Derivative activities and the risk of international banks: A market index and VaR approach

The results of a comparison of international banks using a three-factor multi-index model and a modified value-at-risk (VaR) analysis indicate that the use of options increases the interest rate beta for all banks, while both interest rate and currency swaps generally reduce risk. The results are the strongest and the most consistent for U.S. dealer banks, followed by European banks, and then Japanese banks. Furthermore, the evidence suggests that the VaR approach to risk management can effectively be used by both domestic as well as international banks, although the results appear to be somewhat sensitive to the regulatory environment in which the bank operates.     

Exchange Rate Pass‐through: The Role of Regime Changes

We consider the effect on the degree of exchange rate pass‐through of the exchange rate regime in operation. We test the hypothesis that pass‐through will be lower under a float as firms may be reluctant to pass appreciations or depreciations on to their customers when there is a strong chance that they will be subsequently reversed. Taylor’s hypothesis that pass‐through will be lower in a low‐inflation environment is also considered. Both hypotheses are assessed in relation to the price of manufactured imports into New Zealand and we find that, whereas the shift to a float dramatically lowered the degree of pass‐through, the later shift to a low‐inflation regime has no significant additional effect on the pass‐through relationship.     

Multilateral Reforms of Trade and Environmental Policy

The paper analyzes environmental tax policy reform using a competitive model of world trade that includes production‐generated environmental damage (pollution) and trade tariffs. The authors examine the feasibility of Pareto‐improving multilateral reforms of environmental taxes, and show that any environmental tax reform that is mutually welfare‐improving when compensating lump‐sum transfers are assumed is also welfare‐improving when a suitable tariff reform (but no transfers) is combined with the tax changes. Several specific reform proposals are developed. These results expand the feasible set of mutually improving policy proposals for international policy initiatives.     

The Effect of Risk Characteristics on the Willingness to Pay for Mortality Risk Reductions from Electric Power Generation

The objective of this study is to estimate willingness to pay (WTP) for the reduction of mortality risks caused by fossil fuel (natural gas, coal and oil) versus nuclear electric power generation systems and to examine the influence of risk characteristics involved with electric power generation on WTP. A choice experiment was conducted to achieve these objectives. The attributes for nuclear risks in the experiment included the probability of disasters and the expected losses if a disaster occurs. We find evidence of (i) a baseline effect (where WTP is sensitive to hypothetical versus actual baseline expected mortality); (ii) a ‘labeling effect,’ where, surprisingly, the term ‘nuclear’ has no effect on WTP, but the term ‘fossil-fueled power generation’ results in lower WTP; and (iii) disaster aversion, meaning that people focus on the conditional loss from a nuclear disaster, not the probability. We also find that the WTP for reducing deaths from a nuclear disaster is about 60 times the WTP for routine reducing fossil-fuel generation-related deaths.     

THE HARROD–BALASSA–SAMUELSON HYPOTHESIS: REAL EXCHANGE RATES AND THEIR LONG‐RUN EQUILIBRIUM*

Frictions and perturbations may influence currency values in the short run, but it is generally acknowledged that real‐exchange rates eventually settle toward equilibrium. The puzzle then is how gradually this parity is reached given the fluidity in foreign exchange markets. Persistent differences in the relative productivity of countries—a broad characterization of the Harrod–Balassa–Samuelson hypothesis—may help explain this puzzle. This article introduces methods to estimate equilibrium adjustment paths semiparametrically, and then sort how each of these components influences the dynamics of exchange rates. This is done in a dynamic panel setting by introducing novel local projections methods for cointegrated systems. Productivity shocks affect dynamics, and after adjusting for these factors, adjustment toward equilibrium is relatively rapid.     

Arbitrator Decision-Making in the Transfer Market: an Empirical Analysis

This paper analyses data generated by the annual round of arbitrated settlements of disputed transfer fees for end-of-contract players in the English Football League. Using information on final-offers of the disputant clubs and data on a variety of player and club characteristics we analyse arbitrated fees and final-offers, and the relative importance of final-offers and case facts in fashioning outcomes. Our analysis suggests that a large proportion of the variation in settlements can be accounted for by certain case facts rather than a mechanical compromise of final-offers, with the latter receiving a relatively low weight. In general, our findings are consistent with the view that conventional arbitration systems generate little useful information in terms of final-offers from the disputant parties.     

The regional character of Asian multinational enterprises

In recent issues of this Journal a debate has raged concerning the appropriate nature of academic research in the Asia Pacific region. While we support the desire for both rigor and regional relevance in this research, we wish to demonstrate a strong commonality between the performance of large Asian firms and others from Europe and North America. This prompts us to question the need for a new theory of the MNE based on the experience of Asian firms. Like their counterparts elsewhere, the large Asian firms mostly operate on an intra-regional basis. While in the literature it has been assumed that the path to success for Asian firms is globalization, we show that the data supporting this is confined to a handful of unrepresentative case studies. We also present a bibliometric analysis which shows an overwhelming case study sample selection bias in academic studies towards this small number of unrepresentative cases.

The cross section of cashflow volatility and expected stock returns

I show that historical cashflow volatility is negatively related to future returns cross-sectionally. The negative association is large; economically meaningful; long-lasting up to five years; robust to known return-informative effects of size, value, price and earnings momentums and illiquidity; and extends to both systematic and idiosyncratic cashflow volatilities. Using the standard deviations of cashflow to sales and of cashflow to book equity as proxies for cashflow volatility, the least volatile decile portfolio outperforms the most volatile decile portfolio by 13% a year relative to the Fama–French four factors. The cashflow volatility effect is closely related to the idiosyncratic return volatility effect documented in Ang et al. [Ang, A., Hodrick, R.J., Xing, Y. and Zhang, X. “The cross-section of volatility and expected returns.” Journal of Finance, 51 (2006), 259–299.]. However, in portfolios simultaneously sorted on both cashflow and return volatilities, and in cross sectional regressions of returns at the firm level, these two effects neither drive out nor dominate each other. While the pricing of idiosyncratic cashflow volatility represents an anomaly against the traditional asset pricing theories, the pricing of historical cashflow uncertainty sheds light on potential fundamental risks embodied in the Fama–French HML and SMB factors.     

Intellectual Property, Architecture, and the Management of Technological Transitions: Evidence from Microsoft Corporation

Many studies highlight the challenges facing incumbent firms in responding effectively to major technological transitions. Though some authors argue that these challenges can be overcome by firms possessing what have been called dynamic capabilities, little work has described in detail the critical resources that these capabilities leverage or the processes through which these resources accumulate and evolve. This paper explores these issues through an in‐depth exploratory case study of one firm that has demonstrated consistently strong performance in an industry that is highly dynamic and uncertain. The focus for the present study is Microsoft, the leading firm in the software industry. The focus on Microsoft is motivated by providing evidence that the firm's product performance has been consistently strong over a period of time in which there have been several major technological transitions—one indicator that a firm possesses dynamic capabilities. This argument is supported by showing that Microsoft's performance when developing new products in response to one of these transitions—the growth of the World Wide Web—was superior to a sample of both incumbents and new entrants. Qualitative data are presented on the roots of Microsoft's dynamic capabilities, focusing on the way that the firm develops, stores, and evolves its intellectual property. Specifically, Microsoft codifies knowledge in the form of software “components,” which can be leveraged across multiple product lines over time and accessed by firms developing complementary products. The present paper argues that the process of componentization, the component “libraries” that result, the architectural frameworks that define how these components interact, and the processes through which these components are evolved to address environmental changes represent critical resources that enable the firm to respond to major technological transitions. These arguments are illustrated by describing Microsoft's response to two major technological transitions.