title: Efficiency of the UK Stock Exchange
Abstract: This paper investigates the dynamics of the factors of the Fama & French (1993) model using data from
the UK financial market. Since financial markets are exposed to exogenous and endogenous structural
changes due to the implementation of new regulative guidelines and/or the fluctuation of investors’
behavior or the unanticipated financial crises, my analysis is based on an econometric methodology that
accounts for structural breaks and regimes shifts. According to the empirical results of the paper, although
the functioning of the conventional risk premiums seems to adequately explain the cross-sectionality of
share returns, there exists instability on the parameter set, which is associated with the fundamentals of
the UK economy. Finally, the implications of these results shed much light on the contribution of the
recent financial crisis into the informational efficiency of the UK financial market. Thus, although the
current liquidity crisis is linked with unanticipated imbalances in the economic environment, it might
have been a good opportunity for individual and institutional investors to revise their investing strategies,
since the excess returns’ risk premia have reached more informative regimes.
Classification-JEL: C22, C32, C58, C63, G11
Keywords: Efficient Market Hypothesis, Three Factor model, Regime Shift, Financial Crises
Journal: Journal of Risk & Control 
Pages: 51-69
Volume: 4
Issue: 1
Year: 2017
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/efficiency-of-the-uk-stock-exchange/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:4:y:2017:i:1:p:51-69
Template-Type: ReDIF-Article 1.0
Author-name: Andrey Kudryavtsev
Title: VIX Index and Stock Returns Following Large Price Moves
Abstract: My study explores the effect of future volatility expectations, embedded in VIX index, on large daily stock price changes and on subsequent stock returns. Following both psychological and financial literature claiming that good (bad) mood may cause people to perceive positive (negative) future outcomes as more probable and that the changes in the value of VIX may be negatively correlated with contemporaneous investors’ mood, I hypothesize that if a major positive (negative) stock price move takes place on a day when the value of VIX falls (rises), then its magnitude may be amplified by positive (negative) investors' mood, creating price overreaction to the initial company-specific shock, which may result in subsequent price reversal. In line with my hypothesis, I document that both positive and negative large price moves accompanied by the opposite-sign contemporaneous changes in VIX are followed by significant reversals on the next two trading days and over five- and twenty-day intervals following the event, the magnitude of the reversals increasing over longer post-event windows, while large stock price changes taking place on the days when the value of VIX moves in the same direction are followed by non-significant price drifts. The results remain robust after accounting for additional company (size, beta, historical volatility) and event-specific (stock's return and trading volume on the event day) factors, and are stronger for small and volatile stocks.
Classification-JEL: G11, G14, G19
Keywords: Behavioral Finance; Large Price Changes; Mood; Overreaction; Stock Price Reversals; Volatility Expectations; VIX.
Journal: Journal of Risk & Control 
Pages: 71-101
Volume: 4
Issue: 1
Year: 2017
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/vix-index-and-stock-returns-following-large-price-moves/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:4:y:2017:i:1:p:71-101
Template-Type: ReDIF-Article 1.0
Author-name: Zura Kakushadze 
Author-name: Willie Yu 
Title: Notes on Fano Ratio and Portfolio Optimization
Abstract: We discuss - in what is intended to be a pedagogical fashion - generalized "mean-to-risk" ratios for portfolio optimization. The Sharpe ratio is only one example of such generalized "mean-to-risk" ratios. Another example is what we term the Fano ratio (which, unlike the Sharpe ratio, is independent of the time horizon). Thus, for long-only portfolios optimizing the Fano ratio generally results in a more diversified and less skewed portfolio (compared with optimizing the Sharpe ratio). We give an explicit algorithm for such optimization. We also discuss (Fano-ratio-inspired) long-short strategies that outperform those based on optimizing the Sharpe ratio in our backtests. 
Classification-JEL: G00
Keywords: Portfolio, Stocks, Equities, Optimization, Sharpe Ratio, Fano Ratio, Risk, Return, Expected Return, Alpha, Specific Risk, Idiosyncratic Risk, Factor Loadings, Factor Covariance Matrix, Risk Factor, Volatility, Variance, Covariance, Correlation, Bounds, Trading Costs, Constraints, Regression, Weights.
