Macroeconomic risk

This study examines macroeconomic risk factors to investigate how they affect working capital management (WCM) and, ultimately, firm performance. Additionally, we examine the effect of credit default swaps (CDSs) as a countermeasure for WCM in the presence of volatile macroeconomic risk factors. In doing so, we use firm-level data from the United States, the United Kingdom, Germany, and China between 2006 and 2020. The two-step system generalized method of moments (GMM) estimation method is employed to analyze the study′s objectives. Results show that US, German, and Chinese firms are more conservative, while UK firms are more aggressive in maintaining WCM during economic policy uncertainty. Conversely, foreign exchange risks drive the USA, the UK, and Chinese firms to lengthen their cash conversion cycle level due to fear of value loss, while the opposite is true for German firms. Nevertheless, following CDS adoption, firms are more confident in working capital (WC) investment. CDSs eliminate the need for delayed receivables and payables and increased inventory as safety stock for US, UK, and Chinese firms. Finally, CDS interaction shows that USA, UK, and German firms may boost their profitability by increasing account receivable periods to create more sales, reducing account payable periods, and holding more inventories to expedite sales operations. Alternatively, CDSs suggest an optimal level of WC investment for Chinese firms. As a result, governments should consider CDS adoption in policy decisions when business performance sinks due to macroeconomic volatility.

The goal of this paper is to explain a recent regularity observed in economies in which central banks have moved from using a money aggregate as the instrument for the conduction of monetary policy towards a short-term interest rate (for example Peru in 2002). In particular, in those ...

The goal of this paper is to explain a recent regularity observed in economies in which central banks have moved from using a money aggregate as the instrument for the conduction of monetary policy towards a short-term interest rate (for example Peru in 2002). In particular, in those economies we observe that, after the change in the policy instrument, there is a decrease in the macroeconomic volatility accompanied by a reduction in the average level of both in ‡ation and interest rates vis-à-vis an increase in the average level of money aggregates (an increase in the money demand). In order to explain the previous stylized fact, a second order solution of a general equilibrium model for a small open economy is evaluated. By analyzing the second order solution we relax the assumption of certainty equivalence which permits consider the role of uncertainty (risk) in the equilibrium solution of the economy. The previous solution takes into account the reduction of macroeconomic uncertainty (risk) as a consequence of changing the instrument (from money aggregates to interest rate rules), helping to explain the stylized fact. Our …ndings show that the use of the interest rate as the instrument for the conduction of monetary policy induces a reduction of macroeconomic risks. In turn, the previous reduction has driven a decrease in the average level of interest rates and in ‡ation which is consistent with the increase in the demand for money observed in Peru in the 2000s. Hence, the recent increase in the growth rate of money aggregates should not be linked, whatsoever, to higher in ‡ation rates.

We show that risk plays an important role in estimating the adjustment of the firm's capital structure. We find that the adjustment process is asymmetric and depends on the type of risk, its magnitude, the firm's current leverage, and its financial status. We also show that firms with financial surpluses and above-target leverage adjust their leverage more rapidly when firm-specific risk is low and when macroeconomic risk is high. Firms with financial deficits and below-target leverage adjust their capital structure more quickly when both types of risk are low. Our investigation suggests that models without risk factors yield biased results.

A contribution to the study of volatility and country risk is made in order to achieve a successful crosscountry comparison. We present a methodology for the evaluation of country risk that include endogenous detection of multiple structural breaks (also identifying its different kinds), determination of persistence of shocks through their structural-break free fractional integration order and determination of the adjusted

Algunos eventos vividos en los últimos años, como la pandemia, la crisis logística, alimentaria y energética, han puesto de manifiesto el rol que juegan los riesgos globales en la situación económica, social, política y de relacionamiento internacional de los países (Massot, 2015).

