IDEAS home Printed from https://ideas.repec.org/a/kap/compec/v61y2023i1d10.1007_s10614-021-10208-4.html
   My bibliography  Save this article

An Application of the IFM Method for the Risk Assessment of Financial Instruments

Author

Listed:
  • Adrià Pons

    (University of Lleida)

  • Eduard Cristobal-Fransi

    (University of Lleida)

  • Carla Vintrò

    (University of Lleida)

  • Josep Rius

    (University of Lleida)

  • Oriol Querol

    (University of Lleida)

  • Jordi Vilaplana

    (University of Lleida)

Abstract

External influences or behavioral biases can affect the way risk is perceived. This paper studies the prediction of VaR (Value at Risk) as a measure of the risk of loss for investments on financial products. Our aim is to predict the percentage of loss that a financial product would have in the future to assess the risks and determine the potential loss of a security in the stock market, thus reducing reasoning influenced by feelings for bank and financial firms seeking to deploy AI and advanced automation. We used the IFM (inference function for margins) method in different market scenarios, with particular emphasis on the strengths and weaknesses of it. The study is assessed on single product level with the skewed studen-t GARCH(1,1) model and portfolio level with t-copulas for the inter-dependencies. It has been shown that under normal market conditions the risk is predicted properly for both levels. However, when an unexpected market event occurs, the prediction fails. To address this limitation, a combined model with sentiment analysis and regression is proposed for further investigation as a future work.

