How to limit the impact of downside risk of innovative projects: a new solution from a real option

2011 ◽  
Vol 10 (2/3) ◽  
pp. 208
Author(s):  
Bruna Ecchia
Keyword(s):  
Real Option ◽  
Downside Risk ◽  
The Impact

scholarly journals Light a lamp and look at the stock market

2021 ◽  
Vol 7 (1) ◽  
Author(s):  
Radeef Chundakkadan
Keyword(s):  
Stock Market ◽  
Financial Distress ◽  
Investor Sentiment ◽  
Downside Risk ◽  
Bond Yields ◽  
Risky Assets ◽  
Market Participants ◽  
Market Return ◽  
The Impact

AbstractIn this study, we investigate the impact of the light-a-lamp event that occurred in India during the COVID-19 lockdown. This event happened across the country, and millions of people participated in it. We link this event to the stock market through investor sentiment and misattribution bias. We find a 9% hike in the market return on the post-event day. The effect is heterogeneous in terms of beta, downside risk, volatility, and financial distress. We also find an increase (decrease) in long-term bond yields (price), which together suggests that market participants demanded risky assets in the post-event day.

Does Social Similarity Pay Off? Homophily and Venture Capitalists’ Deal Valuation, Downside Risk Protection, and Financial Returns in India

2020 ◽  
Vol 31 (3) ◽  
pp. 576-603 ◽  
Author(s):  
Kim Claes ◽  
Balagopal Vissa
Keyword(s):  
Early Stage ◽  
Qualitative Interviews ◽  
Downside Risk ◽  
Venture Capitalists ◽  
Data Set ◽  
Start Up ◽  
Risk Protection ◽  
Regional Similarity ◽  
Post Hoc ◽  
The Impact

We ask how social similarity between start-up founders and venture capitalists (VCs) influences VCs’ pricing decisions and returns on investments. We conceptualize how regional and caste similarity, two salient aspects of social similarity in India, affect two distinct aspects of deal pricing: premoney valuation and investors’ downside risk protection in the Indian venture capital market. We theorize that VCs reflect the benefits and costs of social similarity by setting higher premoney valuation when investing in companies led by socially similar founders while also minimizing their downside risks in these investments. We expect that social similarity’s impact on pricing is amplified when VCs face greater subjective uncertainty, such as for early-stage deals or if the VCs lack expertise in the start-up company’s product market. Finally, we claim that VCs achieve superior returns on investments when their deal pricing accurately reflects the impact of social similarity. We tested our conceptual model using both parametric and nonparametric methods on a hand-collected data set of all deals that occurred during 2005–2012, and we supplemented our analyses with in-depth, qualitative interviews that contextualize our findings. The pattern of findings on regional similarity are consistent with our model, but the effects of caste in our data are theoretically anomalous. Post hoc analyses to resolve the anomaly suggest an “intrinsic quality” mechanism, whereby higher-caste VCs set higher valuations when matching with lower-caste founders that signal high quality. Overall, our findings offer evidence that VCs incorporate social attributes into deal pricing in nuanced yet boundedly rational ways.

scholarly journals The Impact of Management Fees on the Pricing of Variable Annuity Guarantees

Risks ◽  
2018 ◽  
Vol 6 (3) ◽  
pp. 103
Author(s):  
Jin Sun ◽  
Pavel Shevchenko ◽  
Man Fung
Keyword(s):  
Numerical Experiments ◽  
Downside Risk ◽  
Equity Market ◽  
Retirement Income ◽  
Variable Annuities ◽  
Management Fees ◽  
Market Friction ◽  
Market Management ◽  
Retirement Fund ◽  
The Impact

Variable annuities, as a class of retirement income products, allow equity market exposure for a policyholder’s retirement fund with optional guarantees to limit the downside risk of the market. Management fees andguarantee insurance fees are charged respectively for the market exposure and for the protection from the downside risk. We investigate the pricing of variable annuity guarantees under optimal withdrawal strategies when management fees are present. We consider from both policyholder’s and insurer’s perspectives optimal withdrawal strategies and calculate the respective fair insurance fees. We reveal a discrepancy where the fees from the insurer’s perspective can be significantly higher due to the management fees serving as a form of market friction. Our results provide a possible explanation of lower guarantee insurance fees observed in the market than those predicted from the insurer’s perspective. Numerical experiments are conducted to illustrate the results.

