Abstract, classic, and explicit turnpikes

Portfolio turnpikes state that as the investment horizon increases, optimal portfolios for generic utilities converge to those of isoelastic utilities. This paper proves three kinds of turnpikes. In a general semimartingale setting, the abstract turnpike states that optimal final payoffs and portfolios converge under their myopic probabilities. In diffusion models with several assets and a single state variable, the classic turnpike demonstrates that optimal portfolios converge under the physical probability. In the same setting, the explicit turnpike identifies the limit of finite-horizon optimal portfolios as a long-run myopic portfolio defined in terms of the solution of an ergodic HJB equation.     

What makes a joint venture: Micro‐evidence from Sino‐Italian contracts

This paper provides new contract-level evidence on control rights allocation in order to define what makes a joint venture. Property rights theory of the firm identifies circumstances under which joint control alleviates investment distortions due to contract incompleteness. We compare predictions of the theoretical literature with actual governance structures of Sino-Italian joint ventures, as reported in a questionnaire submitted to the entire population of Italian enterprises operating in China. With an exceptional response rate of 60%, our evidence confirms most of the theoretical predictions and helps select among competing approaches to model joint ventures.     

A Recursive Scheme for Perpetuities with Random Positive Interest Rates. II: The Impenetrable Wall

In some former contributions, the authors investigated actuarial quantities with stochastic interest rates. In a first model, the randomness is modelled by means of an ordinary Wiener process, and as a consequence negative interest rates are possible. A second model provides a tool to avoid these negative interest rates, which can be necessary in particular situations. This paper wants to present an alternative solution to the problem of negative interest rates. This new model will be implemented to the case of an annuity certain and of a perpetuity.     

Historical simulation approach to the estimation of stochastic discount factor models

We propose an approach to the estimation of the parameters of stochastic discount factor (SDF) models which is based on the idea that the next period joint distribution of the variables in a SDF and asset returns can be well approximated by their joint historical distribution. The estimates of the SDF parameters may therefore be found as the values of the parameters at which the mean of the historical distribution of the product of the SDF with an asset return equals one. Each time period, the estimates are updated using the most recent periods of data and hence can change over time. This method can be viewed as an alternative to the approaches that specify a particular functional form relating the SDF parameters to proxies for the state of the world.     

Critical success factors associated with the implementation of enterprise risk management

The present research aimed to identify which critical success factors have the most influence on the implementation of Enterprise Risk Management – ERM, taking into consideration the important mission to ensure the survival, growth, and perpetuity of businesses in an environment with strong technology integration, global competition, and political, cultural, and economic contexts. To achieve this objective, a systematic and structured literature review was conducted, making it possible to identify 10 critical success factors for ERM initiatives that were analyzed and detailed, based on the literature findings and consultation with experts.     

Semiparametric diffusion estimation and application to a stock market index

The analysis of diffusion processes in financial models is crucially dependent on the form of the drift and diffusion coefficient functions. A new model for a stock market index process is proposed in which the index is decomposed into an average growth process and an ergodic diffusion. The ergodic diffusion part of the model is not directly observable. A methodology is developed for estimating and testing the coefficient functions of this unobserved diffusion process. The estimation is based on the observations of the index process and uses semiparametric and non-parametric techniques. The testing is performed via the wild bootstrap resampling technique. The method is illustrated on S&P 500 index data.     

On the aggregate welfare cost of Great Depression unemployment

The potential benefit of policies that eliminate a small likelihood of economic crises is calculated. An economic crisis is defined as an increase in unemployment of the magnitude observed during the Great Depression. For the U.S., the maximum likelihood estimate of entering a depression is found to be about once every 83 years. The welfare gain from setting this small probability to zero can range between 1% and 7% of annual consumption in perpetuity. For most estimates, more than half of these large gains results from a reduction in individual consumption volatility.     

