Applied Finance Letters

IMPACTS OF RISK PREFERENCE AND SOCIAL INSURANCE ON HOUSEHOLD FINANCIAL MARKET PARTICIPATION IN CHINA: ARE THERE DIFFERENCES BETWEEN URBAN AND RURAL RESIDENTS?

Wei Yang, Zhaohua Li, Le Wang — Fri, 02 Feb 2024 03:13:31 +0000

This letter examines the impact of risk preference and social insurance on household financial market participation and diversification using the 2017 and 2019 China Household Finance Survey. A multi-value treatment model is used to address the selection bias between risk preference and household financial investment, considering the moderation role of social insurance in between. Overall, our results show that high-risk takers are more likely to participate in the financial market and diversify their portfolios than low risk takers. Focusing on rural and urban differentials, we find marked differences in the impacts of risk preference and social insurance on household financial investment. Having social insurance may widen the difference in investment decisions between high- and low-risk takers in urban areas; the latter group tends not to participate in or diversify when socially insured. In contrast, having social insurance encourages low- and intermediate-risk preferred rural households to participate in the financial market and diversify their financial portfolios. Our work highlights the different consequences of social insurance on investment incentives of the rural and urban households. Whilst the obvious benefits of having social insurance for rural households via risk-sharing, there is undesired consequence of incentive distortion of urban households.

The INVESTIGATION OF ASYMMETRIC DYNAMICS OF BORSA ISTANBUL INDEX WITH QUANTILE UNIT ROOT TEST

Müge Özdemir — Thu, 07 Mar 2024 00:00:00 +0000

In this study, we apply the quantile unit root test, which provides robust inferences for non-normal processes based on the quantile autoregression approach, to examine the asymmetric dynamic process of the BIST100 Borsa Istanbul index. The quantile autoregression approach allows the measurement of the persistency of shocks of different magnitudes and signs affecting the stock market index and can capture the adjustment of asymmetric dynamics in the long-run equilibrium of the index. Therefore, quantile unit root tests add new approaches to index dynamics compared to traditional unit root methodologies based on the least squares regression method. Our results show that the index not only returns to the mean but also exhibits asymmetric behavior in its dynamic structure. Compared to traditional unit root tests, quantile unit root tests provide more evidence to support the efficiency of the stock market index and show that the stock market index at different frequencies does not consistently have a unit root. Asymmetric inferences in shock magnitude and sign play an important role in asset pricing and forecasting in the securities market.

FUNDING AND OVERFUNDING PHENOMENA IN CROWDFUNDING: RELEVANCE OF PLATFORM CHOICE AND VARYING INDUSTRY DYNAMICS

Dominika Galkiewicz, Michal Galkiewicz — Sun, 24 Mar 2024 00:00:00 +0000

This study provides new evidence on factors relevant for the success of crowdfunding campaigns run in Europe between 2015 and 2017 on the most popular crowdfunding platforms in Germany/Austria – Kickstarter.com and Startnext.com. In particular, for this study, a sample of 10,514 campaigns from Germany and Austria for the first time serves as a basis for identifying the determinants of the level of projects’ (over-)funding. For crowdfunding projects, an increase in a project’s funding goal results in higher funding on both platforms, but this does not guarantee success, i.e. reaching the relevant funding goal. Projects with a higher success probability show lower funding goals, especially if launched on Startnext.com. In contrast, a longer duration negligibly increases the amount raised on Startnext and slightly decreases on Kickstarter. On Startnext, projects from the Art cluster have a higher chance to succeed, while these from the Technology cluster show smaller success probabilities as they regularly get less funding. On Kickstarter, projects from the Art, Technology, or Lifestyle field reach higher financing as compared to the Sustainability area. We show that the uncertainty about market size and project/founder quality leads to diverging over- and underfunding levels across platforms and industry clusters, which is of core importance to interested stakeholder groups.

Key words: crowdfunding, crowd, reward, Kickstarter, Startnext

GEOPOLITICS, UNCERTAINTY, AND CRYPTOCURRENCY: A LOVE TRIANGLE GONE WRONG

Leila Dagher, Amar Rao, Dagar Vishal, Olatunji Shobande — Tue, 26 Mar 2024 20:55:42 +0000

This study aims to investigate the spillover effects from geopolitical risks (proxied by the geopolitical risk index GPRD) and cryptocurrencies-related uncertainty (proxied by the Cryptocurrency Uncertainty Index UCRY) to cryptocurrencies. We utilize the Baruník and Křehlík (2018) framework to detect time-frequency connectedness. Our investigation for the period 2017 to 2022 discovers significant spillover effects from both indices (GPRD and UCRY) to cryptocurrencies. Utilizing the information transmission theory and network graphs, our findings reveal that some cryptocurrencies function as net receivers of spillovers from geopolitical risks and uncertainty in the short-term, while over longer time horizons they transform into net transmitters of spillovers to uncertainty. The study underscores the importance of comprehending how uncertainty due to various factors (geopolitical, policy changes, regulatory changes, etc.) could affect the cryptocurrencies’ markets.

THE INFORMATIONAL ROLE OF THE LOAN ONLY CREDIT DEFAULT INDEX (LCDX) ON THE PRICING OF SYNDICATED LOANS

Zagdbazar Davaadorj, Jorge Brusa — Wed, 27 Mar 2024 23:08:53 +0000

This paper explores the informational role of the Loan Only Credit Default Index (LCDX) on the pricing of syndicated loans. Despite an extensive body of research on credit indices and loan pricing, limited studies have comprehensively assessed the complex relationship between the LCDX and individual loan spreads. Contrary to indices like the CDX, which are largely linked to corporate bonds, the LCDX directly pertains to the syndicated secured loan market, offering valuable insights about the overall credit default market and the cost of credit risk insurance. Preliminary results reveal a pronounced positive correlation between the LCDX spread and the syndicated loan spread, particularly noticeable amongst borrowers with lower credit quality. The paper highlights the LCDX's pivotal role in conveying secondary credit market information, with critical implications for credit risk management and financial regulations.

INFECTIOUS DISEASE AND ASYMMETRIC INDUSTRIAL VOLATILITY

Muhammad Tahir Suleman Suleman, Burcu Kapar, Faisal Rana — Thu, 04 Apr 2024 21:05:27 +0000

We examine the time-varying effect of stock market volatility due to infectious diseases on industrial sectors
in the US from 2012 to 2021. We extend the current literature by exploring the diverse impact of infectious
diseases on various industrial sectors and decomposing industrial volatility into good and bad volatility to
quantify how good and bad components vary in response to the transmission of shocks due to infectious
diseases. The results show that the transmission of volatile shocks from the stock market more strongly
enhances the good component of industrial volatility as compared with bad volatility during COVID-19. We
conclude that the relationship between infectious disease equity market volatility and industrial volatility
depends on the good and bad volatile components and their respective conditions at different quantiles.

PERFORMANCE AND TRACKING EFFICIENCY OF COMMODITY ETFS IN THE UK

GERASIMOS ROMPOTIS — Wed, 10 Apr 2024 21:13:52 +0000

This paper examines the performance and tracking efficiency of nine iShares ETFs traded on the London Stock Exchange in the UK. The results indicate that, on average, the performance of the examined ETFs has been positive during their entire trading history. However, these ETFs have failed to fully replicate the performance of the underlying commodities and indexes. At the cumulative level, an average underperformance of 172 basis points is found. In addition, at the sample level, about 86% of daily tracking errors are negative (indicating underperformance), and only 14% of tracking errors are positive (reflecting outperformance). Based on our results, the tracking error is induced by the departure from the full replication of the underlying assets.