The ambiguities of globalization

Current discussions of globalization are flawed by confusing two issues: (1) the economic competition among sovereign nation states—so-called “global competitiveness”—which is used as an excuse to reduce social support budgets; and (2) the value of worldwide international organizations set up on a non-state basis—humanitarian, environmental or human rights NGOs, professional, sporting, labor or whatever. Opposition to “globalization” in the first sense is no obstacle to support for the second (NGO) development: on the contrary, NGOs can be the best instrument for countering inhuman governmental policies. The cogency of these economic arguments rests, this paper argues, on confusing two interpretations of the terms “global” and “globalization”. In multinational businesses or other global enterprises, these terms imply that the economic role of governments will be reduced, and global competition will take place between corporations: Fuji vs Kodak, Boeing vs Airbus, Compaq vs Toshiba. In governments, by contrast, the same terms imply a continued—even, enhanced—economic role for governments, so that global competition takes place, rather, between countries: Britain vs Germany, Japan vs the United States, Europe vs America. Business and Government talk at cross-purposes. The steps that multinational corporations take to reduce other “non-wage” labor costs—notably, their taxes—are seen by politicians and journalists as unpatriotic. Rather than follow business onto the global stage, defenders of environmental and labour interests retreat to the domestic stage, and leave governments to bring the corporations into line. If tackled on this level alone, the economic arguments are, indeed, hard to undercut: addressed “one nation state at a time” (so to say) matters of “comparative advantage” tempt rival governments to engage in competitive cost cutting, and the costs of social services are an obvious target for cost cutting, e.g. in France or Sweden. Tackled on a wider (“global”) level, however, the same issues can be stated in terms less damaging to labour and environmental interests. A Global Labour Office capable of looking the World Trade Organization in the eye, for instance, could set standards protecting those interests as strongly as those insisted on by international agencies for “transparency” in accounting, “fair” competition and the like. Excessive cutbacks in social protections, indeed, can then be judged to be “unfair” competition, and penalized as such.     

The Global Century

No people, however they define themselves, can claim the 21st century as theirs; it can only be dubbed The Global Century. A sweep of the horizon at the end of the twentieth shows ten transformations going on at once — all related to the global spread of knowledge. We can't know what will happen or when, but we already know why. The “information environment” is changing our thinking about globalization, diversity, community, the world economy, the rich-poor gap, and education. Nobody can be in charge, so everybody is partly in charge. The implications for learning are huge, from pre-school to higher education. Education for the Global Century must help citizens think about “the situation as a whole”, think about how to “get it all together”.     

The transmodern hypothesis: towards a dialogue of cultures

For a Brussels Seminar at the European Commission, a “double hypothesis” was proposed: that we are in transition to a transmodern way of thinking that combines intuition and spirituality with rational brainwork; and that 21st century conflicts will likely be not between religions or cultures but within them, between premodern, modern, and transmodern worldviews. Non-Western thinkers find this framework useful: it opens a door to criticism of the worst aspects of modernity without being “anti-Western”. Western reactions are more mixed, some critics wanting to maintain a high fence between religion and governance, others welcoming the transmodern concept as helpful in relating states to religions, and in analyzing conflicts involving beliefs about belief. “Transmodernity” turns out to be a rich tool of analysis, with important implications for European foreign policy in the century to come.     

A Continuous Time Model to Price Commodity-Based Swing Options

On the commodity market there exist contracts which give the holder multiple opportunities to adjust delivery of the underlying commodity. These contracts are often named “Swing” or “take-or-pay” options. They are especially common on the electricity market.In this paper the price of a Swing option on commodities is investigated under the additional constraint of a recovery time between two different exercise times. We give an explicit characterization of the price function as the value function of a continuous stochastic impulse control problem and prove existence of an optimal control. We investigate the connection between the price function and the solution of a system of quasi-variational inequalities. Finally, we present a numerical algorithm for solving the quasi-variational inequalities, and give some numerical examples.JEL Classification: C61, C62, C63     

An investigation of the benefits of portfolio investment in Central and Eastern European stock markets

This paper: (i) examines the potential benefits from diversifying into eight stock markets of Central and Eastern Europe (CEE); and (ii) quantifies the importance of country, industry and time factors in CEE equity returns. The findings suggest that substantial benefits exist from investing in CEE stock markets and that they accrue more from the geographical spread than from the industrial mix of the equities included in the portfolio. However, the returns earned by CEE equities vary dramatically over time. This variability may hamper the efforts of investors attempting to exploit the diversification “free lunch”.     

Prophets and predictors : 9. 1750–1850: the shape of the future

This is the last in a series of articles exploring the prophetical prediction in history. With increasing stress on scientific rationality the utopists became specialists and Utopian anticipation a study of forthcoming social changes. This development will be the subject of a new series prepared by I.F. Clarke, “From Prophecy to Prediction: 1798–2001”, which begins in the next issue.     

