The Challenge of Risk Reporting: Regulatory and Corporate Responses

Corporate collapses such as those of Ansett Australia, Centaur Mining, Enron, HIH and One. Tel have rekindled regulators' concerns about the lack of transparency in financial reporting on risks and uncertainties. This paper examines the broad conceptual issues and regulatory responses so far in leading jurisdictions and investigates risk reporting of Australian entities operating in the mining sector. The limited and uneven level of reporting on risk found, in this study, if replicated in other industries and jurisdictions, provides justification for standard-setters considering more explicit requirements than the existing piecemeal rules of restricted scope.     

Alternative central bank credit policies for liquidity provision in a model of payments

I explore alternative central bank policies for liquidity provision in a model of payments. I use a mechanism design approach so that agents’ incentives to default are explicit and contingent on the credit policy designed. In the first policy, the central bank invests in costly enforcement and charges an interest rate to recover costs. I show that the second-best solution is not distortionary. In the second policy, the central bank requires collateral. If collateral does not bear an opportunity cost, then the solution is first best. Otherwise, the second best is distortionary because collateral serves as a binding credit constraint.     

The Downside of Asset Screening for Market Liquidity

This paper explores the tension between asset quality and market liquidity. I model an originator who screens assets whose cash flows are later sold in secondary markets. Screening improves asset quality but gives rise to asymmetric information, hindering trade of the asset cash flows. In the optimal mechanism (second‐best), costly retention of cash flows is essential to implement asset screening. Market allocations can feature too much or too little screening relative to second‐best, where too much screening generates inefficiently illiquid markets. Furthermore, the economy is prone to multiple equilibria. The optimal mechanism is decentralized with two tools: retention rules and transfers.     

Pollution and reforms of domestic and trade taxes towards uniformity

This paper builds a small open economy trade model where there is pollution from the production and consumption of goods. In the presence of production and consumption pollution, we examine a piecemeal consumer-price-neutral reform of the tariff and consumption tax and a piecemeal producer-price-neutral reform of the export and production taxes on a specific good. The paper identifies sufficient conditions under which the above tax reforms improve welfare and increase government tax revenues.     

Identifying operational improvements during the design process of a time-driven ABC system: The role of collective worker participation and leadership style

This paper shows how collective worker participation and leadership style influence the emergence of operational improvements during the design process of a time-driven activity-based costing (ABC) system in a case study setting. In particular, in the case company, the costing project was initiated at different warehouses, which allowed us to distinguish two types of design processes. With the first type, the participation of all organizational members, especially at the lowest levels, fostered dialogue about the input parameters of the costing model. In addition, when these discussions about costing data were held in groups guided by a superior with a considerate, people-oriented leadership style, operational improvements appeared. With the second type, operational employees were not involved in the design process; they feared the new costing system, because it was used to enforce compliance, and no operational improvements emerged. Hence, the case findings suggest that, for operational improvements to appear during the design process of a time-driven ABC system, collective worker participation and appropriate leadership styles are indispensable.     

Monetary Policy Rules Work and Discretion Doesn’t: A Tale of Two Eras

This lecture examines monetary policy during the past three decades. It documents two contrasting eras: first a Rules‐Based Era from 1985 to 2003 and second an Ad Hoc Era from 2003 to the present. During the Rules‐Based Era, monetary policy, in broad terms, followed a predictable systemic approach, and economic performance was generally good. During the Ad Hoc Era, monetary policy is best described as a “discretion of authorities” approach, and economic performance was decidedly poor. By considering alternative explanations of this policy–performance correlation and examining corroborating evidence, the lecture concludes that rules‐based policies have clear advantages over discretion.     

Modeling the cross-section of stock returns using sensible models in a model pool

An increase in the number of asset pricing models intensifies model uncertainties in asset pricing. While a pure “model selection” (singling out a best model) can result in a loss of useful information, a full “model pooling” may increase the risk of including noisy information. We make a trade-off between the two methods and develop a new two-step trimming-then-pooling method to forecast the joint distributions of asset returns using a large pool of asset pricing models. Our method allows investors to focus on certain regions of the distributions. In the first step, we trim the uninformative models from a pool of candidates, and in the second step, we pool the forecasts of the surviving models. We find that our method significantly enhances portfolio performance and predicts downside risk precisely, and the improvements are mainly due to trimming. The pool of sensible models becomes larger when focusing on extreme events, responds rapidly to rising uncertainty, and reflects the magnitude of factor premiums. These findings provide new insights into asset pricing model evaluation.     