Joint Audit: Issues and Challenges for Researchers and Policy-Makers

Abstract

The publication of the European Commission Green Paper, ‘Audit Policy: Lessons from the Crisis’ in October 2010, has stirred up a lively debate on the role of joint audits. This literature review identifies and evaluates, for the benefit of future research and regulators, existing evidence about joint audits. We find limited empirical support to suggest that joint audits lead to increased audit quality, but some empirical support to suggest that joint audits lead to additional costs. Overall, this paper indicates that joint audit should be seen as a mechanism that is embedded in a broader institutional context and not be considered in isolation from other factors that might impact the audit market. The results indicate that various country-level characteristics are simultaneously at play. While joint audits can potentially enhance the audit market competition by allowing smaller audit firms to maintain larger market shares, the related impact on audit quality has not yet been clearly demonstrated and thus provides a promising avenue for future research.     

Authors’ Reply: Corporate Hedging in the Insurance Industry: The Use of Financial Derivatives by U.S. Insurers - Discussion by L. Lee Colquitt; Arlette C. Wilson; Gray G. Venter; Morton Lane; Joan Lamm-Tennant,January 1997

Abstract

This paper studies the joint distribution of the time of ruin, the surplus immediately before ruin, and the deficit at ruin. The time of ruin is analyzed in terms of its Laplace transforms, which can naturally be interpreted as discounting. Hence the classical risk theory model is generalized by discounting with respect to the time of ruin. We show how to calculate an expected discounted penalty, which is due at ruin and may depend on the deficit at ruin and on the surplus immediately before ruin. The expected discounted penalty, considered as a function of the initial surplus, satisfies a certain renewal equation, which has a probabilistic interpretation. Explicit answers are obtained for zero initial surplus, very large initial surplus, and arbitrary initial surplus if the claim amount distribution is exponential or a mixture of exponentials. We generalize Dickson’s formula, which expresses the joint distribution of the surplus immediately prior to and at ruin in terms of the probability of ultimate ruin. Explicit results are obtained when dividends are paid out to the stockholders according to a constant barrier strategy.     

Asymptotic analysis of the ruin with stationary stable steps generated by dissipative flows

We study the exceedance probability of a high threshold (ruin probability) for a random walk with a negative linear drift, where the steps of the walk (claim sizes) constitute a stationary ergodic symmetric α-stable process. We casually use the language of insurance, although this is a popular problem in many other fields of applied probability as well. We refer to ergodic theory to split the step process into two independent processes. We focus on the processes generated by dissipative flows, which are known to have a mixed moving average representation, and we restrict our attention to regular moving averages with non-negative kernels. We give results for the order of magnitude of the exceedance probability as the threshold goes to infinity in the cases of discrete-time and continuous-time claim processes.     

A rationale for science-policy interfaces

This paper aims at a better understanding of the justifications for science-policy interfaces, of the reasons for their growing importance in environmental governance, and of the theoretical and epistemological challenges they pose. I look at the intersections between science and policy to highlight that science and policy, far from being mutually exclusive and hermetic categories, are intersecting domains of human activity which are in co-evolution. Science-policy interfaces are defined as social processes which encompass relations between scientists and other actors in the policy process, and which allow for exchanges, co-evolution, and joint construction of knowledge with the aim of enriching decision-making. They are implemented to manage the intersection between science and policy. The theoretical questions which arise at this intersection are then explored, which allows for the identification of a series of 15 normative requirements for science-policy interfaces. The conclusion suggests that this normative content may provide guidance for the design, implementation, and evaluation of real-life science-policy interfaces, and identifies key methodological issues which need further theoretical research as well as practical experimentation.     

Zur Exaktheit der Standardformel

The Solvency II standard formula permits the approximate computation of the solvency capital requirement for an insurance company. The solvency capital requirement is defined as the 99,5 % quantile of the distribution of the basic own funds of the insurance company taking into account all risks of the company. The standard formula decomposes the total risk into risk units and conducts the aggregation of the solvency capital requirements for the single risk units using their correlations. The present paper provides a condition on the joint distribution of all risk units under which the risk aggregation via the standard formula is exact.     

