Pub Date : 2025-02-12DOI: 10.1016/j.qref.2025.101976
Keehwan Park , Zhongzheng Fang
A flight to quality occurs from risky assets to safe-haven assets in heightened volatile markets of crisis periods. A safe-haven currency gains its value against other currencies in such crisis periods. Traditionally, the U.S. dollar, the Japanese yen, and the Swiss franc have long been considered safe-haven currencies in the investment community. We study the intra-safe haven currency behaviour between these currencies in crises from 2000 to 2022. Our study is motivated by the recent weakness of the Japanese yen during the early Ukraine war in 2022. Following our quantile regression results, we offer a new econometric model of the interactive crisis dummies. We find that intra-safe haven currency behaviour is time-varying, depending on the nature of the crisis. We contrast ours with the prior literature (e.g., Ranaldo and Soderline, 2010; Fatum and Yamamoto, 2016). Our new findings complement the prior literature and add value to the literature.
{"title":"Time-varying intra-safe haven currency behaviour: The U.S. dollar, the Swiss franc, and the Japanese yen","authors":"Keehwan Park , Zhongzheng Fang","doi":"10.1016/j.qref.2025.101976","DOIUrl":"10.1016/j.qref.2025.101976","url":null,"abstract":"<div><div>A flight to quality occurs from risky assets to safe-haven assets in heightened volatile markets of crisis periods. A safe-haven currency gains its value against other currencies in such crisis periods. Traditionally, the U.S. dollar, the Japanese yen, and the Swiss franc have long been considered safe-haven currencies in the investment community. We study the intra-safe haven currency behaviour between these currencies in crises from 2000 to 2022. Our study is motivated by the recent weakness of the Japanese yen during the early Ukraine war in 2022. Following our quantile regression results, we offer a new econometric model of the interactive crisis dummies. We find that intra-safe haven currency behaviour is time-varying, depending on the nature of the crisis. We contrast ours with the prior literature (e.g., Ranaldo and Soderline, 2010; Fatum and Yamamoto, 2016). Our new findings complement the prior literature and add value to the literature.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"100 ","pages":"Article 101976"},"PeriodicalIF":2.9,"publicationDate":"2025-02-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143428902","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-02-01DOI: 10.1016/j.qref.2025.101973
Wang-Zhe Han, Wanshan Meng
While the systemic risk of financial institutions has been frequently discussed, the equally systemically important non-financial corporations have received insufficient attention. We examine a sample of listed Chinese non-financial corporations from 2010 to 2022 and confirm that AI use in non-financial corporations reduces their systemic risk. This beneficial impact is more pronounced in non-state-owned corporations, corporations in the growth stage, and corporations in the economic expansion period. Subsequently, we attribute this result to three risk control channels: decreasing risk-taking levels, reducing default risk, and weakening credit risk contagion. The research extends the understanding of systemic risk to non-financial corporations, providing new insights for balancing technological upgrading with achieving economic stability.
{"title":"Does AI contribute to systemic risk reduction in non-financial corporations?","authors":"Wang-Zhe Han, Wanshan Meng","doi":"10.1016/j.qref.2025.101973","DOIUrl":"10.1016/j.qref.2025.101973","url":null,"abstract":"<div><div>While the systemic risk of financial institutions has been frequently discussed, the equally systemically important non-financial corporations have received insufficient attention. We examine a sample of listed Chinese non-financial corporations from 2010 to 2022 and confirm that AI use in non-financial corporations reduces their systemic risk. This beneficial impact is more pronounced in non-state-owned corporations, corporations in the growth stage, and corporations in the economic expansion period. Subsequently, we attribute this result to three risk control channels: decreasing risk-taking levels, reducing default risk, and weakening credit risk contagion. The research extends the understanding of systemic risk to non-financial corporations, providing new insights for balancing technological upgrading with achieving economic stability.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"100 ","pages":"Article 101973"},"PeriodicalIF":2.9,"publicationDate":"2025-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143130274","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-01-31DOI: 10.1016/j.qref.2025.101975
Yu-En Lin , Shi Teng , Bo Yu , Keith S.K. Lam
This study investigates the relation between ESG ratings and firm investment efficiency and the moderate effect of ESG rating divergence on the relation. Using a sample of firms from 43 countries for the period between 2010 and 2022, we document a significantly positive relation between ESG ratings and firm investment efficiency and a significant negative moderate effect of ESG rating divergence on the positive relation. We also find four firm-level transmission channels-financial constraints, cash flows, opacity, and transparency-affect the ESG and investment inefficiency relation. In addition, our results indicate that the positive relation and the negative moderate effect can be explained by firms’ agency costs. The results hold in endogeneity and robustness tests.
