Measuring and Optimizing Portfolio Credit Risk: A Copula‐based Approach*

In this work, we present a methodology for measuring and optimizing the credit risk of a loan portfolio taking into account the non‐normality of the credit loss distribution. In particular, we aim at modelling accurately joint default events for credit assets. In order to achieve this goal, we build the loss distribution of the loan portfolio by Monte Carlo simulation. The times until default of each obligor in portfolio are simulated following a copula‐based approach. In particular, we study four different types of dependence structure for the credit assets in portfolio: the Gaussian copula, the Student's t‐copula, the grouped t‐copula and the Clayton n‐copula (or Cook–Johnson copula). Our aim is to assess the impact of each type of copula on the value of different portfolio risk measures, such as expected loss, maximum loss, credit value at risk and expected shortfall. In addition, we want to verify whether and how the optimal portfolio composition may change utilizing various types of copula for describing the default dependence structure. In order to optimize portfolio credit risk, we minimize the conditional value at risk, a risk measure both relevant and tractable, by solving a simple linear programming problem subject to the traditional constraints of balance, portfolio expected return and trading. The outcomes, in terms of optimal portfolio compositions, obtained assuming different default dependence structures are compared with each other. The solution of the risk minimization problem may suggest us how to restructure the inefficient loan portfolios in order to obtain their best risk/return profile. In the absence of a developed secondary market for loans, we may follow the investment strategies indicated by the solution vector by utilizing credit default swaps.     

Producer–Consumer Misalignment as a Possible Cause for New Food Failure: Empirical Evidence From Chile

Literature on new food products development agrees on the importance of gaining knowledge about consumer tastes and preferences as a way to increase new product success. However, the failure rate of new food introductions continues to be high. In economies with a highly developed retail system, retailers and other market players create an information and communication barrier between the producer and the consumer. Consequently, the development of new products becomes difficult in such conditions, since misalignments between producers and consumers are more likely to occur. To investigate the issue, we interviewed producers of Chilean companies in the blueberry, plum, and wine industries and concluded that their product design was based on assumptions about consumers’ preferences and on the observed market response to competitors’ products. To test if these assumptions were correct, we compared them to consumer preferences. Results showed that producers’ assumptions about consumer preferences differ significantly from actual consumers’ preferences.     

The value of informational arbitrage

Finance and Stochastics - In the context of a general semimartingale model, we aim at determining how much an investor is willing to pay to learn additional information that allows achieving...     

Food Motivations in a Tourist Destination: North American Tourists Visiting the City of Cuenca,Ecuador

Gastronomy has been established as one of the key elements for the promotion and consolidation of tourist destinations. The current aim is to contribute to the scientific literature in the field of the relationship between gastronomy and tourism in Latin America from the experience affirmed by North American tourists in the city of Cuenca (Ecuador). The methodology is based on a questionnaire presented to North American travelers during their visit to the city of Cuenca. The results show the existence of different segments of tourists in relation to their attitude toward the local gastronomy. Three segments are identified, and depending on their belonging to a certain segment, the tourists have different motivations with respect to gastronomy. Finally, the results permit concluding that the levels of satisfaction of the tourists differ depending on their attitude toward gastronomy, identified by the three segments.     

Secular stagnation or financial cycle drag?

This speech compares and contrasts two different interpretations of the current plight of the global economy. It argues that the world has been suffering not so much from a structural deficiency in aggregate demand—secular stagnation—but from the aftermath of financial booms gone wrong—financial cycle drag. This perspective suggests that the very low levels of interest rates that have prevailed are not necessarily equilibrium ones—consistent with the “natural rate”. And although it indicates that the headwinds from the financial bust, while very persistent, are temporary, it also points to a number of material risks ahead: further episodes of financial distress, a “debt trap” and, ultimately, a rupture in the open global economic order. To limit these risks, policies should be rebalanced towards structural measures and address more systematically the financial cycle.     

