Financial Distress, Return Volatility and Hedging

Tail risk of hedge funds: an extreme value application

The Firm's Trade Credit Policy Effects on Financial Distress: A Whole Response to Molina and Preve (2012)

Mexico pledged 550 million pesos ($41 million USD) in 2012 to fund a price risk management program for agricultural producers (Stargardter, 2012). The program utilizes risk management tools based in the United States, primarily options on futures contracts. In some cases, the subsidy levels for option premiums were as high as 100%, but the program has scaled these back to an 85% subsidy or less. The purpose of this project is to determine the effectiveness of United States corn futures contracts as hedging instruments for Mexican corn producers. Local cash prices for multiple locations across Mexico are reported by La Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación. These prices are available weekly from January 1998 to present. Futures prices for corn are from the CME Group. To determine the effectiveness of the CME Group corn futures contract as a price risk tool for Mexican corn producers linear regression models are estimated where the local cash price is the dependent variable and the futures price is the independent variable. The results of the model offer insight on the basis and optimal hedge ratio for Mexican producers, and we can comment that using futures contracts of yellow corn negotiated at the CME Group as a price risk management tool is effective if we consider white corn national data, since our regression model proves with a ninety five percent of confidence level that prices in Mexico are explain eighty three point five percent by prices at the CME group. However, basis given by the government appear to be insufficient according to our analysis.

Capital Insufficiencies, Absortion Role of Management Inefficiencies and Financial Distress (or Bankruptcy) Probabilities – A Panel Data Probit Analysis from European Western Countries

This study deals with the issue whether gold actually exhibits the function of a hedge or a safe haven as often referred to in the media and academia. In order to test the Baur and Lucey (2010) hypotheses, we contribute to the existing literature by the augmentation of their model to a smooth transition regression (STR) using an exponential transition function which splits the regression model into two extreme regimes. One accounts for periods in which stock returns are on average and therefore allows to test whether gold acts as a hedge for stocks, the other one accounts for periods characterized by extreme market conditions where the volatility of the stock returns is high. The latter state enables us to test whether gold can be regarded as a safe haven for stocks. The study includes a broad set of 18 individual markets as well as five regional indices and covers a sample period running from January 1970 to March 2012 on a monthly frequency. Overall, our findings show that gold serves as both a hedge and a safe haven. However, this ability seems to be market-specific. In addition, by applying a portfolio analysis we also show that our findings are useful for investors.

This paper proposes a multivariate VAR-BEKK-GJR-GARCH volatility model to assess the dynamic interdependence among stock, bond and money market returns and volatility of returns. The proposed model allows for market interaction which provides useful information for pricing securities, measuring value-at-risk (VaR), and asset allocation and diversification, assisting financial regulators for policy implementation. The model is estimated by the maximum likelihood method with Student-t innovation density. The asymptotic chi-square tests for volatility spillovers and leverage effects are constructed and provide predictions of volatility and time-varying correlations of returns. Application of the proposed model to the Australia’s domestic stock, bond, and money markets reveals that the domestic financial markets are interdependent and volatility is predictable. In general, volatility spillovers from stock market to bond and to money markets due to common news. The empirical findings of this paper quantify the association among the security markets which can be utilized for improving agents’ decision-making strategies for risk management, portfolio selection and diversification.

In this paper we empirically analyze the demand for hedging instruments in Taiwan. The results indicate that firm size is the most important factor, larger firms are more likely to use hedging tools. Generally speaking, firms which have larger size, lower board of directors ownership, shorter history, lower risk, and higher percent of foreign exchange profit/loss to EBIT, are more likely to engage in risk hedging. Our result is consistent with the hedging economy of scale hypothesis as well as the signalling hypothesis. In addition, we also examine whether the sensitivity of firm value to exchange rate differs between hedge firms and non-hedge firms, the result suggests that hedging does not matter.

The purpose of this paper is to check the effect of financial ratios and macroeconomic variable on financial distress. The population of this study is 559 non-financial companies that are listed on the Pakistan stock exchange. The final sample size is 285 non-financial companies for the period of 2013- 2017. Financial distress is dependent variable that shows categorical in nature. Therefore, this paper used logistic regression for the analysis. The result shows that profitability (EBITTA) has a negative significant relationship with financial distress, but RETA shows a positive significant relationship with financial distress. The result shows that liquidity ratio (WCTA) has a negative significant relationship with financial distress, but CACL shows a positive and insignificant relationship with financial distress. Additionally, Inflation has a positive significant relationship with financial distress. In the context of Pakistan, previous studies are limited to explore the link between financial and macroeconomic variables on financial distress. This paper also contributes to the literature and fills this gap. This study also indicates that to investigate the association between financial and macroeconomic variables on financial distress in the emerging market. Previous studies are limited to using this model and methodology especially in the context of Pakistan

This paper examines the relationship between Risk Management Committee (RMC) characteristics and the extent of hedging activities disclosure within the annual reports of the Malaysian listed companies. In particular, relationships are tested on RMC size, independence, RMC meeting, RMC gender diversity and RMC training. Our regression analysis shows that RMC independence significantly and negatively influences the extent of hedging activities information disclosure, while RMC meeting positively influences the disclosure. The implications of these findings are discussed.