The FASB exposure draft on accounting for business combinations and intangible assets: an instructional assignment

Accounting standards are constantly evolving to meet the needs of a rapidly changing business environment and changes in accounting theory. Accounting students need to be familiar with the content of Exposure Drafts, since these documents reflect the Financial Accounting Standards Board's (FASB) position on current financial reporting issues. Students are generally not well versed on the standard setting process and how contextual factors affect this process. The purpose of this instructional assignment is to enhance students' understanding of how contextual factors affect the standard setting process within the context of the Exposure Draft on “Business Combinations and Intangible Assets.” The assignment requires that students examine the Exposure Draft and answer questions designed to elicit responses as to why the FASB is considering a new standard and the impact the standard would have on current accounting procedures and financial statements.     

When courts are overgrown with grass: the role of courts in the 21st Century

What will be the social role of courts over the future? This essay explores this question by examining the “five dimensions” of judiciary—the judiciary as a branch of government, subsystem of the legal system, as a forum for resolving dispute, as public agency, and an institution of a changing society. It considers the duty of courts to safeguard the interests of future generations; the place of courts during “the end of authority”; the increasing use of artificial intelligence in formal adjudication, and concludes with a time when “the courts of justice are overgrown with grass”.     

“Extended Black” term structure models

This paper examines “Extended Black” term structure models (EBTSM), which are multi-factor extensions of the one-factor Black model (Black, F., 1995. Interest rates as options. Journal of Finance 50, 1371-1376). EBTSM are not affected by the admissibility restrictions that plague canonical affine models. EBTSM encompass quadratic models, but unlike in quadratic models bond yields are sufficient statistics to infer the latent factors driving the short interest rate. EBTSM are amenable to econometric estimation despite the need to solve bond pricing equations through finite difference numerical methods. Estimation through the Iterated Extended Kalman filter reveals that a two-factor EBTSM fit well the observed cross section and time series of Japanese Government bond yields. A three-factor EBTSM is also proposed.     

Planning with scenarios : The banking world of 1985

Scenarios are widely used in large organisations as a planning tool. The success of this tool, however, depends on its ability to link macroviews of economic, social, and political events to the unique operating experience of a specific type of organisation. This article describes a formal linking procedure for assessing the impact of several scenarios on a large bank. The goal is to define those sets of economic, technological, and regulatory conditions which are most favourable (a “best scenario”) and those which are least favourable (a “worst scenario”).     

Dynamics of credit spread moments of European corporate bond indexes

Traditional quantitative credit risk models assume that changes in credit spreads are normally distributed but empirical evidence shows that they are likely to be skewed, fat-tailed, and change behaviour over time. Not taking into account such characteristics can compromise calculation of loss probabilities, pricing of credit derivatives, and profitability of trading strategies. Therefore, the aim of this study is to investigate the dynamics of higher moments of changes in credit spreads of European corporate bond indexes using extensions of GARCH type models that allow for time-varying volatility, skewness and kurtosis of changes in credit spreads as well as a regime-switching GARCH model which allows for regime shifts in the volatility of changes in credit spreads. Performance evaluation methods are used to assess which model captures the dynamics of observed distribution of the changes in credit spreads, produces superior volatility forecasts and Value-at-Risk estimates, and yields profitable trading strategies. The results presented can have significant implications for risk management, trading activities, and pricing of credit derivatives.     

Exchange rates and order flow in the long run

Several recent papers have underlined the importance of microstructure effects in understanding exchange rate behavior by documenting stable long-run relationships between cumulated order flows and spot exchange rates. This stands in contrast to the widely-studied failure of exchange rates to conform to the long-run behavior implied by “conventional” macroeconomic models and is consistent with the prediction of micro-structure models. We re-examine the evidence for stable long-run relationships. We find that such evidence exists only for a small number of the major currencies we examine and that it is statistically fragile. We conclude that this implication of microstructure models does not fit the data as well as previous studies suggest.     

The accounting of “The Meeting”: Examining calculability within a “Fluid” local space

This study traces events in an empirical setting where a key local space, “The Meeting”, was made calculable. Building on field data from interviews and documentary sources at ABB Industry/Finland, the study theorizes in the interpretive genre, elaborating on the notion of the calculable space. It argues the following: Accounting can be extended into un-formalized and more elusive local spaces – into “fluid” spaces which are not clearly mapped within the organizational hierarchy, and which lie beyond recognized responsibility units or physically distinct cells at the factory floor. By opening visibility into the discretion of these “fluid” local spaces, a tighter alignment between programmatic ideals and real action at the organizational grass-root can be achieved. Self-devised non-financial measurement, mediating local tensions and the interests of “autonomous” actors, becomes the technology of government in this process of normalization – which is, however, not to be acknowledged as being unproblematic.     

Decoupled earnings: An institutional perspective of the consequences of maximizing shareholder value

Recent accounting scandals have brought focus on the role of management in financial statement manipulation. This focus on micro-behavior does not capture the complexities of earnings management. Taking an institutional rather than agency theory approach, earnings management is posited as a decoupled behavior. A behavior that results from not only agency-based motivations of self-interests, but also regulative, normative, and cultural-cognitive legitimacy pressures. Conformity to the central logic of “maximizing shareholder value” found in the “US financial market” institutional field provides the context in which to explore earnings management as a decoupled behavior. Insights for earnings management include the blending of agency and institutional theory perspectives to gain a more complete understanding of the behavior and the positing of a continuum of earnings management conducive to this merger. Institutional theory benefits from exploring the nesting in multiple institutional fields.     