Journal: Journal of Risk & Control 
Pages: 1-33
Volume: 5
Issue: 1
Year: 2018
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/notes-on-fano-ratio-and-portfolio-optimization/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:5:y:2018:i:1:p:1-33
Template-Type: ReDIF-Article 1.0
Author-name: Zura Kakushadze 
Author-name: Willie Yu
Title: Stock Market Visualization
Abstract: We provide complete source code for a front-end GUI and its back-end counterpart for a stock market visualization tool. It is built based on the “functional visualization” concept we discuss, whereby functionality is not sacrificed for fancy graphics. The GUI, among other things, displays a color-coded signal (computed by the back-end code) based on how “out-of-whack” each stock is trading compared with its peers (“mean-reversion”), and the most sizable changes in the signal (“momentum”). The GUI also allows to efficiently filter/tier stocks by various parameters (e.g., sector, exchange, signal, liquidity, market cap) and functionally display them. The tool can be run as a web-based or local application.
Classification-JEL: G00 
Keywords: stock market, visualization, mean-reversion, momentum, signal, quantitative, sector, industry, sub-industry, liquidity, market capitalization, color-coding, exchange, functionality, source code, visual effects, trading, tickers, stocks, equities, filtering, tiering, industry classification, volatility, price, volume
Journal: Journal of Risk & Control 
Pages: 35-140
Volume: 5
Issue: 1
Year: 2018
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/stock-market-visualization/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:5:y:2018:i:1:p:35-140
Template-Type: ReDIF-Article 1.0
Author-name: Olympia Gkouma
Author-name: John Filos
Author-name: Evangelos Chytis
Title: Financial crisis and corporate failure: The going concern assumption Findings from Athens stock exchange
Abstract: Corporate failure may be defined as the situation where a business unit becomes insolvent and progressively moves towards bankruptcy or into liquidation. The recent financial crisis has deteriorated dramatically the financial conditions in which the business units operate and has a significant impact on the companies that experience corporate failure. The going concern assumption constitutes a fundamental accounting principle for the preparation of financial statements and is even more important in times when global economy is facing such a financial crisis. The independent auditor’s report attribute credibility to the financial statements prepared by management. The purpose of this paper is to develop a reliable model that classifies the risk of corporate failure on six levels using financial analysis ratios. The model is developed based on financial data of Athens Stock Exchange (ASE) listed firms for the year 2011.
Classification-JEL: M41, M42, M48
Keywords: IFRS, Going Concern, Insolvent, Auditor’s Report
Journal: Journal of Risk & Control 
Pages: 141-170
Volume: 5
Issue: 1
Year: 2018
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/financial-crisis-and-corporate-failure-the-going-concern-assumption-findings-from-athens-stock-exchange/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:5:y:2018:i:1:p:141-170
Template-Type: ReDIF-Article 1.0
Author-name: Andrey Kudryavtsev
Title: Psychological Aspects of Stock Returns Accompanied by High Trading Volumes
Abstract: Present study explores the effect of the availability heuristic (representing people's tendency to determine the likelihood of an event according to the easiness of recalling similar instances, and, thus, to overweight current information, as opposed to processing all relevant information) on stock price dynamics following days of extremely high trading volumes. I hypothesize that if the sign of a stock's return on the day when it registers an extremely high trading volume corresponds to the sign of the same day's stock market index return, then because of the effect of the availability heuristic, investors may consider the underlying important news to have a greater subjective probability of leading to stock returns of the respective sign, amplifying the latter and creating overreaction, which results in subsequent price reversal. Defining high-volume days according to a number of alternative proxies, I document that, in line with my hypothesis, both positive and negative high-volume day stock returns accompanied by the same-sign contemporaneous daily market returns are followed by significant reversals on the next trading day and over five- and twenty-day intervals following the event, the magnitude of the reversals increasing over longer post-event windows, while high-volume day stock price changes taking place on the days when the market index moves in the opposite direction are followed by non-significant price drifts. The results remain robust after accounting for additional company-specific (size, beta, historical volatility) and event-specific (event-day stock's return) factors, and are stronger for low capitalization and high volatility stocks.
