Measuring informational efficiency of the European carbon market — A quantitative evaluation of higher order dependence

This paper introduces a new method for measuring nonlinear predictability in financial price changes: the so-called intermittency coefficient, a parameter of the multifractal random walk model by Bacry et al. (2001). As the intermittency coefficient can quantify the degree of nonlinear deviation from a random walk, we employ its estimates from financial data as a proxy for the loss of financial market efficiency. In addition, we propose a new statistical test of the random walk hypothesis. In an empirical application using data from the largest currently existing market for tradable pollution permits, the European Union Emissions Trading Scheme (EU ETS), we show that the degree of efficiency of this market remains largely unchanged over the period of observation 2008–2019. This suggests that the market has reached a mature state: informational efficiency in Phase III remains at a level comparable to Phase II. What is more, the EU ETS is found to be more efficient than the US stock market. This result, surprising as such, is largely attributable to the lower exposure to global economic shocks of the EU ETS.     

The European Union preventive restructuring framework: A hole in one?

While traditionally (Continental) Europe has not been known for an in particular debtor‐ or restructuring‐friendly insolvency practice, in recent decades, important reforms were implemented that would foster restructurings in Europe. In this article, we comparatively look a the status quo of insolvency and restructuring practice in five different European countries (Denmark, France, Germany, Netherlands, UK). We place our observations into the context of the preventive restructuring directive, to be implemented within the next two years after its publication on 26 June 2019. The directive leaves quite some room implementation, from a watered‐down restructuring tool with high access threshold to a pre‐insolvency debtor‐friendly US‐style restructuring procedure.     

Do environmental variables affect the performance and technical efficiency of the European banking systems? A parametric analysis using the stochastic frontier approach

The paper compares the efficiency of the European banking systems in view of the constitution of the European Monetary Union. Since competition among banks will increase, it is important to identify the most efficient banking system able to play a role in that market. A parametric approach is adopted, based on the estimation of a stochastic cost frontier. This methodology enables one to measure X-inefficiency and to model it as a function of environmental variables which may influence firms' efficiency. By means of this analysis it is possible to identify the most efficient banking systems and to focus on the determinants of deviations from cost minimizing. The analysis highlights significant efficiency gaps among the performances of banks in different countries and of different institutional types. In particular, it is found that the Mittel-European model is the one that operates closest to the efficient frontier. This may indicate that, compared with separated banks, the universal banking system allows for production plans which come closer to the optimal frontier. The analysis suggests that, at the beginning of European Monetary Union, national barriers and regulatory frameworks are still responsible for deviation from the efficient frontiers.     

Exploring governance of the new European Banking Authority—A case for harmonization?

In the context of the proposed EU financial supervisory reforms, this paper focuses on the governance of the network of national supervisory banking agencies and the newly established Community supervisor (European Banking Authority, EBA). We assess to what extent lack of governance convergence nationally and with EBA could undermine the incentives for cooperation among supervisors. Convergence should particularly focus on (i) the issue of the presence of politicians on decision-making bodies; (ii) the need for clearly defining dismissal procedures of heads of supervision; (iii) autonomy from government in regulatory matters; (iv) supervisory autonomy in matters of licensing and withdrawing licenses; (iv) mechanisms for judicial accountability; (v) legal protection for supervisors handling in good faith. In the absence of full centralization of prudential supervision, early harmonization of national governance arrangements towards best practice would better align supervisors’ incentive structures and, hence, be beneficial for the effectiveness of European supervision.     

Is the European Capital Market Ready for the Single Currency?

This paper defines, and investigates the extent of, capital market integration in the European Ecu government bond market sector utilising Johansen's (1992) multivariate analysis. Evidence suggests the yield system is driven by a unique common trend, although we reject the zero-sum restriction on the cointegrating vector. The former finding is consistent with our definition of full Ecu capital market integration, the latter is not, although it is explainable by failure of the expectations hypothesis. Our results support market utilisation of the extant Ecu yield curve as the initial benchmark for pricing euro-denominated debt securities following stage III EMU.     

Bank efficiency in the new European Union member states: Is there convergence?

We employ the stochastic frontier approach and estimate a common frontier in order to examine cost and profit efficiency in the banking systems of the ten new European Union member states over the period 1998-2003. The results indicate a generally low level of cost and an even lower level of profit efficiency, whilst we do not observe marked differences of inefficiency scores across countries. Foreign banks outperform both state-owned and domestic private-owned banks in terms of profit efficiency, though results are less clear in the case of cost efficiency. In addition, β- and σ-convergence criteria indicate some convergence in cost efficiency across the new member states, yet no convergence appears to have been achieved in terms of profit efficiency.     

Are there too many safe securities? Securitization and the incentives for information production

We present a model that helps explain several past collapses of securitization markets. Originators issue too many informationally insensitive securities in good times, blunting investor incentives to become informed. The resulting endogenous scarcity of informed investors exacerbates primary market collapses in bad times. Inefficiency arises because informed investors are a public good from the perspective of originators. All originators benefit from the presence of additional informed investors in bad times, but each originator minimizes his reliance on costly informed capital in good times by issuing safe securities. Our model suggests regulations that limit the issuance of safe securities in good times.     

