Large real exchange rate movements, firm dynamics, and productivity growth

Abstract.  This paper examines the influence of large real exchange rate movements on firm turnover and production scale, and the contribution of these decisions to productivity growth. Our theoretical model predicts that home currency appreciations cause firm closure and reduce surviving firms' exports while boosting domestic sales. The net effect on sales and productivity therefore depends on changes in domestic sales and exports. Taiwanese firm-level data are used to test these predictions. The results show that real currency appreciations lead to scale expansion of surviving firms which in turn raises productivity. Our findings suggest the existence of a significant scale effect.     

To outsource or not to outsource in an integrated world

This paper investigates outsourcing decision under certainty and uncertainty. When the production activity can be fragmented into two or more processes, an integrated firm must be competitive in each of the fragmented processes. There are gains from outsourcing when factor prices differ between countries. When factor prices are not equalized internationally, a firm may outsource the process which uses its scarce source intensively. If the cost of outsourcing is lower in the foreign country, full outsourcing occurs under certainty. However, even if the outside supplier has a cost advantage, uncertainty in outsourcing cost ensures that partial outsourcing is optimal for risk-averse firms.     

Neural network forecasting of quarterly accounting earnings

This study uses an artificial neural network model to forecast quarterly accounting earnings for a sample of 296 corporations trading on the New York stock exchange. The resulting forecast errors are shown to be significantly larger (smaller) than those generated by the parsimonious Brown-Rozeff and Griffin-Watts (Foster) linear time series models, bringing into question the potential usefulness of neural network models in forecasting quarterly accounting earnings. This study confirms the conjecture by Chatfield and Hill et al. that neural network models are context sensitive. In particular, this study shows that neural network models are not necessarily superior to linear time series models even when the data are financial, seasonal and non-linear.     

Financial integration, information and communication technology, and macroeconomic volatility: Evidence from ten Asian economies

This paper aims to examine the impact of financial integration and information and communication technology (ICT) development on output volatility. It applies a two-country dynamic general equilibrium model, in which ICT is assumed to increase the volume and speed of capital flows. This model predicts that economies with a high ICT development or/and a high degree of financial integration exhibit greater output fluctuations in the face of monetary policy shocks, but lower output fluctuations in the face of fiscal policy shocks. The empirical findings estimated by using the panel vector autoregression approach and impulse response analysis support these predictions.     

What really happens if the positive definiteness requirement on the covariance matrix of returns is relaxed in efficient portfolio selection?

The Markowitz critical line method for mean–variance portfolio construction has remained highly influential today, since its introduction to the finance world six decades ago. The Markowitz algorithm is so versatile and computationally efficient that it can accommodate any number of linear constraints in addition to full allocations of investment funds and disallowance of short sales. For the Markowitz algorithm to work, the covariance matrix of returns, which is positive semi-definite, need not be positive definite. As a positive semi-definite matrix may not be invertible, it is intriguing that the Markowitz algorithm always works, although matrix inversion is required in each step of the iterative procedure involved. By examining some relevant algebraic features in the Markowitz algorithm, this paper is able to identify and explain intuitively the consequences of relaxing the positive definiteness requirement, as well as drawing some implications from the perspective of portfolio diversification. For the examination, the sample covariance matrix is based on insufficient return observations and is thus positive semi-definite but not positive definite. The results of the examination can facilitate a better understanding of the inner workings of the highly sophisticated Markowitz approach by the many investors who use it as a tool to assist portfolio decisions and by the many students who are introduced pedagogically to its special cases.     

Entrepreneurial financing in new business ventures: a help-seeking behavior perspective

How and from whom prospective entrepreneurs seek their start-up capital for new venture formation represent fundamental questions in entrepreneurial financing. Drawing on research of help-seeking behavior, we propose that apart from economic rationale entrepreneurs’ decisions to seek financing may be influenced by socio-psychological factors. Using a scenario experiment (venture risk x relational proximity) to investigate how prospective entrepreneurs considered funding from family and outsiders, it was found that they tended to seek family financing when the family was close and the risk was high, and inclined to seek outsider funding when the venture risk was high and the family was not close. The findings might seem paradoxical but they actually underscore the influence of socio-psychological factors in entrepreneurial financing decisions and offer novel contributions to the entrepreneurship, informal investment, and education literatures.     

Internationalisation of the Renminbi as an Investing and a Funding Currency: Analytics and Prospects

This paper develops a three‐currency model to study the determinants of the demand for assets and liabilites denominated in an international currency and to shed light on the prospects for the renminbi as a budding international currency. We show that interest rate differentials would be only one of the factors shaping the renminbi's position, while other factors, including the correlation between foreign countries' economic growth and their bilateral exchange rates against the renminbi, and the correlation between exchange rates of the renminbi with other international currencies, would also be important. A broad interpretation of these findings is that the renminbi will likely be attractive to investors from high‐income economies and fund‐raisers from emerging market economies.     

Recent Developments at the CMA: 2020–2021

Review of Industrial Organization - We discuss three important projects that economists at the Competition and Markets Authority have completed over the past year. First, our work on the Funerals...