Risk‐Adjusted Measures of Value Creation in Financial Institutions

Abstract Many financial institutions assess portfolio decisions using RAROC, the ratio of expected return to risk (or ‘economic’) capital. We use asset pricing theory to determine the appropriate hurdle rate, finding that this varies with the skewness of asset returns. We quantify this discrepancy under a range of assumptions showing that the RAROC hurdle rate differs substantially, being higher by a factor of five or more for equity which has a right skew compared to debt which has a pronounced left skew, and also between different qualities of debt exposure. We discuss implications for both financial institution risk management and supervision.     

Military conflict and the rise of urban Europe

We present new evidence about the relationship between military conflict and city population growth in Europe from the fall of Charlemagne’s empire to the start of the Industrial Revolution. Military conflict was a main feature of European history. We argue that cities were safe harbors from conflict threats. To test this argument, we construct a novel database that geocodes the locations of more than 800 conflicts between 800 and 1799. We find a significant, positive, and robust relationship that runs from conflict exposure to city population growth. Our analysis suggests that military conflict played a key role in the rise of urban Europe.     

Robots,Unions, and Aging: Determinants of Robot Adoption Evidence from OECD Countries

Atlantic Economic Journal -