LIQUIDITY RISK IMPLICATIONS FOR MARKET RISK ASSESSMENT IN EMERGING MARKETS

Abstract Classical financial market theories built upon the assumption of a perfect market have been coping with frictions on both developed and emerging markets. There are numerous factors affecting the operation of financial markets and their participants’ behavior, but illiquidity is a continuous problem that has important consequences on the financial asset prices and the degree of competition between market participants. Moreover, investments that yield high profits are often the ones related to less liquid financial assets from emerging markets. Since investment decisions are based on risk preferences and investors are commonly risk averse, they tend to limit their risk exposure while defining their investment strategy. Various risk measures can be used to estimate the level of risk. Value at Risk (VaR) is a widely accepted summary measure of market risk that is also recommended by the financial industry regulatory authorities as a risk management tool. The usage of VaR models is rapidly expanding; thus, it is used by both financial and non-financial institutions in order to estimate exposure to financial risks, complement allocation of capital, set trading position limits and evaluate performance of trading strategies. However, the last global financial crisis that occurred in 2007-2008 highlighted some of the weaknesses of this measure as a measure of market risk. The lack of a liquidity parameter in methodologies used to compute VaR significantly decreased the effectiveness of this measure. Therefore, the objective of this research is to examine the implications of asset liquidity risk on market risk assessment, which is obtained by using VaR. The most frequently used technique for VaR estimation is the parametric (analytic) method, but the constant search for precise prediction models results in a large number of variations of basic parametric and non-parametric methods. Thus, in this research, the parametric VaR and volatility models are implemented on a sample representing the stock indices of the European emerging markets in the period from 2009 to 2017. The results of this study indicate that the application of a liquidity constraint in the VaR model provides more accurate assessment of potential loss, especially in emerging markets, and enables investors to detect the liquidity risk and its effect in comparison with a conventional VaR

EDITORIAL

We would like to thank, first of all, authors of the articles published in this Issue of the Journal. At the same time, we feel grateful to all the referees for their valuable help in selecting the papers and improving their quality

Assessing the accuracy of delta-normal VaR evaluation for Serbian government bond portfolio

Interest rate risk is immanent to all sorts of bonds with a fixed interest rate and has a major impact on the value of the bond. The aim of this article is to evaluate this risk over a period of five years (2008–2012), applying the delta-normal Value-at-Risk (VaR) method to a portfolio consisting of bonds that were continuously traded at the Belgrade Stock Exchange and to assess the accuracy of the method for different confidence levels in that period. The results demonstrated that the method underestimated the risk for the confidence levels of 99.5% and 99% and overestimated the risk for the confidence level of 90%

TEORIJA OČEKIVANE KORISNOSTI U USLOVIMA EKSTREMNIH RIZIKA

Expected utility theory provides a framework for modeling choice of a rational individual, whose goal is to maximize expected utility to the preferences towards risk. However, extreme risks, such as, for example, a stock market crash or a natural disaster, significantly affect the function of the probability distribution of outcomes by adding the weight to the tails of the distribution. In such cases, the application of the theory of decision-making is extremely sensitive to assumptions on the probability distribution function. Therefore, this paper will provide a review of models of decision-making in terms of expected utility theory under extreme risk.Teorija očekivane korisnosti pruža okvir za modeliranje izbora racionalnog pojedinca čiji je cilj maksimiranje očekivane korisnosti uz date preferencije prema riziku. Međutim, ekstremni rizici, kao što su, na primer, krah berze ili elementarna nepogoda, značajno utiču na funkciju raspodele verovatnoće ishoda dodajući težinu repovima raspodele. U takvim slučajevima, primena teorije odlučivanja zasnovanoj na očekivanoj korisnosti je izuzetno osetljiva na pretpostavke o funkciji raspodele verovatnoće. Stoga će u ovom radu biti dat pregled modela odlučivanja u okviru teorije očekivane korisnosti u uslovima ekstremnih rizika

UPRAVLJANJE RIZICIMA ODRŽIVOG RAZVOJA U DIGITALNOJ EKONOMIJI

The problem of sustainable development has become an imperative of globalization, which resolutely sets the request for companies to operate socially responsibly, i.e., to create value in a manner that is sustainable in the future by achieving economic, environmental and social goals. The wave of change, conditioned by digital transformation, is considered an opportunity, but also a challenge for the realization of the concept of sustainable development. Therefore, the aim of this paper is to consider the risks of sustainable business emerging from the implementation of ICT in the business process, with focus on the companies in the Republic of Serbia.Problem održivog razvoja je postao imperativ globalizacije, koji pred preduzeća sve odlučnije postavlja zahtev da posluju društveno odgovorno, odnosno stvaraju vrednost na način koji je održiv u budućem periodu ostvarujući ekonomske, ekološke i društvene ciljeve. Talas promena uslovljen digitalnom transformacijom se smatra mogućnošću, ali i izazovom za ostvarenje koncepta održivog razvoja. Stoga je cilj ovog rada sagledavanje rizika održivog poslovanja, koji proizilaze iz implementacije IKT u proces poslovanja, sa posebnim osvrtom na preduzeća koja posluju u Republici Srbiji