A new social contract for technology? – On the policy dynamics of uncertainty

This paper proposes a typology of two fundamentally opposing conceptualizations of managing technology under uncertainty: ‘technology governability’ and ‘technology selection’. A wide variety of different versions of these idealized conceptualizations can be shown to underlie the controversies about scientific‐technological development. The example of genetic engineering indicates that such points of view are reconstructed over time in different forms and diverse settings, not only by the scientific community or during regulatory decision making, but by a rather wide‐reaching spectrum of social actors. Thus, the current efforts to open up science and technology decision making to a wider range of participants is interpreted here as an effort of generating a new social contract for technology management, by way of bridging the differences between the two opposing conceptualizations.     

The accountability demand for information in China and the US – A research note

This study replicated Evans, Heiman-Hoffman and Rau’s (hereafter, EHR) [Evans, J. H., III, Heiman-Hoffman, V. B., & Rau, S. (1994). The accountability demand for information. Journal of Management Accounting Research, 6, 24–42] US study, using Chinese MBA students as participants. The Chinese students acted as owners and selected one of two control systems. One control system requires truthful reporting and the other control system permits the manager to falsify the report. The two systems have the same expected payoff to the owner if the owner believes that the manager will always lie when given the opportunity. If the owner believes that there is any probability that the manager will tell the truth, then the more Lenient System has the higher expected payoff. We compared the US versus Chinese control system choices, and examined whether the Chinese owner-participants would be willing to sacrifice wealth to get accountability. The results indicate that a significant proportion of Chinese participants do have an accountability demand for information, and that this proportion is at least as high as that of the US participants in EHR.     

How is the IFRS for SME accepted in the European context? An analysis of the homogeneity among European countries,users and preparers in the European commission questionnaire

In this paper we analyze the answers to the “Questionnaire on the public consultation of the IFRS for SMEs”, promoted by the European Commission. Our aim is to evaluate the homogeneity among respondents, according to the different perspectives of analysis between both users, preparers and also in European Countries. Results show a substantial diversity among respondents. In particular, preparers demonstrate a strong opposition to the IFRS for SMEs, while users are more favorable. Concerning Country classification, German-speaking Countries and Latin Countries show much less appreciation for that standard with respect to Anglo − Nordic Countries. Relevant consequences for European public policy issues and for accounting studies on differential reporting arise from this result, concerning respectively the role of European accounting system and the acceptance of “user primacy” principle.     

Deferred Shareholder Taxation – Implementing a Neutral Business Tax in the European Union

This paper proposes the replacement of the corporate income tax by shareholder-based capital income taxation. Our proposal would guarantee investment neutrality of taxation and reduced tax compliance costs. The proposal is based on the S-base cash flow tax. Under the S-base tax, transactions within the corporate sector are not taxable and only transactions between shareholders and corporations are subject to tax. In contrast to existing S-base cash flow tax systems, tax deductibility of investments is deferred. Rather, the acquisition costs and capital endowments are compounded at the capital market rate and are set off against future capital gains. Dividends and withdrawals are fully taxable at the shareholder level. Because of the deferral of the tax payments our proposal is called ‘Deferred Shareholder Tax’ (DST). The DST exhibits the same neutrality properties as the traditional cash flow tax. Moreover, the compounded inter-temporal credit method ensures that it is neutral with respect to the decision between domestic and foreign investment. To increase acceptance of the DST, current taxpayers’ documentation requirements will be reduced rather than extended. Our proposal could be realised in a single EU country or in all member states of the EU.     

The German Capital Markets Model Case Act (KapMuG): a European role model for increasing the efficiency of capital markets? Analysis and suggestions for reform

Abstract

The purpose of this study is to examine the determinants of the sovereign credit ratings provided by the three major rating agencies: Fitch Ratings, Moody’s and Standard and Poor. A principal component analysis is employed in order to identify the common factors affecting these ratings. The impact of the variables correlated with these factors on ratings is then assessed through an ordered logistic model. Results show that sovereign ratings are mostly influenced by per capita income, government income, real exchange rate changes, inflation rate and default history. The study also highlights the importance of corruption, as measured by Transparency International’s Corruption Perceptions Index, which appears as a proxy for both economic development and the quality of the governance of a country.     

Southeastern European Trade Analysis: A Role for Endogenous CEFTA-2006?

The objective of this paper is to analyze the impact the Central European Free Trade Agreement of 2006 (CEFTA-2006) has had on trade and provide quantitative comparison with the original CEFTA and with trade liberalization under the EU integration process. The paper belongs to the strand of literature analyzing a free trade agreement in a gravity framework but treating the agreement as being potentially endogenous. The empirical evidence suggests that CEFTA-2006 exerted a positive, significant, and large effect on trade in Southeast Europe. This finding can be largely attributed to the distracted trade flows in the region over the 1990s. The effect of CEFTA-2006 has been estimated to be larger than the effect of the stabilization and association agreements. This counteracts the concern that the EU and the Southeastern European countries formed a "hub-and-spoke" structure in terms of trade.     

Should the insurance industry be banking on risk escalation for solvency II?