Ahora bien, este tipo de eventos -shocks exógenos- a los que se asocian los riesgos globales no afectan de igual forma y con igual intensidad a todos los países, regiones, empresas y familias. Esto depende de su naturaleza (pandemia, crisis energética, alimentaria o financiera, etc. ), el tipo y profundidad de la vulnerabilidad estructural de la economía, región, empresa o familia (comercial, financiera, geológica, etc.) y la resiliencia, en tanto capacidad o recursos, generadas por las políticas pública y las decisiones privadas, en particular, las económicas y sociales (Seth y Ragab, 2012; Massot, 2015; Briguglio, 2016).

En ese marco puede analizarse la cuestión del riesgo macroeconómico, la cual se define como la probabilidad de que un shock exógeno, como la pandemia o una crisis financiera global, pueda alterar la tasa de crecimiento económico de un país o su volatilidad (Massot, 2014). Al indicador que ofrece una cuantificación de esta probabilidad se lo denomina posibilidad de estrés o crisis macroeconómica.

El objetivo del artículo es identificar y examinar similitudes y diferencias en la evolución comparada entre 1990 y 2019 del riesgo y estrés macroeconómico de India, Argentina, Brasil, Chile, Colombia y México.  La hipótesis que nos planteamos es que la distinta estructura y políticas económicas han generado diferencias en el riesgo y estrés macroeconómico de la India y los países de América Latina los que, a su vez, se asemejan entre ellos.

This paper studies the relationship between volatility and long-run growth in a complete market economy with human capital accumulation and Epstein-Zin preferences. There is both crosscountry and time-series evidence that volatility is associated with lower growth. Matching this evidence has proved a challenge for growth models with no market failures as they tend to predict the opposite for values of risk aversion higher than unity. However in our model, risk aversion and intertemporal elasticity of substitution are allowed to move independently of each other, and when both are relatively high or relatively low, the relationship between volatility and growth is negative. Indeed this is the case for parametrizations of preferences in line with the literature.

I utilize a keyword matching technique for comparing sustainability disclosure levels among publicly listed U.S. firms. By computerized parsing of the 10-K form, filed with the U.S. Securities Exchange Commission, I construct a sample of 88,464 firm-year sustainability disclosure observations. I find significant cross-sectional variation in sustainability disclosure in 10-K forms and document a steady increase in the form’s usage as a tool for sustainability reporting since the 1990s. Several firm characteristics correlate with disclosure levels of sustainability relating information. Primarily firm size, geographical dispersion, and industry show significant variation in firm 10-K sustainability disclosure concurring with previous empirical work. After controlling for several firm characteristics, I document a negative association between a firm’s sustainability disclosure and stock returns in microcaps. The relation between sustainability disclosure and stock returns is not statis...

In the US, the size of intangible investment is similar to that of physical investment. The risk premium for holding physical capital over intangible capital is comparable to the market equity premium. We present a quantitative general equilibrium asset pricing model with intangible capital whose predictions are consistent with key features of both macroeconomic quantity dynamics and stylized asset pricing facts. In particular, our model produces: 1) a high spread between the returns of tangible capital and intangible capital; 2) a high premium of the aggregate stock market over the risk-free interest rate; 3) a low and smooth risk-free interest rate; and 4) dynamics for macroeconomic quantities consistent with US data. Our model rationalizes about 75% of the observed difference in the average return of book-to-market sorted portfolios.

For nearly two decades banks in the United States have consolidated in record numbers &in terms of both frequency and the size of the merging institutions. Rhoades (1996) hypothesizes that the main motivators were increased potential for geographic expansion created by changes in state laws regulating branching and a more favorable antitrust climate. To look for evidence of economic incentives to exploit these improved opportunities for consolidation, we examine how consolidation affects expected profit, the riskiness of profit, profit efficiency, market value, market-value efficiencies, and the risk of insolvency. Our estimates of expected profit, profit risk, and profit efficiency are based on a structural model of leveraged portfolio production that was estimated for a sample of highest-level U.S. bank holding companies in Hughes, Lang, Mester, and Moon (1996). Here, we also estimate two additional measures that gauge efficiency in terms of the market values of assets and of equity. Our findings suggest that the economic benefits of consolidation are strongest for those banks engaged in interstate expansion and, in particular, interstate expansion that diversifies banks' macroeconomic risk. Not only do these banks experience clear gains in their financial performance, but society also benefits from the enhanced bank safety that follows from this type of consolidation.

