Hedging costs and joint determinants of premiums and spreads in structured financial products

Evaluating more than 317,000 discount certificates in the German secondary market, we find that premiums and spreads are endogenous and negatively related but depend on different key determinants. The fundamental determinants of the premiums are mainly profit-related, that is, dividends of the underlying, issuers’ credit risk, lifecycle effect, and competition, whereas hedging costs are less important. However, initial hedging costs (IHC) are priced into the premium in the case of large inventory changes. The spread is mostly determined by hedging costs and risk components, such as IHCs, rebalancing costs, volatility, scalper risk, and overnight gap risk—but also by dividends.     

Financial opening in developing countries

Many developing countries are currently considering liberalisation of external capital flows. While the ultimate objective of financial opening is to raise efficiency and growth, the reform process must be carefully designed to achieve these results. A recent conference has discussed the policy choices.     

Consumer Affairs in Rural New Zealand

Recent changes in many areas of Government policy as well as changes in the private sector have had major impacts on the provision of services in rural areas of New Zealand. This report describes the results of a New Zealand survey of 795 rural consumers. The results emphasise how the problems perceived as most important to people in rural areas are essentially linked to fundamental services such as housing, water, communications, and transport. Though this element of basic needs is covered in the consumer policy literature it is not a feature that tends to be emphasised. The survey also gauges some aspects of rural consumers' knowledge of their entitlements under New Zealand consumer law and their familiarity with, and use of, consumer advisory and support services.     

An extended likelihood framework for modelling discretely observed credit rating transitions

The estimation of the parameters of a continuous-time Markov chain from discrete-time observations, also known as the embedding problem for Markov chains, plays in particular an important role for the modeling of credit rating transitions. This missing data problem boils down to a latent variable setting and thus, maximum likelihood estimation is usually conducted using the expectation-maximization (EM) algorithm. We illustrate that the EM algorithm is likely to get stuck in local maxima of the likelihood function in this specific problem setting and adapt a stochastic approximation simulated annealing scheme (SASEM) as well as a genetic algorithm (GA) to combat this issue. Above that, our main contribution is to extend our method GA by a rejection sampling scheme, which allows one to derive stochastic monotone maximum likelihood estimates in order to obtain proper (non-crossing) multi-year probabilities of default. We advocate the use of this procedure as direct constrained optimization (of the likelihood function) will not be numerically stable due to the large number of side conditions. Furthermore, the monotonicity constraint enables one to combine structural knowledge of the ordinality of credit ratings with real-life data into a statistical estimator, which has a stabilizing effect on far off-diagonal generator matrix elements. We illustrate our methods by Standard and Poor’s credit rating data as well as a simulation study and benchmark our novel procedure against an already existing smoothing algorithm.     

NO‐ARBITRAGE PRICING UNDER SYSTEMIC RISK: ACCOUNTING FOR CROSS‐OWNERSHIP

We generalize Merton’s asset valuation approach to systems of multiple financial firms where cross‐ownership of equities and liabilities is present. The liabilities, which may include debts and derivatives, can be of differing seniority. We derive equations for the prices of equities and recovery claims under no‐arbitrage. An existence result and a uniqueness result are proven. Examples and an algorithm for the simultaneous calculation of all no‐arbitrage prices are provided. A result on capital structure irrelevance for groups of firms regarding externally held claims is discussed, as well as financial leverage and systemic risk caused by cross‐ownership.     

Merchanting and Current Account Balances

Merchanting is goods trade that does not cross the border of the firm's country of residence. Merchanting grew strongly in the last decade in several European economies and has become an important determinant of these countries’ current account. Because merchanting firms reinvest their earnings abroad to expand their international activities, this practice raises national savings in the home country without increasing domestic investment. This paper examines the empirical linkages between merchanting and the current account balance. Using a sample of 53 countries during 1980–2011, it shows that merchanting activity is a determinant of the medium‐term current account balance.     

The Corporate Side of the Blogosphere: Examining the Variations of Design and Engagement Among Fortune 500 Blogs

Using design and communication principles, this study uses a content analysis design to evaluate all active blogs from the 2011 Fortune 500 list (n = 125). The results indicate that corporate America has only modestly incorporated the dialogic principles into their blogs. Current corporate blogs are well-designed as far as making them searchable and easy to navigate; however, the blogs are mostly being used to provide information in a one-way manner rather than creating an open dialogue with consumers. While blogging can enhance relationships with stakeholders, corporate communicators must strive to develop legitimate conversations with their blog readers.     

A Bio-Economic Model of Community Incentives for Wildlife Management Under CAMPFIRE

This paper formulates a bio-economic model to analyze community incentives for wildlife management under benefit-sharing programs like the Communal Areas Management Programme for Indigenous Resources (CAMPFIRE) in Zimbabwe. Three agents influence the wildlife stock: a parks agency determines hunting quotas, outside poachers hunt illegally, and a local community may choose to protect wildlife by discouraging poaching. Wildlife generates revenues from hunting licenses and tourism; it also intrudes on local agriculture. We consider two benefit-sharing regimes: shares of wildlife tourism rents and shares of hunting licenses. Resource sharing does not necessarily improve community welfare or incentives for wildlife conservation. Results depend on the exact design of the benefit shares, the size of the benefits compared with agricultural losses, and the way in which the parks agency manages hunting quotas.