Portfolio management without probabilities or statistics

Considered here is on-line portfolio management aimed at maximizing the long-run growth of financial wealth. The portfolio is repeatedly rebalanced in response to observed returns on diverse assets. Suppose statistical information and related methods are not available—or deemed too difficult. On that assumption this paper explores how an adaptive procedure, which totally dispenses with statistics and associated competence, nonetheless may solve the problem over time.     

Multidimensional Screening in a Monopolistic Insurance Market

We consider a population of individuals who differ in two dimensions, their risk type (expected loss) and their risk aversion, and solve for the profit-maximising menu of contracts that a monopolistic insurer puts out on the market. Our findings are threefold. First, it is never optimal to fully separate all the types. Second, if heterogeneity in risk aversion is sufficiently high, then some high-risk individuals (the risk-tolerant ones) will obtain lower coverage than some low-risk individuals (the risk-averse ones). Third, because women tend to be more risk averse than men (in that the risk aversion distribution for women first-order stochastically dominates that for men), gender discrimination may lead to a Pareto improvement.     

Banking competition and welfare

We develop a simple general equilibrium model in which investment in a risky technology is subject to moral hazard and banks can extract market power rents. We show that more bank competition results in lower economy-wide risk, higher social welfare, lower bank capital ratios, more efficient production plans and Pareto-ranked real allocations. Perfect competition supports a second best allocation and optimal levels of bank risk and capitalization. These results are at variance with those obtained by a large literature that has studied a similar environment in partial equilibrium, they are empirically relevant, and carry significant implications for policy guidance.     

Risk measurement distortion: an improved model of return smoothing

We examine the effects of smoothed hedge fund returns on standard deviation, skewness, and kurtosis of return and on correlation of returns using a MA(2)-GARCH(1,1)-skewed-t representation instead of the traditional MA(2) model employed in the literature. We present evidence that our proposed representation is more consistent with the behavior of hedge fund returns than the traditional MA(2) representation and that the traditional method tends to overstate the degree of smoothing observed in hedge fund returns. We examine methods for correcting the distortive effects of smoothing using our representation.     

<Emphasis Type="Italic">GTE Sylvania</Emphasis> and Interbrand Competition as the Primary Concern of Antitrust Law

Footnote 19 of the landmark U.S. antitrust decision in Continental T.V. v. GTE Sylvania, Inc. 433 U.S. 36 (1977) declares that “Interbrand competition … is the primary concern of antitrust law.” We trace the antecedents and influence of this declaration, argue that it is inappropriate, and conclude that it should be abandoned.     

Guanxi and leader member relationships between American managers and Chinese employees: open-minded dialogue as mediator

Effective open relationships with employees can help foreign managers rely upon and utilize the local knowledge of their employees. One hundred and sixty-three Chinese employees from various industries in China were surveyed on their relationships (leadership–member relationship and personal guanxi) with American and Chinese managers, their constructive controversy, that is, their constructive controversy with them, and the job assignments and promotions received from their managers. Results support the hypotheses that quality leader–member relationship and personal guanxi promoted their constructive controversy, which in turn facilitated employees receiving challenging jobs and promotions. Results suggest that leader–member relationship and Chinese value of guanxi may be important for enhancing their constructive controversy; this kind of open dialogue can be a foundation upon which American managers can develop the confidence to give their Chinese employees challenging tasks and promotions.

Analysis of Systemic Risk in the Insurance Industry

In this paper, we discuss the systemic relevance of the insurance sector. Systemic risk is defined as the propensity of a financial institution to be undercapitalised when the financial system as a whole is undercapitalised. By the law of large numbers, traditional lines of insurance with idiosyncratic non-catastrophic risks cannot be systemic. On the contrary, undiversified insurers specialised in activities whose insured risks are highly correlated with GDP are systemic. In the life insurance sector, some contractual clauses such as unhedged minimum guarantees and free options to surrender raise the chance of systemic relevance. On the contrary, life insurers satisfying the classic solvency capital requirements contribute to the liquidity of financial markets thanks to the long-termist approach of their portfolio management. Finally, using historical data in the U.S. on the contribution of different sectors to the aggregate volatility of the economy, we show that investment banking is almost twice as volatile as aggregate GDP, while insurance is one fifth as volatile as aggregate GDP. The insurance sector thus appears to be a stabilising force of the economy.