The surge in cross-border banking prior to global financial crises took place not only in the interbank market but also in the retail market, e.g. between banks and their private customers abroad. We utilize confidential data to estimate for the first time the effects of banking, currency and twin crises on the geography of cross-border deposits and loans. We show that each crisis type has its own specific effects, that these effects themselves lead to sustained increases in cross-border banking, and that they are different for cross-border loans and deposits, respectively.

This paper provides empirical evidence on the relationship between country-fund discounts and time-varying risk factors by analyzing monthly data of 39 closed-end country funds. By using conditional standard deviations derived from stock index returns, foreign exchange returns, inflation rates, real incomes, and interest rates to measure the risks associated with stock markets and macroeconomic fundamentals, respectively, we find significant evidence to support the proposition that fund discounts are correlated with time-varying U.S. and foreign risk factors. Additionally, among all the risk measures, the U.S. stock return volatility appears to be the most dominant risk factor to explain country-fund discounts. During the Asian crisis period, our evidence indicates that foreign exchange risk and foreign macroeconomic risk factors have a more profound impact on the country-fund discounts.

We examine the risk-return characteristics of a rolling portfolio investment strategy where more than 6,300 Nasdaq IPO stocks are bought and held for up to five years over the 1973-2000 period. The puzzling low average long-run (raw) return to IPO stocks first reported by Ritter (1991) manifests itself in this much larger sample as well. As Brav and Gompers (1997) and Brav, Geczy, and Gompers (2000), we challenge the claim that the returns are too low to be explained within standard, rational asset pricing paradigms. However, our risk explanation goes beyond the earlier papers' reference to a general-but poorly understood-book-to-market effect in the average return to small growth stocks. We show that the typical IPO firm exhibits relatively low leverage and high liquidity. There is theoretical basis for arguing that each of these two characteristics lower the systematic risk exposure of equity returns. Our factor model estimation, which includes a new liquidity risk factor, produces estimates consistent with this explanation. We cannot reject the hypothesis that the low average IPO returns are commensurable with their risk exposures, as defined here.

This paper proposes an ICAPM in which the risk premium embedded in variance swaps is the factor mimicking portfolio for hedging exposure to changes in future investment conditions. Recent empirical evidence shows that the fears by investors to deviations from Normality in the distribution of returns are able to explain time-varying financial and macroeconomic risks in addition to being a determinant of the variance risk premium. Moreover, variance swaps hedges unfavorable changes in the stochastic investment opportunity set, and is not a redundant asset because significantly expands the efficient mean-variance frontier. Thence, we should expect the variance swap risk premium to be priced in the market. We report relatively favorable evidence on the incremental pricing information associated with the variance risk premium, particularly at shorter horizons.

This paper introduces state-uncertainty preferences into the Lucas (1982) economy, showing that this type of preferences helps to explain the exchange rate risk premium. Under these preferences we can distinguish between two factors driving the exchange rate risk premium: "macroeconomic risk" and "the risk associated with variation in the private agents' perception on the level of uncertainty". State-uncertainty preferences amount to assuming that a given level of consumption will yield a higher level of utility the lower is the level of uncertainty perceived by consumers. Furthermore, empirical evidence from three main European economies in the transition period to the euro provides empirical support for the model

Depositor behavior has been associated with bank-specific characteristics, random runs, or contagion episodes. Using evidence on the 2000-02 bank runs in Argentina and Uruguay, this paper shows that macroeconomic risk is also important. Few macroeconomic shocks can quickly cause large runs. Macroeconomic risk affects deposits regardless of traditional bank-specific characteristics. Furthermore, bank exposure to macroeconomic factors can explain differences in deposit withdrawals. During crises, the evolution of bank-specific characteristics is mainly driven by macroeconomic factors, while the informational content of bank-specific variables declines. Overall, depositors seem responsive to risk in a broader sense than that often considered by the literature.

