Apportioning of risks via stochastic dominance

Consider a simple two-state risk with equal probabilities for the two states. In particular, assume that the random wealth variable dominates via ith-order stochastic dominance for i=M,N. We show that the 50-50 lottery dominates the lottery via (N+M)th-order stochastic dominance. The basic idea is that a decision maker exhibiting (N+M)th-order stochastic dominance preference will allocate the state-contingent lotteries in such a way as not to group the two “bad” lotteries in the same state, where “bad” is defined via ith-order stochastic dominance. In this way, we can extend and generalize existing results about risk attitudes. This lottery preference includes behavior exhibiting higher-order risk effects, such as precautionary effects and tempering effects.     

Stochastic dominance and decomposable measures of inequality and poverty

In this paper, we characterize some new links between stochastic dominance and the measurement of inequality and poverty. We show that: for second-degree normalized stochastic dominance (NSD), the weighted area between the NSD curve of a distribution and that of the equalized distribution is a decomposable inequality measure; for first-degree and second-degree censored stochastic dominance (CSD), the weighted area between the CSD curve of a distribution and that of the zero-poverty distribution is a decomposable poverty measure. These characterizations provide graphical representations for decomposable inequality and poverty measures in the same manner as Lorenz curve does for the Gini index. The extensions of the links to higher degrees of stochastic dominance are also investigated.     

我国上市商业银行系统性风险中共同风险因素分析

通过实证分析我国14家上市商业银行以及金融指数的收益率的波动情况、相关系数和协方差,分析了我国上市商业银行的系统性风险中的共同风险因素。得到结论:14家上市商业银行对共同风险因素的反应较为一致;与其他上市商业银行相比,共同风险在大型商业银行的系统性风险中所占比重较大;与其他风险相比,大型商业银行对共同外部风险的反应更显著;金融指数能够较好地代表金融风险因素。     

Stronger measures of higher-order risk attitudes

This paper aims to extend the results by Ross (1981) [15] and by Modica and Scarsini (2005) [13] to stochastic dominance of degree 4 and over. Specifically, it is shown that Ross' approach can be extended to any order of risk attitude beyond the generalization proposed by Modica and Scarsini by means of sth degree increase in risk defined by Ekern (1980) [8].     

Bivariate almost stochastic dominance

Univariate almost stochastic dominance has been widely studied and applied since its introduction by Leshno and Levy (Manag Sci 48:1074–1085, 2002). This paper extends this construction to the bivariate case by means of suitable two-attribute utility functions. After having confined correlation aversion and correlation loving to some acceptable levels, bivariate almost stochastic dominance rules are introduced for the preferences exhibiting confined correlation aversion and confined correlation loving. The impact of a change in risk in terms of bivariate almost stochastic dominance on optimal saving is analyzed as an application, as well as the effect of envy and altruism on income distributions. Finally, alternative definitions of bivariate almost stochastic dominance are discussed, as well as testing procedures for such dominance rules in financial problems.     

Where does the risk lie? Systemic risk and tail risk networks in the Chinese financial market

This paper studies tail risk connectedness and systemic risk in the Chinese financial market in the post-crisis period of 2009–2017. We adopt the conditional value at risk (CoVaR) and complex theory to construct the tail risk connectedness network and identify the systemically important financial institutions during the Chinese financial turbulence. We precisely characterize the dynamic evolution of the tail risk connectedness at the institutional, sector and market levels. We find that, during normal times, the banking sector contributes the most tail risk to the market and that the real estate sector contributes the least. However, during the crisis period, the real estate sector played its role and became the most significant tail risk emitter. In addition, we identify the significant important financial institutions in the Chinese financial market, highlighting the fact that the four state-owned commercial banks and two largest insurance companies dominate. Our results are helpful to both regulators for developing macroprudential supervision policies and investors interested in the Chinese financial market for making risk management strategies.     

“Interest Rate Trap”, or Why Does the Central Bank Keep the Policy Rate Too Low for Too Long?

In this paper, we provide a framework for modeling one risk‐taking channel of monetary policy, the mechanism whereby financial intermediaries' incentives for liquidity transformation are affected by the central bank's reaction to a financial crisis. The anticipation of the central bank's reaction to liquidity stress gives banks incentives to invest in excessive liquidity transformation, triggering an “interest rate trap” – the economy will remain stuck in a long‐lasting period of suboptimal, low interest rate equilibrium. We demonstrate that interest rate policy as a financial stabilizer is dynamically inconsistent, and the constrained efficient outcome can be implemented by imposing ex ante liquidity requirements.     

