LARCH, Leverage, and Long Memory

We consider the long-memory and leverage properties of a modelfor the conditional variance of an observable stationary sequence X_t, where is the square of an inhomogeneous linear combination of X_s, s < t, withsquare summable weights b_j. This model, which we call linearautoregressive conditionally heteroskedastic (LARCH), specializes,when depends only on X_t–1, to theasymmetric ARCH model of Engle (1990, Review of Financial Studies3, 103–106), and, when depends only on finitely many X_s, to a version of the quadratic ARCH modelof Sentana (1995, Review of Economic Studies 62, 639–661),these authors having discussed leverage potential in such models.The model that we consider was suggested by Robinson (1991,Journal of Econometrics 47, 67–84), for use as a possiblylong-memory conditionally heteroskedastic alternative to i.i.d.behavior, and further studied by Giraitis, Robinson and Surgailis(2000, Annals of Applied Probability 10, 1002–1004), whoshowed that integer powers , =" BORDER="0">2 can have long-memory autocorrelations. We establish conditionsunder which the cross-autocovariance function between volatilityand levels, , decays in the manner of moving average weights of long-memory processes on suitable choiceof the b_j. We also establish the leverage property that h_t <0 for 0 < t k, where the value of k (which may be infinite)again depends on the b_j. Conditions for finiteness of thirdand higher moments of X_t are also established.     

Practitioners' Corner

The first 150 words of the full text of this article appear below. During the 1980s, the early stages of modeling financial timeseries focused on the striking stylized fact that while returnswere themselves not serially correlated, squared returns were.This history has been nicely documented in the influential bookby Taylor (1986) and, indeed, the opening chapters of contemporaryfinancial econometrics open with Engle (1982) and Bollerslev(1986) who provided a specific ARMA structure of squared returnsvia the celebrated [G]ARCH models. This general orientationin effect acknowledged that there was some room for predictingrisk, as measured by squared values or absolute values of returns,while at the same time maintaining the hypothesis that returnsthemselves were hardly predictable in keeping with some versionof market efficiency. However, this paradigmatic view has beenchallenged over the subsequent 20 years in at least three regards. First, with Nelson (1991), it has been widely acknowledged thatalthough GARCH modeling is about . . . [Full Text of this Article]     

Estimating Value at Risk and Expected Shortfall Using Expectiles

Expectile models are derived using asymmetric least squares.A simple formula has been presented that relates the expectileto the expectation of exceedances beyond the expectile. We usethis as the basis for estimating the expected shortfall. Ithas been proposed that the quantile be estimated by the expectilefor which the proportion of observations below the expectileis . In this way, an expectile can be used to estimate valueat risk. Using expectiles has the appeal of avoiding distributionalassumptions. For univariate modeling, we introduce conditionalautoregressive expectiles (CARE). Empirical results for thenew approach are competitive with established benchmarks methods.     

Practitioners' Corner

The first 150 words of the full text of this article appear below. The article by Christian Gourieroux and Razvan Sufana providesa complete characterization of two-factor affine diffusion termstructure models. The presentation of the article may seem forbiddingto the practitioner audience, so it is perhaps useful that thisinstallment of the column provide some context for the resultsof this article. Prominent among affine diffusion models in the term structureliterature are the Gaussian and square-root diffusion modelsof Vacisek (1977) and Cox, Ingersoll, and Ross (1985). The seminalcontribution of Duffie and Kan (1996) had been to provide anecessary and sufficient condition on the stochastic model toobtain the desirable property of "affine yields," whereby theyield of any zero-coupon bond is seen as a maturity-dependentaffine combination of a selected "basis" set of yields. SubsequentlyDuffie, Pan, and Singleton (2000) proved that the aforementionedcharacterization is even more general, both for the stochasticmodel that may . . . [Full Text of this Article]     

Agricultural Tariffs or Subsidies: Which Are More Important for Developing Economies?

