Granger Causality and Regime Inference in Markov Switching VAR Models with Bayesian Methods

In this paper, we derive restrictions for Granger noncausality in MS‐VAR models and show under what conditions a variable does not affect the forecast of the hidden Markov process. To assess the noncausality hypotheses, we apply Bayesian inference. The computational tools include a novel block Metropolis–Hastings sampling algorithm for the estimation of the underlying models. We analyze a system of monthly US data on money and income. The results of testing in MS‐VARs contradict those obtained with linear VARs: the money aggregate M1 helps in forecasting industrial production and in predicting the next period's state. Copyright © 2016 John Wiley & Sons, Ltd.     

The Relationship between Animal Welfare and Economic Performance at Farm Level: A Quantitative Study of Danish Pig Producers

We propose a theoretical framework for the relationship between animal welfare and the economic performance of livestock farms. We empirically analyse this relationship based on a unique dataset of randomly sampled Danish pig herds that includes information from unannounced inspections of the compliance with the animal welfare legislation. We find large variations in economic performance and animal welfare. The relationship between these two indicators is rather weak, but tends to be slightly positive. A possible explanation for our results is that management has a major influence on both economic performance and animal welfare so that good farm managers are able to meet all animal welfare regulations, while achieving a high economic performance.     

Geoeconomic Relations Between the EU and China: The Lessons From the EU Weapon Embargo and From Galileo

The merging of geopolitical and economic goals, known as geoeconomics, is becoming more and more frequently an important factor of state policies in the age of globalisation and the changing international order. The article offers an analysis of the EU-China relations seen within the increasingly valid geoeconomics perspective. It is focused on two case studies: armament embargo after 1989 Tiananmen Square protests and the Galileo system (a European system of satellite communication). The aforementioned cooperation has laid bare the weakness of European geopolitical thought. It has also demonstrated the supremacy of short-term economic goals of the European actors over strategic goals (both within the economic and the political spheres). In contrast with China, the EU does not possess a coherent geoeconomics strategy.     

Firm‐specific human capital,organizational incentives,and agency costs: Evidence from retail banking

This paper explores conflicting implications of firm‐specific human capital (FSHC) for firm performance. Existing theory predicts a productivity effect that can be enhanced with strong incentives. We propose an offsetting agency effect: FSHC may facilitate more‐sophisticated ‘gaming’ of incentives, to the detriment of firm performance. Using a unique dataset from a multiunit retail bank, we document both effects and estimate their net impact. Managers with superior FSHC are more productive in selling loans but are also more likely to manipulate loan terms to increase incentive payouts. We find that resulting profits are two percentage points lower for high‐FSHC managers. Finally, profit losses increase more rapidly for high‐FSHC managers, indicating adverse learning. Our results suggest that FSHC can create agency costs that outweigh its productive benefits. Copyright © 2013 John Wiley & Sons, Ltd.     

Hedging of a credit default swaption in the CIR default intensity model

An important issue arising in the context of credit default swap (CDS) rates is the construction of an appropriate model in which a family of options written on credit default swaps, referred to hereafter as credit default swaptions, can be valued and hedged. The goal of this work is to exemplify the usefulness of some abstract hedging results, which were obtained previously by the authors, for the valuation and hedging of the credit default swaption in a particular hazard process setup, namely, the CIR default intensity model.     

ON THE ECONOMIC INTERPRETATION OF THE BRÓDY CONJECTURE

The aim of the paper is to study the economic aspects of the Bródy conjecture: an increase in the size of a (random) input matrix causes a decline in the ratio of its subdominant and dominant eigenvalues and implies faster convergence to equilibrium [Bródy, A. (1997) The Second Eigenvalue of the Leontief Matrix. Economic Systems Research, 9, 253–258]. Simulation results provide evidence that this ratio depends inversely on the level of data aggregation and can therefore not be a good indicator of the speed of convergence of an economy to its equilibrium path. We show that this is consistent with findings based on actual input–output tables of EU member states. These results imply that theorems about the speed of convergence of random matrices are not useful in describing the cyclical dynamics of real economies.     

From Invention to Innovation: Toward Developing an Integrated Innovation Model for Biotech Firms*

A review of extant literature reveals various theories on innovation, including technology push, market pull, and an organizational approach. All of these theories have been criticized for their lack of integration and inapplicability to today's competitive environment. An integrated view of innovation has emerged that synthesizes the variables in previous approaches. However, the application of this view has been restricted to investigating the innovation processes within the computer and manufacturing industries, whereas the biotechnology industry has been ignored. This is despite biotech managers' well‐acknowledged thirst for innovation and the ability of biotech to shape the way we live. The present article contributes to the literature by applying an integrated approach to the biotech industry, thereby extending understanding of innovation management beyond the traditional field of inquiry. An integrated approach is of particular relevance to biotech companies, given the complexities of managing the industry's long development cycle and intense collaborative activities. In‐depth interviews with eight organizations in Maryland formed the basis for an investigation into the challenges of managing the innovation process in biotechnology firms. The findings revealed that biotech entrepreneurs are ill prepared to lead their organizations through several transformations necessary along the product life cycle because of their fixation on a technology‐push approach and lack of an understanding of integrated innovation. These leaders also lack the commercialization knowledge necessary to push products to markets, resulting in avoidable delays and loss of productivity. The existing research has dispelled myths associated with biotech. Specifically, it suggests biotech entrepreneurs cannot rely solely on inventions but must invest in a timely application of knowledge to organizational and market forces to take full advantage of the innovation potential associated with the industry. This article presents a conceptual framework for applying the integrated innovation model to biotech firms and makes the case for incorporating market‐oriented mechanisms, building and using appropriate organizational capabilities, developing effective collaborations, and creating parallel interactions as major elements in a general strategy toward the success and improved efficiency of biotech companies. The limitations of current research are discussed, and avenues are highlighted for much‐needed future research into the biotech industry.     

American contingent claims under small proportional transaction costs

American options are considered in the binary tree model under small proportional transaction costs. Dynamic programming type algorithms, which extend the Snell envelope construction, are developed for computing the ask and bid prices (also known as the upper and lower hedging prices) of such options together with the corresponding optimal hedging strategies for the writer and for the seller of the option. Representations of the ask and bid prices of American options in terms risk-neutral expectations of stopped option payoffs are also established in this setting.     

CONTINUOUS-TIME MEAN-VARIANCE PORTFOLIO SELECTION WITH BANKRUPTCY PROHIBITION

A continuous-time mean-variance portfolio selection problem is studied where all the market coefficients are random and the wealth process under any admissible trading strategy is not allowed to be below zero at any time. The trading strategy under consideration is defined in terms of the dollar amounts, rather than the proportions of wealth, allocated in individual stocks. The problem is completely solved using a decomposition approach. Specifically, a (constrained) variance minimizing problem is formulated and its feasibility is characterized. Then, after a system of equations for two Lagrange multipliers is solved, variance minimizing portfolios are derived as the replicating portfolios of some contingent claims, and the variance minimizing frontier is obtained. Finally, the efficient frontier is identified as an appropriate portion of the variance minimizing frontier after the monotonicity of the minimum variance on the expected terminal wealth over this portion is proved and all the efficient portfolios are found. In the special case where the market coefficients are deterministic, efficient portfolios are explicitly expressed as feedback of the current wealth, and the efficient frontier is represented by parameterized equations. Our results indicate that the efficient policy for a mean-variance investor is simply to purchase a European put option that is chosen, according to his or her risk preferences, from a particular class of options.