Risk management has been an important topic since the 2008 financial crisis, and it has become an important area of focus in business management. It is important for the board of directors to evaluate the ability and competence of the CEO. This study was aimed to investigate the effect of various risks on forced CEO turnover through the use of a linear probability model. The Chinese A-share market from 2010 to 2019 was selected as the sample, and theoretical analysis and empirical research were combined to explore the impact of various risks on forced CEO turnover, further analyzes the relationship under different ownerships. This paper study revealed that the crash risk is positively associated with forced CEO turnover. This paper also found that the idiosyncratic risk increases the likelihood of forced CEO turnover, and that the relationship is more significant in non- state-owned enterprises (non-SOEs) than state-owned enterprises (SOEs). The systematic risk has no effect on forced CEO turnover. Risks can be an important indicator of the CEO's ability and competence. This paper also evaluated the relationships in Chinese circumstances. China is an emerging market that has a different legal and social environment than other countries. The different goals of SOEs and non-SOEs lead to different risk attitudes. It is necessary to distinguish ownership when evaluating the Chinese situation.
{"title":"Impact of risks on forced CEO turnover","authors":"Xue Chang","doi":"10.3934/qfe.2022008","DOIUrl":"https://doi.org/10.3934/qfe.2022008","url":null,"abstract":"Risk management has been an important topic since the 2008 financial crisis, and it has become an important area of focus in business management. It is important for the board of directors to evaluate the ability and competence of the CEO. This study was aimed to investigate the effect of various risks on forced CEO turnover through the use of a linear probability model. The Chinese A-share market from 2010 to 2019 was selected as the sample, and theoretical analysis and empirical research were combined to explore the impact of various risks on forced CEO turnover, further analyzes the relationship under different ownerships. This paper study revealed that the crash risk is positively associated with forced CEO turnover. This paper also found that the idiosyncratic risk increases the likelihood of forced CEO turnover, and that the relationship is more significant in non- state-owned enterprises (non-SOEs) than state-owned enterprises (SOEs). The systematic risk has no effect on forced CEO turnover. Risks can be an important indicator of the CEO's ability and competence. This paper also evaluated the relationships in Chinese circumstances. China is an emerging market that has a different legal and social environment than other countries. The different goals of SOEs and non-SOEs lead to different risk attitudes. It is necessary to distinguish ownership when evaluating the Chinese situation.","PeriodicalId":45226,"journal":{"name":"Quantitative Finance and Economics","volume":null,"pages":null},"PeriodicalIF":5.3,"publicationDate":"2022-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"70230122","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, two comprehensive mathematical approaches: cubic piecewise polynomial function (CPPF) model and the Fourier Flexible Form (FFF) model are built into asset pricing models to explore the stock market risk, commodity market risk and overall business conditions in relation to US stock returns as a modelling experiment. A selection of knots and orders are applied on the models to determine the best fit coefficients, respectively, based on Akaike Information Criteria (AIC). The classic risk coefficient along with downside and upside counterparts are estimated in a non-linear time-weighted fashion and are subsequently adopted as risk factors to investigate the explanatory and predictive power to stock returns. It is found that time-weighted classic, downside and upside risk coefficients of all three domains provide significant explanatory power to current stock returns, while the predictive power appears to be weak. The findings fill the gap in literature, specifically on both investigating and pricing the time-weighted risk. This paper innovatively employs the Aruoba-Diebold-Scotti (ADS) real business index to measure the business conditions in macroeconomics context. The methodology proposed in this paper embeds advanced mathematical approaches to provide robust regression estimation. The application of proposed models enriches the dimension in pricing risk in stock market and wider financial market.