This article assesses the impact of the world price–depressingeffect of agricultural subsidies and border protection in OECDcountries on developing economies' exports, imports, and welfare.Developing economy exporters are likely to benefit from reductionsin such subsidies and trade barriers, whereas net importersmay lose as world prices rise. A simple partial equilibriummodel of global trade in commodities that benefit from domesticsupport or export subsidies is developed to estimate the relevantelasticities. Simulation results suggest that a 50 percent reductionin border protection will have a much larger positive impacton developing economies' exports and welfare than a 50 percentreduction in agricultural subsidies. Although there is significantheterogeneity across developing economies, the results suggestthat efforts in the Doha Round of negotiations should be directed at substantially reducing border protection.     

Practitioners' Corner

The first 150 words of the full text of this article appear below. In our discussion in the last issue of Journal of FinancialEconometrics (JFEC) of the nonparametric methods developed byBarndorff-Nielsen and Shephard (2006) to detect jumps in thelocal behavior of the continuous time path of a price process,we observed these tests were not designed to detect major pricediscontinuity events such as the 1987 crash, since the testingmethodology precludes jumps in adjacent time intervals. Indeed,a major event such as Black Monday is characterized by a sequenceof jumps in consecutive time intervals throughout the day. Inthe interest of thematic continuity, let’s pursue thematter of jumps further. The first article in the current issue by Hossein Asgharianand Chistoffer Bengtsson addresses directly the detection ofbig events in stock prices. More particularly, the authors analyzethe spillover of jumps across international stock markets. Tomeasure jumps, the authors formulate a parametric model in . . . [Full Text of this Article]     

Inequality Constraints in the Fractionally Integrated GARCH Model

In this article we derive necessary and sufficient conditionsfor the nonnegativity of the conditional variance in the fractionallyintegrated generalized autoregressive conditional heteroskedastic(p, d, q) (FIGARCH) model of the order p 2 and sufficient conditionsfor the general model. These conditions can be seen as beinganalogous to those derived by Nelson and Cao (1992, Journalof Business & Economic Statistics 10, 229–235) forthe GARCH(p, q) model. However, the inequality constraints whichwe derive for the FIGARCH model illustrate two remarkable propertiesof the FIGARCH model which are in contrast to the GARCH model:(i) even if all parameters are nonnegative, the conditionalvariance can become negative and (ii) even if all parametersare negative (apart from d), the conditional variance can benonnegative almost surely. In particular, the conditions forthe (1, d, 1) model substantially enlarge the sufficient parameterset provided by Bollerslev and Mikkelsen (1996, Journal of Econometrics73, 151–184). The importance of the result is illustratedin an empirical application of the FIGARCH(1, d, 1) model toJapanese yen versus U.S. dollar exchange rate data.     

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.     

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.     

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.     

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.     

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.     

Financial Sector Risk and the Stock Returns: Evidence from Tokyo Stock Exchange Firms

We investigate whether the activity of financial firms creates value and/or risk to the economy within the asset pricing framework. We use stock return data from nonfinancial firms listed in the first section of the Tokyo Stock Exchange. The value-weighted index that is solely composed of nonfinancial firms is augmented with the index of the firms from the financial sector, and we estimate multivariate asset pricing model with these two indices. We note that our procedure can simultaneously take into account the cross-holding phenomena among Japanese firms, especially between the financial sector and the nonfinancial sector. Our augmented index model performs well both with cross-sectional Fama and MacBeth regression test and GMM test. Our two index model with additional Fama and French's HML factor can capture cross-sectional variations of the returns of sample portfolios better than the original Fama and French model can, when measured by Hansen and Jagannathan distance measure. We find that this additional new sector variable can be a substitute for Fama and French's size factor, but not related to the bond index return. This variable has similar factor characteristic as money supply growth or the term structure, but the latter variables contain more information than the former. Morever, our financial sector model helps explain the return and risk structure of Japanese firms during the so-called bubble period.     

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.     

