FORECASTING FDI EQUITY INCOME FOR THE DANISH BALANCE OF PAYMENTS

Late and significant revisions are often observed in FDI equity income in many countries, hampering the quality of preliminary balance of payments statistics. We test a range of models on Danish data and find that forecasts for FDI equity income based on a combination of past profitability and consensus data for changes in expected private consumption growth outperform forecasts solely based on historical profitability. When the refined models are applied to the Danish balance of payments, the largest improvements are observed for outward and inward FDI separately. Revisions of net FDI equity income only decrease marginally because the significant revisions in gross terms resulting from the historical models have a tendency to (partly) cancel out each other on a net basis.     

Funding Value Adjustments

In this paper, we demonstrate that the funding value adjustments (FVAs) of major dealers are debt overhang costs to their shareholders. To maximize shareholder value, dealer quotations therefore adjust for FVAs. Our case studies include interest‐rate swap FVAs and violations of covered interest parity. Contrary to current valuation practice, FVAs are not themselves components of the market values of the positions being financed. Current dealer practice does, however, align incentives between trading desks and shareholders. We also establish a pecking order for preferred asset financing strategies and provide a new interpretation of the standard debit value adjustment.     

THE EFFECT OF EMPHASIS ON TIGHT BUDGET TARGETS AND COST CONTROL ON PRODUCTION AND MARKETING MANAGERS'' PROPENSITY TO CREATE SLACK

Extant literature suggests that target setting must be complemented by cost control. There are, however, strong theoretical reasons to suggest that cost control, whilst meaningful for the manufacturing function, may be less effective for the marketing function. Difficulties in setting standards and tracing marketing results (sales) to marketing effort and the discretionary nature of many marketing costs are likely to reduce the effectiveness of cost control in marketing departments. This study examines firstly, whether cost control moderates the relationships between emphasis on tight budget targets and subordinates' propensity to create slack; and secondly, whether these relationships are found in both the manufacturing and the marketing functions. The results support a significant two-way interaction between emphasis on tight budget targets and cost control affecting propensity to create slack for the manufacturing function, but not for the marketing function. Marketing managers' propensity to create slack was found to be associated only with emphasis on tight budget targets. These results are consistent with the theory that differences in manufacturing and marketing can influence the effectiveness of accounting control systems.     

Do Bonds Span Volatility Risk in the U.S. Treasury Market? A Specification Test for Affine Term Structure Models

We propose using model‐free yield quadratic variation measures computed from intraday data as a tool for specification testing and selection of dynamic term structure models. We find that the yield curve fails to span realized yield volatility in the U.S. Treasury market, as the systematic volatility factors are largely unrelated to the cross‐section of yields. We conclude that a broad class of affine diffusive, quadratic Gaussian, and affine jump‐diffusive models cannot accommodate the observed yield volatility dynamics. Hence, the Treasury market per se is incomplete, as yield volatility risk cannot be hedged solely through Treasury securities.     

Short‐Term Market Risks Implied by Weekly Options

We study short‐maturity (“weekly”) S&P 500 index options, which provide a direct way to analyze volatility and jump risks. Unlike longer‐dated options, they are largely insensitive to the risk of intertemporal shifts in the economic environment. Adopting a novel seminonparametric approach, we uncover variation in the negative jump tail risk, which is not spanned by market volatility and helps predict future equity returns. As such, our approach allows for easy identification of periods of heightened concerns about negative tail events that are not always “signaled” by the level of market volatility and elude standard asset pricing models.     

Return Volatility and Trading Volume: An Information Flow Interpretation of Stochastic Volatility

The paper develops an empirical return volatility-trading volume model from a microstructure framework in which informational asymmetries and liquidity needs motivate trade in response to information arrivals. The resulting system modifies the so-called “Mixture of Distribution Hypothesis” (MDH). The dynamic features are governed by the information flow, modeled as a stochastic volatility process, and generalize standard ARCH specifications. Specification tests support the modified MDH representation and show that it vastly outperforms the standard MDH. The findings suggest that the model may be useful for analysis of the economic factors behind the observed volatility clustering in returns.     

CVP analysis with stochastic price-demand functions and shortage-surplus costs*

Abstract. This paper considers CVP analysis in a situation where: (i) a stochastic price-demand relationship exists for the product, (ii) production quantity fixed at the beginning of the period may not be equal to the actual demand realized in the period, (iii) the difference between production quantity and realized demand results in either shortage or surplus cost. Procedures for determining optimal price level and production quantity are developed for the managerial objectives of maximizing either (i) expected profit, (ii) expected utility, or (iii) probability of achieving a profit target. Résumé. Cet article examine l'analyse des interactions coût-volume-profit dans un contexte où: (i) une relation stochastique entre le prix et la demande existe pour le produit, (ii) la quantité de production établie en début de période peut ne pas être égale à la demande réelle atteinte au cours de la période, (iii) la différence entre la quantité fabriquée et la demande atteinte donne lieu à un coût soit de pénurie ou d'excédent. Des procédés de détermination du niveau optimal de prix et de la quantité fabriquée sont élaborés dans le cadre d'objectifs de la direction visant à maximiser soit (i) le bénéfice espéré, (ii) l'utilité espérée, ou (iii) la probabilité d'atteindre un bénéfice cible.     

CREDIBILITY AND MULTIPLE EQUILIBRIA IN POLICY GAMES: A REPLY TO IRWIN

In this note we respond to Irwin's comment on Andersen and Risager(1991).