{"title":"ESG rating, rating divergence and investment efficiency: International evidence","authors":"Yu-En Lin , Shi Teng , Bo Yu , Keith S.K. Lam","doi":"10.1016/j.qref.2025.101975","DOIUrl":"10.1016/j.qref.2025.101975","url":null,"abstract":"<div><div>This study investigates the relation between ESG ratings and firm investment efficiency and the moderate effect of ESG rating divergence on the relation. Using a sample of firms from 43 countries for the period between 2010 and 2022, we document a significantly positive relation between ESG ratings and firm investment efficiency and a significant negative moderate effect of ESG rating divergence on the positive relation. We also find four firm-level transmission channels-financial constraints, cash flows, opacity, and transparency-affect the ESG and investment inefficiency relation. In addition, our results indicate that the positive relation and the negative moderate effect can be explained by firms’ agency costs. The results hold in endogeneity and robustness tests.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"100 ","pages":"Article 101975"},"PeriodicalIF":2.9,"publicationDate":"2025-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143348359","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-01-31DOI: 10.1016/j.qref.2025.101974
Purba Bhattacherjee , Sibanjan Mishra , Sang Hoon Kang
The study examines the extreme time-frequency connectedness among 12 major cryptocurrencies for the period from February 26, 2018, to February 6, 2024. We employ the novel TVP-VAR approach proposed by Chatziantoniou et al. (2022), and three portfolio construction methods (i.e., MVP, MCP and MCoP). The results reveal interesting insights. First, it unveils the diverse sensitivities of individual cryptocurrencies to total return shocks, with short-term events exerting a predominant influence compared to long-term shocks. Notably, most cryptocurrencies act as net transmitters of shocks, reflecting their susceptibility to external market fluctuations. Second, the variations in the behavior of cryptocurrencies are observed during extreme market conditions and crisis periods, such as the COVID-19 pandemic and the Russia-Ukraine conflict. Furthermore, the outcomes of the portfolio construction process provide light on the efficacy of hedging as well as the performance of the portfolio. Notably, the minimum correlation portfolio (MCP) strategy outperforms other techniques, highlighting its superiority in terms of optimizing portfolio performance. Lastly, we report that macroeconomic factors and asset-based volatility are the significant drivers of cryptocurrency contagion. However, the degree and direction of their impact vary across market conditions and time-frequency horizons. These findings have important policy ramifications since they point to the necessity of strong regulatory frameworks and risk management techniques to reduce systemic risks and protect the financial stability of the bitcoin market.
{"title":"Extreme frequency connectedness, determinants and portfolio analysis of major cryptocurrencies: Insights from quantile time-frequency approach","authors":"Purba Bhattacherjee , Sibanjan Mishra , Sang Hoon Kang","doi":"10.1016/j.qref.2025.101974","DOIUrl":"10.1016/j.qref.2025.101974","url":null,"abstract":"<div><div>The study examines the extreme time-frequency connectedness among 12 major cryptocurrencies for the period from February 26, 2018, to February 6, 2024. We employ the novel TVP-VAR approach proposed by Chatziantoniou et al. (2022), and three portfolio construction methods (i.e., MVP, MCP and MCoP). The results reveal interesting insights. First, it unveils the diverse sensitivities of individual cryptocurrencies to total return shocks, with short-term events exerting a predominant influence compared to long-term shocks. Notably, most cryptocurrencies act as net transmitters of shocks, reflecting their susceptibility to external market fluctuations. Second, the variations in the behavior of cryptocurrencies are observed during extreme market conditions and crisis periods, such as the COVID-19 pandemic and the Russia-Ukraine conflict. Furthermore, the outcomes of the portfolio construction process provide light on the efficacy of hedging as well as the performance of the portfolio. Notably, the minimum correlation portfolio (MCP) strategy outperforms other techniques, highlighting its superiority in terms of optimizing portfolio performance. Lastly, we report that macroeconomic factors and asset-based volatility are the significant drivers of cryptocurrency contagion. However, the degree and direction of their impact vary across market conditions and time-frequency horizons. These findings have important policy ramifications since they point to the necessity of strong regulatory frameworks and risk management techniques to reduce systemic risks and protect the financial stability of the bitcoin market.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"100 ","pages":"Article 101974"},"PeriodicalIF":2.9,"publicationDate":"2025-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143420660","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-01-17DOI: 10.1016/j.qref.2025.101963
Yoko Shirasu , Yukihiro Yasuda
Mergers and acquisitions play a crucial part in global investment, particularly in the banking sector. We use comprehensive data on banks’ mergers and acquisitions in Asia-Pacific countries to investigate the performance implications of different types of foreign institutional investors holding equity stakes in acquirer banks. We find that acquirer banks with higher equity stakes from foreign bank investors experience an increase in their Q ratios, a proxy for bank value, and loan ratios in the three years post-acquisition when their income streams are diversified. By contrast, acquirer banks in which investment advisors or fund-type investors hold significant ownership stakes fail to expand their core business in the long run despite short-term cost reductions. Our findings suggest that bank-type foreign investors in Asia’s opaque banking industry improve acquirer bank performance through influential advisory functions.