Predictive Modeling in Long-Term Care Insurance

The accurate prediction of long-term care insurance (LTCI) mortality, lapse, and claim rates is essential when making informed pricing and risk management decisions. Unfortunately, academic literature on the subject is sparse and industry practice is limited by software and time constraints. In this article, we review current LTCI industry modeling methodology, which is typically Poisson regression with covariate banding/modification and stepwise variable selection. We test the claim that covariate banding improves predictive accuracy, examine the potential downfalls of stepwise selection, and contend that the assumptions required for Poisson regression are not appropriate for LTCI data. We propose several alternative models specifically tailored toward count responses with an excess of zeros and overdispersion. Using data from a large LTCI provider, we evaluate the predictive capacity of random forests and generalized linear and additive models with zero-inflated Poisson, negative binomial, and Tweedie errors. These alternatives are compared to previously developed Poisson regression models.

Our study confirms that variable modification is unnecessary at best and automatic stepwise model selection is dangerous. After demonstrating severe overprediction of LTCI mortality and lapse rates under the Poisson assumption, we show that a Tweedie GLM enables much more accurate predictions. Our Tweedie regression models improve average predictive accuracy (measured by several prediction error statistics) over Poisson regression models by as much as four times for mortality rates and 17 times for lapse rates.     

The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from Romania

Abstract

Romanian accounting rules (RAR) had followed a convergence process with International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) since 1999, and the level of convergence has increased over time. The Romanian accounting regulator continues to follow IAS/IFRS in internalizing the Accounting Directive 2013 Directive 2013/34/EU. Directive 2013/34/EU of the European Parliament and of the Council on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, Official Journal of the European Union, L 182/19. [Google Scholar]/34/EU. Only a few major differences still exist (some of them due the restrictions in the Accounting Directive 2013 Directive 2013/34/EU. Directive 2013/34/EU of the European Parliament and of the Council on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, Official Journal of the European Union, L 182/19. [Google Scholar]/34/EU) between RAR and IFRS. However, RAR lack the level of detail existing in IFRS, and IFRS cannot be used in practice as a source of guidance and interpretation. While major stakeholders have a positive attitude towards the convergence with IAS/IFRS, the Romanian accounting regulator intends to keep the control over RAR and avoid differences in interpretations that might have tax consequences. Despite the good level of convergence of RAR with IFRS, practitioners tend to continue to utilize the tax approach as a source of guidance and interpretation.     

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.     

How do Professional Financial Services Firms Understand their Skill Needs and Organise their Recruitment Practices?

Abstract

The recruitment practices of professional financial service firms are informed by hegemonic cultural norms embedded in global and national institutions. There is a propensity, particularly in the financial services, to employ ‘people like us’ [Erel, U. (2010). Migrating cultural capital: Bourdieu in migration studies. Sociology, 44(4), 642–660. doi:10.1177/0038038510369363], which, it is argued, has constrained the employment outcomes of skilled migrants. Using the concept of cultural fit, this paper draws on interviews with representatives of accounting firms in Australia to understand the criteria for recruiting in a highly commercialised and globalised professional labour market. The results demonstrate that client-focused firms place an emphasis on cultural fit in the recruitment process. It is concluded that a lack of cultural capital by migrants means that their efforts to infiltrate the professional accounting labour market in Australia are limited. Furthermore, from an education perspective, the skill set taught in the accounting curriculum is increasingly geared to meet the recruitment strategies of professional service firms.     

Comparing Professions in UK and German-Speaking Management Accounting

This paper studies professional education in management accounting and the ways in which management accounting professions establish jurisdictional claims about management accounting work in the UK and German-speaking countries, respectively. We adopt a comparative approach drawing on the framework of systems of professions and the distinction between public, legal and workplace jurisdiction [Abbott, A. (1988 Abbott, A. (1988). The system of professions: An essay on the division of expert labor. Chicago, IL: University of Chicago Press.[Crossref] , [Google Scholar]). The system of professions: An essay on the division of expert labor. Chicago, IL: University of Chicago Press]. Our findings highlight some notable differences between the UK and German-speaking countries with respect to professional management accounting education, the jurisdictional claims that the professions make as well as the establishment and history of professional institutes for management accounting. Based on this analysis, the paper identifies a dilemma or at least a challenge for policy-makers with respect to balancing the need for a context-dependent model of professional education with a need for comparability and convergence.