scholarly journals The impact of downside risk on UK stock returns

2019 ◽  
Vol 18 (1) ◽  
pp. 53-70
Author(s):  
Fangzhou Huang
Keyword(s):  
Stock Returns ◽  
Financial Crises ◽  
Negative Impact ◽  
Positive Impact ◽  
Downside Risk ◽  
Content Type ◽  
Portfolio Returns ◽  
Time Sensitivity ◽  
Window Approach ◽  
The Impact

PurposeThis paper aims to investigate patterns in UK stock returns related to downside risk, with particular focus on stock returns during financial crises.Design/methodology/approachFirst, stocks are sorted into five quintile portfolios based on the relevant beta values (classic beta, downside beta and upside beta, calculated by the moving window approach). Second, patterns of portfolio returns are examined during various sub-periods. Finally, predictive powers of beta and downside beta are examined.FindingsThe downside risk is observed to have a significant positive impact on contemporaneous stock returns and a negative impact on future returns in general. In contrast, an inverse relationship between risk and return is observed when stocks are sorted by beta, contrary to the classic literature. UK stock returns exhibit clear time sensitivity, especially during financial crises.Originality/valueThis paper focuses on the impact of the downside risk on UK stock returns, assessed via a comprehensive sub-period analysis. This paper fills the gap in the existing literature, in which very few studies examine the time sensitivity in relation to the downside risk and the risk-return anomaly in the UK stock market using a long sample period.

The impact of delaying an investment decision on R&D projects in real option game

2016 ◽  
Vol 87 ◽  
pp. 182-189 ◽  
Author(s):  
Shuhua Chang ◽  
Yue Li ◽  
Fanglu Gao
Keyword(s):  
Real Option ◽  
Investment Decision ◽  
The Impact

scholarly journals Downside systematic risk in Pakistani stock market: role of corporate governance, financial liberalization and investor sentiment

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Shahzad Hussain ◽  
Muhammad Akbar ◽  
Qaisar Ali Malik ◽  
Tanveer Ahmad ◽  
Nasir Abbas
Keyword(s):  
Corporate Governance ◽  
Stock Market ◽  
Financial Liberalization ◽  
Investor Sentiment ◽  
Systematic Risk ◽  
Downside Risk ◽  
Market Volatility ◽  
Content Type ◽  
The Impact

Purpose The purpose of this paper is to examine the impact of corporate governance, investor sentiment and financial liberalization on downside systematic risk and the interplay of socio-political turbulence on this relationship through static and dynamic panel estimation models. Design/methodology/approach The evidence is based on a sample of 230 publicly listed non-financial firms from Pakistan Stock Exchange (PSX) over the period 2008–2018. Furthermore, this study analyzes the data through Blundell and Bond (1998) technique in the full sample as well sub-samples (big and small firms). Findings The authors document that corporate governance mechanism reduces the downside risk, whereas investor sentiment and financial liberalization increase the investors’ exposure toward downside risk. Particularly, the results provide some new insights that the socio-political turbulence as a moderator weakens the impact of corporate governance and strengthens the effect of investor sentiment and financial liberalization on downside risk. Consistent with prior studies, the analysis of sub-samples reveals some statistical variations in large and small-size sampled firms. Theoretically, the findings mainly support agency theory, noise trader theory and the Keynesians hypothesis. Originality/value Stock market volatility has become a prime area of concern for investors, policymakers and regulators in emerging economies. Primarily, the existence of market volatility is attributed to weak governance, irrational behavior of market participants, the liberation of financial policies and sociopolitical turbulence. Therefore, the present study provides simultaneous empirical evidence to determine whether corporate governance, investor sentiment and financial liberalization hinder or spur downside risk in an emerging economy. Furthermore, the work relates to a small number of studies that examine the role of socio-political turbulence as a moderator on the relationship of corporate governance, investor sentiment and financial liberalization with downside systematic risk.