本文将三次分段多项式函数(CPPF)模型和傅立叶灵活形式(FFF)模型两种综合数学方法构建到资产定价模型中，作为建模实验，探讨股市风险、商品市场风险和整体商业状况与美股收益的关系。根据赤池信息准则(Akaike Information Criteria, AIC)，对模型分别应用选择的结和顺序来确定最佳拟合系数。以非线性时间加权的方式估计经典风险系数以及下行和上行对应系数，然后将其作为风险因素来研究对股票收益的解释和预测能力。研究发现，三个领域的时间加权经典、下行和上行风险系数对当前股票收益具有显著的解释能力，但预测能力较弱。这些发现填补了文献上的空白，特别是在调查和定价时间加权风险方面。本文创新性地采用了Aruoba-Diebold-Scotti (ADS)真实商业指数来衡量宏观经济背景下的商业状况。本文提出的方法嵌入了先进的数学方法来提供稳健的回归估计。所提出的模型的应用丰富了股票市场和更广泛的金融市场的风险定价维度。
{"title":"The impact of business conditions and commodity market on US stock returns: An asset pricing modelling experiment","authors":"Fangzhou Huang, Jiao Song, N. Taylor","doi":"10.3934/qfe.2022019","DOIUrl":"https://doi.org/10.3934/qfe.2022019","url":null,"abstract":"In this paper, two comprehensive mathematical approaches: cubic piecewise polynomial function (CPPF) model and the Fourier Flexible Form (FFF) model are built into asset pricing models to explore the stock market risk, commodity market risk and overall business conditions in relation to US stock returns as a modelling experiment. A selection of knots and orders are applied on the models to determine the best fit coefficients, respectively, based on Akaike Information Criteria (AIC). The classic risk coefficient along with downside and upside counterparts are estimated in a non-linear time-weighted fashion and are subsequently adopted as risk factors to investigate the explanatory and predictive power to stock returns. It is found that time-weighted classic, downside and upside risk coefficients of all three domains provide significant explanatory power to current stock returns, while the predictive power appears to be weak. The findings fill the gap in literature, specifically on both investigating and pricing the time-weighted risk. This paper innovatively employs the Aruoba-Diebold-Scotti (ADS) real business index to measure the business conditions in macroeconomics context. The methodology proposed in this paper embeds advanced mathematical approaches to provide robust regression estimation. The application of proposed models enriches the dimension in pricing risk in stock market and wider financial market.","PeriodicalId":45226,"journal":{"name":"Quantitative Finance and Economics","volume":null,"pages":null},"PeriodicalIF":5.3,"publicationDate":"2022-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"70230576","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines if investors exhibited evidence of the availability heuristic in their investment decisions when significant price changes occurred in the British stock market during the 2010–2018 period. We raise the hypothesis that if a significant stock price move takes place on a day when the stock market index also undergoes a significant change (either positive or negative), then the magnitude of that shock may be increased by the availability of positive investment or negative outcomes. We applied three different proxies for large stock price changes which yielded a robust sample of events for this study. We found no significant evidence of the availability heuristic. In addition, we also found no significant evidence of price overreaction for both price decreases and increases. Inversely, we found robust results that suggest randomness in the behavior of stock prices in this period, thus supporting the efficiency of financial markets and opposing the results from similar studies carried out in the United States.
{"title":"Availability heuristic and reversals following large stock price changes: evidence from the FTSE 100","authors":"Diogo Matos, Luís Pacheco, Júlio Lobão","doi":"10.3934/qfe.2022003","DOIUrl":"https://doi.org/10.3934/qfe.2022003","url":null,"abstract":"This paper examines if investors exhibited evidence of the availability heuristic in their investment decisions when significant price changes occurred in the British stock market during the 2010–2018 period. We raise the hypothesis that if a significant stock price move takes place on a day when the stock market index also undergoes a significant change (either positive or negative), then the magnitude of that shock may be increased by the availability of positive investment or negative outcomes. We applied three different proxies for large stock price changes which yielded a robust sample of events for this study. We found no significant evidence of the availability heuristic. In addition, we also found no significant evidence of price overreaction for both price decreases and increases. Inversely, we found robust results that suggest randomness in the behavior of stock prices in this period, thus supporting the efficiency of financial markets and opposing the results from similar studies carried out in the United States.","PeriodicalId":45226,"journal":{"name":"Quantitative Finance and Economics","volume":null,"pages":null},"PeriodicalIF":5.3,"publicationDate":"2022-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"70229959","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines the evidence of herding in the revolutionary cryptocurrency market for the period from January 2017 to December 2020. The study employs quantile regression technique for investigating herd behaviour during market asymmetries of rising and falling returns, extreme market returns, high volatility, and the exogenous event of the COVID-19 pandemic. The results provide evidence of pronounced herding during the bull phase, extreme down-markets, and high volatility. These results indicate that herd hunch is prevalent in the cryptocurrency market as investors exhibit imitation while ignoring their own knowledge and beliefs. Also, the phenomenon is more vividly observed during the panic period of COVID-19.