Classification-JEL: G11, G14, G19
Keywords: Availability Heuristic; Behavioral Finance; High Trading Volumes; Overreaction; Stock Price Reversals.
Journal: Journal of Risk & Control 
Pages: 1-17
Volume: 6
Issue: 1
Year: 2019
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/psychological-aspects-of-stock-returns-accompanied-by-high-trading-volumes/?download=attachment.pdf
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Handle: RePEc:rmk:rmkjrc:v:6:y:2019:i:1:p:1-17
Template-Type: ReDIF-Article 1.0
Author-name:  Vasilios Plakandaras
Author-name: Periklis Gogas
Author-name: Theophilos Papadimitriou
Title: A re-evaluation of the Feldstein-Horioka puzzle in the Eurozone
Abstract: In this paper we re-evaluate the capital immobility hypothesis of Feldstein and Horioka (1980) for the case of the European Union and the Eurozone, based on long-run regressions. We employ the Long Run Derivative proposed by Fischer and Seater (1993) in order to examine capital mobility as a long-run phenomenon. In order to enhance the robustness of our results we also perform panel causality tests on our data as it is a common approach in this setting. Our empirical findings provide no evidence in favor of the capital immobility hypothesis. In fact, we reject capital immobility even before the creation of the European Union, the introduction of the Eurozone or the 2008 global financial crisis. 
Classification-JEL: F20, F30
Keywords: Feldstein -Horioka puzzle, Investment, Savings, International Economics
Journal: Journal of Risk & Control 
Pages: 19-35
Volume: 6
Issue: 1
Year: 2019
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/a-re-evaluation-of-the-feldstein-horioka-puzzle-in-the-eurozone/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:6:y:2019:i:1:p:19-35
Template-Type: ReDIF-Article 1.0
Author-name: Zura Kakushadze
Author-name: Willie Yu
Title: Machine Learning Risk Models
Abstract: We give an explicit algorithm and source code for constructing risk models based on machine learning techniques. The resultant covariance
matrices are not factor models. Based on empirical backtests, we compare the performance of these machine learning risk models to other constructions,
including statistical risk models, risk models based on fundamental industry classifications, and also those utilizing multilevel clustering based
industry classifications.
Classification-JEL: G00; G10; G11; G12; G23
Keywords: machine learning; risk model; clustering; k-means; statistical risk models; covariance; correlation; variance; cluster number; risk factor; optimization;
regression; mean-reversion; factor loadings; principal component; industry classification; quant; trading; dollar-neutral; alpha; signal; backtest
Journal: Journal of Risk & Control 
Pages: 37-64
Volume: 6
Issue: 1
Year: 2019
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/machine-learning-risk-models/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:6:y:2019:i:1:p:37-64
Template-Type: ReDIF-Article 1.0
Author-name: Michael Jacobs
Title: An Analysis of the Impact of Modeling Assumptions in the Current Expected Credit Loss (CECL) Framework on the Provisioning for Credit Loss  
Abstract: The CECL revised accounting standard for credit loss provisioning is intended to represent a for-ward-looking and proactive methodology that is conditioned on expectations of the economic cycle.  In this study we analyze the impact of several modeling assumptions - such as the methodology for projecting expected paths of macroeconomic variables, incorporation of bank-specific variables or the choice of macroeconomic variables – upon characteristics of loan loss provisions, such as the degree of pro-cyclicality.  We investigate a modeling framework that we believe to be very close to those being contemplated by institutions, which projects various financial statement line items, for an aggregated “average” bank using FDIC Call Report data.  We assess the accuracy of 14 alternative CECL modeling approaches.  A key finding is that assuming that we are at the end of an economic expansion, there is evidence that provisions under CECL will generally be no less procyclical compared to the current incurred loss standard.  While all the loss prediction specifications perform similarly and well by industry standards in-sample, out of sample all models perform poorly in terms of model fit, and also exhibit extreme underprediction.  Among all scenario generation models, we find the regime switching scenario generation model to perform best across most model performance metrics, which is consistent with the industry prevalent approaches of giving some weight to scenarios that are somewhat adverse.  Across scenarios that the more lightly parametricized models tended to perform better according to preferred metrics, and also to produce a lower range of results across metrics.  An implication of this analysis is a risk CECL will give rise to challenges in comparability of results temporally and across institutions, as estimates vary substantially according to model specification and framework for scenario generation.  We also quantify the level of model risk in this hypothetical exercise using the principle of relative entropy, and find that credit models featuring more elaborate modeling choices in terms of number of variables, such as more highly parametricized models, tend to introduce more measured model risk; however, the more highly parametricized MS-VAR model, that can accommodate non-normality in credit loss, produces lower measured model risk.  The implication is that banks may wish to err on the side of more parsimonious approaches, that can still capture non-Gaussian behavior, in order to manage the increase model risk that the introduction of the CECL standard gives rise to.  We conclude that investors and regulators are advised to develop an understanding of what factors drive these sensitivities of the CECL estimate to modeling assumptions, in order that these results can be used in prudential supervision and to inform investment decisions.  . 
