Non-parametric estimation of operational risk losses adjusted for under-reporting

Not all claims are reported when a database for financial operational risk is created. The probability of reporting increases with the size of the operational risk loss, and converges towards one for big losses. Losses in operational risk have different causes, and usually follow a wide variety of distributional shapes. Therefore, a method for modelling operational risk based on one or two parametric models is deemed to fail. In this paper, we introduce a semi-parametric method for modelling operational risk that is capable of taking under-reporting into account and being guided by prior knowledge of the distributional shape.     

Calculation of ruin probabilities for a dense class of heavy tailed distributions

In this paper, we propose a class of infinite-dimensional phase-type distributions with finitely many parameters as models for heavy tailed distributions. The class of finite-dimensional phase-type distributions is dense in the class of distributions on the positive reals and may hence approximate any such distribution. We prove that formulas from renewal theory, and with a particular attention to ruin probabilities, which are true for common phase-type distributions also hold true for the infinite-dimensional case. We provide algorithms for calculating functionals of interest such as the renewal density and the ruin probability. It might be of interest to approximate a given heavy tailed distribution of some other type by a distribution from the class of infinite-dimensional phase-type distributions and to this end we provide a calibration procedure which works for the approximation of distributions with a slowly varying tail. An example from risk theory, comparing ruin probabilities for a classical risk process with Pareto distributed claim sizes, is presented and exact known ruin probabilities for the Pareto case are compared to the ones obtained by approximating by an infinite-dimensional hyper-exponential distribution.     

Assessing farmers’ risk preferences and their determinants in a marginal upland area of Vietnam: a comparison of multiple elicitation techniques

We examine the consistency of risk preference measures based on eight hypothetical elicitation methods and a lottery game applied to smallholder farmers in a marginal upland environment in Vietnam. Using these measures, we identify influencing factors of risk aversion via regression analysis, whereby unlike previous studies, we include several proxies of social capital such as social networks and norms. Data were collected from household heads and spouses separately in a random sample of 300 households. Although correlations between most of the various risk preference measures are all statistically highly significant, most are weak. On average, respondents have a high degree of risk aversion and specific characteristics—gender, age, idiosyncratic shocks, education, social norms, network‐reliance with extended family, and connections to local authorities—are significant determinants of risk preferences across most elicitation methods, whereas others—the household's dependency ratio, wealth, and covariate shocks—are significant in a few methods only. The explanatory power of the models is limited, indicating that other factors are likely to be of greater importance in determining risk preferences. The results can help target safety nets, encourage investments, and lead to the development of more applicable methods for assessing risk preferences of smallholders in developing countries.     

Pricing to market with trade liberalization: The role of market heterogeneity and product differentiation in India’s exports

This paper studies the links between pricing to market (PTM) and trade liberalization using data for India’s exports (at the 4-digit level of classification) during the economic reforms period (1992–2005). We estimate a PTM model for exports to the G3 and three other emerging markets (Brazil, China and South Africa), distinguishing homogeneous from differentiated goods and correcting for changes in the level of protection faced by India’s exporters (import tariffs in destination markets), inflation and openness in the export destination market, a macroeconomic policy index partly reflecting changes in exporter’s costs, the share of the exporter in the destination market and the share of the product in the exporter’s total exports. We find that market heterogeneity changes the level of PTM, but PTM does not significantly differ between homogeneous and differentiated products. Indian exporters practice PTM by absorbing exchange rate changes into their mark-up in G3 markets, where they face tougher competition, but fully pass-through exchange rate changes in emerging markets. On the contrary, Indian exporters seem to be taking advantage of trade liberalisation in destination markets by marginally increasing exporter currency prices into emerging markets but not into the G3. However, in the case of differentiated goods, we find this effect of trade liberalisation for both G3 and emerging markets.     

Private contracting and corporate governance: Evidence from the provision of tag-along rights in Brazil

We identify two opposing effects of issuing equity with tag-along rights that secure an equal price in the event of a takeover. First, the anti-self dealing effect commits controlling owners to sell only to new owners that increase shareholder value. Second, the rent transfer effect shifts rents to existing unprotected minority owners. The institutional setting in Brazil's stock market allows us to test this trade-off. We find that announcements of tag-along rights are associated with an average cumulative abnormal return of around 5%, and that the probability of issuing shares with tag-along rights increases with the cost of self-dealing and decreases in the share of existing unprotected minority investors. Overall, our analysis confirms that private contracting can mitigate the economic costs associated with the inadequate legal protection of investors in emerging markets.     

Identity in entrepreneurship effectuation theory: a supplementary framework

The article proposes a new framework on identity construction in entrepreneurship that in valuable ways supplements the logic of identity presented in Sarasvathy??s (2001, 2008) popular effectuation theory. Effectuation theory assumes that identity is a given and relative stable precondition of the entrepreneurial process that support the entrepreneur in ordering preferences in the process of effectuating resources, stakeholder commitment, etc.. The article shows that identity construction is an active and integral part of the effectuation process, and it importantly influences the manner in which the entrepreneur acts and makes decisions in the process. The article seeks to challenge and advance effectuation theory??s view on identity based on a narrative study of ten novice student entrepreneurs. The study gives insight into the identity processes involved in becoming a student entrepreneur, and it may serve as a guide to how entrepreneurship educators and counselors can place more emphasis on identity related struggles involved in the entrepreneurial effectuation process.     

Images of entrepreneurship: towards a new categorization of entrepreneurship

Based on a systematic literature review of contemporary entrepreneurship process research, the article provides a supplementary way of categorizing research on the entrepreneurial process which takes philosophy of science into account to a higher extent than done in previous categorizations. The motivation for doing so is to minimize problems of communication and comparison of concepts, results and theoretical contributions often experienced in entrepreneurship research. Applying Burrell and Morgan’s (1979) paradigmatic framework to analyse the selected literature, it is suggested that the essence of past and present entrepreneurship process theory can be captured in five images of entrepreneurship: 1) The Image of Machines; 2) The Image of Evolution; 3) The Image of Contingencies; 4) The Image of Mind; and 5) The Image of Social Becoming. The five images are considered to be concise and easily recalled tools, which will be valuable in the continuous development and organization of future ideas in entrepreneurship research.     

Psychological Constructs Underlying Farmers’ Decisions to Diversify or Specialise their Businesses – An Application of Theory of Planned Behaviour

We use the theory of planned behaviour (TPB) to explain how underlying psychological constructs influence farmers’ decisions to extend their farm businesses to income‐generating ventures outside conventional agricultural production. The analysis contrasts the influence of psychological constructs on this decision with those on decisions to specialise in a single farm enterprise or to have multiple farm enterprises. This is one of the first studies to introduce psychological constructs into the study of farm diversification. It is based on a sample of 929 Swedish farms participating in the official Swedish Farm Economic Survey. These data are supplemented with a detailed postal questionnaire to the participating farmers, generating a response rate of 73% and an effective sample size of 679 farmers and their businesses. Data are analysed with factor and multinomial logistic regression analyses. Results show that psychological constructs in TPB (attitude, subjective norm and perceived behavioural control) influence farmers’ decisions regarding the strategy they adopt. Attitude and subjective norm are found to be especially influential in these decisions. Given the prominent role agriculture still has in rural development policy, where the development of new ventures in farm businesses is perceived as the engine for rural economic growth and employment, these findings have clear policy implications.