{"title":"Asymmetrical herding in cryptocurrency: Impact of COVID 19","authors":"Bharti, Ashish Kumar","doi":"10.3934/qfe.2022014","DOIUrl":"https://doi.org/10.3934/qfe.2022014","url":null,"abstract":"This paper examines the evidence of herding in the revolutionary cryptocurrency market for the period from January 2017 to December 2020. The study employs quantile regression technique for investigating herd behaviour during market asymmetries of rising and falling returns, extreme market returns, high volatility, and the exogenous event of the COVID-19 pandemic. The results provide evidence of pronounced herding during the bull phase, extreme down-markets, and high volatility. These results indicate that herd hunch is prevalent in the cryptocurrency market as investors exhibit imitation while ignoring their own knowledge and beliefs. Also, the phenomenon is more vividly observed during the panic period of COVID-19.","PeriodicalId":45226,"journal":{"name":"Quantitative Finance and Economics","volume":null,"pages":null},"PeriodicalIF":5.3,"publicationDate":"2022-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"70230556","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The crash of 1987 is considered one of the most significant events in the history of financial markets due to the severity and swiftness of market declines worldwide. In the aftermath of the crash, a permanent change in options market occurred; implied volatility skew started appearing in options markets worldwide. In this article, we argue that the emergence of the implied volatility skew can be understood as arising from increased investor awareness about the stock price process and its implications for delta hedging. Delta-hedging aims to eliminate the directional risk associated with price movements in the underlying asset. Before the crash, investors were unaware of the proposition that "a delta-hedged portfolio is risky". That is, they implicitly believed in the proposition that "a delta-hedged portfolio is risk-free". The crash caused "portfolio insurance delta-hedges" to fail spectacularly. The resulting visceral shock drove home the lesson that "a delta-hedged portfolio is risky", thus, increasing investor awareness. We show that this sudden realization that a delta-hedged portfolio is risky is sufficient to generate the implied volatility skew and is equivalent to replacing the risk-free rate with a higher rate in the European call option formula. It follows that investor awareness (beyond asymmetric information) is an important consideration that matters for financial market behavior.