{"title":"Do foreign bank investors promote acquirer bank value in Asia-Pacific countries?","authors":"Yoko Shirasu , Yukihiro Yasuda","doi":"10.1016/j.qref.2025.101963","DOIUrl":"10.1016/j.qref.2025.101963","url":null,"abstract":"<div><div>Mergers and acquisitions play a crucial part in global investment, particularly in the banking sector. We use comprehensive data on banks’ mergers and acquisitions in Asia-Pacific countries to investigate the performance implications of different types of foreign institutional investors holding equity stakes in acquirer banks. We find that acquirer banks with higher equity stakes from foreign bank investors experience an increase in their Q ratios, a proxy for bank value, and loan ratios in the three years post-acquisition when their income streams are diversified. By contrast, acquirer banks in which investment advisors or fund-type investors hold significant ownership stakes fail to expand their core business in the long run despite short-term cost reductions. Our findings suggest that bank-type foreign investors in Asia’s opaque banking industry improve acquirer bank performance through influential advisory functions.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"100 ","pages":"Article 101963"},"PeriodicalIF":2.9,"publicationDate":"2025-01-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143420673","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-01-12DOI: 10.1016/j.qref.2025.101962
Olivier Ledoit, Michael Wolf
Markowitz portfolio selection is a cornerstone in finance, in academia as well as in the industry. Most academic studies either ignore transaction costs or account for them in a way that is both unrealistic and suboptimal by (i) assuming transaction costs to be constant across stocks and (ii) ignoring them at the portfolio-selection state and simply paying them after the fact. Our paper proposes a method to fix both shortcomings. As we show, if transaction costs are accounted for (properly) at the portfolio-selection stage, net performance in terms of the Sharpe ratio often increases, in particular for high-turnover strategies.
{"title":"Markowitz portfolios under transaction costs","authors":"Olivier Ledoit, Michael Wolf","doi":"10.1016/j.qref.2025.101962","DOIUrl":"10.1016/j.qref.2025.101962","url":null,"abstract":"<div><div>Markowitz portfolio selection is a cornerstone in finance, in academia as well as in the industry. Most academic studies either ignore transaction costs or account for them in a way that is both unrealistic and suboptimal by (i) assuming transaction costs to be constant across stocks and (ii) ignoring them at the portfolio-selection state and simply paying them after the fact. Our paper proposes a method to fix both shortcomings. As we show, if transaction costs are accounted for (properly) at the portfolio-selection stage, net performance in terms of the Sharpe ratio often increases, in particular for high-turnover strategies.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"100 ","pages":"Article 101962"},"PeriodicalIF":2.9,"publicationDate":"2025-01-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143130275","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-01-10DOI: 10.1016/j.qref.2025.101960
Valter T. Yoshida Junior , Rafael Schiozer , Alan de Genaro , Toni R.E. dos Santos
Large databases and Machine Learning enhance our capacity to develop models with many observations and explanatory variables. While the literature has primarily focused on optimizing classifications, little attention has been given to model risk, especially originating from inadequate use. To address this gap, we introduce a new metric for assessing model risk in credit applications. We test the metric using cross-section LASSO default models, each incorporating 200 thousand loan observations from several banks and more than 100 explanatory variables. The results indicate that models that use loans from a single bank have lower model risk than models using loans from the entire financial system. Therefore, adding loans from different banks to increase the number of observations in a model is suboptimal, challenging the widely accepted assumption that more data leads to better predictions.