This article examines private Austrian investment in the Hungarian economy as an example of private financial investment in a backward foreign economy in the late nineteenth century. The main finding is the dominant role of Austrian investment in institutional securities such as Hungarian state bonds and bank securities, which comprised a steadily rising proportion in the portfolios of investors. The only other important sector of the Hungarian economy that was invested in directly was the transport system, which depended on the fluctuations in the development of the Hungarian economy rather than on long-term trends. Securities of the manufacturing sector did not attract the interest of most Austrian investors. Banks and the state thus constituted an element of stability in the Hungarian economy and helped it to acquire funds that could not be provided by the domestic market. Co. 00011) O.OOIOO*** Co. 000//; 0.00122*** Co. 00009) 0.00116*** (0.00010) 0.00102*** Co. 00014) 0.00107*** (0.00007) 0.00133*** Co. 00011) 0.00098*** Co. 00016) 0.00046*** Co. 00010) 0.00046** Co. 00016) 0.00108*** Co. oooo5; 0.00073*** Co. 00010) 0.00083*** Co. 00008) 0.00026*** Co. 00001) 0.00000* Co. 00000; 0.00036*** Co. 00004) 0.00014** Co. 00004)-0.00002 Co. 00004) 0.00013*

This paper addresses the question of whether and how monetary policy ease may lead to excesses in financial and real asset markets and ultimately result in financial dislocation. It presents evidence suggesting that periods when short-term interest rates have been persistently and significantly below what Taylor rules would prescribe are correlated with increases in asset prices, especially as regards housing, though no systematic effects are identified on equity markets. Significant asset price increases, however, can also occur when interest rates are in line with Taylor rules, associated with periods of financial deregulation and/or innovation. The paper argues that accommodating monetary policy over the period 2002-2005, in combination with rapid financial market innovation, would seem in retrospect to have been among the factors behind the run-up in asset prices and consequent financial imbalances-the (partial) unwinding of which helped trigger the 2007 financial market turmoil. Moreover, the paper points out that in certain situations policy rates may be a rather blunt tool for dealing with both the build-up and aftermath of financial imbalances, raising the question whether "macro-prudential" regulation could be useful.

The modern history of the Russian stock market has mirrored ups and downs of the country's transition as well as swings in investor perceptions. In this paper, we describe the evolution of the Russian stock market over its first decade, with particular attention to the risk factors driving stock returns. First, we analyze the development of the institutional infrastructure and dynamics of the market's size and liquidity measured by the number of listed and traded stocks, depositary receipts and IPOs as well as trading volume in the local stock exchanges and abroad. Then, we examine major political and economic events, which influenced the investor perceptions of the country risk and were reflected in stock prices. Finally, we carry out quantitative analysis of risk factors explaining considerable time and cross-sectional variation in Russian stock returns. We document a significant role of corporate governance, political risk, and macroeconomic risk factors, such as global equity markets performance, oil prices, and exchange rates, whose relative importance varied a lot over time.

Purpose-This study investigates long term underperformance anomaly existence on Seasoned Equity Offerings (seos) conducted in Borsa Istanbul for the 2010-2015 period and analyzes its determinant factors. Methodology-Raw and abnormal returns were calculated then t statistics were obtained for each type of returns. All returns were compared to market average and peer groups returns. The hypotheses were tested via the comparison t statistics and t values. Regression analysis were used to determine what kind of determinants affect long-term price performance. To find out underperformance anomaly's determinants regression analysis was used through Panel Dynamic OLS (PDOLS) method. The analysis was also conducted based on year and sector separately. Findings-Long-term price performance of firms that performed seos during the 2010-2015 period were calculated lower than market average and peer groups and all findings were statistically significant. Same results were obtained when the analysis was conducted on the basis of year and sector. Conclusion-Long-term underperformance anomaly was confirmed and it has been determined that Leverage Change Ratio, Private Placemet method and Volume variables have a positive effect on long-term price performance while all other variables have a negative effect.