{"title":"Financial market disruption and investor awareness: the case of implied volatility skew","authors":"Hammad Siddiqi","doi":"10.3934/qfe.2022021","DOIUrl":"https://doi.org/10.3934/qfe.2022021","url":null,"abstract":"The crash of 1987 is considered one of the most significant events in the history of financial markets due to the severity and swiftness of market declines worldwide. In the aftermath of the crash, a permanent change in options market occurred; implied volatility skew started appearing in options markets worldwide. In this article, we argue that the emergence of the implied volatility skew can be understood as arising from increased investor awareness about the stock price process and its implications for delta hedging. Delta-hedging aims to eliminate the directional risk associated with price movements in the underlying asset. Before the crash, investors were unaware of the proposition that \"a delta-hedged portfolio is risky\". That is, they implicitly believed in the proposition that \"a delta-hedged portfolio is risk-free\". The crash caused \"portfolio insurance delta-hedges\" to fail spectacularly. The resulting visceral shock drove home the lesson that \"a delta-hedged portfolio is risky\", thus, increasing investor awareness. We show that this sudden realization that a delta-hedged portfolio is risky is sufficient to generate the implied volatility skew and is equivalent to replacing the risk-free rate with a higher rate in the European call option formula. It follows that investor awareness (beyond asymmetric information) is an important consideration that matters for financial market behavior.","PeriodicalId":45226,"journal":{"name":"Quantitative Finance and Economics","volume":null,"pages":null},"PeriodicalIF":5.3,"publicationDate":"2022-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"70230619","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Yanhong Feng, Shuanglian Chen, Wang Xuan, Tan Yong
In recent years, the frequency adjustment of U.S. monetary policy has a dynamic and global impact on other countries' economy. Based on the financial conditions index (FCI), the paper employs the time-varying parameter vector autoregressive model with stochastic volatility (TVP-VAR-SV) and spillover index respectively to investigate the time-varying impact of U.S. financial conditions (UFCI) on China's inflation (CINF) and its impact mechanisms. Some results are achieved as follows: first, the impacts of UFCI on CINF vary greatly over time both in the dimension of action duration and time point. Second, the effects of UFCI on CINF directly relate to different types of major events, and they are heterogeneous in action duration, degree, direction as well as the trend and range of fluctuations. In addition, UFCI can work on CINF through trade flow and China's financial market, and the China's financial market plays a main conductive role, and its conductive effect changes over time.
{"title":"Time-varying impact of U.S. financial conditions on China's inflation: a perspective of different types of events","authors":"Yanhong Feng, Shuanglian Chen, Wang Xuan, Tan Yong","doi":"10.3934/qfe.2021027","DOIUrl":"https://doi.org/10.3934/qfe.2021027","url":null,"abstract":"In recent years, the frequency adjustment of U.S. monetary policy has a dynamic and global impact on other countries' economy. Based on the financial conditions index (FCI), the paper employs the time-varying parameter vector autoregressive model with stochastic volatility (TVP-VAR-SV) and spillover index respectively to investigate the time-varying impact of U.S. financial conditions (UFCI) on China's inflation (CINF) and its impact mechanisms. Some results are achieved as follows: first, the impacts of UFCI on CINF vary greatly over time both in the dimension of action duration and time point. Second, the effects of UFCI on CINF directly relate to different types of major events, and they are heterogeneous in action duration, degree, direction as well as the trend and range of fluctuations. In addition, UFCI can work on CINF through trade flow and China's financial market, and the China's financial market plays a main conductive role, and its conductive effect changes over time.","PeriodicalId":45226,"journal":{"name":"Quantitative Finance and Economics","volume":null,"pages":null},"PeriodicalIF":5.3,"publicationDate":"2021-09-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49171827","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Tiago Cardao-Pito, Julia A. Smith, João da Silva Ferreira
We present an empirical test of a new measure to classify organizations according to the tangibility of product (output) flows delivered to customers. Our measure exhibits the empirical consequences of using standard industrial classifications to assume that firms within the same industry either share identical properties or sell homogeneous products. To illustrate the misleading findings that can result from these assumptions, we investigate whether prior literature on capital structure provides a sensible interpretation of organizational behavior, based as it often is on an assumption that all firms within a given industrial classification sell durable goods. In contrast to the product-market literature based upon the trade-off theory of capital structure, that would predict that firms selling physical goods will have proportionately less debt, in fact, when firms within industries are classified using our measure, we find to the contrary. Our intention is not to displace existing systems of industry classification but is, rather, to highlight the dangers of drawing conclusions from assuming homogeneity amongst firms which are formally registered within the same industry.