Purpose: the present study examines the liquidity of the firm and its impact on financial distress, which may or may not increase the chances of bankruptcy. The study also analyzes the profitability, cash position, and solvency of the firm. Design/methodology/approach: we use the data of a listed Government manufacturing company and measure the financial distress and probabilities of bankruptcy to test the chances of financial distress during the period between 2015 and 2019. The financial models used for evaluation in the study are the Altman z-score model, Logit Probability model, and Falmur model. Findings: The study found that there was a chance of bankruptcy in the initial years, but later, it survived the bankruptcy. The study also established that the liquidity and solvency of the firm were not up to the standard. Practical implications: the result of the study extends our theoretical understanding and also provides valuable guidelines to reduce the chance of insolvency, bankruptcy, and financial distress of firms and to maintain the proper financial health of the firm. Originality/value: while many empirical studies investigate the relationship between liquidity position and its impact on financially distressed firms in the industry as a whole, but most do not consider the impact of financial distress in an individual firm or company. Most of the published studies use statistical tools for the evaluation of financial distress. This study uses Multiple Discriminant financial model analysis. Multiple Discriminant financial model Analyses are very useful in deciding remedial actions for financial distress problems

The explosion of corporate risk management programs in the early 1990s was a hasty and ill‐conceived reaction by U.S. corporations to the great “derivatives disasters” of that period. Anxious to avoid the fate of Barings and Procter & Gamble, most top executives were more concerned about crisis management than risk management. Many companies quickly installed (often outrageously priced) value‐at‐risk (VaR) systems without paying much attention to how such systems fit their specific business requirements. Focused myopically on loss avoidance and technical risk measurement issues, the corporate risk management revolution of the '90s thus got underway in a disorganized, ad hoc fashion, producing a curious amalgam of policies and procedures with no clear link to the corporate mission of maximizing value.But as the risk management revolution unfolded over the last decade, the result has been the “convergence” of different risk management perspectives, processes, and products. The most visible sign of such convergence is a fairly recent development called “alternative risk transfer,” or ART. ART forms consist of the large and growing collection of new risk transfer and financing products now being offered by insurance and reinsurance companies. As just one example, a new class of security known as “contingent capital” gives a company the option over a specified period—say, the next five years—to issue new equity or debt at a pre‐negotiated price. And to hold down their cost, such “pre‐loss” financing options are typically designed to be “triggered” only when the firm is most likely to need an infusion of new capital to avoid underinvestment or financial distress.But underlying—and to a large extent driving—this convergence of insurance and capital markets is a more fundamental kind of convergence: the integration of risk management with corporate financing decisions. As first corporate finance theorists and now practitioners have come to realize, decisions about a company's optimal capital structure and the design of its securities cannot be made without first taking account of the firm's risks and its opportunities for managing them. Indeed, this article argues that a comprehensive, value‐maximizing approach to corporate finance must begin with a risk management strategy that incorporates the full range of available risk management products, including the new risk finance products as well as established risk transfer instruments like interest rate and currency derivatives. The challenge confronting today's CFO is to maximize firm value by choosing the mixture of securities and risk management products and solutions that gives the company access to capital at the lowest possible cost.

The operating efficiency of Taiwanese commercial banks is a key factor on Taiwan's economic development. However, the changes in credit risk of the banks have serious impact on productivity change. In this paper, we use financial ratios to assess credit risk of 34 Taiwanese commercial banks before and during the global financial crisis over the period 2007-08, and investigate the productivity change based on the changes in credit risk with the Malmquist productivity index (MPI) approach, which is calculated from efficiency scores based on data envelopment analysis (DEA). Then we apply Tobit regression to identify the key variables which significantly affect the efficiencies in c 6 pt redit risk and to analyze the correlation between the experience of M & As investment and productivity change. And according to earning per share (EPS) and MPI, we classify the 34 banks into four groups. We find that different groups of banks should have different strategies of credit risk management to survive in this changing environment. Furthermore, the increase of the ratio of total loans to total assets could not improve technical efficiency (TE) and pure technical efficiency (PTE) at the decision making units (DMUs) due to the increase of credit risk. Also, the experience of M & As investment could have poor help on efficiency/productivity change on credit risk at the DMUs.

Investors may not understand the wealth-destroying implications of their investment decisions, because of the deleterious effect of volatility of returns on wealth creation. Managing the volatility of returns is integral to creating long-term wealth. The methodology presented quantifies the single-period risk-and-return tradeoff that investors need to be aware of to create long-term wealth. Practitioners can use it as a tool to educate clients about the wealth-creating benefits of diversification. Economic sector return data is used to demonstrate that underdiversified portfolios, as opposed to diversified portfolios, inhibit long-term wealth creation, because of the volatility drag associated with underdiversified portfolios. <b>TOPICS:</b>Wealth management, risk management, portfolio construction

Appropriate modelling of the process of volatility has implications for portfolio selection, the pricing of derivative securities and risk management. Further, a large body of research has suggested that both long memory and structural changes simultaneously characterize the structure of financial returns volatility. Given this, in this article, we aim to model conditional volatility of the returns of the Dow Jones Islamic Market World Index (DJIM), interest on which has come to the fore following the need for renovation of the conventional financial system, in the wake of the recent global financial crisis. To model the conditional volatility of the DJIM returns, accounting for both long memory and structural changes, we allow the parameters in the conditional variance equation of the fractionally integrated generalized autoregressive conditional heteroscedasticity (FIGARCH) model to be time dependent, such that the parameters evolve smoothly over time based on a logistic smooth transition function, yiel...

The Firm’s Trade Credit Policy Effects on Debt and Capital Structure under Trade-Off and Pecking Order Predictions – A Panel Data Static Model Analysis, from European Western Countries