M. Humayun Kabir

Risk managers in banks, especially in resource constrained emerging markets, face a dilemma in choosing between standard and sophisticated models in estimating financial risk. Using a sample of four local banks from an emerging market and four international banks, we examine ten backtesting tests on forecasting risk. The tests include the highly parametric Markov Regime Switching-GARCH (MRS-GARCH) model as an alternative to more popular and user-friendly two-parametric Gaussian risk model of Black-Scholes or the one-parametric RiskMetricsTM benchmark model. The results show that a heavily parameterized risk model may not perform better than the popular models with fewer or no parameters at all, especially during crisis periods of Black Swan events, such as the subprime mortgage and COVID-19. There is also no discernible difference in either single or multi-period ahead forecasts.

This paper demonstrates a significant positive impact of political regime transition on cereal productivity across sub-Saharan African countries, after controlling for agricultural inputs, climate, demographic, and economic variables. The up-switching sample of political regimes suggests that transitions from the current regime to democracy positively affect cereal productivity. Conversely, the downward switch in political regimes indicates that the transition towards autocracy negatively affects cereal productivity. Food security in the region improves following this trans ition from an autocratic to a democratic regime. The moderating effects of NPK fertilizer consumption, intrastate conflict, and mineral rents on cereal productivity are significant. The mediating roles of political stability, control of corruption, ODA, and subsidies demonstrate that marginal improvements in the political regime toward a democratic system increase cereal productivity. We examined alternative independent variables in political regimes using Freedom House data and various democracy indices and conducted extensive robustness tests. Additionally, we find significant heterogeneity across regions and between British and non-British colonization of sub-Saharan Africa.

This paper estimates how corporate innovation investment responds to climate policy uncertainty using panel data with 3197 listed firms from 2010 to 2022 in China. The findings show that climate policy uncertainty positively contributes to corporate innovation investment, and this result continues to hold after controlling for endogeneity and conducting a series of robustness tests. Furthermore, we find that stringent government environmental regulation serves as a potential mechanism, compelling firms to adopt cleaner production and increase their investment in innovation. Additionally, this positive relationship is stronger for firms with higher government subsidies and disappears for firms with a higher allocation of fixed assets. We also find that firms with fewer connections to the government are more sensitive to climate policy uncertainty and they tend to increase their investment in innovation to mitigate the uncertainty. Furthermore, when firms invest more in innovation during periods of high policy uncertainty, their long-term performance and firm value are likely to improve. This study sheds light on the importance and influence of climate policy uncertainty on corporate innovation investment in China.

This paper implements the deterministic volatility function (DVF) in the context of the truncated Black‐Scholes (TBS) model, which is identified as the truncated practitioners' Black‐Scholes (PTBS) model, and compares the pricing and hedging performance with the Black‐Scholes (BS), TBS, practitioners' BS (PBS) models. Using the S&P500 index call options data, we find that the PTBS model outperforms all in‐sample and out‐of‐sample regardless of moneyness. On weekly counts, the success rates of the PTBS model are significantly higher for both the in‐the‐money (ITM) and out‐of‐the‐money (OTM) options. The weekly approximation errors of delta and delta‐gamma approximations against full valuation for the PTBS model are lower than those of other models, and the PTBS model is more accurate and stable. The findings are robust to alternative sample variations.

Using a novel measure of air pollution exposure adjusted for the heterogeneity of exposures and the extent of local air pollution, we find a significant negative relationship between adjusted air pollution exposure and corporate innovation investment. This finding still holds after controlling for endogeneity and conducting a series of robustness tests. While the relationship is mediated through net operating cash flows and debt financing costs, we also find that firms with high adjusted air pollution exposure might have deteriorated productivity of R&D personnel, which ultimately hinders innovation input and output. However, state ownership appears to mitigate this adverse effect of adjusted air pollution exposure. Furthermore, the adverse effects of air pollution exposure on innovation investment are more pronounced among firms that disclose environmental information, exhibit low managerial risk tolerance, operate in non‐polluting industries, or are located in developed and less polluted regions. Additionally, the negative impact is particularly evident in the subsample of firms after the signing of the 2015 Paris Agreement. This study sheds light on the importance of adjusted air pollution exposure and its influence on corporate investment in China.

This paper proposes an approximate closed-form option-pricing model based on a non-linear GARCH process with Normal Inverse Gaussian (NIG) Lévy innovations. We develop the mathematical framework and demonstrate how to obtain a closed-form solution to the option price when the return dynamics are characterized by NIG innovations for volatility that follow a non-linear GARCH process. Using a sample of S&P 500 index options, we calibrate the proposed model alongside popular existing models. Overall, from a unified comparison of various analytic pricing approaches, we find that our model performs significantly better than existing models, both in-sample and out-of-sample.

The paper attempts to capture the sentiment derived from routine financial news and outlines the impact of the media content on the main index futures contracts of Hong Kong and Singapore. News factors are generated from routine financial news, but pessimistic market sentiment factors are more prevalent. High pessimistic news factors predict lower returns for the same day, and the returns start to reverse two days after the news for Hong Kong and Singapore markets. The finding is consistent with the sentiment theory. There is a significant reversal in returns, and the reversal in returns offsets the initial changes entirely. The bad news factor does not seem to work as a proxy for trading costs. The sub-sample results are similar to the whole sample. We also find the significant impact of U.S. news sentiment on news factors, futures return, and open interests in both markets. Trading strategies based on bad news factors generate economically significant returns when trading costs are considered.

Academics traditionally view retail investors as rationally passive toward corporate proxy fights due to the higher cost of individual information gathering and their inability to coordinate collectively. In the wake of the digital age and social media, we re‐examine retail investors’ attention and participation during the shareholder activism process. Using a sample from 2005 to 2016, we find that abnormal Google search activities (a proxy for retail investors’ attention in the literature) on firms that receive a shareholder proposal increase during the 3‐week period leading up to the voting. This increase is more pronounced for less transparent firms. Our textual analyses of proxy statements also indicate that these abnormal Google search activities particularly increase for proposals with a more negative or controversial tone. In turn, this retail investors’ attention is associated with greater participation in the voting process, especially among proposals that resonate with shareholders’ preferences and interests (high salience activism). Finally, we show that greater participation during high salience activism is more prominent after E‐proxy regulation became fully effective in 2009. By highlighting that retail investors are proactively engaged in “informed” voting during the shareholder activism process, our study further challenges the view that retail investors are narratively passive.