Yang Zhao, Jin-Ping Lee and Min-Teh Yu
Catastrophe (CAT) events associated with natural catastrophes and man-made disasters cause profound impacts on the insurance industry. This research thus reviews the impact of CAT…
Abstract
Purpose
Catastrophe (CAT) events associated with natural catastrophes and man-made disasters cause profound impacts on the insurance industry. This research thus reviews the impact of CAT risk on the insurance industry and how traditional reinsurance and securitized risk-transfer instruments are used for managing CAT risk.
Design/methodology/approach
This research reviews the impact of CAT risk on the insurance industry and how traditional reinsurance and securitized risk-transfer instruments are used for managing CAT risk. Apart from many negative influences, CAT events can increase the net revenue of the insurance industry around CAT events and improve insurance demand over the post-CAT periods. The underwriting cycle of reinsurance causes inefficiencies in transferring CAT risks. Securitized risk-transfer instruments resolve some inefficiencies of the reinsurance market, but are subject to moral hazard, basis risk, credit risk, regulatory uncertainty, etc. The authors introduce some popular securitized solutions and use Merton's structural framework to demonstrate how to value these CAT-linked securities. The hybrid solutions by combining reinsurance with securitized CAT instruments are expected to offer promising applications for CAT risk management.
Findings
The authors introduce some popular securitized solutions and use Merton's structural framework to demonstrate how to value these CAT-linked securities. The hybrid solutions by combining reinsurance with securitized CAT instruments are expected to offer promising applications for CAT risk management.
Originality/value
This research reviews a broad array of impacts of CAT risks on the (re)insurance industry. CAT events challenge (re)insurance capacity and influence insurers' supply decisions and reconstruction costs in the aftermath of catastrophes. While losses from natural catastrophes are the primary threat to property–casualty insurers, the mortality risk posed by influenza pandemics is a leading CAT risk for life insurers. At the same time, natural catastrophes and man-made disasters cause distinct impacts on (re)insures. Man-made disasters can increase the correlation between insurance stocks and the overall market, and natural catastrophes reduce the above correlation. It should be noted that huge CAT losses can also improve (re)insurance demand during the postevent period and thus bring long-term effects to the (re)insurance industry.
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Vector Autoregression (VAR) has been a standard empirical tool used in macroeconomics and finance. In this paper we discuss how to compare alternative VAR models after they are…
Abstract
Vector Autoregression (VAR) has been a standard empirical tool used in macroeconomics and finance. In this paper we discuss how to compare alternative VAR models after they are estimated by Bayesian MCMC methods. In particular we apply a robust version of deviance information criterion (RDIC) recently developed in Li, Zeng, and Yu (2014b) to determine the best candidate model. RDIC is a better information criterion than the widely used deviance information criterion (DIC) when latent variables are involved in candidate models. Empirical analysis using US data shows that the optimal model selected by RDIC can be different from that by DIC.
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This study examines the stock market efficiency in China to offer trading strategy guidance to investors and efficiency evaluation insight to policymakers.
Abstract
Purpose
This study examines the stock market efficiency in China to offer trading strategy guidance to investors and efficiency evaluation insight to policymakers.
Design/methodology/approach
This study examines the stock market efficiency in China with a new combined liquidity trading strategy by blending technical analysis into a liquidity buy-and-hold strategy.
Findings
Our results show that the combined strategy generates significant excess returns in the whole sample period, suggesting that the Chinese stock market is not consistent with the weak form efficient hypothesis. In addition, the combined strategy yields more significant risk-adjusted excess returns after the 2004 split-share reform, indicating the stock market efficiency in China does not exhibit a distinct upgrade after the reform. Our further test results reinforce the main conclusions after taking transaction costs, market states, short-selling reform and other issues into consideration.
Originality/value
Our study contributes to the literature in two ways: First, we shed light on the mixed documented results about the market efficiency form in China. Second, we contribute to the mixed relation between the 2004 split-share reform and market efficiency in China.
