Optimal portfolio allocation under the probabilistic VaR constraint and incentives for financial innovation

We characterize the investor’s optimal portfolio allocation subject to a budget constraint and a probabilistic VaR constraint in complete markets environments with a finite number of states. The set of feasible portfolios might no longer be connected or convex, while the number of local optima increases exponentially with the number of states, implying computational complexity. The optimal constrained portfolio allocation may therefore not be monotonic in the state–price density. We propose a type of financial innovation, which splits states of nature, that is shown to weakly enhance welfare, restore monotonicity of the optimal portfolio allocation in the state-price density, and reduce computational complexity. We are grateful to Ken Kavajecz and seminar participants at Harvard Business School, London School of Economics, Maastrict University, ZEI Bonn, and Danske Bank Symposium on Asset allocation and Value-at-Risk: Where Theory Meets Practice for comments on an earlier version of this paper. We also benefitted from the suggestions of two anonymous referees. Our papers can be downloaded from www.RiskResearch.org.     

Demographic determinants of incident experience and risk perception: do high-risk groups accurately perceive themselves as high-risk?

This paper analyzes demographic determinants of incident experience and risk perception, as well as the relationship between the two, for eight different risk domains. Analyses were conducted by merging the results of a Swedish population-based survey, which includes approximately 15,000 individuals, with demographic and socio-economic register data. Being male was associated with higher incident experience yet a lower risk perception for nearly all risk domains. Lower socioeconomic status was associated with higher incident experience for falls, and being a victim of violence but lower incident experience for road traffic accidents. Lower socioeconomic status was also associated with higher risk perception for falls. On aggregate, ranking the different domains, respondents’ risk perception was in almost perfect correspondence to the ranking of actual incident experience, with the exception that the risk of being a victim of violence is ranked higher than indicated by actual incident experience. On a demographic group level, men and highly educated respondents perceive their risks to be lower than what is expected considering their actual incident experience.     

Epistemic habits: primary school teachers’ development of pedagogical content knowledge (PCK) in a design-based research project

Generalist primary school teachers often have little or no training in school subjects such as science and technology. Not surprisingly, several studies show that they often experience difficulties when teaching these subjects, in fact some primary teachers even avoid teaching them. The over all aim of this study is to contribute to new theoretical and methodological tools for the study of how teachers develop knowledge for teaching, i.e. pedagogical content knowledge (PCK). And based on this, elaborate on implications for the professional development of primary school teachers. The teachers in the study participated in a design-based research project concerning technology education in Grade 1. We were especially interested in whether the teachers displayed any habits that contributed to the development of their personal PCK. We found three significant patterns in how the teachers, together with the researcher, developed knowledge of how to teach a specific topic in technology. We argue that these patterns tell us something about the teachers’ epistemic habits in relation to the teaching of technology. The existence of these habits could help to explain how teachers with little or no experience of teaching a subject can develop relevant PCK.     

Risk as feelings or risk and feelings? A cross‐lagged panel analysis

This article focuses on affective and cognitive processes underlying the perception of risk. A limitation with most process models of affect/cognition is that they include only concurrent emotions. By following a group (n?=?129) of military sailors prospectively during an international operation, we explored longitudinal relations between perceived risk and related feelings.

Longitudinal cross‐lagged path models were estimated to explore the relationships between perceived risk, worry, and emotional distress. Results gave support to earlier studies by showing that cross‐sectional measures of risk and worry were weakly related. Across time, worry and emotional distress were reciprocally related. Perceived risk had impact on worry but not on emotional distress. Neither worry nor emotional distress influenced perceived risk.

The risk‐as‐feelings hypothesis postulates a direct effect of feelings onto behavioural choice, and a reciprocal relation between cognitive evaluations and feelings.

Our findings do not support a reciprocal relation between judgements of risk and feelings, but an impact from risk on to worry. Between various measures of feelings reciprocity seems to exist. Further replications, including also behavioural measures, are needed.     