A strategically minded CFO will realize that strategic corporate risk management is about finding the right balance between risk prevention and proactive value generation. Efficient risk and performance management requires adequate assessment of risk and risk exposures on the one hand and performance on the other. Properly designed, a risk measure should provide information on to what extend the firm's performance is at risk, what is causing that risk, the relative importance of non-value-adding and value-adding risk, and the possibilities to use risk management to reduce total risk. In this chapter, we present an approach-exposure-based cash-flow-at-risk-to calculating a firm's downside risk conditional on the firm's exposure to non-value-adding macroeconomic and market risk and to analyzing corporate performance adjusted for the impact of non-value-adding risk.

With increasing globalization, to what extent do stock market returns reflect global or domestic risk factors? We find a significant relationship between stock market returns and the global market risk factor and macroeconomic factors respectively. In particular, global factors offer four times more explanatory power than domestic factors for developed market stock returns. Yet domestic factors are as important as global ones in emerging economies. Our method allows for the proxies of the state variables to be endogenously determined. The relationship between macroeconomy and stock market returns is robust after accounting for the market factor, firm size and book-to-market characteristics.

This publication is a Technical report by the Joint Research Centre (JRC), the European Commission's science and knowledge service. It aims to provide evidence-based scientific support to the European policymaking process. The scientific output expressed does not imply a policy position of the European Commission. Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use that might be made of this publication.

I. INTRODUCTION Since the worldwide stock market crash in October 1987, the focus on the effectiveness of the regulatory mechanisms such as margin requirement has generated considerable interest in the implications of public policies.' This paper addresses another regulatory mechanism-price limit, which may have significant impact on asset price volatility and market efficiency. For the stock market, Roll (1989) argues that trading halts induced by stock price limits would have no effect on reducing stock market volatility. Ma, Rao, and Sears (1989) empirically investigate the impact of price limits on Treasury bond futures price volatility. Their findings indicate that price limits are effective in reducing volatility following limit moves, which is consistent with the overreaction hypothesis. ' They suggest that price limits can act as a cooling-off mechanism and allow traders to evaluate market information in a rational manner and aid in the price resolution process. Theoretically, Brennan (1986) suggests that no price limits should exist on financial futures because the traders have access to abundant information beyond the financial futures market. Brennan shows that price limits in futures markets may act as a partial substitute for margin requirements in ensuring contract performance. He argues that price limits are used in futures markets to prevent excess futures price movements to ensure contract compliance. On February 22, 1985, the Chicago Mercantile Exchange (CME) released the price limits of all foreign currency futures contracts. The removal of price limits is consistent with Brennan's assertion that no price limits should exist in financial futures markets. The regulatory change to remove price limits on all foreign currency futures provides a unique opportunity to examine whether the removal of price limits may improve market efficiency at the cost of increasing price volatility.

We develop a conditional version of the consumption capital asset pricing model (CCAPM) using the conditioning variable from the cointegrating relation among macroeconomic variables (dividend yield, term spread, default spread, and short-term interest rate). Our conditioning variable has a strong power to predict market excess returns in the presence of competing predictive variables. In addition, our conditional CCAPM performs approximately as well as Fama and French's (1993) three-factor model in explaining the cross-section of the Fama and French 25 size and book-to-market sorted portfolios. Our specification shows that value stocks are riskier than growth stocks in bad times, supporting the risk-based story.

The financial sector of each country in the world has its own specificities that depend on many factors. In this paper we will talk about the structure of the financial system in our country from the aspect of the banking sector. Banks are specialized institutions that have a special role in the development of the country's economic system, as their basic function is to supply the economy with the necessary amount of loans and money. Banking business is a special economic activity. It is determined by the type and content of banking operations. In general terms, banking transactions are divided into two groups: active and passive. The Bank is established as a joint-stock company, which is regulated by the laws on banks and international regulatory frameworks.

