2024 SPECIAL ISSUE ON FINANCIAL ENGINEERING AND FINANCE RESEARCH 

Vol.43 No.3, Jul. 2024

Chong-Chuo Chang　Special Issue Editor’s Note (excerpt)

Management Review collaborates with the Financial Engineering Association of Taiwan to launch the “Special Issue on Financial Engineering and Finance Research.” We welcome submissions for this special issue at the Financial Engineering Association of Taiwan Annual Conference and International Academic Symposium. This special issue’s “call for submissions” extended from June 2023 to August 31, 2023, during which a total of 9 submissions were received. After 3 rounds of reviews, 3 papers were selected, resulting in an acceptance rate of 33.3%.

The first paper, titled “Delta Hedging in the USD/JPY Options Market: Insights from Implied Stochastic Volatility” and written by authors Shih-Kuei Lin, Kendro Vincent, Chung-Jen Lin, and Zong-Wei Yeh. The purpose of this paper is to explore the performance of the implied stochastic volatility (ISV) approach in fitting the implied volatility surface (IVS) of USD/JPY and to analyze the hedging performance under standard and minimum variance (MV) delta. In this study, the ISV approach proposed by Aït-Sahalia et al. (2021) is mainly used to construct the IVS and parameter estimation using the Heston model as the model base. Firstly, based on the Heston model, the ISV approach has better in-sample and out-of-sample fitting ability compared to the conventional approach. On the other hand, we demonstrate that the ISV approach is effective in improving the accuracy of the hedging, especially in terms of the MV delta, using a delta-neutral hedging strategy. The ISV approach incorporates information about the shape characteristics of the IVS into the parameter estimation procedure, making it more effective in capturing the dynamics of the underlying asset and volatility. The ISV approach integrates the advantages of no-arbitrage models and polynomial models to present volatility dynamics in a more comprehensive way. On the other hand, the methodology has significant economic implications for both academic and practical applications. This study is the first empirical study using the ISV approach in the FX option market. The study confirms the economic significance of incorporating shape characteristics into the parameters.

The second paper, entitled “Disentangling Latent Factors for Inflation Forecasting in Taiwan via Supervised Dimension-Reduction Approach” and written by authors Jin-Huei Yeh and Tsung Lin Pan. Past literature on Taiwan’s inflation forecasting mostly confines to only few theory-specific variables, which limits the possibility of other potential important variables. In view of the superior forecasts from the diffusion index method via incorporating large dimension information. The authors generalize the framework to allow for a richer spectrum that encompass and compare various linear/nonlinear, supervised/unsupervised dimensionality reduction methods. They collected nearly 100 potential variables, from the period of 2000 to 2021, in order to extract the hidden common factors for inflation forecasting. Among the examined 4 approaches, the results indicate that the supervised partial quantile regression (PQR) dominate the other 3 approaches in anticipating inflation. Once the authors further divide variables into 11 categories and extract category-specific factors for the subsequent forecasting as in Stock & Watson (2002b), they found that the predictability of PQR became even better. They can not only visualize the importance of each category in 1-step ahead inflation projection across time. The authors establish an early warning model for monitoring the arrival of radical inflation/deflation and promptly adjusting for policy interventions.

The third paper, entitled “Peer Effects of Corporate Environmental Protection Policies” and written by authors Vivian W. Tai and Ming-Xiu Sun. This study aims to investigate the role of peer effects on corporate environmental protection policies. According to the similarity of the firm’s core business activities, the industry classification is used to define the peer firms. The peer effect of environmental rating is measured by the average of net environmental rating in the same industry without sample firm. The research findings are as follows: Firstly, the firm’s environmental protection policy is significantly positively affected by the environmental protection policies of peer firms; Moreover, the peer effect of environmental protection policies is more pronounced for market leaders, financial-unconstrained firms and stronger for firms with higher institutional ownership; Thirdly, peer mimicking in environmental policies can enhance firm value and market share. Environmental protection policies are important and large capital expenditures, and costs and risks can be reduced by imitating peers’ practices in environmental protection policies. Laws and regulations on environmental protection policies will also put pressure on enterprises and guide them to more actively face the requirements of environmental protection. This study provides a reference for enterprises to implement environmental protection policies, and assist the government authorities with the laws and regulations related to environmental protection policies.