Communicating production outcomes as gains or losses,operator skill and their effects on safety-related violations in a simulated production context

In this study, violation-producing conditions from an organizational and individual point of view are investigated. In concrete terms, framing effects of production outcome displays in relation to production goals, the risk of a technical accident, as well as person-related variables and their impact on violations are investigated based on the theoretical assumptions of prospect theory and risk-taking. It is assumed that violations are more likely when performance is below the aspiration level associated with an anticipated loss. A 2?×?3 factorial experimental design (n?=?118) was selected in accordance with the ‘Asian Disease’ decision scenario in the form of a computer-simulated task environment Simulation Waste Water Treatment. Participants acted out the role of a production supervisor running a plant. Experimental conditions were (1) the framing of individual performance outcomes in relation to the production goals in terms of losses or gains, and (2) the risk (20, 35, and 5%) with which an accident (a deflagration) might occur through using a corner-cutting procedure. A significant main effect of the framing conditions and no effect of risk conditions or interaction effect emerged. An additional path analysis shows the influence of risky decision-making and acquired skills in terms of knowledge of the safety-related procedure on a violation. In summary, violations are strongly affected by (a) framing effects of production outcomes when the performance is below the aspiration level and (b) person-related variables, in particular risky decision-making and skill. Results strongly emphasize that we found violation-producing conditions over and above what has so far been proposed and give rise to our claim that communicating production outcomes as gains and the increase of skill increases the likelihood of compliance with safety-related procedures.     

Non-parametric and parametric bootstrap techniques for age-to-age development factor methods in stochastic claims reserving

In the literature, one of the main objects of stochastic claims reserving is to find models underlying the chain-ladder method in order to analyze the variability of the outstanding claims, either analytically or by bootstrapping. In bootstrapping these models are used to find a full predictive distribution of the claims reserve, even though there is a long tradition of actuaries calculating the reserve estimate according to more complex algorithms than the chain-ladder, without explicit reference to an underlying model. In this paper we investigate existing bootstrap techniques and suggest two alternative bootstrap procedures, one non-parametric and one parametric, by which the predictive distribution of the claims reserve can be found for other age-to-age development factor methods than the chain-ladder, using some rather mild model assumptions. For illustration, the procedures are applied to three different development triangles.     

A stable demand for money despite financial crisis: the case of Venezuela

The demand for broad money in Venezuela is investigated over a period of financial crisis and substantial exchange rate fluctuations. The analysis shows that there exist a long-run relationship between real money, real income, inflation, the exchange rate and an interest rate differential, that remains stable over major policy changes and large shocks. The long-run properties emphasize that both inflation and exchange rate depreciations have negative effects on real money demand, whereas a higher interest rate differential has positive effects. The long-run relationship is finally embedded in a dynamic equilibrium correction model with constant parameters. These results have implications for a policy-maker. In particular, they emphasize that with a high degree of currency substitution in Venezuela, monetary aggregates will be very sensitive to changes in the economic environment.     

Intergenerational Income Persistence in Urban China

Intergenerational income elasticities are estimated using samples for urban China (covering many cities) for the years 1995 and 2002 and compared with results from other studies. We find that the income relation between the pairs—sons and fathers, sons and mothers, and daughters and mothers—are in 2002 all similar in magnitude. In contrast the relation between daughters' and fathers' income is weaker. The income relationship between offspring and mothers was weaker in 1995 than in 2002. Our preferred estimates of income persistence for the son/father pairs of 0.47 for 1995 and 0.53 for 2002 are higher than those which have been reported in the literature for several high‐income countries with large welfare states. The strength of the income link between sons and fathers in urban China appears to be not very different from what has been reported for countries such as Brazil, Chile, and the U.S.     

Human Rights in the Void? Due Diligence in the UN Guiding Principles on Business and Human Rights

The ‘Guiding Principles on Business and Human Rights’ (Principles) that provide guidance for the implementation of the United Nations’ ‘Protect, Respect and Remedy’ framework (Framework) will probably succeed in making human rights matters more customary in corporate management procedures. They are likely to contribute to higher levels of accountability and awareness within corporations in respect of the negative impact of business activities on human rights. However, we identify tensions between the idea that the respect of human rights is a perfect moral duty for corporations and the Principle’s ‘human rights due diligence’ requirement. We argue that the effectiveness of the ‘human rights due diligence’ is in many respects dependent upon the moral commitment of corporations. The Principles leave room for an instrumental or strategic implementation of due diligence, which in some cases could result in a depreciation of the fundamental norms they seek to promote. We reveal some limits of pragmatic approaches to coping with business-related human rights abuses. As these limits become more apparent, not only does the case for further progress in international and extraterritorial human rights law become more compelling, but so too does the argument for a more forceful discussion on the moral foundations of human rights duties for corporations.