Classification-JEL: G21, G28, M40, M48
Keywords: Accounting Rule Change, Current Expected Credit Loss, Allowance for Loan and Lease Losses, Credit Provisions, Credit Risk, Financial Crisis, Model Risk. 
Journal: Journal of Risk & Control 
Pages: 65-112
Volume: 6
Issue: 1
Year: 2019
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/an-analysis-of-the-impact-of-modeling-assumptions-in-the-current-expected-credit-loss-cecl-framework-on-the-provisioning-for-credit-loss/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:6:y:2019:i:1:p:65-112
Template-Type: ReDIF-Article 1.0
Author-name: Zura Kakushadze
Title: Healthy. . .Distress. . . Default
Abstract: We discuss a simple, exactly solvable model of stochastic stock dynamics that incorporates regime switching between healthy and distressed
regimes. Using this model, which is analytically tractable, we discuss a way of extracting expected returns for stocks from realized CDS spreads,
essentially, the CDS market sentiment about future stock returns. This alpha/signal could be useful in a cross-sectional (statistical arbitrage) context
for equities trading.
Classification-JEL: G00; G10; G11; G12; G23
Keywords: stock; CDS spread; healthy; distress; default; stochastic dynamics; statistical arbitrage; alpha; regime switching; expected return; market sentiment;
equities trading
Journal: Journal of Risk & Control 
Pages: 113-119
Volume: 6
Issue: 1
Year: 2019
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/healthy-distress-default/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:6:y:2019:i:1:p:113-119
Template-Type: ReDIF-Article 1.0
Author-name: Andrey Kudryavtsev
Title: Stock Return Dynamics after Analyst Recommendation Revisions
Abstract: The study explores the correlation between the immediate and the longer-term stock returns following analyst recommendation revisions. In line with previous studies, documenting that recommendation revisions are followed by significant stock price drifts , I suggest that if a recommendation revision is followed by a relatively large short-term stock price drift, then it may indicate that the new information is more completely reflected by the respective stock's price, creating significantly less reasons for subsequent longer-term price drift, which therefore, should be significantly less pronounced compared to the one following another recommendation revision which is not immediately followed by a significant price drift in a short run. Employing a sample of recommendation revisions, I establish that positive (negative) one-, three- and six-month stock price drifts after recommendation upgrades (downgrades) are significantly more pronounced if the latter are immediately followed by relatively low (high) short-term (5- or 10-day) cumulative abnormal returns. The effect remains robust after accounting for additional company-specific (size, Market-Model beta, historical volatility) and event-specific (number of recommendation categories changed in the revision, analyst experience) factors.
Classification-JEL: G11, G14, G19
Keywords: Analyst Recommendation Revisions; Behavioral Finance; Overreaction; Stock Price Drifts.
Journal: Journal of Risk & Control 
Pages: 1-16
Volume: 7
Issue: 1
Year: 2020
File-URL: https://www.riskmarket.co.uk/jrc/journals-articles/issues/stock-return-dynamics-after-analyst-recommendation-revisions/?download=attachment.pdf
File-Format: Application/pdf
Handle: RePEc:rmk:rmkjrc:v:7:y:2020:i:1:p:1-16