Diversification of interdependent prospects

This paper extends the stochastic dominance approach to the problem of diversification of interdependent prospects. One basic result is that a risk averter should always mix any two identically distributed prospects, regardless of the nature of the interdependence between them. A similar result holds for the case of n prospects, provided all the joint distribution functions of dimension n ? 1 are identical. When the n-dimensional joint distribution function is symmetric, then the optimal strategy is to put an equal amount into each prospect. The paper also provides conditions which make diversification optimal in the absence of identical marginal distributions.     

Systemic risk in the Angolan interbank payment system – a network approach

ABSTRACT

In this work, we analyse the topology of the network of interbank payment flows settled via the real-time gross settlement system (RTGS) of the Angolan payment system (APS) during the fourth quarter of 2016, with the aim of discussing the APS resilience to systemic risk, focusing on its vulnerability in case of failures in the settlement of any bank payments. We conclude that (i) the Angolan RTGS payment network is sparse, characterized by low connectivity, (ii) it is a scale-free network with five banks with high connectivity, representing the main origin and destination of the settled transactions and concentrating about 47% of the total volume and amount of payments settled, which adds to contagion risk. However (iii) the systemic risk arising from the removal of a single participant from the network is low, since the largest bank in the system, with the greatest transacted volume and amount, accounts only for about 11% of the total transacted amounts. In addition, (iv) the adequate risk-mitigating operational processes of each of the RTGS subsystems safeguard the APS from systemic risk.     

Markov rational expectations equilibria in an overlapping generations model

In this paper, we analyze rational expectations equilibrium paths in a stochastic overlapping generations model. The work presented here builds on results of S. E. Spear (J. Econ. Theory 35 (1985), 251–275), where is is shown that in a model with multiple goods and time non-separable preferences, a stochastic steady state equilibrium will generically fail to exist. A stochastic steady state is defined as an equilibrium in which the stochastic process of endogenously determined variables is measure isomorphic to the exogenous process driving the model. In this paper, we establish the existence of non-steady state equilibria and provide a characterization of their stochastic properties.     

Insolvency regimes and firms' default risk under economic uncertainty and shocks

One of the arguments often advanced for implementing a stronger insolvency and bankruptcy framework is that it enhances credit discipline among firms. Using a large cross-country firm-level dataset, we empirically test whether a stronger insolvency regime reduces firms' likelihood of defaulting on their debt. In particular, we examine whether it reduces default risk during increased economic uncertainty and various external shocks. Our results confirm that a stronger insolvency regime moderates the adverse effects of economic shocks on firms' default risk. The effects are more pronounced for firms in the top half of the size distribution. We also explore channels through which improved creditor rights influence firms' default risk, including dependence on external finance, corporate leverage, and managerial ethics. Our main results are robust to an alternative measure of default risk, inclusion of currency and sovereign debt crisis episodes, and alternative estimations.     

The Global Governance of Systemic Risk: How Measurement Practices Tame Macroprudential Politics

ABSTRACT

This article explores how systemic risk has been governed at the international level after the financial crisis. While macroprudential ideas have been widely embraced, the policy instruments used to implement them have typically revolved more narrowly around the monitoring of risk posed by discrete ‘systemically important’ entities. This operational focus on individual entities sidelines the more radical implications of macroprudential theory regarding fallacies of composition, fundamental uncertainty and the public control of finance. We explain this tension using a performative understanding of risk as a socio-technical construction, and illustrate its underlying dynamics through case studies of systemic risk governance at the Financial Stability Board (FSB) and the International Monetary Fund (IMF or Fund). Drawing on official reports, consultation documents and archival sources, we argue that the FSB’s and IMF’s translations of systemic risk into a measurable and attributable object have undermined the transformative potential of the macroprudential agenda. The two cases illustrate how practices of quantification can make systemic risk seemingly more governable but ultimately more elusive.     

Pareto efficiency for the concave order and multivariate comonotonicity

This paper studies efficient risk-sharing rules for the concave dominance order. For a univariate risk, it follows from a comonotone dominance principle, due to Landsberger and Meilijson (1994) [27], that efficiency is characterized by a comonotonicity condition. The goal of the paper is to generalize the comonotone dominance principle as well as the equivalence between efficiency and comonotonicity to the multidimensional case. The multivariate case is more involved (in particular because there is no immediate extension of the notion of comonotonicity), and it is addressed by using techniques from convex duality and optimal transportation.     