Evaluating business credit risk by means of approach‐integrating decision rules and case‐based learning

This research utilizes a new approach which uses a hybrid learning system that combines two representations of knowledge: the first in a form of decision rules referring to general knowledge, and the other of single cases corresponding to exceptions or untypical situations. The Explore algorithm was chosen as a tool for inducing general rules. It generates all simple and sufficiently strong general rules from a given data set. Examples discovered by these rules are then used to identify exceptions and untypical cases. The paper discusses problems connected with tuning parameters of this approach and introduces a new procedure for this task. This methodology is applied to solve the problem of evaluating the risk of business credit applications in a Polish commercial bank. Using information about business credit applications, as described by 35 economic parameters and using five groups of banking risk, a knowledge base consisting of 70 decision rules and 15 specific cases was induced. Testing this model in the standard ‘leaving‐one‐out’ way we achieved the best classification accuracy of 81%. A comparative study showed that results obtained by other machine‐learning algorithms resulted in significantly worse classification accuracy. Copyright © 2001 John Wiley & Sons, Ltd.     

The strategy of professional forecasting

We develop and compare two theories of professional forecasters’ strategic behavior. The first theory, reputational cheap talk, posits that forecasters endeavor to convince the market that they are well informed. The market evaluates their forecasting talent on the basis of the forecasts and the realized state. If the market expects forecasters to report their posterior expectations honestly, then forecasts are shaded toward the prior mean. With correct market expectations, equilibrium forecasts are imprecise but not shaded. The second theory posits that forecasters compete in a forecasting contest with pre-specified rules. In a winner-take-all contest, equilibrium forecasts are excessively differentiated.     

Price trends and patterns in technical analysis: A theoretical and empirical examination

While many technical trading rules are based upon patterns in asset prices, we lack convincing explanations of how and why these patterns arise, and why trading rules based on technical analysis are profitable. This paper provides a model that explains the success of certain trading rules that are based on patterns in past prices. We point to the importance of confirmation bias, which has been shown to play a key role in other types of decision making. Traders who acquire information and trade on the basis of that information tend to bias their interpretation of subsequent information in the direction of their original view. This produces autocorrelations and patterns of price movement that can predict future prices, such as the “head-and-shoulders” and “double-top” patterns. The model also predicts that sequential price jumps for a particular stock will be positively autocorrelated. We test this prediction and find that jumps exhibit statistically and economically significant positive autocorrelations.     

体系化视角下税法总则的结构安排与法际协调

在法典化视阈下,除了贯彻法治原则和纳税人主义,税法总则的功能主要体现在促进税法体系化。有鉴于此,税法总则需要提炼基本概念,整理出规范编排的逻辑主线,税收债务和围绕其而建立的法律关系,可以帮助它实现这个目标,合理确定立法文本之体例。在该思路指导下,税法总则可以划分为三个部分,首先是原则和立场方面的一般性规定,包括纳税人权利保护的内容,其次是实体性规则,如纳税人的发生、变更、扩张、消灭等,最后是程序方面的基本要求。由于采用先分后统的法典化模式,税法总则需要考虑融入现行税法体系,处理好内容安排和法律适用问题。鉴于税法的主体内容属于行政法,税法总则还需要处理跟行政处罚法、行政强制法等法律的关系,并高度重视行政法法典化对税法总则的影响。     

Editors’ Introduction to the Special Issue

In February 2019, the Journal of Money, Credit and Banking (JMCB) turned 50. The editors of the journal decided to celebrate this anniversary with two conferences, reflecting the two broad areas that the journal covers. A first conference on “Financial intermediation, regulation and economic policy” was held at the European Central Bank in Frankfurt/Germany on March 28–29, 2019, and addressed topics in the credit and financial intermediation fields. A second conference addressed topics in the macro-economic and monetary fields, and took place at the Federal Reserve Bank of New York on May 30–31, 2019. This Special Issue displays the best contributions to the first conference. The contributions to the second celebratory conference are published in a separate Special Issue.     