La baisse de la volatilite macroeconomique des les annees 1980 jusqu’au debut de la Grande Recession ne s’est pas, en general, traduite par une plus grande stabilite microeconomique. Si la volatilite microeconomique peut traduire des processus generateurs de croissance tels que la destruction creatrice et la reallocation des ressources, la volatilite de la croissance de la consommation pese sur le bien-etre des menages. Cette etude dresse un panorama de la litterature existante sur les liens entre les politiques economiques et la stabilite economique au niveau des entreprises et des menages. En s’appuyant sur des donnees d'entreprises et de menages couvrant un large eventail de pays de l'OCDE, elle fournit egalement des resultats preliminaires sur les caracteristiques de la volatilite microeconomique et ses origines.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

The previous financial crisis has revealed the importance of risk in the financial and business cycle within the economy. This paper examines relationship among three cycles in the economy, namely (i) business cycle macro risk, (ii) credit cycle and (iii) risk cycle, and their impacts toward individual bank performance. We examine the responses of individual bank credit cycle and risk cycle toward a shock in business cycle macro risk and its consequence to the bank performance. We use Indonesian data for period of 2005q1 to 2014q4. We use unbalanced panel data of individual banks’ balance sheet with Panel Vector Autoregressive approach based on GMM style estimation by implementing PVAR package developed by Abrigo and Love (2015). The result shows dynamic relationship between business cycle macro risk and financial risk cycles. The study also observes prominent role of risk cycles in driving bank performance. We also show the existence of financial accelerator phenomenon in Indonesia...

This paper estimates hedge fund and mutual fund exposure to newly proposed measures of macroeconomic risk that are interpreted as measures of economic uncertainty. We find that the resulting uncertainty betas explain a significant proportion of the cross-sectional dispersion in hedge fund returns. However, the same is not true for mutual funds, for which there is no significant relationship. After controlling for a large set of fund characteristics and risk factors considered in earlier work, the positive relation between uncertainty betas and future hedge fund returns remains economically and statistically significant. Hence, we argue that macroeconomic risk is a powerful determinant of crosssectional differences in hedge fund returns. We also show that directional and semi-directional hedge fund managers have the ability to time macroeconomic changes by increasing (decreasing) their portfolios' exposure to macroeconomic risk factors when economic uncertainty is high (low). However, the same is not true for non-directional hedge funds and mutual funds, both of which lack significant macro-timing ability. Thus, the predictive power of uncertainty betas seems to arise from the ability of hedge funds to detect fluctuations in financial markets and to adjust their positions in a timely fashion as macroeconomic conditions change.

Depositor behavior has been associated with bank-specific characteristics, random runs, or contagion episodes. Using evidence on the 2000-02 bank runs in Argentina and Uruguay, this paper shows that macroeconomic risk is also important. Few macroeconomic shocks can quickly cause large runs. Macroeconomic risk affects deposits regardless of traditional bank-specific characteristics. Furthermore, bank exposure to macroeconomic factors can explain differences in deposit withdrawals. During crises, the evolution of bank-specific characteristics is mainly driven by macroeconomic factors, while the informational content of bank-specific variables declines. Overall, depositors seem responsive to risk in a broader sense than that often considered by the literature.

An exposure to macroeconomic risk factors across banks is a source of systemic risk that influences the banking sector performance. In this paper, we present some evidence on macroeconomic variables affecting the non-performing loans (NPL) ratio in the Czech Republic, Slovakia and Slovenia.The GDP growth might have improved borrowers' ability to serve their bank loans in Slovenia, meanwhile the accelerating NPL ratio dynamics has failed to support the hypothesis that the GDP growth fosters an improvement in the NPL ratio in the case of Slovakia. Meanwhile deceleration in the NPL ratio on export impulses has supported a procyclical theory in the Czech Republic, Slovakia and Slovenia. The response of non-performing loans to inflation supports the hypothesis about the lowering inflation that decelerates the NPL ratio. Savings have accelerated the NPL ratio in the case of Slovakia and Slovenia. The banking sector performance is possibly reflecting a favourable assessment of the econ...

