Stochastic Optimization: a Review

We review three leading stochastic optimization methods—simulated annealing, genetic algorithms, and tabu search. In each case we analyze the method, give the exact algorithm, detail advantages and disadvantages, and summarize the literature on optimal values of the inputs. As a motivating example we describe the solution—using Bayesian decision theory, via maximization of expected utility—of a variable selection problem in generalized linear models, which arises in the cost-effective construction of a patient sickness-at-admission scale as part of an effort to measure quality of hospital care.     

A model for identifying and ranking dangerous accident locations: a case study in Flanders

These days, road safety has become a major concern in most modern societies. In this respect, the determination of road locations that are more dangerous than others (black spots or also called sites with promise) can help in better scheduling road safety policies. The present paper proposes a multivariate model to identify and rank sites according to their total expected cost to the society. Bayesian estimation of the model via a Markov Chain Monte Carlo approach is discussed in this paper. To illustrate the proposed model, accident data from 23,184 accident locations in Flanders (Belgium) are used and a cost function proposed by the European Transport Safety Council is adopted to illustrate the model. It is shown in the paper that the model produces insightful results that can help policy makers in prioritizing road infrastructure investments.     

A posteriori ratemaking using bivariate Poisson models

Recently, different bivariate Poisson regression models have been used in the actuarial literature to make an a priori ratemaking taking into account the dependence between two types of claims. A natural extension for these models is to consider a posteriori ratemaking (i.e. experience rating models) that also relaxes the independence assumption. We introduce here two bivariate experience rating models that integrate the a priori ratemaking based on the bivariate Poisson regression models, extending the existing literature for the univariate case to the bivariate case. These bivariate experience rating models are applied to an automobile insurance claims data-set to analyse the consequences for posterior premiums when the independence assumption is relaxed. The main finding is that the a posteriori risk factors obtained with the bivariate experience rating models are significantly lower than those factors derived under the independence assumption.     

Relative equity market valuation conditions and acquirers’ gains

We examine whether the relative equity market valuation conditions (EMVCs) in the countries of merging firms help acquirers’ managers to time the announcements of both domestic and foreign targets. After controlling for several deal- and merging firm-specific features we find that the number of acquisitions and acquirers’ gains are higher during periods of high-EMVCs at home, irrespective of the domicile of the target. We also find that the higher gains of foreign target acquisitions realized during periods of high-EMVCs at home stem from acquiring targets based in the RoW (=World-G7), rather than the G6 (=G7-UK) group of countries. We argue that this is due to the low correlation of EMVCs between the UK (home) and the RoW group of countries. However, these gains disappear or even reverse during the post-announcement period. Moreover, acquisitions of targets domiciled in the RoW (G6) countries yield higher (lower) gains than acquisitions of domestic targets during periods of high-EMVCs at home. This suggests that the relative EMVCs between the merging firms’ countries allow acquirers’ managers to time the market and acquire targets at a discount, particularly in countries in which acquirers’ stocks are likely to be more overvalued than the targets’ stocks.     

Investing at home and abroad: Different costs,different people?

We investigate US households’ direct investment in stocks, bonds and liquid accounts and their foreign counterparts, in order to identify the different participation hurdles affecting asset investment domestically and overseas. To this end, we estimate a trivariate probit model with three further selection equations that allows correlations among unobservables of all possible asset choices. Our results point to the existence of a second hurdle that stock owners need to overcome in order to invest in foreign stocks. On the other hand, we find little evidence for additional pecuniary or informational costs associated with investment in foreign bonds and liquid accounts.     

Information disclosure,CEO overconfidence,and share buyback completion rates

An open market share buyback is not a firm commitment, and there is limited evidence on whether firms repurchase the intended shares. Unlike US studies, we use data from unique UK regulatory and disclosure environment that allows to accurately measure the share buyback completion rates. We show that information disclosure and CEO overconfidence are significant determinants of the share buyback completion rate. In addition, we find that large and widely held firms that conduct subsequent buyback programs and have a past buyback completion reputation exhibit higher completion rates. Finally, we assess whether other CEO characteristics affect buyback completion rates and find that firms with senior CEOs who hold external directorships and have a longer tenure as CEO are more likely to complete the buyback programs. In sum, our results suggest there is a clear relationship between information disclosure, CEO overconfidence, and buyback completion rates.     

Are there any cost and profit efficiency gains in financial conglomeration? Evidence from the accession countries

Diversified banks should benefit from an efficient allocation of resources, debt coinsurance and scope economies. At the same time, critics of diversification question these advantages pointing to agency problems such as managerial entrenchment and empire building that could also lead to diversification but for the ‘wrong’ reasons. This paper sheds further light on the issue of bank diversification by taking a direct look into how efficiently financial conglomerates operate and by measuring to what extent size and other bank- and market-specific factors matter in evaluating the relationship between diversification and efficiency. We focus on banks operating in the accession countries over the period 2001–2007 and estimate their cost and alternative profit efficiencies using a data envelopment analysis estimator. The results indicate that banks suffer from relatively high cost and profit inefficiencies and that there are noticeable differences in the efficiency levels across countries. Concerning banks’ degree of diversification, we find strong evidence to suggest that more diversified institutions are more likely to be cost- and profit-efficient and that size is a key factor in explaining best practice, particularly on the profit side.     

The dynamics of US bank profitability

We examine the determinants of profitability for a large sample of US banks over the period 1984–2010. Specifically, we assess the extent to which short-run profits persist, and whether such persistence is affected by changes in regulation and the recent financial crisis. Our findings suggest that the competitive process reduces positions of abnormal profitability, albeit this is not immediate. There is also evidence that changes in regulation enacted during the 1990s affected both the level and persistence of bank profitability. The financial crisis of 2007–2010 appears to have resulted in an increase in the persistence of bank profitability.     

An investigation into international assignment directions of R&D MNE employees: evidence from Greece

In this study, we explore the effects of the roles of research and development (R&D) laboratories, roles of subsidiaries and level of technological intensity of the sector in which multinational enterprise (MNE) subsidiaries operate on international assignment directions of R&D employees. International assignments are an underinvestigated issue in the international human resource management literature despite its significant research and managerial importance. In particular, to the best of our knowledge, no prior research on international assignments of R&D employees has been undertaken and so the current study aims at filling this void in the literature. Based on a large quantitative research on MNE subsidiaries operating in Greece, the findings suggest that variables of the aforementioned categories of factors influence different international assignment directions, with roles of the R&D subsidiary exerting the most crucial effect. Researchers may examine the unexplored issue of R&D employee international assignments to a larger extent, while MNE management can particularly take into account the micro (laboratory) context of R&D international assignees when developing effective international human resource management programmes.