{"title":"Using accounting measures of (in)tangibility for organizational classifications","authors":"Tiago Cardao-Pito, Julia A. Smith, João da Silva Ferreira","doi":"10.3934/QFE.2021015","DOIUrl":"https://doi.org/10.3934/QFE.2021015","url":null,"abstract":"We present an empirical test of a new measure to classify organizations according to the tangibility of product (output) flows delivered to customers. Our measure exhibits the empirical consequences of using standard industrial classifications to assume that firms within the same industry either share identical properties or sell homogeneous products. To illustrate the misleading findings that can result from these assumptions, we investigate whether prior literature on capital structure provides a sensible interpretation of organizational behavior, based as it often is on an assumption that all firms within a given industrial classification sell durable goods. In contrast to the product-market literature based upon the trade-off theory of capital structure, that would predict that firms selling physical goods will have proportionately less debt, in fact, when firms within industries are classified using our measure, we find to the contrary. Our intention is not to displace existing systems of industry classification but is, rather, to highlight the dangers of drawing conclusions from assuming homogeneity amongst firms which are formally registered within the same industry.","PeriodicalId":45226,"journal":{"name":"Quantitative Finance and Economics","volume":null,"pages":null},"PeriodicalIF":5.3,"publicationDate":"2021-05-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46249481","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study uses unbalanced panel data from Bankscope from 171 banks in 9 countries in Southeast Asia over the period 2004–2016 and the Generalized Method of Moments (SGMM) to analyze the impact of liquidity risk on bank performance in Southeast Asian countries. The results show that liquidity risk has a positive effect on the performance of banks or that most banks with good performance have a high liquidity risk under normal conditions. However, if there is a financial crisis, the effect of liquidity risk on bank performance is negative. This means that during the crisis, banks will seek to increase liquidity assets, to improve profitability, which will increase financial costs and reduce bank efficiency. Besides, bank performance in Southeast Asian countries is also influenced by the following factors: impact of the lag variable of bank performance, quality of liquid assets, bank size, bank capital, loan loss provision, GDP growth, money supply and inflation. The results of this study are intended to supplement the experimental results and suggest some critical guidelines for bank management in this area.
{"title":"Liquidity risk and bank performance in Southeast Asian countries: a dynamic panel approach","authors":"Tram Thi Xuan Huong, T. T. Nga., T. Oanh","doi":"10.3934/QFE.2021006","DOIUrl":"https://doi.org/10.3934/QFE.2021006","url":null,"abstract":"This study uses unbalanced panel data from Bankscope from 171 banks in 9 countries in Southeast Asia over the period 2004–2016 and the Generalized Method of Moments (SGMM) to analyze the impact of liquidity risk on bank performance in Southeast Asian countries. The results show that liquidity risk has a positive effect on the performance of banks or that most banks with good performance have a high liquidity risk under normal conditions. However, if there is a financial crisis, the effect of liquidity risk on bank performance is negative. This means that during the crisis, banks will seek to increase liquidity assets, to improve profitability, which will increase financial costs and reduce bank efficiency. Besides, bank performance in Southeast Asian countries is also influenced by the following factors: impact of the lag variable of bank performance, quality of liquid assets, bank size, bank capital, loan loss provision, GDP growth, money supply and inflation. The results of this study are intended to supplement the experimental results and suggest some critical guidelines for bank management in this area.","PeriodicalId":45226,"journal":{"name":"Quantitative Finance and Economics","volume":null,"pages":null},"PeriodicalIF":5.3,"publicationDate":"2021-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"70229057","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The dynamics of financial systems depends not only on Brownian motion but also on wave-like behavior of fluctuations. Statistical mechanics and viscoelastic theory were used to elucidate it by using the daily data of S & P-500 from 1986 to 2019. The viscoelastic behavior of asset values or stock market index can be studied within the basis of "cause-and-effect" principle by using scattering diagram of the data. The angles between the consecutive vectors in scattering diagram reveal that some peculiar angles deviate from the main course of the percent occurrence. These angles correspond to relatively more stable states, and they can be expressed in terms of golden ratio. The Elliott waves and golden ratio observed in financial systems can be explained by the existence of these peculiar angles. Whenever stability is of major concern such as in sharp falls or sharp increases and also in Elliott waves these angles reveal more frequently. The formation principles of Elliott waves were established on physical and mathematical grounds.