Basel II introduced a three pillar approach which concentrated upon new capital ratios (Pillar I), new supervisory procedures (Pillar II) and demanded better overall disclosure to ensure effective market discipline and transparency. Importantly, it introduced operational risk as a standalone area of the bank which for the first time was required to be measured, managed and capital allocated to calculated operational risks. Concurrently, Solvency II regulation in the insurance industry was also re-imagining regulations within the insurance industry and also developing operational risk measures. Given that Basel II was first published in 2004 and Solvency II was set to go live in January 2014. This paper analyses the strategic challenges of Basel II in the UK banking sector and then uses the results to inform a survey of a major UK insurance provider. We report that the effectiveness of Basel II was based around: the reliance upon people for effective decision making; the importance of good training for empowerment of staff; the importance of Board level engagement; and an individual's own world view and perceptions influenced the adoption of an organizational risk culture. We then take the findings to inform a survey utilizing structural equation modelling to analyze risk reporting and escalation in a large UK insurance company. The results indicate that attitude and uncertainty significantly affect individual's intention to escalate operational risk and that if not recognized by insurance companies and regulators will hinder the effectiveness of Solvency II implementation.     

What is the value of recourse to asset-backed securities? A clinical study of credit card banks

The present paper uses credit card securitization data to show that recourse to securitized debt may benefit short- and long-term stock returns and long-term operating performance of sponsors. Therefore, although recourse violates regulatory guidelines and FASB140, recourse may have beneficial effects for sponsors by revealing that the shocks that made recourse necessary are transitory. Sponsors providing recourse do, however, experience an abnormal delay in their normal issuance cycle around the event. Hence, it appears that the asset-backed securities market is like the commercial paper market, where a firm’s ability to issue is directly correlated with credit quality.     

Evaluating the effectiveness of the new EU bank regulatory framework: A farewell to bail-out?

In response to the economic and financial crisis, the EU has adopted a new regulatory framework of the banking sector. Its central elements consist of new capital requirements, the single rulebook, and rules for bank recovery and resolution. These legislations have been adopted to reduce the call for government bail-out of distressed banks in future crises.The present study performs a detailed quantitative assessment of the reduction in public finance costs brought about by the introduction of these rules. We use a microsimulation portfolio model, which implements the Basel risk assessment framework, to estimate the joint distribution of bank losses at EU level. The approach incorporates the complete safety-net set up in EU legislation to absorb these losses, explicitly modelling enhanced Basel III capital rules, the bail-in tool and the resolution funds.Using a near-full sample of commercial, cooperative and savings banks in the EU, we quantify the cumulative effects of this safety-net and the contribution of each individual tool to the total effect. Considering a crisis of a similar magnitude as the recent one, our results show that potential costs for public finances decrease from roughly 3.7% of EU GDP (before the introduction of any new tool) to 1.4% with bail-in, and finally to 0.5% when all the elements we model are in place. This latter amount is very close to our estimate of leftover resolution funds and the size of the Deposit Guarantee Scheme.This exercise extends the quantitative analyses performed by the European Commission in its Economic Review of the Financial Regulation Agenda by developing additional scenarios, crucial robustness checks, simulations for different annual data vintages, and by implementing some methodological improvements.     

Risk perception and worry in environmental decision-making – a case study within the Swedish steel industry

Sustainable development is an important issue for the industry in order to fulfil legislation requirements and to be able to use green marketing as a competitive advantage. The Swedish steel industry has implemented a large number of environmental improvements, for example, within energy efficiency, raw materials and recyclability. Technical improvements can help the industry decrease its environmental impact; however, in order to reach sustainable development, more factors need to be considered: an effective environmental decision-making process, for example. This process may be influenced by personal factors such as risk perception and worry, which are factors that will not contribute to an effective decision-making process. The aim of this study was to investigate if personal worry and risk perception influenced environmental decision-making within the Swedish steel industry. Thirty-eight interviews were performed at 10 Swedish steelworks using the Q-methodology. The major perceived environmental risks with the facility and personal worry were assessed, compared to the day-to-day work. It was concluded that the major perceived risks were emissions of carbon dioxide, use of non-renewable energy and emissions of particulate matter. The decision-makers were mainly worried about emissions of carbon dioxide, emissions of dioxin and use of non-renewable energy. The environmental issues that were prioritised in practice (day-to-day work) were emissions of carbon dioxide, emissions of particulate matter and emissions of metals. Even though emissions of carbon dioxide were given the highest priority in the Q-sorts, there was in general no clear relationship between risk perception and personal worry with the prioritised environmental issues at the steelworks. The quantitative analysis of the Q-sorts and the qualitative interviews both showed that the day-to-day work was unaffected by personal worry and risk.     

A discrete Itô calculus approach to He’s framework for multi-factor discrete markets

In the present paper, a discrete version of Itô’s formula for a class of multi-dimensional random walk is introduced and applied to the study of a discrete-time complete market model which we call He’s framework. The formula unifies continuous-time and discrete-time settings and by regarding the latter as the finite difference scheme of the former, the order of convergence is obtained. The result shows that He’s framework cannot be of order 1 scheme except for the one dimensional case.