The Relationship between CO2 Emissions, Industry, Services and Gross Fixed Capital Formation in the Balkan Countries

The examination of the economy-environment nexus is one of the focal issues in the field of environmental economics. This study examines the causal relationships between carbon dioxide (CO2) emissions, industry, services, and gross fixed capital formation for a panel of Balkan countries over the period 1996-2017. A three-step methodological approach is used, including panel unit root tests, panel cointegration tests, and panel causality tests. The results suggest a strong cointegration between the variables, meaning that all variables have a long-run relationship with CO2 emissions. The results of the panel causality show that there is a short-run bidirectional panel causality running between industry and services, and gross fixed capital formation and services. Moreover, there is a unidirectional causality running from industry and gross fixed capital formation to CO2 emissions, and from industry to gross fixed capital formation. The results of the long-run causal relationships show that estimated coefficients of the error correction terms (ECT) in the case of CO2 emissions, industry and gross fixed capital formation are statistically significant, indicating that these three variables are an important part in the adjustment process as the model diverges from the long-run equilibrium. Balkan countries need to further invest in the modernisation of their technological process, as well as to act following the global policy incentives. Environmental taxes, carbon capture and storage, taking part in emission trading schemes and orientation towards renewable energy sources, should further strengthen Balkan countries in achieving environmentally sound economic growth

EFEKTI PRIMENE RAZLIČITIH MERA RIZIKA NA IZBOR OPTIMALNOG PORTFOLIJA: SLUČAJ BEOGRADSKE BERZE

Despite its wide use in practice, Modern Portfolio Theory and Markowitz’s approach to optimization, which is based on quadratic programming and the first two moments of the probability distribution of returns as major parameters, was faced with criticism. Therefore, standard Mean-Variance approach had been modified by applying more appropriate risk measures in optimization algorithm. The aim of this paper is to indicate efficiency of these models as well as justification of their usage in managing stocks portfolio on the Belgrade Stock Exchange.Savremena portfolio teorija i Markovicev pristup optimizaciji, koji se zasniva na kvadratnom programiranju i čiji su osnovni parametri prva dva momenta raspodele verovatnoće prinosa, uprkos širokoj primeni u praksi, suočila se sa brojnim kritikama. Stoga su razvijeni modeli, koji na adekvatniji način inkorporiraju rizik u model optimizacije. Cilj ovog rada je da ukaže na efikasnost ovako formiranih modela optimizacije i opravdanost njihove primene u upravljanju portfoliom hartija od vrednosti na Beogradskoj berzi

Performance of Social Pillar-Based Portfolio in Developing Capital Market

Research Question: This study examined the preconditions and efficiency of socially responsible investing (SRI) in the developing capital market, specifically the Belgrade Stock Exchange (BSE). Motivation: Considering the increasing trend of SRI (GSIA, 2020) and importance of information on corporate social responsibility (CSR) to investors (Miralles‐Quiros, Miralles‐Quiros, & Arraiano, 2017), especially on social issues (Giese, Nagy, & Lee, 2021), we explored the influence of applying the social criteria in asset selection on investment portfolio performance at the BSE. This study builds on the existing literature that is mostly focused on developed capital markets of Europe, the United States and Canada (Von Wallis & Klein, 2015) by analysing the issue of SRI in the developing market. The provided setup for socially driven portfolio structuring based on market trends and social performance disclosure proved to be efficient in the long-term. Idea: The core idea of this paper was to analyse the terms for SRI and empirically evaluate the performance of social pillar-based portfolio on the BSE in order to provide evidence to support the trend of SRI in developing markets. The structure of the portfolios was set using the best-in-class strategy, while the classes were determined on the basis of the stocks’ return trends. Data: The analysis was conducted using trading data and information from financial and non-financial reports of the companies listed on the BSE. Tools: Cluster analysis was used for classification of stocks, while performances of portfolios were evaluated implementing return, volatility and risk-adjusted measures. Findings: The social pillar-based portfolio outperformed the conventional one and benchmarking indices in the observed five-year period. However, mixed results were obtained in the short-term indicating that specific effects of CSR practice on financial performance of the companies in observed developing market could still be obscured. Contribution: This paper expands the existing research related to SRI in the developing markets and offers practical recommendations for potential socially conscious investors

Exposure to outdoor air pollution and cancer development: Is air pollution responsible for more than lung cancer?

Zagađenje vazduha predstavlja ekološki faktor rizika koji je povezan sa 1% svih slučajeva razvoja karcinoma i 2% svih smrtnih slučajeva usled razvoja karcinoma u Evropi. Postoji veliki broj podataka koji ukazuju na vezu između zagađenja vazduha, posebno suspendovanih čestica (PM), i pojave karcinoma pluća. ...Air pollution represents environmental risk factor linked to 1% of all cancer incidences and 2% of all cancer deaths in Europe. There is a strong body of data linking outdoor (ambient) air pollution, particularly particulate matter (PM), with lung cancer incidence. ..