scholarly journals Optimizing Risk Allocation in Public-Private Partnership Projects by Project Finance Contracts. The Case of Put-or-Pay Contract for Stranded Posidonia Disposal in the Municipality of Bari

2020 ◽  
Vol 12 (3) ◽  
pp. 806 ◽  
Author(s):  
Antonella Lomoro ◽  
Giorgio Mossa ◽  
Roberta Pellegrino ◽  
Luigi Ranieri
Keyword(s):  
Real Option ◽  
Public Support ◽  
Treatment Plant ◽  
Cash Flows ◽  
Public Private Partnership ◽  
Project Finance ◽  
Risk Allocation ◽  
Private Partnership ◽  
Put Options ◽  
The Impact

This paper investigates the impact of the adoption of public support on the performance of public–private partnership (PPP) projects as perceived and measured by the different actors involved. In particular, the public support investigated by this study is put-or pay contracts, which are often used in PPP projects financed through project finance to optimize risk allocation. In order to quantify the benefit gained by each party with and without the put-or-pay contract, cash flows of the project have been modeled by using the concept of real option, defined as the right without the obligation to make an action if it is convenient to do so. This concept enabled us to model and quantify the inner flexibility mechanism of put-or-pay contracts. With a put-or-pay agreement signed between the municipality, a (private) owner, and operator of a disposal facility, the owner of the facility has the faculty, without any obligation, to require the payment of penalty, if the municipality fails to meet its obligations. This means that the owner of the facility holds a series of European put options that can be exercised if it is convenient for the holder. The developed model has been used for studying the effectiveness of put-or-pay contracts for financing the treatment plant of a special dispose through project finance, i.e., the plant for disposal of marine plant posidonia.

Credit Default Swaps and Debt Overhang

2021 ◽  
Author(s):  
Tak-Yuen Wong ◽  
Jin Yu
Keyword(s):  
Cross Sections ◽  
Firm Value ◽  
Real Option ◽  
Credit Default Swaps ◽  
Equity Returns ◽  
Negative Effects ◽  
Debt Overhang ◽  
Credit Default ◽  
Asset Growth ◽  
The Impact

We analyze the impact of credit default swaps (CDSs) trading on firm investment, long-term debt financing, and valuation. In our model, the firm is endowed with a real option to initiate a project and enhance its future growth. Its creditors have access to CDS contracts that hedge them against default losses. We show that CDS protection increases the firm’s pledgable income: that is, the maximum amount of debt it can raise. However, at the same time CDS protection decreases asset growth and impedes project initiation. As a result, CDS trading could reduce firm value, and the negative effects are stronger when the firm is riskier, where shareholders have stronger bargaining power, and growth opportunities are less valuable. Using simulated cross-sections of firms, we find that CDS trading increases corporate default rates and deters investment. Altogether, CDS firms tend to have a lower firm value and more volatile equity returns than non-CDS firms. This paper was accepted by Gustavo Manso, finance.

scholarly journals Investment and exchange rate uncertainty under different regimes

2014 ◽  
Vol 44 (3) ◽  
pp. 553-577
Author(s):  
Cristiano Aguiar de Oliveira
Keyword(s):  
Exchange Rate ◽  
Real Option ◽  
Investment Decision ◽  
Exchange Rate Regimes ◽  
Significant Loss ◽  
Project Investment ◽  
Foreign Markets ◽  
Exchange Rate Uncertainty ◽  
Regime Stability ◽  
The Impact

This paper examines the impact of the exchange rate uncertainty on investment under different exchange rate regimes. The paper presents a theoretical model where exchange rate is a stochastic process and investment decision behaves as a Real Option. The paper evaluates the performance of a new project investment under free float, fixed and intermediate exchange rate regimes (managed float and crawling peg). The comparison among the different regimes shows that the crawling peg has advantages when compared to other regimes. The regime stability implies that less currency devaluations are necessary to stimulate investment, especially when there is a significant loss of market power in foreign markets.

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