The extent of resource use inefficiencies in cotton production in Pakistan's Punjab: an application of Data Envelopment Analysis

This paper attempts to identify sources of resource use inefficiency for cotton production in Pakistan's Punjab. The use of a non‐parametric method, Data Envelopment Analysis (DEA), is developed to study the relative technical and allocative efficiencies of individual farms which use similar inputs, produce the same product and operate under comparable circumstances. In the ‘cotton‐wheat’ system of Pakistan, there are a considerable number of farms that are both technically and allocatively inefficient. The use of DEA shows that the technique provides a clear identification of both the extent and the sources of technical and allocative inefficiencies in cotton production. However, both the interpretation of the farm level results generated and the projection of these results to a higher level require care, given the technical nature of the agricultural production processes.     

The role of time‐varying rare disaster risks in predicting bond returns and volatility

This paper aims to provide empirical evidence to the theoretical claim that rare disaster risks affect government bond market movements. Using a nonparametric quantiles‐based methodology, we show that rare disaster‐risks affect only volatility, but not returns, of 10‐year government bond of the United States over the monthly period of 1918:01 to 2013:12. In addition, the predictability of volatility holds for the majority of the conditional distribution of the volatility, with the exception of the extreme ends. Moreover, in general, similar results are also obtained for long‐term government bonds of an alternative developed country (UK) and an emerging market (South Africa).     

Getting compensation right - The choice of performance measures in CEO bonus contracts and earnings management

This paper examines whether the choice of performance measures in CEO bonus compensation contracts is associated with earnings management. From a sample of FTSE350 Index firms over the period of 2005–2014, we investigate the relationship between earnings management, through discretionary accruals and real activities management, and (1) the use of and extent of reliance on financial and non-financial performance measures in CEO bonus contracts; and (2) the use of long-term and short-term measures in CEO bonus contracts. We find less income-increasing manipulation through discretionary accruals and expenses when non-financial performance measures (NFPMs) are used alongside financial performance measures (FPMs) and when the NFPMs are used to a larger extent than FPMs. Furthermore, we find less discretionary accruals when long-term performance measures are used. This implies that non-financial and long-term measures encourage executives to work towards the long-term success of the company rather than their own short-term reward.     

Financial and corporate social performance in the UK listed firms: the relevance of non-linearity and lag effects

Using environmental, social and governance scores compiled by Reuters Datastream for each company’s corporate social performance (CSP), we examine the relationship between CSP and corporate financial performance (CFP) of 314 UK listed companies over the period 2002–2015. We further evaluate the relationship between prior and subsequent CFP and prior and subsequent CSP. Based on the system-GMM estimation method, we provide direct evidence that suggests that while CFP and CSP can be linked linearly; however, when we examine the impact of CSP on CFP, the association is more non-linear (cubic) than linear. Our results suggest that firms periodically adjust their level of commitment to society, in order to meet their target CSP. The primary contributions of this paper are testing (1) the non-monotonous relationship between CSP and CFP, (2) the lagged relationship between the two and the optimality of CSP levels, and (3) the presence of a virtuous circle. Our results further suggest that CSP contributes to CFP better during post-crisis years. Our findings are robust to year-on-year changes in CFP and CSP, financial versus non-financial firms, and the intensity of corporate social responsibility (CSR) engagement across industries.

     

No-arbitrage up to random horizon for quasi-left-continuous models

This paper studies the impact, on no-arbitrage conditions, of stopping the price process at an arbitrary random time. As price processes, we consider the class of quasi-left-continuous semimartingales, i.e., semimartingales that do not jump at predictable stopping times. We focus on the condition of no unbounded profit with bounded risk (called NUPBR), also known in the literature as no arbitrage of the first kind. The first principal result describes all the pairs of quasi-left-continuous market models and random times for which the resulting stopped model fulfils NUPBR. Furthermore, for a subclass of quasi-left-continuous local martingales, we construct explicitly martingale deflators, i.e., strictly positive local martingales whose product with the price process stopped at a random time is a local martingale. The second principal result characterises the random times that preserve NUPBR under stopping for any quasi-left-continuous model. The analysis carried out in the paper is based on new stochastic developments in the theory of progressive enlargements of filtrations.     

An Investigation into Factors Affecting the Occupational Choices of Nominated Farm Heirs in Ireland

The resilience of family farming is an important feature of the structure of the farming industry in many countries, due largely to the ‘smooth’ succession of farms from one generation to the next. The stability of this structure is now threatened by the widening gap between the income expected from farming when compared with non‐farming occupations in an economy like Ireland, operating at almost full employment. Nominated farm heirs are increasingly unlikely to choose full‐time farming as their preferred occupation. To identify the factors that affect this occupational choice, a multinomial logit model is developed and applied to Irish data to examine the farm, economic and personal characteristics that influence a nominated heir's decision to enter farming as opposed to some non‐farming occupation. The results show a significant negative relationship between higher education and the choice of full‐time farming as an occupation. The interdependence between education and occupational choices is further explored using a bivariate probit model. The main findings are: the occupational choice and the decision to continue with higher education are made jointly; the nominated heirs on more profitable farms are less likely to pursue tertiary education and therefore more likely to enter full‐time farming. The model developed is sufficiently general for studying the phenomenon of succession on farms.     

MINIMAL ENTROPY–HELLINGER MARTINGALE MEASURE IN INCOMPLETE MARKETS

This paper defines an optimization criterion for the set of all martingale measures for an incomplete market model when the discounted price process is bounded and quasi-left continuous. This criterion is based on the entropy–Hellinger process for a nonnegative Doléans–Dade exponential local martingale. We develop properties of this process and establish its relationship to the relative entropy "distance." We prove that the martingale measure, minimizing this entropy–Hellinger process, is unique. Furthermore, it exists and is explicitly determined under some mild conditions of integrability and no arbitrage. Different characterizations for this extremal risk-neutral measure as well as immediate application to the exponential hedging are given. If the discounted price process is continuous, the minimal entropy–Hellinger martingale measure simply is the minimal martingale measure of Föllmer and Schweizer. Finally, the relationship between the minimal entropy–Hellinger martingale measure (MHM) and the minimal entropy martingale measure (MEM) is provided. We also give an example showing that in contrast to the MHM measure, the MEM measure is not robust with respect to stopping.     

CLASSICAL AND IMPULSE STOCHASTIC CONTROL FOR THE OPTIMIZATION OF THE DIVIDEND AND RISK POLICIES OF AN INSURANCE FIRM

This paper deals with the dividend optimization problem for a financial or an insurance entity which can control its business activities, simultaneously reducing the risk and potential profits. It also controls the timing and the amount of dividends paid out to the shareholders. The objective of the corporation is to maximize the expected total discounted dividends paid out until the time of bankruptcy. Due to the presence of a fixed transaction cost, the resulting mathematical problem becomes a mixed classical-impulse stochastic control problem. The analytical part of the solution to this problem is reduced to quasivariational inequalities for a second-order nonlinear differential equation. We solve this problem explicitly and construct the value function together with the optimal policy. We also compute the expected time between dividend payments under the optimal policy.     

Risk-Hedging in Real Estate Markets

Topics in real estate markets have attracted much attention recently. In this article, we first address the risk-hedging issues of speculators based on an American put option pricing model, and then investigate their risk-hedging behaviors using a generalized swing option so as to take capacity effects into account. Semi-analytic solutions are derived, and examples are presented. Results have important implications in the real estate markets and contribute to the operational research literature on risk measuring and risk management.