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Mohammad Sedigh Kohanpour and Gholamreza Imani
This study aims to investigate lattice Boltzmann (LB) simulation of the fluid flow and heat transfer characteristics of a heated porous elliptic cylinder in uniform flow based on…
Abstract
Purpose
This study aims to investigate lattice Boltzmann (LB) simulation of the fluid flow and heat transfer characteristics of a heated porous elliptic cylinder in uniform flow based on the two-domain scheme. In the present research, the effect of axis ratio (1 ≤ AR ≤ 2), Reynolds number (5 ≤ Re ≤ 40) and Darcy number (10−4 ≤ Da ≤ 10−2) are studied.
Design/methodology/approach
To perform the LB simulation based on the two-domain scheme, the nonequilibrium extrapolation method is modified to model the heat transfer interfacial conditions required at the curved interface.
Findings
The results show that the axis ratio as well as Reynolds and Darcy numbers significantly affect the fluid flow and heat transfer characteristics of the porous elliptic cylinder. It is shown that for AR > 1, the phenomenon of detached recirculating zone occurs at much higher Darcy numbers compared with the case of the porous circular cylinder (AR = 1). The results show that the location of maximum temperature within the cylinder moves downstream when the Reynolds number, Darcy number and axis ratio increase. It is also concluded that the average Nusselt number of a porous elliptic cylinder is always lower than that of a porous circular cylinder.
Originality/value
The LB simulation of forced convection from a porous cylinder in uniform flow with a curved interface based on the two-domain scheme has not been studied yet.
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Jin-Ping Lee, Edward M.H. Lin, Min-Teh Yu and Yang Zhao
This study develops a multi-period structural model to value bank subordinated debt (subdebt) under different regulatory policies. The model provides a complete framework for…
Abstract
This study develops a multi-period structural model to value bank subordinated debt (subdebt) under different regulatory policies. The model provides a complete framework for analyzing how various factors, such as credit and interest rate risks, bank characteristics, and regulatory policies, affect subdebt prices and yield spreads. It finds that the implementation of Prompt Corrective Action (PCA) will raise subdebt prices and lower subdebt spreads, while capital forbearance will have the opposite effects. Also, subdebt spreads are less sensitive to bank risk when PCA is imposed than when capital forbearance occurs. The results of the paper suggest that enhancing market discipline through giving subdebt investors more rights to force timely reorganization of weak banks will reduce the subdebt spreads required by investors.
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S.T. Boris Choy, Wai-yin Wan and Chun-man Chan
The normal error distribution for the observations and log-volatilities in a stochastic volatility (SV) model is replaced by the Student-t distribution for robustness…
Abstract
The normal error distribution for the observations and log-volatilities in a stochastic volatility (SV) model is replaced by the Student-t distribution for robustness consideration. The model is then called the t-t SV model throughout this paper. The objectives of the paper are twofold. First, we introduce the scale mixtures of uniform (SMU) and the scale mixtures of normal (SMN) representations to the Student-t density and show that the setup of a Gibbs sampler for the t-t SV model can be simplified. For example, the full conditional distribution of the log-volatilities has a truncated normal distribution that enables an efficient Gibbs sampling algorithm. These representations also provide a means for outlier diagnostics. Second, we consider the so-called t SV model with leverage where the observations and log-volatilities follow a bivariate t distribution. Returns on exchange rates of Australian dollar to 10 major currencies are fitted by the t-t SV model and the t SV model with leverage, respectively.
Christian Eckert and Nadine Gatzert
Financial firms announcing large operational losses have empirically been shown to cause significant negative spillover effects in other non-announcing firms in case of the…
Abstract
Purpose
Financial firms announcing large operational losses have empirically been shown to cause significant negative spillover effects in other non-announcing firms in case of the banking and insurance industry. The purpose of this paper is 1) to model such spillover effects in a network from a portfolio perspective and 2) to holistically assess operational risk, reputational risk and the risk of spillover effects, taking into account the dependencies between these risk types.
Design/methodology/approach
The authors propose different approaches to model spillover effects with different complexity, including stochasticity and influencing factors within the industry network. They then calibrate the model based on information from previous empirical literature.
Findings
The results emphasize that spillover effects can represent a considerable (non-diversifiable) risk, especially in portfolios, and that neglecting them may lead to a severe underestimation of the actual impact of single operational loss events.
