Sovereign Risk Contagion in East Asia: A Mixture of Time-Varying Copulas Approach

This study analyzes sovereign risk contagion between four East Asian economies (China, Hong Kong, Japan, and Korea) and its structural changes through the Global Financial Crisis (GFC) and the European Debt Crisis (EDC) by applying the mixture of time-varying copulas to those economies’ credit default swap (CDS) spreads.

This article first finds a strong contagion from the US and PIIGS economies to the East Asian sovereign CDS markets and intraregional contagion within the East Asian markets. Second, the impact of contagion is different according to whether it is measured by the linear (Gaussian) or the upper tail dependence. Third, Japan plays an important role in increasing the linear dependence whereas China and Korea are crucial in terms of the upper tail dependence. Lastly, the GFC has structurally increased the linear dependence but not the upper tail dependence between the East Asian sovereign CDS markets.     

Capital reduction case law decisions and the development of the capital maintenance doctrine in late-nineteenth-century England

Incorporation with limited liability enabled companies to ‘lock-in’ their financial capital’ and then invest in the long-term, highly specific investments on which the modern industrial economy would be based. The level of benefit varied from country to country, according to the way that the concept of capital lock-in, or maintenance, was defined in the legal systems concerned.

In the UK, the concept was not well defined in early company legislation and challenges were raised through the courts during the late nineteenth century. Some of these, the ‘dividend cases’, have been quite widely considered in the literature but direct reductions of share capital, or capital reduction schemes, have received far less attention, even though they raised fundamental issues concerning long-term dividend positions, the accounting treatment of accumulated losses, depreciation and asset values and had important effects on the development of the capital maintenance doctrine and on shareholder class rights.

The purpose of this paper is to question whether this literature adequately captures judicial influences on the development of the capital maintenance doctrine in England during the latter part of the nineteenth century, given the limited attention that has been paid to date to the leading capital reduction cases.     

Do Personal Taxes Destroy Tax Shields? A Critique to Miller’s (1977) Proposal

We discuss the relevance of personal taxes on tax shields. Interest and taxes are the basis for defining an optimal capital structure. When personal taxes are greater than or equal to TS, an optimal capital structure does not exist.

We suggest that the approach proposed by Miller (1977) might understate the effect of personal taxes in the net TS and/or its associated net value. We consider the irrelevance of personal taxes on interest received by debtholders on the value of TS earned by the firm on interest paid. We conclude that Miller’s approach might be wrong and has some inconsistencies.     

Is the Virtual Integration of Financial Markets Beneficial in Emerging Markets? Evidence from MILA

This article analyzes whether the Latin American Integrated Market (MILA) has been beneficial for its participants. Using a dynamic conditional correlation (DCC) model proposed by Engle (2002), we found evidence that creating MILA increased the correlation levels in stock returns of member countries. Evidence indicates that this increase occurs mainly due to the increase in traded volume in the country with the least developed stock market—Peru.

In short, findings suggest that in an integration process such as MILA, as stock market members differ, in terms of stock market development, the markets will benefit from the integration. However, in the long term these benefits dissipate over time.     

An Exchange Rate Model with Market Pressures and a Contagion Effect

The model we propose includes variables accounting for the behavioral aspects of decision-making in the currency markets, namely the contagion effect between countries in the same region. It combines the classical purchasing power parity (PPP) and uncovered interest rate parity (UIP) hypotheses with the effects of risk aversion in financial markets and of currency market pressures.

The results based on the Polish data confirm that the currency market instabilities arise not only from fundamental factors such as economic activity and the country’s balance of payments, but also from the contagion effect brought about by investors’ tendency to view Poland and its neighbors, the Czech Republic and Hungary, as one group.     

IPSAS,ESA and the fiscal deficit—a question of calibration

The academic literature on IPSAS adoption is not clear whether this would lead to a fiscal deficit measure close to that reported in national accounts. This paper presents a case study which attempts to clarify this dilemma. The authors show that IPSAS compliance would result in yet another deficit measure that is nowhere close to the statistical measure, leading to even more confusion.

IMPACT

IPSAS compliance would neither simplify nor standardize the conversion exercise that EU member countries have to do to change a governmental accounting deficit to the EC’s required statistical deficit. Nor would it directly lead to more reliable statistical data. The authors therefore question the impact of the proposed EPSAS on the quality of macro-surveillance.     

Public service motivation and performance: The role of organizational identification

Although the association between public service motivation (PSM) and job performance has received increased attention, there is limited knowledge of the mechanisms underlying its effects. Utilizing data from Chinese civil servants and their supervisors, the authors found that PSM results in higher levels of organizational identification and leads to higher levels of job performance because civil servants perceive the organization’s fate and results as their own.

