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The growth in derivative activities, and the change in the way financial firms conduct these activities, has led to the development of practices within firms to manage risk. These practices relate to both the organisational context in which risk management takes place, and the measurement of market risk. Proposals and recommendations have been made in a number of reports in an attempt to encourage firms to adopt best practice, as identified by the Group of Thirty, through public disclosure requirements and rides for determining the amount of regulatory capital to support trading and derivatives activities. The adoption of best practice, together with the benefits of increased transparency and more appropriate methods for determining capital requirements, is seen to lead to a reduction in systemic risk. This paper examines the main proposals and recommendations made in the reports. In particular, the use of market risk measurement models, developed for internal risk management purposes, for public disclosures of market risk and for calculating regulatory capital is critically examined.

Though of fairly recent origin, the capital‐asset pricing model (CAPM) is becoming a dominant influence in the analysis of financial and investment decisions. While continuing to undergo stringent theoretical and empirical examination, the demonstrable explanatory and predictive ability of the CAPM have led to its widespread recognition as the foundation of modern financial management. Though usually attributed to Sharpe, Lintner and Mossin, the origins of the CAPM can be traced back to the celebrated work of Harry Markowitz on portfolio selection.

PurposeIn 1997, the Securities and Exchange Commission (SEC) issued Financial Reporting Release No. 48. FFR No. 48 requires that companies disclose both qualitative and quantitative market risk information for risks of loss arising from adverse changes in interest rates, foreign currency rates, commodity prices, and equity prices. This research focuses on the required disclosure of market risk related to equity prices which is commonly known as Beta in the capital asset pricing model (CAPM).Design/methodology/approachA sample of 323 companies listed in NYSE was selected to investigate the relationship between the market risk and the accounting measures of risk in order to determine the accounting variables that should be disclosed as a substitute of market risk, if there is no data, for the companies to fulfill the SEC requirements.FindingsBy identifying the accounting measures most closely associated with market Beta, the financial manager may be able to influence the Beta value by changing the company's structure as summarized in the successful accounting – determined risk measures. Such finding may also be used to estimate a company's Beta value in situations where historical stock market price data is limited or not available. An example of this later circumstance occurs in the case of initial public offer (IPO). Market price data may also be limited in acquisition cases, where the acquisition target is a subsidiary of a larger company.Originality/valueThe results of this study address these finance and accounting practice situations.

This paper analyzes the special character of currency risks associated with equity investments in emerging capital markets. Such investments are an important and growing source of funds for financing projects which contribute to the rapid pace of growth in emerging markets. While investors in any foreign market face the consequences of possible changes in the value of foreign currency, uncertainty about the terms for currency conversion in emerging markets are aggravated by the interaction of capital flows and currency values, particularly for countries which rely heavily on external sources of financing. In such an environment, it is essential for investors to understand the characteristics of currency risk in order to incorporate them in their investment decisions. This paper analyzes equity market returns and currency fluctuations in a group of emerging markets by comparing them to a set of developed countries. By traditional measures of risk emerging markets appear to have low levels of currency risk. This paper demonstrates that there has also been substantial changes in currency risk in emerging markets which have not occurred in developed markets. This paper also discusses methods of hedging currency risk, taking into account the limitations on hedging strategies in emerging markets and the special characteristics of currency risks in those markets.

The purposes of this article are to evaluate models of stock market risk developed by Robert Engle, and related models (ARCH, GARCH, VAR, etc.); to establish whether prospect theory, cumulative prospect theory, expected utility theory, and market‐risk models (ARCH, GARCH, VAR, etc.) are related and have the same foundations.

The author critiques existing academic work on risk, decision making, prospect theory, cumulative prospect theory, expected utility theory, VAR and other market‐risk models (ARCH, GARCH, etc.) and analyzes the shortcomings of various measures of risk (standard deviation, VAR, etc.).

Prospect theory, cumulative prospect theory, expected utility theory, and market‐risk models are conceptually the same and do not account for many facets of risk and decision making. Risk and decision making are better quantified and modeled using a mix of situation‐specific dynamic, quantitative, and qualitative factors. Belief systems (a new model developed by the author) can better account for the multi‐dimensional characteristics of risk and decision making. The market‐risk models developed by Engle and related models (ARCH, GARCH, VAR, etc.) are inaccurate, do not incorporate many factors inherent in stock markets and asset prices, and thus are not useful and accurate in many asset markets.

Areas for further research include: development of dynamic market‐risk models that incorporate asset‐market psychology, liquidity, market size, frequency of trading, knowledge differences among market participants, and trading rules in each market; and further development of concepts in belief systems.

Decision making and risk assessment are multi‐criteria processes that typically require some processing of information, and thus cannot be defined accurately by rigid quantitative models. Existing market‐risk models are inaccurate – many international banks, central banks, government agencies, and financial institutions use these models for risk management, capital allocation, portfolio management, and investments, and thus the international financial system may be compromised.

The critiques, ideas, and new theories in the article were all developed by the author. The issues discussed in the article are relevant to a multiplicity of situations and people in any case that requires decision making and risk assessment.

Managerial finance has become a modern professional discipline with a coherent theory and a growing body of statistical research in support of the theory. Finance faculty in leading business schools around the world are now actively engaged in making the modern theory accessible to executive participants in post‐experience educational programmes. What makes the modern theory of finance exciting is the simplicity and the authority with which issues of concern to management today can be resolved. One of the areas of interest where answers to old questions are being found is in the estimation of discount rates or required rates of return for capital projects.

The recent 2008–2009 financial crisis has led international financial authorities to review the existing regulation; the Basel Committee on Banking Supervision has been thus induced to review the pillars of the Basel Accord (Basel II) in order to strengthen the risk coverage of capital framework (Basel 2.5 and III). These reforms will help to raise capital requirements for the trading book, which represents a major source of losses for internationally financial institutions, especially during crisis periods. In particular, the Committee has introduced a Stressed Value-at-Risk (SVaR) capital requirement, as a new methodology to evaluate market risk.

This chapter aims to shed some lights on the issues major banks have to face when calculating SVaR in the context of emerging markets, pointing out the differences in adopting an estimation model with respect to another one. Our results show a considerable increase in capital requirements especially when new rules are applied to financial markets with high-risk parameters, such as emerging markets are. The increased cost due to higher capital requirements could be a disincentive to investment in markets with higher risk profiles than the developed markets, taking also into account that diversification benefits deriving from investing in emerging economies have shown a decrease over time. The reduction of institutional investors can thus represent a brake on the process of innovation and evolution of emerging markets.

Going back into previously exited markets is a significant management risk. But, how are re-entry risks managed? By adding strategic reference point (SRP) rationales to the risk management literature, this chapter examines re-entry after initial entry and divestment on a sample of 654 multinational enterprise (MNE) re-entrants. The authors move away from narrow risk management lenses according to which risks happen in isolation and theorize that MNEs simultaneously manage international risk by exploiting the trade-offs among external and internal sources of risk. The authors explain that, for re-entrants, exit may become the SRP for evaluating future strategic choices. The results suggest that re-entrants tend to manage re-entry risk by choosing partner-based modes that enable them to maintain strategic flexibility at re-entry. Surprisingly perhaps, market-specific experience acquired during the initial market foray does not provide strategic flexibility, in that highly experienced firms still experience risk trade-offs.