公众公司财务报告的披露、分析与解释机制

本文旨在研究公众公司财务报告的披露、分析与解释机制。以披露为基础的财务报告架构要想有效地发挥其功效, 必须做到两点第一, 必须要披露财务报告; 第二, 使用者应该有效地使用所披露的财务报告。前者通过公众公司财务报告披露机制完成, 其中披露规则和披露过程是关键; 后者则需要借助公众公司财务报告的分析与解释机制, 主要包括证券分析师、评级机构等中介服务机构功能的发挥。本文对这些机制和要件分别进行了理论探究和制度分析, 并在此基础上针对中国相关机制的现状和问题进行剖析, 得出一些有益的启示和改进的建议。     

Nonparametric correlation models for portfolio allocation

This article proposes time-varying nonparametric and semiparametric estimators of the conditional cross-correlation matrix in the context of portfolio allocation. Simulations results show that the nonparametric and semiparametric models are best in DGPs with substantial variability or structural breaks in correlations. Only when correlations are constant does the parametric DCC model deliver the best outcome. The methodologies are illustrated by evaluating two interesting portfolios. The first portfolio consists of the equity sector SPDRs and the S&P 500, while the second one contains major currencies. Results show the nonparametric model generally dominates the others when evaluating in-sample. However, the semiparametric model is best for out-of-sample analysis.     

How profitable are FX technical trading rules?

This paper provides a comprehensive empirical investigation of the profitability of foreign exchange technical trading rules over the 1996:10–2015:06 period for 22 currencies quoted in US dollars. It reports evidence of profitability across a universe of 113,148 rules that include traditional moving average rules and those constructed on the basis of technical indicators such as Bollinger bands and the relative strength index. The best trading rules achieve annualised returns of up to 30%. The Step-SPA test (Hsu, Hsu, & Kuan, 2010) results show a sharp fall in the total number of rules that are robust to data snooping bias. Virtually no traditional rule is significant in the 2006–2015 sub-sample, in line with the adaptive market hypothesis. By contrast, rules based on new technical indicator such as Bollinger band and relative strength index rules remain robustly profitable across all currencies over the more recent sub-sample.     

Monetary Policy and the Natural Rate of Interest

It is most important for monetary policy to track the natural rate of interest when interest rates take large and sustained swings away from their long‐run equilibrium values. Here, we study two models: a standard New Keynesian model and one in which government bonds provide liquidity. Policy rules that cannot track the natural rate perform poorly in both models, but are especially bad in the second because of sustained movements in the natural rate induced by fiscal shocks. First difference rules, on the other hand, do surprisingly well. When model uncertainty is taken into account, the dominance of the first difference rule is even more pronounced.     

Adverse selection when loss severities differ: First-best and costly equilibria

With information asymmetry between contracting parties, adverse selection may result. A separation may be achieved if low-risk types can signal their identity—for example, by selecting from a menu of price-quantity contracts. In such models, signaling is costly and solutions are, at best, second best. These models characterize risk types by differences in the probability, rather than in severity, of the costs they impose. However, when severity differences also are considered, first best solutions become feasible. We identify the circumstances in which costly separating equilibria prevail and those in which full-information equilibria can be attained.     

ACCOUNTING MODELS AS AN INQUIRING SYSTEM IN LOCAL GOVERNMENT

Budgetary processes of local governments have been studied a lot, but there seems to be a lack of knowledge on how the accounting systems are actually used and how they fit into these processes . This is the theme of this paper, which is based on studies of local governments in Sweden. The paper is divided into two parts. In the first part there is a discussion of the budgetary process, the accounting system and their interrelationship. Two particular problems are discussed; the first relates to the fact that the accounting system is systematically filtering away what seems to be relevant financial information; and the second is that the accounting system is also very badly adapted to that process of commitments, which is understood to be the budgetary best. In the second part of the paper, it is argued in a normative manner that changes should be made to solve these two problems.     

Liquidity commonality and high frequency trading: Evidence from the French stock market

High frequency trading (HFT) depends on sophisticated algorithms to closely monitor price changes across securities. Theory predicts this technological advantage should translate into market-wide liquidity co-variation, by transmitting information-based liquidity shocks. Using a dataset of orders and trades from the French stock market, we investigate whether HFT algorithms constitute a source of systematic liquidity risk. We demonstrate that, across securities, the liquidity offered by high frequency traders is significantly less diverse than that of traditional traders; this finding is in line with the cross-asset learning hypothesis. The excessive co-movement in liquidity is also partly explained by common market making rules. In periods of increased market stress, we find HFT, designated market making, and order size to be important sources of liquidity commonality. Our results have policy implications for market regulators in Paris, suggesting the inclusion of maximum spread-limit rules in market making contracts will reduce the possibility of liquidity drying up when markets are in turmoil.