An Experimental Analysis of the Effects of Non‐audit Services on Auditor Independence in Appearance in the European Union: Evidence from Germany

The provision of non‐audit services by the statutory auditor may have a negative impact on auditor independence. Therefore, the European Union decided to prevent auditors from offering a significant extent of non‐audit services to audit clients. Prior research has revealed that different advisory services have different effects on perceived auditor independence. This could be caused by differences in number and intensity of independence threats (self‐interest, familiarity, self‐review, advocacy). Therefore, this experimental study investigates the effect of such threats on independence perceptions in the case of German individual investors. Multivariate analyses indicate that a high self‐interest and a high‐familiarity threat may impair auditor independence in appearance. On the other hand, our findings do not reveal a significant effect of an existing advocacy threat on investors’ trust in auditor independence. A negative effect of a self‐review threat is not directly confirmed. However, the provision of services with regard to internal controls, and thus the self‐review threat, interacts with the self‐interest threat. They potentially impact perceived auditor independence negatively when non‐audit fees are high. In contrast, no significant interactions with familiarity are found. Based on these findings, a general prohibition of non‐audit services does not seem to be necessary. On the other hand, a non‐audit fees cap might be reasonable.     

The role of implied volatility in forecasting future realized volatility and jumps in foreign exchange,stock, and bond markets

We study the forecasting of future realized volatility in the foreign exchange, stock, and bond markets from variables in our information set, including implied volatility backed out from option prices. Realized volatility is separated into its continuous and jump components, and the heterogeneous autoregressive (HAR) model is applied with implied volatility as an additional forecasting variable. A vector HAR (VecHAR) model for the resulting simultaneous system is introduced, controlling for possible endogeneity issues. We find that implied volatility contains incremental information about future volatility in all three markets, relative to past continuous and jump components, and it is an unbiased forecast in the foreign exchange and stock markets. Out-of-sample forecasting experiments confirm that implied volatility is important in forecasting future realized volatility components in all three markets. Perhaps surprisingly, the jump component is, to some extent, predictable, and options appear calibrated to incorporate information about future jumps in all three markets.     

Power of Tests for Unit Roots in the Presence of a Linear Trend*

Dickey and Fuller [Econometrica (1981) Vol. 49, pp. 1057–1072] suggested unit‐root tests for an autoregressive model with a linear trend conditional on an initial observation. TPower of tests for unit roots in the presence of a linear trendightly different model with a random initial value in which nuisance parameters can easily be eliminated by an invariant reduction of the model. We show that invariance arguments can also be used when comparing power within a conditional model. In the context of the conditional model, the Dickey–Fuller test is shown to be more stringent than a number of unit‐root tests motivated by models with random initial value. The power of the Dickey–Fuller test can be improved by making assumptions to the initial value. The practitioner therefore has to trade‐off robustness and power, as assumptions about initial values are hard to test, but can give more power.     

Inference in Cointegrating Models: UK M1 Revisited

The paper addresses the practical determination of cointegration rank. This is difficult for many reasons: deterministic terms play a crucial role in limiting distributions, and systems may not be formulated to ensure similarity to nuisance parameters; finite-sample critical values may differ from asymptotic equivalents; dummy variables alter critical values, often greatly; multiple cointegration vectors must be identified to allow inference; the data may be I(2) rather than I(1), altering distributions; and conditioning must be done with care. These issues are illustrated by an empirical application of multivariate cointegration analysis to a small model of narrow money, prices, output and interest rates in the UK.     

Non-price strategic behavior: the case of bank branches

We perform an empirical study of banks’ branching decisions as a strategic non-price variable in an oligopolistic setting. Using panel data of banks from Norway, we find clear evidence that banks act strategically in their branching decisions, taking into consideration the future response from rival banks. The analysis is applied to a unique data set which covers the entire banking sector during both pre- and post-banking crisis periods, where very different types of conduct are found in each of these periods both for banks and borrowers. Moreover, we find that a bank specific branch-network does not confer externality on other banks. As a result branch network affects only market shares but not market size.     

Searching an Ex Situ Collection of Wheat Genetic Resources

A theoretical model is developed and applied to the search for disease and pest resistance in ex situ collections of wheat genetic resources, employing actual data on frequency distributions, disease losses, and search costs. Experiments developed from case studies clarify several misperceptions about the value of gene banks and their utilization by breeders. The observation that wheat breeders use gene banks rarely does not imply that marginal accessions have low value. High costs of transferring genes with conventional breeding techniques mean that it may be efficient to store certain categories of genetic resources (such as landraces) 'unused' for many years.