{"title":"A novel credit model risk measure: Do more data lead to lower model risk?","authors":"Valter T. Yoshida Junior , Rafael Schiozer , Alan de Genaro , Toni R.E. dos Santos","doi":"10.1016/j.qref.2025.101960","DOIUrl":"10.1016/j.qref.2025.101960","url":null,"abstract":"<div><div>Large databases and Machine Learning enhance our capacity to develop models with many observations and explanatory variables. While the literature has primarily focused on optimizing classifications, little attention has been given to model risk, especially originating from inadequate use. To address this gap, we introduce a new metric for assessing model risk in credit applications. We test the metric using cross-section LASSO default models, each incorporating 200 thousand loan observations from several banks and more than 100 explanatory variables. The results indicate that models that use loans from a single bank have lower model risk than models using loans from the entire financial system. Therefore, adding loans from different banks to increase the number of observations in a model is suboptimal, challenging the widely accepted assumption that more data leads to better predictions.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"100 ","pages":"Article 101960"},"PeriodicalIF":2.9,"publicationDate":"2025-01-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143130277","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-01-04DOI: 10.1016/j.qref.2025.101961
MeiChi Huang
This study investigates the time-varying influences of monetary policies on state-level housing markets, utilizing a time-varying parameter vector autoregression model with stochastic volatility (TVP-VAR-SV). The results suggest that time-varying state-level volatilities in housing price returns and permits growths are evident, and some of them are higher in the Covid-19 period 2020–22 than the 2007–09 housing crisis. Monetary policies exert less persistent but stronger effects on housing quantities than housing prices. The findings provide supportive evidence that the Covid-19 pandemic enhances monetary-policy influences, and aggressive contractionary monetary policies in 2022 play vital roles in driving state-level housing markets. The differences and commonalities across state-level housing markets yield new implications for policy-making and risk diversification.
{"title":"Time-varying impacts of monetary policies on state-level housing markets: Evidence from the Covid-19 period","authors":"MeiChi Huang","doi":"10.1016/j.qref.2025.101961","DOIUrl":"10.1016/j.qref.2025.101961","url":null,"abstract":"<div><div>This study investigates the time-varying influences of monetary policies on state-level housing markets, utilizing a time-varying parameter vector autoregression model with stochastic volatility (TVP-VAR-SV). The results suggest that time-varying state-level volatilities in housing price returns and permits growths are evident, and some of them are higher in the Covid-19 period 2020–22 than the 2007–09 housing crisis. Monetary policies exert less persistent but stronger effects on housing quantities than housing prices. The findings provide supportive evidence that the Covid-19 pandemic enhances monetary-policy influences, and aggressive contractionary monetary policies in 2022 play vital roles in driving state-level housing markets. The differences and commonalities across state-level housing markets yield new implications for policy-making and risk diversification.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"100 ","pages":"Article 101961"},"PeriodicalIF":2.9,"publicationDate":"2025-01-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143130271","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-01-03DOI: 10.1016/j.qref.2024.101959
Joseph Attila , Jean-Louis Combes , Rasmané Ouedraogo
This paper investigates the effects of natural disasters on bank liquidity creation in sub-Saharan African during the period 1988–2018. Using bank-level data from more than 30 countries, we find that natural disasters affect negatively the liquidity creation in the region. The cumulative effect over the three years following a disaster is economically significant, amounting to a total reduction of 4 % in the average liquidity generated. This impact is mainly channeled through the asset-side activities of banks. We also find heterogeneous impact of natural disasters on bank liquidity creation based on the size of banks, the magnitude of disasters and the income level of countries. Moreover, these effects are mainly observed when disasters strike on a large-scale. On the contrary, there is no significant difference depending on whether or not the disaster is climatic in origin. Additional tests show that foreign ownership of banks as well as monetary policy change do not qualitatively alter our primary findings. These results support bank regulation policies taking into the specificities of banks operating in environments prone to frequent natural disasters. Specifically, we recommend that central banks implement targeted regulatory measures such as stress-testing or resilience programs. As natural disasters are likely to increase in the coming years due to climate change, we suggest that microprudential policies be further strengthened and adapted to incorporate climate change considerations.