Originality/value
This study is relevant not only for a firm’s risk management strategy but also for investors holding a portfolio of firms potentially subject to spillover effects.
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Haiwei Zhu, Hongfa Yu, Haiyan Ma, Bo Da and Qiquan Mei
The purpose of this paper is to compare the effect of rust inhibitors and surface strengthening materials on the service life of RC structures in tropical marine environments and…
Abstract
Purpose
The purpose of this paper is to compare the effect of rust inhibitors and surface strengthening materials on the service life of RC structures in tropical marine environments and ultimately to provide basis and recommendations for the durability design of reinforced concrete (RC) structures.
Design/methodology/approach
Slag concrete specimens mixed with four kinds of rust inhibitors and coated with four kinds of surface strengthening materials were corroded by seawater exposure for 365 days, and the key parameters of chloride ion diffusion were obtained by testing. Then a new service life prediction model, based on the modified model for chloride ion diffusion and reliability theory, was applied to analyze the effect of rust inhibitors and surface strengthening materials on the service life of RC structures in tropical marine environments.
Findings
Rust inhibitors and surface strengthening materials can effectively extend the service life of RC structures through different effects on chloride ion diffusion behavior. The effects of rust inhibitors and surface strengthening materials on the service life extension of RC structures adhered to the following trend: silane material > cement-based permeable crystalline waterproof material > hydrophobic plug compound > spray polyurea elastomer > water-based permeable crystalline waterproof material > calcium nitrite > preservative > amino-alcohol composite.
Originality/value
Using a new method for predicting the service life of RC structures, the attenuation law of the service life of RC structures under the action of rust inhibitors and surface strengthening materials in tropical marine environments is obtained.
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He Li, Zhixiang Yu, Chuanjie Zhang and Zhuang Zhang
The paper aims to investigate the determinants of China’s daily intervention in the foreign exchange market since the 2005 reform aimed at moving the Renminbi (RMB) exchange rate…
Abstract
Purpose
The paper aims to investigate the determinants of China’s daily intervention in the foreign exchange market since the 2005 reform aimed at moving the Renminbi (RMB) exchange rate regime towards greater flexibility.
Design/methodology/approach
The paper uses bivariate probit models to test whether China’s intervention decision is driven by three sets of factors, comprising Model I (basic model), Model II and Model III.
Findings
Evidence from the models suggests that medium-term Chinese interventions tend to be leaning-against-the-wind, whereas long-term interventions are leaning-with-the-wind. Furthermore, by analyzing exchange rate volatility, this paper finds that intervention is used by the Chinese central bank to ensure that there are no big swings in the RMB exchange rate.
Originality/value
The paper will be of value to other researchers attempting to understand the policy of the central bank and, in particular, the factors that can lead to interventions during periods of financial crisis.
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This paper aims to investigate the relationship between earnings management and media reports, assess the roles played by the media in determining the reputation mechanism and…
Abstract
Purpose
This paper aims to investigate the relationship between earnings management and media reports, assess the roles played by the media in determining the reputation mechanism and examine whether the media has an influence on executives’ behavior in the case of earnings management.
Design/methodology/approach
This paper uses Chinese A-share listed firms from the period 2008 to 2012 to test the research questions using regression analyses.
Findings
Although the Chinese Stock Markets are still immature compared to those of developed countries, the media seems to play a role in affecting executives’ decisions about dabbling in earnings management. Specifically, firms receiving more media attention are more likely to undertake earnings management. Furthermore, negative media reports result in even higher levels of earnings management activities, indicating that managers tend to use earnings management to achieve earnings goals to reduce or relieve the pressure they feel from the media and to remedy any reputation loss. Moreover, the authors have found that firms whose CEOs have higher reputations are more likely to manage earnings and they are more likely to be affected by negative media reports. Similar results were found for state-owned enterprises (SOEs).
Originality/value
This study analyzes how the level and tone of media coverage affect earnings management rather than just assessing the overall effect of media coverage on earnings management. This paper verifies that the reputation mechanism of the media works in China, but it leads to different results than those experienced in developed countries. Reputational benefits have been introduced into the equation for measuring the governance effect of the media to derive a more in-depth analysis of the reputation mechanism. This paper is among the first to link news coverage and state ownership with earnings management.