This paper introduces state-uncertainty preferences into the Lucas (1982) economy, showing that this type of preferences helps to explain the exchange rate risk premium. Under these preferences we can distinguish between two factors driving the exchange rate risk premium: "macroeconomic risk" and "the risk associated with variation in the private agents' perception on the level of uncertainty". State-uncertainty preferences amount to assuming that a given level of consumption will yield a higher level of utility the lower is the level of uncertainty perceived by consumers. Furthermore, empirical evidence from three main European economies in the transition period to the euro provides empirical support for the model

In many countries public equity markets capture a small fraction of economic activity. We show that relying on public equity indices to assess benefits from international diversification significantly understates diversification gains. We propose a new diversification approach to access a foreign country's overall economy rather than just its equity index. With this approach, we show that diversifying into emerging economies by investing solely in publicly-traded export-oriented firms in developed markets provides benefits beyond those available through emerging market equity indices. Our method delivers factor-adjusted returns above 7% annually, generates Sharpe ratios exceeding those of equity indices in developed and emerging markets, offers distinct correlation benefits, and shifts the efficient frontier by an economically large magnitude. Our results suggest that developed markets, by providing access to emerging economies, still offer substantial diversification benefits.

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This paper proposes an ICAPM in which the risk premium embedded in variance swaps is the factor mimicking portfolio for hedging exposure to changes in future investment conditions. Recent empirical evidence shows that the fears by investors to deviations from Normality in the distribution of returns are able to explain time-varying financial and macroeconomic risks in addition to being a determinant of the variance risk premium. Moreover, variance swaps hedges unfavorable changes in the stochastic investment opportunity set, and is not a redundant asset because significantly expands the efficient mean-variance frontier. Thence, we should expect the variance swap risk premium to be priced in the market. We report relatively favorable evidence on the incremental pricing information associated with the variance risk premium, particularly at shorter horizons.

This paper estimates hedge fund and mutual fund exposure to newly proposed measures of macroeconomic risk that are interpreted as measures of economic uncertainty. We find that the resulting uncertainty betas explain a significant proportion of the cross-sectional dispersion in hedge fund returns. However, the same is not true for mutual funds, for which there is no significant relationship. After controlling for a large set of fund characteristics and risk factors considered in earlier work, the positive relation between uncertainty betas and future hedge fund returns remains economically and statistically significant. Hence, we argue that macroeconomic risk is a powerful determinant of crosssectional differences in hedge fund returns. We also show that directional and semi-directional hedge fund managers have the ability to time macroeconomic changes by increasing (decreasing) their portfolios' exposure to macroeconomic risk factors when economic uncertainty is high (low). However, the same is not true for non-directional hedge funds and mutual funds, both of which lack significant macro-timing ability. Thus, the predictive power of uncertainty betas seems to arise from the ability of hedge funds to detect fluctuations in financial markets and to adjust their positions in a timely fashion as macroeconomic conditions change.

This paper proposes an ICAPM in which the risk premium embedded in variance swaps is the factor mimicking portfolio for hedging exposure to changes in future investment conditions. Recent empirical evidence shows that the fears by investors to deviations from Normality in the distribution of returns are able to explain time-varying financial and macroeconomic risks in addition to being a determinant of the variance risk premium. Moreover, variance swaps hedges unfavorable changes in the stochastic investment opportunity set, and is not a redundant asset because significantly expands the efficient mean-variance frontier. Thence, we should expect the variance swap risk premium to be priced in the market. We report relatively favorable evidence on the incremental pricing information associated with the variance risk premium, particularly at shorter horizons.

This paper introduces state-uncertainty preferences into the Lucas (1982) economy, showing that this type of preferences helps to explain the exchange rate risk premium. Under these preferences we can distinguish between two factors driving the exchange rate risk premium: "macroeconomic risk" and "the risk associated with variation in the private agents' perception on the level of uncertainty". State-uncertainty preferences amount to assuming that a given level of consumption will yield a higher level of utility the lower is the level of uncertainty perceived by consumers. Furthermore, empirical evidence from three main European economies in the transition period to the euro provides empirical support for the model

This paper proposes an ICAPM in which the risk premium embedded in variance swaps is the factor mimicking portfolio for hedging exposure to changes in future investment conditions. Recent empirical evidence shows that the fears by investors to deviations from Normality in the distribution of returns are able to explain time-varying financial and macroeconomic risks in addition to being a determinant of the variance risk premium. Moreover, variance swaps hedges unfavorable changes in the stochastic investment opportunity set, and is not a redundant asset because significantly expands the efficient mean-variance frontier. Thence, we should expect the variance swap risk premium to be priced in the market. We report relatively favorable evidence on the incremental pricing information associated with the variance risk premium, particularly at shorter horizons.

