Volume 11, Number 3 (February 2009)
University of Florida
The unprecedented scale of recent financial and economic losses is a driving force for a better understanding of amplification effects. Factors such as correlated tail events, similarity of search for and response to financial information and wide adoption of models subject to robustness issues have become intrinsic risk dimensions. As the enclosed articles address these topics, the journal is clearly well-positioned to be the outlet of choice to communicate results on far-reaching risk research.
As observers scrutinize the market for clues in its anticipated evolution, the current crisis has had its fair share of sudden shifts in direction. Furthermore, with substantial government intervention in the attempted remedies, bond-stock differentials are significant indicators of risk perception in financial markets. In this regard, the paper of Consigli et al offers an empirical validation of a jump-diffusion model that effectively captures deviations from and reversions to an equilibrium process.
The current financial crisis has also illustrated the importance of accurately assessing correlations at the tails of probability distributions. In their paper, Friedman et al develop an estimation method combining the copula approach with analytic results of certain mixture distributions. Using a variety of data, the authors show that their approach compares favorably against benchmarks.
Major market participants are generally assumed to make portfolio selections on the basis of risk-return trade-offs. Given model and parameter uncertainties, the need for robust portfolio optimization is evident. The paper from Zhu et al proposes a conditional value-at-risk framework for which they develop an efficient computational technique. Through simulation they show that their approach is more robust than min–max portfolio optimization.
Finally, the concept of expected utility has been developed to capture risk aversion. However, its critics have identified empirical anomalies such as loss aversion and attachment to status quo. The paper from Flåm proposes a remedy based on a bivariate utility criterion accounting for both level of wealth and direction of uncertainty. This construct leads, however, to non-smoothness, which the author addresses through the use of convolution.
Note: Risk Journals is pleased to announce that after a successful evaluation by Thomson Reuters, The Journal of Risk will be indexed and abstracted from Volume 10 Number 3 onwards in the following information services: Social Sciences Citation Index, Journal Citation Reports/Social Sciences Edition, Current Contents/Social and Behavioral Sciences and Social Scisearch.
Papers in this issue
Risk premium and non-smooth utility
The bond-stock yield differential as a risk indicator in financial markets
Joint and conditional transformed t mixture models with applications to financial and economic data
Min-Max robust and CVaR robust mean-variance portfolios