{"title":"Physical approach to elucidate stability and instability issues, and Elliott waves in financial systems: S & P-500 index as case study","authors":"Güngör Gündüz","doi":"10.3934/qfe.2021008","DOIUrl":"https://doi.org/10.3934/qfe.2021008","url":null,"abstract":"The dynamics of financial systems depends not only on Brownian motion but also on wave-like behavior of fluctuations. Statistical mechanics and viscoelastic theory were used to elucidate it by using the daily data of S & P-500 from 1986 to 2019. The viscoelastic behavior of asset values or stock market index can be studied within the basis of \"cause-and-effect\" principle by using scattering diagram of the data. The angles between the consecutive vectors in scattering diagram reveal that some peculiar angles deviate from the main course of the percent occurrence. These angles correspond to relatively more stable states, and they can be expressed in terms of golden ratio. The Elliott waves and golden ratio observed in financial systems can be explained by the existence of these peculiar angles. Whenever stability is of major concern such as in sharp falls or sharp increases and also in Elliott waves these angles reveal more frequently. The formation principles of Elliott waves were established on physical and mathematical grounds.","PeriodicalId":45226,"journal":{"name":"Quantitative Finance and Economics","volume":null,"pages":null},"PeriodicalIF":5.3,"publicationDate":"2021-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138503659","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Commodity-linked bond, a type of state contingent claims, presents an innovative tool for African countries to mobilize resources on the international capital markets. Given their colossal financing needs, which has been worsened by the COVID-19 pandemic, African countries need to put in place innovative financing mechanisms to support their development frameworks for building back better. The issuing of this type of bond could provide an opportunity for commodity-producing African countries to hedge against fluctuations in their export earnings. The results show that the value of a commodity-linked bond increases as the price of the commodity indexed to the bond rises, suggesting that African countries should issue debt contracts that are tied to their export commodities so that their debt declines with plummeting export prices (or export revenues). A simple portfolio rule derived suggests that countries should issue more commodity-linked bonds than conventional debt if the variance of the portfolio is greater than twice the spread between the expected total return of the conventional debt and the commodity-linked bond. This rule supports the view that African countries' debt-service payments, for debt issued in the form of commodity-linked bonds, would decline whenever the price of their export commodities decline thus lightening their debt load.
{"title":"Commodity-linked bonds as an innovative financing instrument for African countries to build back better","authors":"Joseph Atta-Mensah","doi":"10.3934/qfe.2021023","DOIUrl":"https://doi.org/10.3934/qfe.2021023","url":null,"abstract":"Commodity-linked bond, a type of state contingent claims, presents an innovative tool for African countries to mobilize resources on the international capital markets. Given their colossal financing needs, which has been worsened by the COVID-19 pandemic, African countries need to put in place innovative financing mechanisms to support their development frameworks for building back better. The issuing of this type of bond could provide an opportunity for commodity-producing African countries to hedge against fluctuations in their export earnings. The results show that the value of a commodity-linked bond increases as the price of the commodity indexed to the bond rises, suggesting that African countries should issue debt contracts that are tied to their export commodities so that their debt declines with plummeting export prices (or export revenues). A simple portfolio rule derived suggests that countries should issue more commodity-linked bonds than conventional debt if the variance of the portfolio is greater than twice the spread between the expected total return of the conventional debt and the commodity-linked bond. This rule supports the view that African countries' debt-service payments, for debt issued in the form of commodity-linked bonds, would decline whenever the price of their export commodities decline thus lightening their debt load.","PeriodicalId":45226,"journal":{"name":"Quantitative Finance and Economics","volume":null,"pages":null},"PeriodicalIF":5.3,"publicationDate":"2021-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"70229145","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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