Risk Applications

Citation

McCarthy, J. (2015), "Risk Applications", Review of Accounting and Finance, Vol. 14 No. 4. https://doi.org/10.1108/RAF-10-2015-0137

Risk Applications

Article Type: Editorial From: Review of Accounting and Finance, Volume 14, Issue 4

Within this Special Issue of Review of Accounting and Finance, a wide variety of risk considerations are analyzed. Papers in this issue evaluate the risk/return tradeoff for different style mutual funds. They analyze the linkage between economic growth and stock market development. International diversification and return differentials are considered. Asymmetric co-movements between financial markets and economies are examined. And, finally, a comparison of the Carhart four-factor model and the Fama-French three-factor model is applied in the South African Stock Market.

More specifically, our first paper examines the risk/return attributes of micro-cap, small cap and mid-cap mutual funds. Given the performance of small cap mutual funds referenced by a number of studies, the paper by Professor Rodriguez shows that over pursuing a given theme can lead to sub-optimal results. In his paper, examining risk-adjusted performance among different size mutual funds, the author finds that micro-cap mutual funds have sub-optimal performance over an extended period of time relative to small cap mutual funds or mid-sized mutual funds.

Next, our second paper examines the linkage between stock market development and economic growth in emerging market economies. The authors use three different indicators of stock market development: a market capitalization ratio, total value of shares traded ratio and turnover ratio. The authors find that stock market development significantly contributes to economic growth. This significant finding is robust, as the authors control variables for economic growth consider a country’s aggregate investment ratio, exchange rate stability, the rate of inflation, trade openness and the inflow of foreign direct investment as a percentage of GDP.

Our third paper studies the diversification and return differential between the USA and foreign markets. Country mutual funds offer the benefits of additional diversification which can be obtained at a relatively small cost. The two types of country mutual funds studied by the authors are: Exchange Traded Funds and Closed End Funds. The authors use time varying beta’s within the framework of conditional factor pricing specifications and find that country mutual funds are generally exposed to foreign market risk, while local (USA) market risk is generally not priced.

The fourth paper in our Special Issue considers the asymmetric economic and financial co-movements in an international environment. The authors find a different outcome when the price differential is decreasing as opposed to increasing. These findings indicate that the benefits of international diversification may be limited in scope. The authors studied a 30-year period from 1980 to 2010. They analyzed industrial production and equity market returns in the USA and the other G-7 countries.

Our last paper investigates the Carhart four-factor model and the Fama-French three-factor model applied in the South African Stock Market. The paper examines 848 firms over the time period of 1996-2012. The authors report that the Fama-French model only partly captures the size and book-to-market effects in the South African Stock Market. On balance, they report superior performance of the Carhart model in the South African Stock Market. Given the inclusion of a momentum variable in the Carhart model and the relatively small size of the equity market, the author’s results support the intuition that momentum is an important consideration in smaller size markets.

Joseph McCarthy Bryant University, Smithfield Rhode Island, USA