Transport infrastructure equities in mixed-asset portfolios: estimating risk with a Garch-Copula CVaR model

Transport infrastructure is an important subsector within infrastructure, but knowledge of its equities in terms of risk-return characteristics and contribution to portfolio performance is still limited. This study assesses the subsector individually and in a multi-asset, index-based portfolio. In doing so, we apply a t-Copula-based Conditional Value-at-Risk model to simulate risk and returns. Our findings reveal that the subsector has a relatively low dependency on other equities, performs like other alternative asset classes such as general real estate, and does not grant significant risk diversification benefits for mainstream institutional investors such as pension funds. Investors aiming for higher target returns may however assign substantial weights to transport infrastructure, supporting our conjecture that it does not share the same asset class characteristics as general infrastructure. By contrasting Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR) scores for both the mean-variance framework and the t-Copula simulation, we further document the limitations of traditional VaR approaches. Hence, this study’s results support the use of risk assessment tools that incorporate non-normal distributions to represent multivariate dependence structures.     

Does ethnic diversity decrease economic interactions? Evidence from exchange networks in rural Gambia

Using a unique dataset collected in 59 rural Gambian villages, we study how ethnic heterogeneity is related to the structure of four economic exchange networks: land, labour, inputs and credit. We find that different measures of village‐level ethnic fragmentation are mostly uncorrelated with network structure. At a more disaggregated level, household heads belonging to ethnic minorities are not less central than those from the predominant ethnicity in any of the networks and, at the dyadic level, the fact that two households share ethnicity is not an economically significant predictor of link formation. Our results indicate that, in the particular setting of our study, the structure of the exchange networks is better defined by other variables than ethnicity and that ethnic heterogeneity is unlikely to be a driver for sub‐optimal economic exchanges.     

Perks and the informativeness of stock prices in the Chinese market

While the literature shows that perks can affect firm values positively or negatively, we argue that firms with higher perks are more likely to be associated with a lower quality of financial reporting, which, in turn, can affect the informativeness of stock prices. Based on hand-collected data on perks from Chinese listed firms, we find that firms with lower perks are associated with higher informativeness of stock prices (or lower R-square). Moreover, the positive association between perks and R-square is shown to be weaker for firms with higher financial reporting quality through audit and earnings quality measures.     

Reducing reporting risk: Designating foreign currency forward contracts as cash flow hedges

We present an example that compares the effects on earnings of designating a foreign currency forward contract as either a cash-flow or fair-value hedge of a foreign currency denominated receivable. Entities engaging in exchange transactions not denominated in their functional currency frequently enter into foreign currency forward contracts in order to mitigate their foreign exchange rate risk exposure. The aggregate effect on earnings of the transaction gain or loss on the foreign currency receivable and the gain or loss on the forward contract is known on the date the forward contract is initiated. The effect on each period’s earnings during the term of a forward contract designated as a cash-flow hedge is also known on the date the contract is initiated; whereas the effect on each periods’ earnings from a fair-value hedge cannot be determined until the respective balance sheet dates. Therefore, designating forward contracts as cash-flow hedges may suppress volatility in reported earnings compared to designating forward contracts as fair-value hedges. In addition, the reporting risk (the amount of uncertainty surrounding the pending measure of an item to be reported in the financial statements) is lower when a forward contract is designated as a cash-flow hedge relative to designating it as a fair-value hedge. This suggests foreign currency forward contracts designated as cash-flow hedges are more consistent with the purpose of hedge accounting: to mitigate the effects on earnings of applying different measurement criteria for the hedge and the hedged item.     

Doing More with Less: The Disordinal Implications of Firm Age for Leveraging Capabilities for Innovation Activity*

Innovation requires the entrepreneurial capabilities of opportunity recognition and opportunity exploitation. Such capabilities generally accrue over time from a firm's cumulative learning and experience. In this study, we theorize that firm age should therefore moderate the firm's ability to leverage these capabilities for innovation activity, such that older firms can obtain higher outputs from their capabilities than younger firms can. We examine this relationship using a sample of 676 small and medium enterprises. We find that when both younger and older firms have highly developed innovation capabilities, older firms appear to enjoy higher levels of innovation activity than younger firms do. However, younger firms generally appear more likely to have higher levels of innovation activity than older firms do, when neither firm has highly developed innovation capabilities. We conclude with a discussion of the implications of these findings for research and practice.     

Environmental Policy,Rankings and Stock Values

This paper examines the impact of Newsweek's ‘The Greenest Big Companies in America’ on stock values for large companies. Newsweek ranks the biggest Companies in America from one to 500. An event window of ten days following the rankings release to the public was examined to analyze the impact of relative rankings on stock values. Dummy variables were constructed denoting firms ranked in the highest and lowest quartiles. Control variables included return to the Dow Jones Industrial Average, the firm's beta coefficient and total revenue. The main finding of the study is that inclusion in the top quartile of the rankings has a positive and statistically significant impact on firms' stock values, while the coefficient for the lowest quartile was not statistically different from zero. The results provide evidence of a positive impact on stock values from favorable environmental recognition but no effect for low ranked firms. Copyright © 2011 John Wiley & Sons, Ltd and ERP Environment.     

Product variety and the demographic transition

Why does the rate of population growth decline in the face of economic growth? We show that growing product variety may induce a permanent reduction in the demand for children and a continuous rise in income and consumption.     

Strategic R&D investment,competitive toughness and growth

We show, within a single industry, the possibility that R&D‐investment is non‐monotonically related to competitive toughness: increasing when competition is soft and decreasing when competition is tough. This possibility results from the combination of a Schumpeterian markup squeezing effect discouraging innovation, and a concentration effect spurring innovators. It is obtained in a sectoral model where the number of innovators is random and where non‐successful investors may remain productive. The result is extended to a multisectoral stochastic endogenous growth model with overlapping generations of consumers and firms, the number of which is endogenously determined in the capital market.     

Concavity of utility,concavity of welfare,and redistribution of income

The marginal social value of income redistribution is understood to depend on both the concavity of individuals’ utility functions and the concavity of the social welfare function. In the pertinent literatures, notably on optimal income taxation and on normative inequality measurement, it seems to be accepted that the role of these two sources of concavity is symmetric with regard to the social concern about inequality in the distribution of income. Direct examination of the question, however, reveals that this is not the case. Concavity of utility has a simple, direct effect on the marginal social value of redistribution, as might be expected, whereas concavity of the social welfare function has a more subtle influence, one that in some cases may not be very significant. The implications of this difference are examined for some standard forms of utility and welfare functions, including particular versions that appear in the optimal income taxation literature.     

Cost-benefit analysis of the Dutch nature policy: Transaction costs and land market impacts

This paper analyses the financial and economic costs and benefits of the large scale National Ecological Network (NEN) nature conservation project in the Netherlands, taking into account transaction costs and land market impacts of different institutional arrangements. The net financial costs associated with achieving the current plan are equivalent with an annual amount €876 per hectare. Of the costs, transaction costs amount about 16% or €140 per hectare. The substantive land purchases involved in the plan will lead to land price increase of 20%. Nature management by agriculture turns out to be a relatively cheap option.