Bank reserves: A dispute over words and classification

A prominent philosophical/legal case for requiring 100% bank reserves employs a flawed style of argument. It involves essentialism (criticized by Karl Popper and Joseph Schumpeter), persuasive definitions (identified by Charles L. Stevenson), faulty classification, and the piling up of irrelevant facts and considerations.     

Weitzman Revisited: Emission Standards Versus Taxes with Uncertain Abatement Costs and Market Power of Polluting Firms

Studies dealing with the optimal choice of pollution control instruments under uncertainty have invariably taken it for granted that regulated firms face perfectly competitive markets. By introducing the product market into the stochastic framework of Weitzman (Rev Econ Stud 41:477–491, 1974), this paper shows for the case of a polluting symmetric Cournot oligopoly that Weitzman’s policy rule for choosing emission standards versus taxes with uncertain abatement costs is biased in the presence of market power. Since the oligopolists take into account their influence on the market price, their total abatement effort, including the restriction of output, is less vulnerable to miscalculations of the tax rate compared to price-taking firms. Consequently, the comparative advantage of instruments is shifted in favour of taxes. In a further step, the provided policy recommendations are generalised by abolishing the assumption that firms are symmetric.     

Choice Certainty and Consistency in Repeated Choice Experiments

The main objective of this study is to examine how repeated choice affects preference learning in stated preference experiments. We test different hypotheses related to preference learning by analyzing response patterns and asking respondents in a choice experiment to report their experienced certainty when going through the choice tasks. In a split-sample test, we show that follow-up choice certainty questions are procedural invariant. The self-reported certainty results indicate that learning occurs, but econometric testing procedures do not identify any significant impact of learning effects on parameter estimates or variance across choice tasks. Additional tests of choice consistency suggest that preferences in the choice experiment are stable and coherent.     

Finite state Markov-chain approximations to highly persistent processes

The Rouwenhorst method of approximating stationary AR(1) processes has been overlooked by much of the literature despite having many desirable properties unmatched by other methods. In particular, we prove that it can match the conditional and unconditional mean and variance, and the first-order autocorrelation of any stationary AR(1) process. These properties make the Rouwenhorst method more reliable than others in approximating highly persistent processes and generating accurate model solutions. To illustrate this, we compare the performances of the Rouwenhorst method and four others in solving the stochastic growth model and an income fluctuation problem. We find that (i) the choice of approximation method can have a large impact on the computed model solutions, and (ii) the Rouwenhorst method is more robust than others with respect to variation in the persistence of the process, the number of points used in the discrete approximation and the procedure used to generate model statistics.     

Diversified growth and competition: the experience of twelve large UK firms

This paper looks at the causes and competitive consequences enterprise diversification with reference to the experience of twelve large UK firms. It is noted although the majority of these firms diversified intially for defensive reasons, continuing diversification was often undertaken to enable the firm to maintain a satisfactory rate of earnings growth. In accordance with this goal, most of the twelve firms had acquired market leaders in diverse areas. A second conclusion therefore, is that diversification can add to the total market power available to the firm. The use of this power however, appears to depend upon the management philosophy and nature of resource allocation found within the firm.     

A comparative performance of conventional and Islamic unit trusts: Market timing and persistence evidence

It is expected that the returns and resistance of Islamic mutual funds will be different from conventional mutual funds as the former have limited choices for portfolio diversification. This article analyses the performance of conventional and Islamic unit trusts for the period February 1995 to July 2012 in the Malaysian market, one of the most developed Islamic mutual fund markets. The performance analysis is based on four parameters: (i) risk-adjusted returns of unit trusts; (ii) market timing abilities; (iii) selection performance; and (iv) persistence. The results of this study suggest that the returns of both conventional and Islamic unit trusts have outperformed the market throughout the sample period. The results for market timing and selectivity are mostly the same for both categories of funds. However, Islamic unit trusts seem to have better resistance to market downturn than conventional unit trusts. The results of this research can be used by investors to identify funds or create portfolios that are more suitable for a recessionary scenario and for fund managers to better manage their portfolio performance during times when markets are likely to fall. The findings in this article are highly relevant for policymakers, investors and fund managers to determine policy matters, deciding on investment and marketing strategy for Islamic mutual funds.     

Co-monotonicity of optimal investments and the design of structured financial products

We prove that, under very weak conditions, optimal financial products on complete markets are co-monotone with the reversed state price density. Optimality is meant in the sense of the maximization of an arbitrary preference model, e.g., expected utility theory or prospect theory. The proof is based on a result from transport theory. We apply the general result to specific situations, in particular the case of a market described by the Capital Asset Pricing Model or the Black–Scholes model, where we derive a generalization of the two-fund-separation theorem and give an extension to APT factor models and structured products with several underlyings. We use our results to derive a new approach to optimization in wealth management, based on a direct optimization of the return distribution of the portfolio. In particular, we show that optimal products can (essentially) be written as monotonic functions of the market return. We provide existence and nonexistence results for optimal products in this framework. Finally we apply our results to the study of bonus certificates, show that they are not optimal, and construct a cheaper product yielding the same return distribution.     

Two-stage DEA: <Emphasis Type="Italic">caveat emptor</Emphasis>

This paper examines the wide-spread practice where data envelopment analysis (DEA) efficiency estimates are regressed on some environmental variables in a second-stage analysis. In the literature, only two statistical models have been proposed in which second-stage regressions are well-defined and meaningful. In the model considered by Simar and Wilson (J Prod Anal 13:49–78, 2007), truncated regression provides consistent estimation in the second stage, where as in the model proposed by Banker and Natarajan (Oper Res 56: 48–58, 2008a), ordinary least squares (OLS) provides consistent estimation. This paper examines, compares, and contrasts the very different assumptions underlying these two models, and makes clear that second-stage OLS estimation is consistent only under very peculiar and unusual assumptions on the data-generating process that limit its applicability. In addition, we show that in either case, bootstrap methods provide the only feasible means for inference in the second stage. We also comment on ad hoc specifications of second-stage regression equations that ignore the part of the data-generating process that yields data used to obtain the initial DEA estimates.