“De‐risking” Corporate Pension Plans: Options for CFOs

Until the stock market bubble burst in 2000–2002, most CFOs viewed their defined benefit pension plans as profit centers and relatively risk‐free sources of income. Since neither pension assets nor liabilities were reported on corporate balance sheets, and expected returns on pension stocks could be substituted for actual returns when reporting net income, the risks associated with DB plans were masked by GAAP accounting and thus assumed to have no bearing on corporate capital structure. But when stock prices and corporate profits fell together, the risks associated with conventional stock‐heavy pension plans showed up first in reduced pension surpluses (or, in many cases, deficits) and then later in higher required cash contributions and lower reported earnings. As a consequence, today's investors (and rating agencies) are viewing pension and other legacy liabilities as corporate debt, and demands for transparency and increased funding have triggered accounting changes and proposed legislative reforms that will further unmask the economics. This article aims to provide both private‐sector and public‐sector CFOs with suggestions for reducing and controlling the cost of providing for the retirement of their employees. Profitable, tax‐paying companies with DB plans should consider (1) funding any unfunded liabilities (if necessary, by issuing debt) and (2) reducing pension equity and interest rate exposures by shifting some (if not all) pension assets into bonds and defeasing the pension liability (achieving a tax arbitrage in the process). And in cases where the expected costs of maintaining DB plans outweigh the benefits, companies should consider freezing or terminating their plans and switching to a defined contribution (DC) or some form of hybrid plan. The authors also propose similar changes for public pension plans, where underfunding and mismatch problems are greater, less transparent, and in some ways less tractable than those of corporate DB plans.     

Immigration and the Global City Hypothesis: Towards an Alternative Research Agenda

The debate around the ‘Global City Hypothesis’ (GCH), and particularly the research agenda of the ‘Globalization and World Cities’ network, have been preoccupied recently with the business and technological dimensions of so–called ‘global cities’. This article seeks to recover the role of immigration in large urban economies. Using mainly observations from European metropolises, I argue first that the GCH requires significant revision insofar as it can be used as a tool for addressing issues of inequality, and I offer five propositions for a renewal of the existing contours of the GCH. Second, beyond these revisions, I suggest a complete reformulation of the debate by linking it with ideas emanating from the literature on transnationalism. Le débat sur ‘l’Hypothèse de la ville globale’, et notamment sur le programme de recherche du réseau ‘Mondialisation et Villes mondiales’, s’est récemment soucié des dimensions économiques et technologiques des dites ‘villes planétaires’. Cet article tente de révéler le rôle de l’immigration dans les grandes économies urbaines. A partir d’observations de métropoles européennes principalement, il affirme d’abord que, dans la mesure où cette hypothèse peut servir d’outil pour aborder les questions d’inégalité, elle requiert une importante révision; sont donc exposées cinq propositions pour en renouveler les profils existents. Il suggère ensuite une reformulation complète du débat en l’associant à des idées émanant de travaux sur le transnationalisme.     

Combining information for prediction in linear regression

This article deals with the prediction problem in linear regression where the measurements are obtained using k different devices or collected from k different independent sources. For the case of k=2, a Graybill-Deal type combined estimtor for the regression parameters is shown to dominate the individual least squares estimators under the covariance criterion. Two predictors ŷ _c and ŷ _p are proposed. ŷ _c is based on a combined estimator of the regression coefficient vector, and ŷ _p is obtained by combining the individual predictors from different models. Prediction mean square errors of both predictors are derived. It is shown that the predictor ŷ _p is better than the individual predictors for k≥2 and the predictor ŷ _c is better than the individual predictors for k=2. Numerical comparison between ŷ _c and ŷ _p shows that the former is superior to the latter for the case k=2.     

A Study of Arbitrage Efficiency Between the FTSE‐100 Index Futures and Options Contracts

Despite the importance of the London markets and the significance of the relationship for market makers, little published research is available on arbitrage between the FTSE‐100 Index futures and the FTSE‐100 European index options contracts. This study uses the put–call–futures parity condition to throw light on the relationship between options and futures written against the FTSE Index. The arbitrage methodology adopted in this study avoids many of the problems that have affected prior research on the relationship between options or futures prices and the underlying index. The problems that arise from nonsynchroneity between options and futures prices are reduced by the matching of options and futures prices within narrow time intervals with time‐stamped transaction data. This study allows for realistic trading and market‐impact costs. The feasibility of strategies such as execute‐and‐hold and early unwinding is examined with both ex‐post and ex‐ante simulation tests that take into consideration possible execution time lags for the arbitrage trade. This study reveals that the occurrence of matched put–call–futures trios exhibits a U‐shaped intraday pattern with a concentration at both open and close, although the magnitude of observed mispricings has no discernible intraday pattern. Ex‐post arbitrage profits for traders facing transaction costs are concentrated in at‐the‐money options. As in other major markets, despite important microstructure differences, opportunities are generally rapidly extinguished in less than 3 min. The results suggest that arbitrage opportunities for traders facing transaction costs are small in number and confirm the efficiency of trading on the London International Financial Futures and Options Exchange. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22:31–58, 2002     

Are Fundamentals Priced in the Bond Market?*

To date, the discussion of the Lev and Thiagarajan 1993 fundamentals in the prior literature has been exclusively in the context of the stock market. Our study is the first to examine the value‐relevance of these fundamentals for default risk. By focusing on the market for new bond issues, we examine the value‐relevance of the fundamental score using expected rather than realized returns. Also, by focusing on the bond market we provide a different perspective than that brought by prior studies relying solely on stock prices. We find the fundamentals to be priced in the market for new bond issues as indicators of expected future earnings and to be value‐relevant in enabling the market to discern differences in bond credit quality over and above the published bond ratings.     

Analysing Materials and Energy Flows in an Industrial District using an Enterprise Input–Output Model

Recent approaches to sustainable development leave much room for policies at a local level. In fact, it is becoming evident that targets such as increasing resource productivity, preserving natural cycles, or extending the present level of welfare, are best pursued within the confines of a local area. In particular, environmental changes are best brought about by considering local systems of firms as cornerstones of cooperative strategies and using data on materials and energy use in physical terms. In this paper, an enterprise input–output model is developed for an industrial district, i.e. a local group of firms specialized in the production of a single final output. The model allows for a detailed quantitative analysis of materials and energy flows and the consequent generation of waste and pollution. As a planning tool, the model may be used to evaluate alternative scenarios, such as the possibility of re- using waste taking account of sustainability requirements. An empirical case study applies the model to an industrial district in Southern Italy producing leather sofas.     

Regulating Banks through Market Discipline: A Survey of the Issues

Abstract.  The interest in the application of market discipline to regulate the financial industry has boomed recently due to the proposed New Capital Accord. This paper reviews the potential role market discipline can play in financial regulation. We start with a discussion of the rationale for financial regulation and with a brief history of the current regulatory mechanisms. Next, a definition of market discipline as a regulatory mechanism is advanced. We evaluate the disciplining power various market participants have. Finally, we argue that more external risk management disclosure is a condition sine qua non in order to enable market discipline as a regulatory mechanism. In this respect, the Basle Committee has taken the right approach.