This paper aims to mainly investigate equity risk premium of the six major members of ASEAN countries such as Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam which have been chosen based on their stock market development and data availability. It has focused on the two main issues of the equity risk premium such as the intriguing issue on the existence of equity premium puzzle and the analysis on the impact of the 2008 financial crisis on the trend of the equity risk premium and their potential contribution on the risk aversion's attitude of the ASEAN investors. Three methods are utilized to test this phenomenon (1) basic model consumption of Mehra and Prescott (1985) and simplified model by Ni (2006); (2) calibration (Campbell, 2003) and (3) GMM estimation (Hansen, 1982). The calibration method results suggest that the puzzle exists in Indonesia.It has determined that the puzzle seems lying on the negative covariance between the consumption growth rate and the...

A contribution to the study of volatility and country risk is made in order to achieve a successful crosscountry comparison. We present a methodology for the evaluation of country risk that include endogenous detection of multiple structural breaks (also identifying its different kinds), determination of persistence of shocks through their structural-break free fractional integration order and determination of the adjusted

We show that risk plays an important role in estimating the adjustment of the firm's capital structure. We find that the adjustment process is asymmetric and depends on the type of risk, its magnitude, the firm's current leverage, and its financial status. We also show that firms with financial surpluses and above-target leverage adjust their leverage more rapidly when firm-specific risk is low and when macroeconomic risk is high. Firms with financial deficits and below-target leverage adjust their capital structure more quickly when both types of risk are low. Our investigation suggests that models without risk factors yield biased results.

Developing countries are being urged to extent public spending to reach The Millennium Development Goals (MDGs). Following a series of debt cancellations, the public debt of many developing countries has reached low levels, so that external borrowing is a plausible option. However, developing countries can not exclusively rely on external financing. Consequently, is an increase in the domestic debt possible and desirable? This paper investigates this issue in the case of the West African Economic and Monetary Union (WAEMU), of which several countries have benefited from important debt cancellations. We show that an increase in the domestic debt is feasible for some of the WAEMU countries since 1) there exist excess bank liquidity and foreign reserves which involve a low cost for public finance, 2) the main macroeconomic risks (debt distress, crowding out of private investment and real exchange rate appreciation) can be averted and 3) absorptive capacity may be enlarged by giving lar...

Uncertainty and its composition can affect the demand for social insurance, and thereby the labor market. This paper shows that small to medium-sized increases in uncertainty or risk aversion are enough to recommend an expansion of the safety net that would be broadly similar to the actual safety net expansions, which significantly depressed the labor market. Labor market effects of uncertainty through investment and insurance channels are also examined with employer and employee labor wedges.

This paper investigates the interaction between aggregate risk, financial fragility, and the macroeconomic performance of emerging market countries when asymmetric information at the level of firms and banks gives rise to agency costs. Two-sided debt contracts are the funding mechanism through which banks borrow from international investors and lend to domestic firms. Banks are risky because their portfolio returns hinge on the strength of the economy which represents a non-diversifiable aggregate risk. Banking crises are sporadic and driven by fundamentals. Macroeconomic risk affects business cycles because all agents suffer the effect of banking failures and incorporate the endogenously determined probability of a crisis into their economic decisions. Model results are consistent with the empirical evidence on banking crises because a slowdown of the economy or an unforeseen interest-rate rise tends to breed banking sector problems. Furthermore, the country-specific interest-rate spread is counter-cyclical because financial crises are less likely during booms.

We show that risk plays an important role in estimating the adjustment of the firm's capital structure. We find that the adjustment process is asymmetric and depends on the type of risk, its magnitude, the firm's current leverage, and its financial status. We also show that firms with financial surpluses and above-target leverage adjust their leverage more rapidly when firm-specific risk is low and when macroeconomic risk is high. Firms with financial deficits and below-target leverage adjust their capital structure more quickly when both types of risk are low. Our investigation suggests that models without risk factors yield biased results.