Warrington College of Business, University of Florida
The present issue of The Journal of Risk includes an analysis contrasting the respective impacts of the great financial crisis of 2008 and the Covid-19 pandemic on target-date fund strategies; a study illustrating the importance of accounting for off-balancesheet positions on credit risk; an ordinal approach to capital allocation under limited information; and an empirical assessment of the correlation between economic policy uncertainty and exchange rate volatility.
In the issue’s first paper, “Target-date funds: lessons learned?”, Bin Chang and Laurence Booth extend the standard simulation-based evaluations of target-date funds (TDFs) with an empirical study. In particular, they focus on whether TDFs aggressively tilted their positions toward equities prior to the onset of the Covid-19 pandemic, as they did prior to the great financial crisis of 2008, succumbing to the temptations of an ambient long bull market. Chang and Booth show that this was not the case and that TDF managers avoided return-chasing strategies during the more recent crisis.
In the second paper in the issue, “The impact of treasury operations and offbalance- sheet credit business on commercial bank credit risk”, Qiwei Xie, Lu Cheng, Jingyu Li and Xiaolong Zheng propose a comprehensive credit risk model for commercial banks. Specifically, their new model integrates exposures to loans and advances, treasury operations and off-balance-sheet credit positions using a vine copula approach. Li et al show that banks that are not global and systemically important face higher credit risk than global banks that are systemically important. Furthermore, the authors’ data suggest that the risk of loans and advances is positively correlated with treasury operations risk but negatively correlated with off-balance-sheet credit risk.
Next, in “On capital allocation under information constraints”, our third paper, Christoph J. Börner, Ingo Hoffmann, Fabian Poetter and Tim Schmitz propose the use of a Cobb–Douglas production model to rank investment opportunities, as might be needed by a venture capitalist (VC), say, and optimally allocate limited capital accordingly. To compensate for the limited information faced by the VC, Börner et al suggest using an individual entrepreneur’s success record as an input factor in the Cobb–Douglas function, and they then show – through a numerical illustration – that their approach is superior to the even allocation benchmark strategy.
In the issue’s fourth and final paper, “Time-varying higher moments, economic policy uncertainty and renminbi exchange rate volatility”, Xinyu Wu, Xueting Mei and Xuebao Yin propose a generalized autoregressive conditional heteroscedasticity (GARCH) mixed data sampling (MIDAS) model with skewness and kurtosis (SK) to forecast the short-run volatility of currency exchange rates in the presence of time-varying moments and global economic policy uncertainty (GARCH-MIDASSK- GEPU). Using data on the US and Chinese economies, as well as the highly volatile exchange rate between their respective currencies, the authors show that their approach dominates alternatives based on variants of the GARCH model that exclude either SK, GEPU or both.
The authors return to the topic of their 2011 paper and investigate the maturation of target-date funds and their performance during the Covid-19 pandemic, finding that the funds have largely achieved their designation.
The authors investigate how time-varying higher moments and economic policy uncertainty may be used for predicting the renminbi exchange rate volatility.
The impact of treasury operations and off-balance-sheet credit business on commercial bank credit risk
Using a vine copula, he authors demonstrate that global systemically important banks face lower credit risk using data from commercial banks based on three risk factors.
This paper offers a portfolio optimization framework that uses return data to calculate an optimal capital allocation based on a Cobb–Douglas utility function.