Cointegration: how short is the long run?

When testing for cointegration and faced with short sample periods, it is common for researchers to turn to more frequently sampled observations, that is, to move from annual to quarterly or monthly data, in order to increase the number of observations. We argue that such a gain in the degrees of freedom is more apparent than real. Essentially, cointegration is a long-run concept and hence requires long spans of data to give tests for cointegration much power rather than merely large numbers of observations. Using Monte Carlo simulations, we demonstrate this for four popular tests for cointegration.     

Is management still a science?

New technologies are transforming products, markets, and entire industries. Yet the more science and technology reshape the essence of business, the less useful the concept of management itself as a science seems to be. On reflection, this paradox is not so surprising. The traditional scientific approach to management promised to provide managers with the capacity to analyze, predict, and control the behavior of the complex organizations they led. But the world most managers currently inhabit often appears to be unpredictable, uncertain, and even uncontrollable. In the face of this more volatile business environment, the old-style mechanisms of "scientific management" seem positively counterproductive. And science itself appears less and less relevant to the practical concerns of managers. In this article, science journalist David Freedman argues that the problem lies less in the shortcomings of a scientific approach to management than in managers' understanding of science. What most managers think of as scientific management is based on a conception of science that few current scientists would defend. What's more, just as managers have become more preoccupied with the volatility of the business environment, scientists have also become preoccupied with the inherent volatility--the "chaos" and "complexity"--of nature. They are developing new rules for complex behavior in physical systems that have intriguing parallels to the kind of organizational behaviors companies are trying to encourage. In fact, science, long esteemed by business as a source of technological innovation, may ultimately prove of greatest value to managers as a source of something else: useful ways of looking at the world.     

Leveraged stock portfolios over long holding periods: A continuous-time model

We use a continuous-time model to derive return and wealth distributions for leveraged portfolios over long holding periods. These theoretical distributions closely match empirical distributions obtained from a resampling procedure. The expected annualized return is a concave function of the degree of leverage. With historical parameter values, the function is maximized at 203% stock, borrowing an amount equal to 103% of net wealth. This maximal stock proportion is considerably reduced if the borrowing rate is higher than the historical lending rate.     

The eurosystem money market auctions: A banking perspective

This paper analyzes the individual bidding behavior of German banks in the money market auctions conducted by the ECB from the beginning of 2000:IIIQ to the end of 2001:IQ. Our approach takes a variety of characteristics of the individual banks into account, particularly variables that capture the different use of liquidity and the different attitude towards liquidity risk of the individual banks. It turns out that these characteristics are reflected in banks’ bidding behavior. Thus, our study contributes to a deeper understanding of the way liquidity risk is managed in the banking sector.     

Paramater estimation bias and volatility scaling in Black-Scholes option prices

When asset returns conform to a Gaussian distribution, the moments of the distribution over long return intervals may be estimated by scaling the moments of shorter return intervals. While it is well known that asset returns are not normally distributed, a key empirical question concerns the effect that scaling the volatility of dependent processes will have on the pricing of related financial assets. This study investigates the return properties of the most important currencies traded in spot markets against the U.S. dollar: the Japanese yen, the British pound, and the Swiss franc during the period November 1983 to April 2004. The novelty of this paper is that the volatility properties of the series are tested utilising statistical procedures developed from fractal geometry, with the economic impact determined within an option-pricing framework.     

Wherein Lies the Benefit of the Second Referee in the NHL?

This paper investigates the impact of the second referee in the National Hockey League, including the indirect impact of the second referee on in-arena attendance and national television audiences. During the 1998–1999 and 1999–2000 seasons, the second referee improved scoring, reduced fighting and penalty minutes but had no measurable impact on closeness of competition. In-arena attendance, a source of non-shared revenue for team owners, was not influenced by improved scoring or reduced fighting. On the other hand, national television viewership increased with expected scoring. The empirical results allow for an initial comparison of the benefits and costs of the second referees to the league. While it seems unlikely that any team would have unilaterally paid for all of the second referees, the benefits of the second referee seemed to have outweighed the costs. Therefore, the NHL's decision to introduce a second referee may have solved a free-rider problem while providing profit potential for NHL franchises.