TAX UNCERTAINTIES AND THE INVESTMENT DECISION

This paper investigates how the firm's investment decision is affected by uncertainties in the tax laws under an asymmetric structure of income taxation. Tax liability is modelled as a call option, and tax uncertainties are modelled as randomness in the exercise price of the call option. The effects on the investment decision are derived by evaluating the comparative statics of the optimal investment level with respect to the volatility of the exercise price. The central result is that the disincentive effects of the tax uncertainties are generally exacerbated under the tax asymmetry.     

Covered interest arbitrage with transaction costs: An evidence from the Hong Kong foreign exchange market

This paper deals with the effects of transaction costs on the efficacy of covered and one-way interest arbitrage under the linked exchange rate system in the Hong Kong foreign exchange market. First, we examine the arbitrage opportunities in the swap market and in domestic and foreign securities markets. Second, we measure the profitability of covered interest arbitrage and one-way arbitrage. Empirical findings have shown that allowing for transaction costs, covered interest arbitrage seems to entail less unexploited opportunities for profit. However, there exists a great deal of unexploited profit opportunities in one-way arbitrage in the Hong Kong financial market.We are grateful to two anonymous referees and the editor for their helpful comments on an earlier version of this paper.     

The Profitability of Trading Strategies Based on Book Value and Earnings in Hong Kong: Market Inefficiency vs. Risk Premia

Using a sample of Hong Kong firms, we have examined the relative and incremental usefulness of book-to-price ratio (B/P), and earnings-to-price ratio (E/P) for providing profitable trading strategies or for predicting stock returns. Our results show that trading strategies based on B/P or E/P yield significant excess returns for various holding periods up to two years, and that B/P and E/P are not only individually but also incrementally useful for predicting stock returns. Further, results of various tests indicate that trading profits observed from the B/P strategy are likely to be a result of B/P proxying for risk differentials, while those from the E/P strategy are related to gains from exploitation of market inefficiency or mispricing. The two ratios appear to capture different aspects of firm value in Hong Kong.     

On the discounted aggregate claim costs until ruin in dependent Sparre Andersen risk processes

In this paper, a dependent Sparre Andersen risk process in which the joint density of the interclaim time and the resulting claim severity satisfies the factorization as in Willmot and Woo is considered. We study a generalization of the Gerber–Shiu function (i) whose penalty function further depends on the surplus level immediately after the second last claim before ruin; and (ii) which involves the moments of the discounted aggregate claim costs until ruin. The generalized discounted density with a moment-based component proposed in Cheung plays a key role in deriving recursive defective renewal equations. We pay special attention to the case where the marginal distribution of the interclaim times is Coxian, and the required components in the recursion are obtained. A reverse type of dependency structure, where the claim severities follow a combination of exponentials, is also briefly discussed, and this leads to a nice explicit expression for the expected discounted aggregate claims until ruin. Our results are applied to generate some numerical examples involving (i) the covariance of the time of ruin and the discounted aggregate claims until ruin; and (ii) the expectation, variance and third central moment of the discounted aggregate claims until ruin.     

Corporate social responsibility and provision of trade credit

In this article, we identify and examine three different views of corporate social responsibility (CSR) and the relationship between CSR and firms’ provision of trade credit. The trust view of CSR argues that CSR and trade credit provision are related positively, because CSR, as a trust-enhancing device, complements the incomplete contract nature of trade credit. The CSR literature shows that CSR firms tend to have higher cash holdings. With this in mind, the precautionary motive view of CSR suggests that cash holdings serve as a hedge against trade credit risk, while, on the other hand, the substitution view of CSR predicts that cash hoarding discourages the provision of trade credit. Using a dataset of 20,591 firm-year observations from 1991 to 2015, we find strong evidence that supports both the trust and substitution views of CSR but not the precautionary view of CSR.     

