A new microstructure noise index

We introduce a new microstructure noise index for financial data. This index, the computation of which is based on the p-variations of the considered asset or rate at different time scales, can be interpreted in terms of Besov smoothness spaces. We study the behavior of our new index using empirical data. It gives rise to phenomena that a classical signature plot is unable to detect. In particular, with our data set, it enables us to separate the sampling frequencies into three zones: no microstructure noise for low frequencies, increasing microstructure noise from low to high frequencies, and some kind of additional regularity on the finest scales. We then investigate the index from a theoretical point of view, under various contexts of microstructure noise, trying to reproduce the facts observed on the data. We show that this can be partially done using models involving additive correlated errors or rounding error. Accurate reproduction seems to require either both kinds of error together or some unusual form of rounding error.     

Determinants of the Level of Knowledge Application: A Knowledge‐Based and Information‐Processing Perspective*

Knowledge application is of key importance in the development of successful new products. Knowledge application refers to an organization's timely response to technological change by utilizing the knowledge and technology generated into new products and processes. This study uses the knowledge‐based theory of the firm and considers its roots in the information‐processing approach to organization theory to identify and structure potential antecedents of knowledge application. This study develops four hypotheses concerning antecedents of knowledge application. The hypotheses are tested using data collected from 277 high‐technology firms. Empirical results indicate that a long‐term orientation supported by a research and development (R&D) budget, formal rewards, and information technology directly increases the level of knowledge application, while R&D co‐location indirectly increases the level of knowledge application. It is surprising to find that an increase in the level of organizational redundancy reduces the level of knowledge application. The findings also suggest that information technologies, lead‐user, and supplier networks do not appear to significantly influence organizational redundancy.     

Bach Music Inc.: Impact of Price Pressure,Capacity Constraints,and a Special Order on Management Decision Making

This case has been developed for an introductory management accounting course at the undergraduate and MBA levels. Although the setting is relatively simple, it illustrates several management accounting issues that are relevant to firms of every size that produce a product or service under competitive pressures and capacity constraints. The case also integrates several topics that are often viewed as abstract by the students. Specifically, it deals with the concepts around cost‐volume profit analysis in a realistic environment, the tension between short‐term and long‐term decisions, discounted cash flow analysis, the impact of managerial incentives and compensation on decision making and the impact of operating leverage on profitability. The case was used successfully several times in an introductory course at the MBA level. Surveys of the students reveal that the case has contributed significantly to their learning and has clarified the concepts introduced in the case.     

The Interactions between the Credit Default Swap and the Bond Markets in Financial Turmoil

We analyse the links between credit default swap (CDS) and bond spreads in order to determine which one is the leading market in the price discovery process. To do that, we construct a sample of CDS premia and bond spreads on a generic 5‐year bond for 17 financials and 18 sovereigns. First, we run panel vector error correction model estimations, showing that the CDS market has a lead over the bond market for financial institutions. This also holds for high‐yield sovereigns, whereas the reverse is found for low‐yield sovereigns in the core of the euro area. We interpret these results according to the relative liquidity of both markets for different types of entities. Second, we check for nonlinearities in the adjustment process. Results show that the CDS market's lead is amplified when default risk increases, during crisis periods, as well as continuously when CDS premia increase.     

Multivariate Models of Equity Returns for Investment Guarantees Valuation

Abstract

In this paper we investigate the valuation of investment guarantees in a multivariate (discrete-time) framework. We present how to build multivariate models in general, and we survey the most important multivariate GARCH models. A direct multivariate application of regime-switching models is also discussed, as is the estimation of these models using maximum likelihood and their comparison in a multivariate setting. The computation of the CTE provision is further presented. We have estimated the models with a multivariate dataset (Canada, United States, United Kingdom, and Japan), and we compared the quality of their fit using multiple criteria and tests. We observe that multivariate GARCH models provide a better overall fit than regime-switching models. However, regime-switching models appropriately represent the fat tails of the returns distribution, which is where most GARCH models fail. This leads to significant differences in the value of the CTE provisions, and, in general, provisions computed with regime-switching models are higher. Thus, the results from this multivariate analysis are in line with what was obtained in the literature of univariate models.     

The alpha and omega of fund of hedge fund added value

In spite of a somewhat disappointing performance throughout the crisis, investors are showing interest in hedge funds. Still, funds of hedge funds keep on experiencing outflows. Can this phenomenon be explained by the failure of fund of hedge fund managers to deliver on their promise to add value through active management, or is it symptomatic of a move toward greater disintermediation in the hedge fund industry? We introduce a return-based attribution model allowing for a full decomposition of fund of hedge fund performance. The results of our empirical study suggest that funds of hedge funds are funds of funds like others. Strategic allocation turns out to be a crucial step in the investment process, in that it not only adds value over the long-term, but most importantly, it brings resilience precisely when investors need it the most. Fund picking, on the other hand, turns out to be a double-edged sword.     

Knowledge sharing mechanisms in industrial research

Previous research has firmly established the importance of knowledge sharing in Research and Development (R&D) settings. However, current theories provide only fragmented insights into the origination of knowledge sharing, and thus offer limited guidance for knowledge management practices in R&D. To integrate and extend these fragmented insights, we undertook two exploratory field studies of knowledge sharing in industrial research organizations. The contributions of this study are the following. First, we introduce three dimensions that differentiate origination mechanisms for knowledge sharing. Second, we show that some of these mechanisms correspond to mechanisms assumed in particular streams of literature, whereas others have been neglected till now. Third, based on our field studies, we show that each of these knowledge-sharing mechanisms have a different value for industrial research practices. Therefore, knowledge management in R&D should facilitate and stimulate a broad portfolio of knowledge-sharing mechanisms.     

Managerial Incentives for Income Smoothing Through Bank Loan Loss Provisions

We examine alternative underlying motives of bank managers in using loan loss provisions (LLP) to smooth reported income. Based on the analytical results of Fudenberg and Tirole (1995), we predict that for banks with good (poor) current performance and expected poor (good) future performance, managers will save income for (borrow income from) the future by reducing (increasing) current income through LLP. We also analyze three additional variables that could explain cross-sectional differences in the level of income smoothing. Our empirical analysis provides support for our predictions. The difference in LLP between the two groups of banks is positive as hypothesized, indicating that bank managers do save earnings through LLP in good times and borrow earnings using LLP in bad times. Similar results are obtained for analysis using discretionary LLP. When bank managers are saving earnings for the future, we provide evidence that the need to obtain external financing is an important additional variable in explaining cross-sectional differences in the extent of income smoothing. Furthermore, whether or not a bank is well capitalized is also weakly significant in explaining cross-sectional differences in income smoothing.     

Managing learning in informal innovation networks: overcoming the Daphne-dilemma

In this article we discuss the nature and productivity of informal innovation networks, i.e. informal collaborative arrangements between organizations engaged in product or process innovation. Such networks can be used in any phase of the innovation process, but their informal nature makes them especially suited for its fuzzy front end. We explore their potential in technology exchange and learning on the basis of a combination of organization network theory and knowledge management theory. We discuss issues in network governance and network operational management and discuss the basic dilemma – which we named the Daphne-dilemma – facing attempts to improve the productivity of informal innovation networks: too little management effort may lead to under-exploitation of their potential and poor productivity, but too much management effort may destroy their informal nature and hence their creative and explorative potential.