Suggested Citation

  • Adrià Pons & Eduard Cristobal-Fransi & Carla Vintrò & Josep Rius & Oriol Querol & Jordi Vilaplana, 2023. "An Application of the IFM Method for the Risk Assessment of Financial Instruments," Computational Economics, Springer;Society for Computational Economics, vol. 61(1), pages 295-315, January.
    • Handle: RePEc:kap:compec:v:61:y:2023:i:1:d:10.1007_s10614-021-10208-4
    DOI: 10.1007/s10614-021-10208-4
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10614-021-10208-4
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10614-021-10208-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Zoran Ivković & Scott Weisbenner, 2005. "Local Does as Local Is: Information Content of the Geography of Individual Investors' Common Stock Investments," Journal of Finance, American Finance Association, vol. 60(1), pages 267-306, February.
    2. Thomas J. Linsmeier & Neil D. Pearson, 1996. "Risk Measurement: An Introduction to Value at Risk," Finance 9609004, University Library of Munich, Germany.
    3. van Rooij, Maarten & Lusardi, Annamaria & Alessie, Rob, 2011. "Financial literacy and stock market participation," Journal of Financial Economics, Elsevier, vol. 101(2), pages 449-472, August.
    4. Nicolosi, Gina & Peng, Liang & Zhu, Ning, 2009. "Do individual investors learn from their trading experience?," Journal of Financial Markets, Elsevier, vol. 12(2), pages 317-336, May.
    5. Satish Kumar & Nisha Goyal, 2015. "Behavioural biases in investment decision making – a systematic literature review," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 7(1), pages 88-108, February.
    6. Mugerman, Yevgeny & Sade, Orly & Shayo, Moses, 2014. "Long term savings decisions: Financial reform, peer effects and ethnicity," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 235-253.
    7. Linsmeier, Thomas J. & Pearson, Neil D., 1996. "Risk measurement: an introduction to value at risk," ACE Reports 14796, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    8. Darren Bernard & Nicole L. Cade & Frank Hodge, 2018. "Investor Behavior and the Benefits of Direct Stock Ownership," Journal of Accounting Research, Wiley Blackwell, vol. 56(2), pages 431-466, May.
    9. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    10. Knutson, Brian & Wimmer, G. Elliott & Kuhnen, Camelia & Winkielman, Piotr, 2008. "Nucleus accumbens activation mediates the influence of reward cues on financial risk-taking," MPRA Paper 8013, University Library of Munich, Germany.
    11. Heimer, Rawley Z., 2014. "Friends do let friends buy stocks actively," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 527-540.
    12. Bailey, Warren & Kumar, Alok & Ng, David, 2011. "Behavioral biases of mutual fund investors," Journal of Financial Economics, Elsevier, vol. 102(1), pages 1-27, October.
    13. Satish Kumar & Nisha Goyal, 2015. "Behavioural biases in investment decision making – a systematic literature review," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 7(1), pages 88-108, February.
    14. Antonides, Gerrit & Van Der Sar, Nico L., 1990. "Individual expectations, risk perception and preferences in relation to investment decision making," Journal of Economic Psychology, Elsevier, vol. 11(2), pages 227-245, June.
    15. Camelia Kuhnen & Brian Knutson, 2005. "The Neural Basis of Financial Risk Taking," Experimental 0509001, University Library of Munich, Germany.
    16. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, April.
    17. Kuhnen, Camelia M. & Knutson, Brian, 2011. "The Influence of Affect on Beliefs, Preferences, and Financial Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(3), pages 605-626, June.
    18. Brad M. Barber & Terrance Odean, 2001. "Boys will be Boys: Gender, Overconfidence, and Common Stock Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 261-292.
    19. Jacobsen, Ben & Lee, John B. & Marquering, Wessel & Zhang, Cherry Y., 2014. "Gender differences in optimism and asset allocation," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 630-651.
    20. Hansen, Bruce E, 1994. "Autoregressive Conditional Density Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 705-730, August.
    21. Dima Alberg & Haim Shalit & Rami Yosef, 2008. "Estimating stock market volatility using asymmetric GARCH models," Applied Financial Economics, Taylor & Francis Journals, vol. 18(15), pages 1201-1208.
    22. Halko, Marja-Liisa & Kaustia, Markku & Alanko, Elias, 2012. "The gender effect in risky asset holdings," Journal of Economic Behavior & Organization, Elsevier, vol. 83(1), pages 66-81.
    23. Meir Statman & Steven Thorley & Keith Vorkink, 2006. "Investor Overconfidence and Trading Volume," The Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1531-1565.
    24. Georgarakos, Dimitris & Fürth, Sven, 2015. "Household repayment behavior: The role of social capital and institutional, political, and religious beliefs," European Journal of Political Economy, Elsevier, vol. 37(C), pages 249-265.
    25. McInish, Thomas H. & Srivastava, Rajendra K., 1984. "The nature of individual investors' heterogeneous expectations," Journal of Economic Psychology, Elsevier, vol. 5(3), pages 251-263, September.
    26. Gina Nicolosi & Liang Peng & Ning Zhu, 2003. "Do Individual Investors Learn from Their Trading Experience?," Yale School of Management Working Papers ysm439, Yale School of Management, revised 01 Sep 2009.
    27. Kiymaz, Halil & Öztürkkal, Belma & Akkemik, K. Ali, 2016. "Behavioral biases of finance professionals: Turkish evidence," Journal of Behavioral and Experimental Finance, Elsevier, vol. 12(C), pages 101-111.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    2. Cary Frydman & Nicholas Barberis & Colin Camerer & Peter Bossaerts & Antonio Rangel, 2012. "Using Neural Data to Test a Theory of Investor Behavior: An Application to Realization Utility," NBER Working Papers 18562, National Bureau of Economic Research, Inc.
    3. Pikulina, Elena & Renneboog, Luc & Ter Horst, Jenke & Tobler, Philippe N., 2014. "Bonus schemes and trading activity," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 369-389.
    4. D’Hondt, Catherine & De Winne, Rudy & Merli, Maxime, 2021. "Do retail investors bite off more than they can chew? A close look at their return objectives," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 879-902.
    5. Yogita Singh & Mohd. Adil & S. M. Imamul Haque, 2023. "Personality traits and behaviour biases: the moderating role of risk-tolerance," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(4), pages 3549-3573, August.
    6. Forman, John & Horton, Joanne, 2019. "Overconfidence, position size, and the link to performance," Journal of Empirical Finance, Elsevier, vol. 53(C), pages 291-309.
    7. Ritika & Nawal Kishor, 2020. "Development and validation of behavioral biases scale: a SEM approach," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 14(2), pages 237-259, November.
    8. Hoffmann, Arvid O.I. & Post, Thomas & Pennings, Joost M.E., 2013. "Individual investor perceptions and behavior during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 60-74.
    9. Campbell, John Y & Ranish, Benjamin, 2014. "Getting Better or Feeling Better? How Equity Investors Respond to Investment Experience," CEPR Discussion Papers 9907, C.E.P.R. Discussion Papers.
    10. D'Hondt, Catherine & Elhichou Elmaya, Younes & Petitjean, Mikael, 2020. "Retail Investing in Passive Exchange Traded Funds," LIDAM Discussion Papers LFIN 2020013, Université catholique de Louvain, Louvain Finance (LFIN).
    11. Xu, Rong & Liu, Yaodong & Hu, Nan & Guo, Jie (Michael), 2022. "What drives individual investors in the bear market?," The British Accounting Review, Elsevier, vol. 54(6).
    12. Aman, Hiroyuki & Motonishi, Taizo & Ogawa, Kazuhito & Omori, Kozo, 2024. "The effect of financial literacy on long-term recognition and short-term trade in mutual funds: Evidence from Japan," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 762-783.
    13. Bellofatto, Anthony & Broihanne, Marie-Hélène & D'Hondt, Catherine, 2019. "Appetite for information and trading behavior," LIDAM Discussion Papers LFIN 2019002, Université catholique de Louvain, Louvain Finance (LFIN).
    14. Laurens Cherchye & Bram De Rock & Dieter Saelens, 2024. "Nonparametric analysis of financial portfolio performance," Working Papers ECARES 2024-08, ULB -- Universite Libre de Bruxelles.
    15. Glaser, Markus & Weber, Martin, 2009. "Which past returns affect trading volume?," Journal of Financial Markets, Elsevier, vol. 12(1), pages 1-31, February.
    16. Fung, Scott & Obaid, Khaled & Tsai, Shih-Chuan, 2024. "Information acquisition and processing skills of institutions and retail investors around information shocks," Journal of Empirical Finance, Elsevier, vol. 77(C).
    17. Jiang, Jinglin & Liao, Li & Wang, Zhengwei & Xiang, Hongyu, 2020. "Financial literacy and retail investors' financial welfare: Evidence from mutual fund investment outcomes in China," Pacific-Basin Finance Journal, Elsevier, vol. 59(C).
    18. Merkle, Christoph, 2018. "The curious case of negative volatility," Journal of Financial Markets, Elsevier, vol. 40(C), pages 92-108.
    19. Merkle, Christoph & Weber, Martin, 2014. "Do investors put their money where their mouth is? Stock market expectations and investing behavior," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 372-386.
    20. Camille Magron, 2012. "Performance of individual investors and personal investment objectives," Working Papers of LaRGE Research Center 2012-07, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:compec:v:61:y:2023:i:1:d:10.1007_s10614-021-10208-4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.