Periodic threshold-type dividend strategy in the compound Poisson risk model

In this paper, the compound Poisson risk model is considered. Inspired by Albrecher, Cheung, & Thonhauser. [(2011b). Randomized observation periods for the compound Poisson risk model: dividend. ASTIN Bulletin 41(2), 645–672], it is assumed that the insurer observes its surplus level periodically to decide on dividend payments at the arrival times of an Erlang(n) renewal process. If the observed surplus is larger than the maximum of a threshold b and the last observed (post-dividend) level, then a fraction of the excess is paid as a lump sum dividend. Ruin is declared when the observed surplus is negative. In this proposed periodic threshold-type dividend strategy, the insurer can have a ruin probability of less than one (as opposed to the periodic barrier strategy). The expected discounted dividends before ruin (denoted by V) will be analyzed. For arbitrary claim distribution, the general solution of V is derived. More explicit result for V is presented when claims have rational Laplace transform. Numerical examples are provided to illustrate the effect of randomized observations on V and the optimization of V with respect to b. When claims are exponential, convergence to the traditional threshold strategy is shown as the inter-observation times tend to zero.     

Understanding visitor–resident relations in overtourism: developing resilience for sustainable tourism

While almost all travel destinations seek to increase tourists, less attention is paid to balancing the growth in tourists against consequent visitor–resident irritants, which is essential if the objective is to make tourism more sustainable. Overlooking the carrying capacity of a destination is a common mistake committed when formulating travel visa policies. Overtourism is a term recently used to contextualize this potential hazard to many popular tourist destinations worldwide. One notable case in point is the “multiple-entry permit” policy implemented in Hong Kong which is causing conflicts between mainland Chinese visitors and Hong Kong residents. To investigate the overtourism phenomenon in Hong Kong we develop a hysteresis model. We hypothesized that ceteris paribus, the implementation of a “multiple-entry permit” policy would lead to an overwhelming growth in day-trippers and cause a permanently negative cointegrating relationship with residents’ sentiment. We confirmed our hypothesis by using the bound tests of Autoregressive-Distributed Lag models. Our findings suggest that policymakers should note that the deterioration in visitor–resident relations from overtourism may exhibit a significant hysteresis effect that will persist far beyond the original stimulus. “Developing resilience in tourism” and “exploring sustainable degrowth” are discussed as potential strategies for long-term tourism growth.     

Reinsurance contract design with adverse selection

ABSTRACT

In light of the richness of their structures in connection with practical implementation, we follow the seminal works in economics to use the principal–agent (multidimensional screening) models to study a monopolistic reinsurance market with adverse selection; instead of adopting the classical expected utility paradigm, the novelty of our present work is to model the risk assessment of each insurer (agent) by his value-at-risk at his own chosen risk tolerance level consistent with Solvency II. Under information asymmetry, the reinsurer (principal) aims to maximize his average profit by designing an optimal policy provision (menu) of ‘shirt-fit’ reinsurance contracts for every insurer from one of the two groups with hidden characteristics. Our results show that a quota-share component, on the top of simple stop-loss, is very crucial for mitigating asymmetric information from the insurers to the reinsurer.     

Moments of Discounted Dividends for a Threshold Strategy in the Compound Poisson Risk Model

Abstract

We consider a compound Poisson risk model in which part of the premium is paid to the shareholders as dividends when the surplus exceeds a specified threshold level. In this model we are interested in computing the moments of the total discounted dividends paid until ruin occurs. However, instead of employing the traditional argument, which involves conditioning on the time and amount of the first claim, we provide an alternative probabilistic approach that makes use of the (defective) joint probability density function of the time of ruin and the deficit at ruin in a classical model without a threshold. We arrive at a general formula that allows us to evaluate the moments of the total discounted dividends recursively in terms of the lower-order moments. Assuming the claim size distribution is exponential or, more generally, a finite shape and scale mixture of Erlangs, we are able to solve for all necessary components in the general recursive formula. In addition to determining the optimal threshold level to maximize the expected value of discounted dividends, we also consider finding the optimal threshold level that minimizes the coefficient of variation of discounted dividends. We present several numerical examples that illustrate the effects of the choice of optimality criterion on quantities such as the ruin probability.