Mean-Gini analysis of stochastic externalities: The case of groundwater contamination

The mean-Gini approach is used to analyze stochastic externalities generated by agricultural production. The model addresses the problem of groundwater pollution caused by excessive fertilizer application. Inherent in the mean-Gini approach to expected utility maximization is a two-fold value: the simplicity of the two-parameter mean-variance model and satisfaction of necessary and sufficient conditions for stochastic dominance. Price and quantity policy recommendations to control externalities are formulated based upon the relative assessment of uncertainty by the regulatory authority and the farmers. Using the Gini as a measure of risk allows for the quantification of control policy measures under differentiated risk aversion and multiple sources of pollution. The model shows that when producers underestimate uncertainty, quota policies restricting fertilizer are more efficient than tax policies in reducing groundwater contamination.Work on this paper was carried out when visiting the University of Maryland. Financial aid for the work was provided by the USDA ERS-NRED under a cooperative agreement between the Department of Agricultural and Resource Economics, University of Maryland, and the USDA — Economic Research Service — Natural Resource Economics Division, I am grateful to John Miranowski and Darrell Hueth for that support. I am indebted as well to Lana Shalit, who helped me revise the paper.     

Dominance testing for ‘pro-poor’ growth with an application to European growth

This article introduces statistical testing procedures to evaluate ??pro-poor?? growth. Our measure of ??pro-poorness?? follows Kakwani (J Quant Econ 16(1):67?C80, 2000), Kakwani and Pernia (Asian Dev Rev 18(1):1?C16, 2000), and Son (Econ Lett 82:307?C314, 2004), who decompose the generalized Lorenz ordinates into a growth effect and an inequality effect. We derive an asymptotic distribution-free covariance matrix for the decomposed generalized Lorenz curves. Using this decomposition (and our standard errors), we test for pro-poor dominance in the growth process. We illustrate our test for the pro-poor dominance by evaluating the degree of pro-poor growth in five European countries.     

Should the Social Security Trust Fund Hold Equities? An Intergenerational Welfare Analysis

In a stochastic economy with overlapping generations, fiscal policy affects the allocation of aggregate risks. The paper shows how to compute the welfare effects of marginal policy changes that shift risk across cohorts, in general and for an application to social security equity investments. I estimate the relevant correlations between macroeconomic shocks and equity returns from 1874–1996 U.S. data, calibrate the model, and find positive welfare effects for equity investments. Since stock returns are positively correlated with social security's wage-indexed benefit obligations, equity investments would also help to stabilize the payroll tax rate. Journal of Economic Literature Classification Numbers: E62, H55.     

Corporate liquidity and risk management with time-inconsistent preferences

This paper extends the model of corporate liquidity and risk management with limited commitment by incorporating time-inconsistent preferences. With respect to the firm's liquidity w = W∕K, it predicts that in the presence of time-inconsistency, the entrepreneur optimally responds by lowering the maximal debt capacity, over-consuming, under-investing and reducing both the idiosyncratic and systematic volatility of w. When disentangling the entrepreneur's belief with regard to future selves' time-inconsistent behavior, as a result of sophistication effect, the sophisticated entrepreneur reduces the endogenous debt capacity, invests less, decreases consumption, engages less in financial hedging and allocates even smaller liquid assets in the market portfolio than naive entrepreneur.     

Capital Accumulation in a Stochastic Overlapping Generations Model with Social Security

This paper analyzes the impact of pay-as-you-go financed social security on the stochastic process for the capital stock in a stochastic overlapping generations model. It is shown that the probability distribution of the capital stock in absence of social security dominates that in a pay-as-you-go system in the sense of stochastic dominance. Furthermore, the study demonstrates that the sufficient conditions ensuring the existence and uniqueness of stationary equilibria in a pay-as-you-go system are more restrictive than in the model without social security. Journal of Economic Literature Classification Numbers: C62, H55.     

Transfer principles in income redistribution

Dalton's principle of transfer for income redistribution says that society will be better off when a unit of income in transferred from a richer to a poorer individual. This paper investigates the conjunction of a natural extension of Dalton's principle — which says that any combination of a socially desirable transfer with its inverse at uniformly higher levels of income will have positive social benefit — and a traditional utilitarian-egalitarian formulation of social welfare. The transfer principles involved in the extension of Dalton's rule correspond to stochastic dominance relations between income distributions with a common mean, and lead to the conclusion that, when ? and g are income distributions, the social welfare of ? is larger than that of g if $\text{Σe}{}^{\mathrm{-ax}}\text{?(x)<Σe}{}^{\mathrm{-ax}}\text{g(x)}$ for all positive a. This conclusion is intimately connected with a measure of income inequality studied by Kolm.     

Stochastic convexity in dynamic programming

Summary. This paper explores sufficient conditions for a continuous stationary Markov optimal policy and a concave value function in stochastic dynamic programming problems. Also, the paper addresses conditions needed for the differentiability of the value function. The paper uses conditions such as first order stochastic dominance, second order stochastic dominance and concave stochastic dominance that are widely applied in economics. Received: February 23, 2001; revised version: May 19, 2002 RID="*" ID="*" I am deeply indebted to Prajit Dutta for patient assistance and advice. This paper has benefited from discussions with Tsz Cheong Lai, Tackseung Jun, Werner Stanzl and Satyajit Bose as well as feedback from an anonymous referee.