{"title":"Natural disasters and bank liquidity creation in Sub-Saharan African countries: Evidence from banks panel data","authors":"Joseph Attila , Jean-Louis Combes , Rasmané Ouedraogo","doi":"10.1016/j.qref.2024.101959","DOIUrl":"10.1016/j.qref.2024.101959","url":null,"abstract":"<div><div>This paper investigates the effects of natural disasters on bank liquidity creation in sub-Saharan African during the period 1988–2018. Using bank-level data from more than 30 countries, we find that natural disasters affect negatively the liquidity creation in the region. The cumulative effect over the three years following a disaster is economically significant, amounting to a total reduction of 4 % in the average liquidity generated. This impact is mainly channeled through the asset-side activities of banks. We also find heterogeneous impact of natural disasters on bank liquidity creation based on the size of banks, the magnitude of disasters and the income level of countries. Moreover, these effects are mainly observed when disasters strike on a large-scale. On the contrary, there is no significant difference depending on whether or not the disaster is climatic in origin. Additional tests show that foreign ownership of banks as well as monetary policy change do not qualitatively alter our primary findings. These results support bank regulation policies taking into the specificities of banks operating in environments prone to frequent natural disasters. Specifically, we recommend that central banks implement targeted regulatory measures such as stress-testing or resilience programs. As natural disasters are likely to increase in the coming years due to climate change, we suggest that microprudential policies be further strengthened and adapted to incorporate climate change considerations.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"100 ","pages":"Article 101959"},"PeriodicalIF":2.9,"publicationDate":"2025-01-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143129718","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-01-03DOI: 10.1016/j.qref.2024.101949
Yumo Zhang , Huainian Zhu
This paper discusses a non-zero-sum stochastic differential game involving multiple players and model ambiguity. Each economic agent is concerned about the relative performance of other agents in terms of their average terminal wealth and intermediate consumption. The goal is to find the optimal investment–consumption strategy that is robust under the worst-case scenario of adverse probability measures. The competitive and ambiguity-averse agents can invest in an incomplete financial market composed of a risk-free asset, an equity index, and a single equity depicted by a class of generically non-Markovian multivariate stochastic covariance models, under which the market prices of risks hinge on a multivariate affine-diffusion factor process. The unified modeling framework includes some state-of-the-art stochastic covariance models as particular cases. A backward stochastic differential equation approach coupled with the martingale optimality principle addresses the robust non-Markovian stochastic differential game. Closed-form solutions are derived to the robust Nash equilibrium investment–consumption policies, the probability perturbation processes associated with the well-defined worst-case scenarios, and the corresponding value functions. Under certain technical conditions, we verify the admissibility of the solutions. Finally, we performed numerical experiments to showcase the impact of model parameters on robust investment–consumption strategies.
{"title":"Robust non-zero-sum investment–consumption games under multivariate stochastic covariance models","authors":"Yumo Zhang , Huainian Zhu","doi":"10.1016/j.qref.2024.101949","DOIUrl":"10.1016/j.qref.2024.101949","url":null,"abstract":"<div><div>This paper discusses a non-zero-sum stochastic differential game involving multiple players and model ambiguity. Each economic agent is concerned about the relative performance of other agents in terms of their average terminal wealth and intermediate consumption. The goal is to find the optimal investment–consumption strategy that is robust under the worst-case scenario of adverse probability measures. The competitive and ambiguity-averse agents can invest in an incomplete financial market composed of a risk-free asset, an equity index, and a single equity depicted by a class of generically non-Markovian multivariate stochastic covariance models, under which the market prices of risks hinge on a multivariate affine-diffusion factor process. The unified modeling framework includes some state-of-the-art stochastic covariance models as particular cases. A backward stochastic differential equation approach coupled with the martingale optimality principle addresses the robust non-Markovian stochastic differential game. Closed-form solutions are derived to the robust Nash equilibrium investment–consumption policies, the probability perturbation processes associated with the well-defined worst-case scenarios, and the corresponding value functions. Under certain technical conditions, we verify the admissibility of the solutions. Finally, we performed numerical experiments to showcase the impact of model parameters on robust investment–consumption strategies.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"100 ","pages":"Article 101949"},"PeriodicalIF":2.9,"publicationDate":"2025-01-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143130273","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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