IMPACT

Our study demonstrates that organizational identification is a key mechanism that explains how public service motivation (PSM) leads to higher levels of performance. To improve performance, public agencies should create an environment that helps employees identify with the organization, for example by highlighting the distinct services that the organization provides for the public and by establishing socialization practices for newcomers.     

Implementation of accrual accounting in Thailand’s central government

This paper evaluates the outcomes of accrual accounting implementation in Thailand’s central government. A new conceptual framework was used to study transition barriers and their effects. Financial transparency and accountability were shown to have improved. Significant barriers to the transition to accrual accounting include a lack of incentives, a management culture, a lack of accounting manuals, and a failure to understand accrual information.

IMPACT

This paper explains the transition barriers Thailand has faced in adopting accrual accounting in its central government and how these barriers are affecting financial reporting in the public sector. The results in this paper can be applied to other countries in terms of evaluating outcomes or planning transition processes.     

Infrastructure endowment,financial constraints and willingness to engage in PPPs: The case of Poland

Public-private partnership (PPP) is widely considered to be a solution to overcoming a public infrastructure gap while providing value for money. A growing body of empirical research papers suggests that value for money is not the only reason for a government setting up PPPs. This paper presents a detailed analysis of why local municipalities in Poland have chosen the PPP route to develop public infrastructure.

IMPACT

Government’s investment opportunities are often restricted by debt limits. That is why a PPP can be an attractive solution. Municipalities in Poland seem to opt for PPPs to keep their debt figures low. There is a risk that they are choosing the PPP route for the wrong reasons. Therefore we suggest that legislation is needed that requires greater financial transparency of PPP projects. This could help verify whether PPPs are being compiled according to EUROSTAT rules and to assess if PPP really is the best available option in terms of value for money.     

Glocalization of accounting standards: Observations on neo-institutionalism of IPSAS

This paper defines and then observes processes of glocalization surrounding the adoption of International Public Sector Accounting Standards (IPSAS) for public sector financial reporting. Glocalization can be best understood using sociological institutionalism, because this theory focuses on the retention of identity, and processes of legitimacy, during adaptation (diffusion) of standards. The paper discusses the history of standard-setting for the public sector in New Zealand to explain why this theory has value.

IMPACT

This paper defines and describes the utility of the concept of glocalization in analysing the implementation of IPSAS, with a New Zealand focus. The value of the paper is in its combination of a jurisdiction-specific experience with an understanding of the broader issues of ‘global versus local’ and processes of sociological institutionalism. Such studies of IPSAS adoption can offer distinctive perspectives on global processes of isomorphism within neo-institutional theory. This paper explains the advantages of flexible strategies to standard-setters.     

What is the impact of corruption on audit fees?

This study examines the impact of country-level corruption on audit fees. Using a sample of 102,934 companies from 48 countries over the period 1998–2014, the authors find that audit fees are positively associated with higher levels of corruption. They also discovered that corruption adds a significant margin to the premium paid to Big 4 (Deloitte Touche Tohmatsu, PricewaterhouseCoopers, Ernst & Young and KPMG) auditors. The study opens up a new line of research and adds significantly to the academic literature on the Big 4 audit premium.

IMPACT

The study has several important implications for academics and policy-makers. These include discussion of the factors driving corruption and the role of auditing. Knowledge of the factors driving corruption should guide policy-makers to adoption of polices that could reduce corruption. The finding that audit fees are positively associated with corruption, as well as with audit quality, points to the potential for auditing as a tool for corruption control beyond its traditional role as an assurance service.     

Stochastic automatic differentiation: automatic differentiation for Monte-Carlo simulations

In this paper we re-formulate the automatic differentiation (and in particular, the backward automatic differentiation, also known as adjoint automatic differentiation, AAD) for random variables. While this is just a formal re-interpretation it allows one to investigate the algorithms in the presence of stochastic operators like expectation, conditional expectation or indicator functions.

We then specify the algorithms to efficiently incorporate non-pathwise operators (like conditional expectation operators). Under a comparably mild assumption it is possible to retain the simplicity of the backward automatic differentiation algorithm in the presence of conditional expectation operators. This simplifies important applications like - in mathematical finance - the application of backward automatic differentiation to the valuation of Bermudan options or calculation of xVA's.

We give the proof for a generalized version of the result. We then discuss in detail how the framework allows dramatic reduction of the memory requirements and improves the performance of a tapeless implementation of automatic differentiation (while the implementation brings advantages similar to ‘vector AAD’ (sometimes called tape compression) for free, it allows improvements beyond this. We present the implementation aspects and show how concepts from object-functional programing, like immutable objects and lazy evaluation enable additional reductions of the memory requirements.     

