A Black–Litterman approach to correlation stress testing

Correlation stress testing is motivated by a well-known phenomenon: correlations change under financial crises. The adjustment of correlation matrices may be required to evaluate the potential impact of these changes. Very often, some correlations are explicitly adjusted (core correlations), with the remainder left unspecified (peripheral correlations), although it would be more natural for both core correlations and peripheral correlations to vary. However, most existing methods ignore the potential change in peripheral correlations. In this paper, we propose a Black–Litterman approach to correlation stress testing in which the stress impact on the core correlations is transmitted to the peripheral correlations through the dependence structure of the empirical correlations.     

M-Business Organizational Benefits and Value: A Qualitative Study

The most crucial aspect of information systems (IS) engineering is the gathering and validating of requirements. Requirements can be seen as coming from 1 of 2 domains: the technical and the social. Consequently, 1 of the questions currently facing IS engineering is: How do you capture and validate requirements from the social domain? In an attempt to answer this question, researchers have started to examine the role that stakeholders and domain knowledge play in IS development. The belief is that the best source of requirements is domain knowledge, and the best source of domain knowledge is stakeholders. Current requirements engineering methods, which are being used in industry, are failing to adequately identify stakeholders and their associated requirements. In an attempt to address this issue, the responsibility modeling technique developed in this article focuses on the specification of requirements and domain knowledge through the identification of stakeholders and the specification of the roles they play and the actions they perform within an organization.     

Entrepreneurial overconfidence and ambiguity aversion: dealing with the devil you know,than the devil you don't know

Various empirical studies find that entrepreneurs are systematically overconfident in their venture's probabilistic chances of success. Yet, entrepreneurs often face an ambiguous future that precludes them from making such probabilistic judgements. A theoretical framework based on ambiguity aversion is developed to explain an entrepreneur's overconfidence under complex and novel conditions of ambiguity. Unlike optimistic explanations, this ambiguity-averse form of overconfidence offers a non-probabilistic approach to entrepreneurial judgements of uncertainty.     

Collective Contracts in Chinese Enterprises: A New Brand of Collective Bargaining under ‘Market Socialism’?

As China reforms its legislation and institutions to best fit the requirements of an emerging labour market, it has instituted both individual and collective contracts in a range of industrial enterprises. We describe the 'benchmarks' against which such nascent Chinese collective bargaining may be compared, followed by a detailed examination of contracts and the context in which they are found. We conclude that collective contracts have been more widely implemented in state-owned enterprises than in foreign-funded ones and that such contracts may need to be made more 'user-friendly' to the latter if they are to become more generally adopted.     

Forecasting economic time series using targeted predictors

This paper studies two refinements to the method of factor forecasting. First, we consider the method of quadratic principal components that allows the link function between the predictors and the factors to be non-linear. Second, the factors used in the forecasting equation are estimated in a way to take into account that the goal is to forecast a specific series. This is accomplished by applying the method of principal components to ‘targeted predictors’ selected using hard and soft thresholding rules. Our three main findings can be summarized as follows. First, we find improvements at all forecast horizons over the current diffusion index forecasts by estimating the factors using fewer but informative predictors. Allowing for non-linearity often leads to additional gains. Second, forecasting the volatile one month ahead inflation warrants a high degree of targeting to screen out the noisy predictors. A handful of variables, notably relating to housing starts and interest rates, are found to have systematic predictive power for inflation at all horizons. Third, the targeted predictors selected by both soft and hard thresholding changes with the forecast horizon and the sample period. Holding the set of predictors fixed as is the current practice of factor forecasting is unnecessarily restrictive.     

The age-dependent value of time: a life cycle analysis

A life cycle framework is developed to examine how the value of time (VOT) changes as one ages. We consider two risk-sharing schemes, the Tonti scheme under which wealth is actuarially insured, and the Robinson Crusoe scheme under which insurance institution is entirely absent. For the first time in the literature, we characterize the condition, in terms of key parameters for valuating VOT, under which VOT may increase, decline, or even display more complicated profiles, as one ages. Our analysis reveals the crucial role played by the relative magnitude of the market interest rate to other parameters (including the parameter of time preference, the age-specific mortality and the wage growth rate) in determining the age profile of VOT, and the difference in VOT that is caused by the insurance scheme.      

Introduction to special section in honor of Professor Amartya Sen. Fairness and welfare: An introduction

After a very brief review of Sen and his contributions, Sen's views on capability egalitarianism are discussed. At the ultimate level, equality in welfare weights (the utilitarian objective of maximizing the equally weighted sum of individual welfares) is the morally right objective. Ultimately, everyone wants to have high welfare, not equal welfare with others. Capability and welfare egalitarianisms may lead to very low welfare levels for all and hence be unacceptable. However, Sen's capability egalitarianism may be very useful at the practical level, as a means to promote harmony and ultimately high levels of welfare. Other contributions (including one from Sen himself) to this volume are summarized and commented on.     

Asset Pricing Specification Errorsand Performance Evaluation

Many evaluation techniques typically measure performance as deviations of average returns on actively managed funds from those predicted by some asset pricing model. Empirical evidence, however,has so far suggested that all asset pricing models lack empiricalsupport, implying that the models contain mis-specification errors tovarious degrees. Evaluating mutual fund performance relative to any of these models thus becomes problematic.In this paper, we propose an approach to performancemeasurement that emphasizes minimizing explicitly the pricing error associated with an asset pricing function which isemployed to compute performance measures. This approachis henceforth called the minimum specification-error (MSE) method. We also discuss the statistical properties for implementing MSE performance measures.To demonstrate the significance of the pricing errorconfounded in evaluation measurement, we contrast our methodology with the Grinblatt and Titman (1989) period weighting approach and with the empirical implementation of Chen and Knez(1996). We find that the greater the pricing error ofpassive assets, the larger the performance measures. Given the average pricing error generated from a collection of 163 diverse passive portfolios used in this analysis, the performance values assigned to a large number of the funds become statistically and economically insignificant.     

PERIODICITIES OF FOREIGN EXCHANGE MARKETS AND THE DIRECTIONAL CHANGE POWER LAW

This paper utilizes advanced methods from Fourier analysis in order to describe periodicities in financial ultrahigh frequency foreign exchange data. The Lomb–Scargle Fourier transform is used to take into account the irregularity in spacing in the time domain. It provides a natural framework for the power spectra of different inhomogeneous time‐series processes to be easily and quickly estimated. Furthermore, an event‐based approach in intrinsic time based on a power‐law relationship is employed using different event thresholds to filter the foreign exchange tick‐data. The calculated spectral density demonstrates that the price process in intrinsic time contains different periodic components for directional changes, especially in the medium–long term, implying the existence of stylized facts of ultrahigh frequency data in the frequency domain. Copyright © 2013 John Wiley & Sons, Ltd.     

The impacts of network relationships on SMEs' internationalization process

In today's globalization era, more and more firms are striving to have an international presence, even though they face many challenges. Based on a multisite case study method, this article examines how indigenous Malaysian small and medium‐sized enterprises (SMEs) use their network relationships to facilitate their internationalization process. The evidence from the case of three software firms and one control firm in this study support the firms' internationalization process in the ways that network relationships trigger and motivate them to internationalize, influence their marketselection decision and mode‐of‐entry decision, help them gain initial credibility, allow access to additional relationships and established channels, help in lowering cost and reducing risk, and influence their internationalization pace and pattern. © 2006 Wiley Periodicals, Inc.