Dealing with consumer default: Bankruptcy vs garnishment

What are the positive and normative implications of eliminating bankruptcy protection for indebted individuals? Without bankruptcy protection, creditors can collect on defaulted debt to the extent permitted by wage garnishment laws. The elimination lowers the default premium on unsecured debt and permits low-net-worth individuals suffering bad earnings shocks to smooth consumption by borrowing. There is a large increase in consumer debt financed essentially by super-wealthy individuals, a modest drop in capital per worker, and a higher frequency of consumer default. Average welfare rises by 1% of consumption in perpetuity, with about 90% of households favoring the change.     

Tail-dependence in stock-return pairs

The empirical joint distribution of return pairs on stock indices displays high tail-dependence in the lower tail and low tail-dependence in the upper tail. The presence of tail-dependence is not compatible with the assumption of (conditional) joint normality. The presence of asymmetric tail-dependence is not compatible with the assumption of a joint student-t distribution. A general test for one dependence structure versus another via the profile likelihood is described and employed in a bivariate GARCH model, where the joint distribution of the disturbances is split into its marginals and its copula. The copula used in the paper is such that it allows for the existence of lower tail-dependence and for asymmetric tail-dependence, and is such that it encompasses the normal or t-copula, depending on the benchmark tested. The model is estimated using bivariate data on a set of European stock indices. We find that the assumption of normal or student-t dependence is easily rejected in favour of an asymmetrically tail-dependent distribution. Copyright © 2002 John Wiley & Sons, Ltd.     

Optimal Portfolio Selection Based on Expected Shortfall Under Generalized Hyperbolic Distribution

This paper discusses optimal portfolio selection problems under Expected Shortfall as the risk measure. We employ multivariate Generalized Hyperbolic distribution as the joint distribution for the risk factors of underlying portfolio assets, which include stocks, currencies and bonds. Working under this distribution, we find the optimal portfolio strategy.     

Core tensions in Wales's new politics: pluralist trends in a majoritarian system

This article examines aspects of Wales's new political system. It identifies a core tension between traditional, majoritarian-designed institutions and procedures, and a new political pluralism. There is a fundamental disconnection between current politics and the original system design which has added complexity and inefficiency to the operation, management and administration of most aspects of devolved politics. Moreover, understanding the contours of the nascent and inchoate system in W ales has been obscured by debates about the distribution of legislative powers between Westminster and Cardiff. The article identifies lessons from coalition government in Wales, both for academics working on the implications of coalitions and for practitioners—specifically for ‘constitution managers’ and those engaged in policy-making.     

Understanding partial mergers in Japan

Since the late 1990s, Japan has witnessed a substantial increase of partial mergers where two or more firms spin off whole operations in the same business and combine them into a joint venture (JV). This paper provides the first academic evidence on this phenomenon. I find that partial mergers normally occur as a response to negative economic shocks by firms that are larger and more diversified than firms in total mergers. An event study identifies positive and significant returns to partial merger announcements. Unlike total mergers whose value accrues mostly to the shareholders of small (acquired) firms, large and small firms in partial mergers receive comparable returns, which are particularly large to firms forming an equally owned JV. This study also finds that partial mergers are often ex post transformed, with equity sale between partners being the main source of change.     

Financial Ratio Cross-section Dynamics: a Non-parametric Approach

This study introduces a non-parametric approach to study the cross-sectional dynamic behaviour of financial ratios and to test their convergence. A non-parametric Markov transition matrix approach is used to consider the evolution of the entire cross-section distribution. Conclusions with respect to the convergence of financial ratios are derived from the ergodic distributions. The results demonstrate high intra-distribution mobility with more persistence in the smallest and the largest size classes. Furthermore we find no convergence towards the industry average.