Examining the unintended outcomes of NPM reforms in Indonesia

This paper argues that despite Indonesia’s implementation of public sector reforms, the impact of these reforms has yet to achieve the goal of improving governance and preventing corruption. The obvious place to lay blame would be a lack of state capacity, but this study presents evidence to argue that the legacy of General Suharto’s authoritarian regime and the cultural ecology of Indonesian bureaucracy has compromised the government’s capacity to implement these public sector reforms in a meaningful way.

IMPACT

This paper highlights some fundamental points for public policy-makers using NPM techniques to improve accountability and to counter fraud. First, the cultural context and costs of reforms should be taken into account before implementing new accounting technology. Second, policy-makers should consult academic work on the implementation of new reporting systems and other NPM policies. Finally, the powers of local politicians (for example mayors or district heads) need to be controlled to ensure they do not undermine the role of accounting and auditing for better transparency, governance and corruption eradication.     

Meeting Bougainville’s co-produced reporting expectations

Using the theory of indigenous alternatives, this paper considers whether the Autonomous Bougainville Government (ABG) complies with Bougainville’s co-produced financial reporting expectations. Textual analysis of the indigenous-led state audit reports from 2008 to 2013 shows that the ABG’s financial statements were disclaimed. The study considers how the deployment of indigenous alternative mechanisms may help improve reporting outcomes of the ABG.

IMPACT

Co-produced policies arranged in the aftermath of jurisdictions that have just endured civil wars may be well-intentioned but their impact may count for little if pedestrian processes, such as financial reporting and the rendering of accountability by an autonomous government, do not meet co-produced reporting expectations. This paper highlights how financial statements of the Autonomous Bougainville Government (ABG) from 2008 to 2013 did not meet those reporting expectations. The inability of the ABG to provide an account of its activities appears to undermine calls for Bougainville’s independence.     

Biomedical risks and citizenship: depoliticizing cell site deployment in the Netherlands and Southern California

Cell phone technology has become a ubiquitous quasi-utility worldwide. Meanwhile, controversies around its health risks are continually emerging in locations around the world. In this paper, we argue that the ongoing controversy is primarily the effect of practices that are trying to govern cell site risks, rather than inherent uncertainties or qualities of the technology. We understand this as a process of medicalization that engenders bio-citizenship. We extend bio-citizenship theory by exposing how actors show an astute and reflexive awareness of the mobilizing potential of medicalization.

We study the governance practice of cell site deployment in the Netherlands and Southern California, USA and investigate how the risk issues and citizenship concerning cell site deployment are co-produced in four main governance practices. Network roll-out practices move health risks backstage, prevention practices push health risks and uncertainties into the future. Design practices actively avoid cell site risks, whereas care practices contain them. Government and industry have become aware of the contentious effect of cell site deployment and govern this to protect the roll-out of the technology. We call this depoliticization. Depoliticization can unintendedly open up new avenues for citizen mobilization.     

From insurance risk to credit portfolio management: a new approach to pricing CDOs

We present a new approach for pricing collateralized debt obligations (CDOs) which takes into account the issue of the market incompleteness. In particular, we develop a suitable extension of the actuarial framework proposed by Bayraktar et al. [Valuation of mortality risk via the instantaneous Sharpe ratio: Applications to life annuities. J. Econ. Dyn. Control, 2009, 33, 676–691], Milevsky et al. [Financial valuation of mortality risk via the instantaneous Sharpe-ratio: Applications to pricing pure endowments. Working Paper, 2007. Available at: http://arxiv.org/abs/0705.1302], Young [Pricing life insurance under stochastic mortality via the instantaneous Sharpe ratio: Theorems and proofs. Technical Report, 2007. Available at: http://arxiv.org/abs/0705.1297] and Young [Pricing life insurance under stochastic mortality via the instantaneous Sharpe ratio. Insurance: Math. Econ., 2008, 42, 691–703], which is based on the so-called instantaneous Sharpe ratio. Such a procedure allows us to incorporate the attitude of investors towards risk in a direct and rational way and, in addition, is also suitable for dealing with the often illiquid CDO market. Numerical experiments are presented which reveal that the market incompleteness can have a strong effect on the pricing of CDOs, and allows us to explain the high bid-ask spreads that are frequently observed in the markets.     

Lapses in long-term care insurance

About a quarter of long-term care insurance (LTCI) policy holders aged 65 let their policies lapse before death, forfeiting all benefits. We find that lapse rates are substantially higher among the cognitively impaired in the Health and Retirement Study. This generates a pernicious form of dynamic advantageous selection, as the cognitively impaired are more likely to use care. Simulations show that an inappropriately optimistic asset drawdown path further increases the individual welfare cost of unanticipated lapses. Meanwhile, we find evidence of a significant but very small role for either strategic or financial motives for lapsing.