Global civil society: lessons from ocean governance

Late 20th century ideas about governance of the world's oceans may provide clues to the role of “civil society” in the 21st century. The UN Convention on Law of the Sea has radically changed traditional ideas about “national sovereignty”, shifting its focus from territorial to functional, imposing on states the duty to cooperate and pay taxes, requiring the sharing of sovereign rights, and transcending sovereignty with the “common heritage” concept. The proliferation of nongovernmental organisations operating on the international stage is empowering all elements of a burgeoning global civil society. In some pioneering experiences in international relations, nongovernmental representatives sit on a par with delegates from governments. Most of the elements of global civil society—NGOs, international business, the community of scientists, worldwide media, and local communities—are not yet focused on the kinds of globalization that can narrow the rich–poor gap and promote sustainable development, but in the new century, a more global civil society can play a more constructive role.     

The causal structure of economic models

Large quantitative models of the economy are increasingly being used to prepare short-term and long-term projections. In most cases inspection of each single equation is not sufficient to understand the functioning of a complete model, a situation which sometimes leads to so-called “counter-intuitive” results of model simulations. The authors briefly describe a method for the analysis of the causal structure of large models and apply this method to an analysis of the United Nations model of the future of the world economy directed by W. Leontief.     

The timing of exchange rate collapse

Recent episodes of exchange rate collapse have renewed interest in models of speculative attacks. These episodes have been considered by some observers to be inconsistent with “fundamentals” models of attack since there was no prolonged period of policy misalignment and declining reserves, as required by such models. This paper develops a fundamentals model in which collapse is instantaneous at the time of unexpected policy change and/or a change in the expectations of future policy, even for a reserve abundant country.     

Syndicated Loans

This paper analyzes the market for syndicated loans, a hybrid of private and public debt, which has grown at well over a 20% rate annually over the past decade and which totaled over $1 trillion in 1997. We identify empirically the factors that influence a bank or nonbank's decision to syndicate a loan and the determinants of the proportion of the loan sold in the event of syndication. The evidence reveals a loan is more likely to be syndicated as information about the borrower becomes more transparent, as the syndicate's managing agent becomes more “reputable”, and as the loan's maturity increases. The lead manager holds larger proportions of information-problematic loans in its own portfolio. Loan syndications, like loan sales, appear to be motivated, in part, by capital regulations, and the liquidity position of the agent bank influences the likelihood of syndication, but not the extent. Our results confirm that information and agency problems affect the salability of debt claims and the extent to which a loan is “transaction oriented” rather than “relationship oriented” in the sense of A. Boot and A. Thakor (2000, J. Finance54, 679–713). Journal of Economic Literature Classification Numbers: D82, G20, G21, G24.     

Discrete versus continuous state switching models for portfolio credit risk

Dynamic models for credit rating transitions are important ingredients for dynamic credit risk analyses. We compare the properties of two such models that have recently been put forward. The models mainly differ in their treatment of systematic risk, which can be modeled either using discrete states (e.g., expansion versus recession) or continuous states. It turns out that the implied asset correlations and default rate volatilities for discrete state switching models are implausibly low compared to empirical estimates from the literature. We conclude that care has to be taken when discrete state regime switching models are employed for dynamic credit risk management. As a side result of our analysis, we obtain indirect evidence that asset correlations may change over the business cycle.     

In- and out-of-sample specification analysis of spot rate models: Further evidence for the period 1982–2008

We review and construct consistent in-sample specification and out-of-sample model selection tests on conditional distributions and predictive densities associated with continuous multifactor (possibly with jumps) and (non)linear discrete models of the short term interest rate. The results of our empirical analysis are used to carry out a “horse-race” comparing discrete and continuous models across multiple sample periods, forecast horizons, and evaluation intervals. Our evaluation involves comparing models during two distinct historical periods, as well as across our entire weekly sample of Eurodollar deposit rates from 1982 to 2008. Interestingly, when our entire sample of data is used to estimate competing models, the “best” performer in terms of distributional “fit” as well as predictive density accuracy, both in-sample and out-of-sample, is the three factor Chen (Chen, 1996) model examined by Andersen, Benzoni and Lund (2004). Just as interestingly, a logistic type discrete smooth transition autoregression (STAR) model is preferred to the “best” continuous model (i.e. the one factor Cox, Ingersoll, and Ross (CIR: 1985) model) when comparing predictive accuracy for the “Stable 1990s” period that we examine. Moreover, an analogous result holds for the “Post 1990s” period that we examine, where the STAR model is preferred to a two factor stochastic mean model. Thus, when the STAR model is parameterized using only data corresponding to a particular sub-sample, it outperforms the “best” continuous alternative during that period. However, when models are estimated using the entire dataset, the continuous CHEN model is preferred, regardless of the variety of model specification (selection) test that is carried out. Given that it is very difficult to ascertain the particular future regime that will ensue when constructing ex ante predictions, thus, the CHEN model is our overall “winning” model, regardless of sample period.