Mega-events and their legacy: Image and tourism in Genoa,Turin and Milan

Hosting, or organising, a mega-event is a form of destination branding; it is a way to generate the leveraging process of the event itself and promote the image of a location. Besides, these events allow a destination to attract the attention of the public and the media, enhancing its awareness nationally and internationally. Mega-events promote greater flows of tourists and visitors, especially in the short term. Nevertheless they produce long-lasting effects, such as the attraction and stimulation of investments, urban regeneration, advanced facilities and equipment, in addition to the improvement of accommodation, services and infrastructures. Thanks to those investments and to the growth in tourist arrivals, the mega-events could have a positive impact on the local economy, also over years, but some of their most important outcomes deal with the so-called intangible legacy, or rather social, cultural and political effects, more difficult to identify and measure. They can modify local identity and image, supporting the repositioning of the hosting place at an international level. The above considerations are discussed in this study; most attention is paid to three Italian cities, involved in top events: Genoa, appointed as European Capital of Culture in 2004; Turin, that hosted the XX Olympic Winter Games in 2006; Milan, that is now organising the Universal Expo 2015.     

On arbitrages arising with honest times

In the context of a general continuous financial market model, we study whether the additional information associated with an honest time τ gives rise to arbitrage profits. By relying on the theory of progressive enlargement of filtrations, we explicitly show that no kind of arbitrage profit can ever be realised strictly before τ, whereas classical arbitrage opportunities can be realised exactly at τ as well as after τ. Moreover, arbitrages of the first kind can only be obtained by starting to trade as soon as τ occurs. We carefully study the behavior of local martingale deflators and consider no-arbitrage-type conditions weaker than no free lunch with vanishing risk.     

Stepwise Approach to the Long‐Term Management of Radioactive Waste1

Stepwise decision making has long been utilised as a tool for handling the technical complexity of radioactive waste management (RWM). Recently, it is being recognised as a useful means to address social complexities. This paper reviews—through a number of examples—the current developments regarding the stepwise approach to managing long‐lived wastes from a societal point of view with the aim of pinpointing where it stands, highlighting its social dimensions, and identifying guiding principles and issues in implementation. It is observed that there is convergence between the approach taken by the practitioners of RWM and the indications received from social research, and that general guiding principles can be distilled from the analysis of RWM case histories. The paper concludes that a stepwise approach to decision‐making indeed constitutes an effective tool, and that competing requirements of social sustainability and efficiency, openness and analytical rigour will need to be balanced. A long‐term process of decision‐making incorporating the views of national and local stakeholders will very likely be a difficult process to implement. The concrete arrangements for sketching out and agreeing on decision phases, for selecting and involving stakeholders in a participatory process, and for adapting institutions to meet long‐term requirements, will require careful reflection and tuning in each national context.     

Response of Tax Credit Claims to Tax Enforcement: Evidence from a Quasi‐Experiment in Chile

Diesel in Chile receives different tax treatments depending on its use. If diesel is used in industrial activities, the diesel taxes paid can be fully used as a credit against VAT, but if it is used in freight or public transportation – basically trucks and buses – only a fraction of diesel taxes paid can be claimed as a tax credit for VAT payments. As a result of this different tax treatment, firms have incentives to use ‘tax‐exempted’ diesel in activities requiring ‘non‐tax‐exempted’ diesel. This tax wedge therefore generates an opportunity for tax evasion, especially for firms with multiple economic activities, one of them being transport. In this paper, we analyse the impact of a tax enforcement programme implemented by the Chilean Internal Revenue Service (IRS), where letters requiring information about diesel purchases and use and vehicle ownership were sent to around 200 firms in 2003. Using different empirical strategies to consider the non‐randomness of the selection of firms, the empirical results show consistently that firms receiving a letter decreased their diesel tax credits by around 10 per cent.     

Strategic incentives to human capital

Motivating human capital in knowledge‐intensive activities is a serious managerial challenge because it is difficult to link rewards to actions or performance. Firms instead might motivate knowledge workers by offering them opportunities to increase personal benefits (e.g., learning, satisfaction) through autonomy in the decision‐making process. Our model shows that firms can offer less autonomy in projects closer to their core business: Because firm specialization raises the value of the project's outcomes, it also increases the benefits for knowledge workers, who derive motivation even though they make fewer decisions to support their realization of personal goals. Projects farther from the core offer weaker firm contributions, so firms can motivate knowledge workers by allowing them to benefit from greater autonomy. We discuss several implications of our analysis. Copyright © 2013 John Wiley & Sons, Ltd.