Hedge funds and optimal asset allocation: Bayesian expectations and spanning tests

This paper analyzes the contribution of hedge funds to optimal asset allocations between 1993 and 2010. The preferences of specific institutional investors are captured by implementing a Bayesian asset allocation framework that incorporates heterogeneous expectations regarding hedge fund alpha. Mean-variance spanning tests are used to infer the ability of hedge funds to significantly enhance the mean-variance efficient frontier. Further, a novel democratic variance decomposition procedure sheds light on the dynamics in the co-movement of hedge fund returns with a set of common benchmark assets. The empirical findings indicate that portfolio benefits of hedge funds are time-varying and strongly depend on investor optimism regarding hedge funds’ ability to generate alpha. In general, allocations to hedge funds improve the global minimum variance portfolio even after controlling for short-selling restrictions and minimum diversification constraints. However, due to dynamics underlying the composition of the aggregate hedge fund universe, the factor structure of hedge fund returns has become more similar to the benchmark assets over time.     

Entrepreneurial orientation in long-lived family firms

We apply a key construct from the entrepreneurship field, entrepreneurial orientation (EO), in the context of long-lived family firms. Our qualitative in-depth case studies show that a permanently high level of the five EO dimensions is not a necessary condition for long-term success, as traditional entrepreneurship and EO literature implicitly suggest. Rather, we claim that the level of EO is dynamically adapted over time and that the original EO scales (autonomy, innovativeness, risk taking, proactiveness, and competitive aggressiveness) do not sufficiently capture the full extent of entrepreneurial behaviors in long-lived family firms. Based on these considerations we suggest extending the existing EO scales to provide a more fine-grained depiction of firm-level corporate entrepreneurship in long-lived family firms.     

The Continuing Continuum Problem of Deposits and Loans

Barnett and Block (J Bus Ethics 18(2):179–194, 2011) argue that one cannot distinguish between deposits and loans due to the continuum problem of maturities and because future goods do not exist—both essential characteristics that distinguish deposit from loan contracts. In a similar way but leading to opposite conclusions (Cachanosky, forthcoming) maintains that both maturity mismatching and fractional reserve banking are ethically justified as these contracts are equivalent. We argue herein that the economic and legal differences between genuine deposit and loan contracts are clear. This implies different legal obligations for these contracts, a necessary step in assessing the ethics of both fractional reserve banking and maturity mismatching. While the former is economically, legally, and perhaps most importantly ethically problematic, there are no such troubles with the latter.     

Background filtrations and canonical loss processes for top-down models of portfolio credit risk

In single-obligor default risk modeling, using a background filtration in conjunction with a suitable embedding hypothesis (generally known as ℍ-hypothesis or immersion property) has proven a very successful tool to separate the actual default event from the model for the default arrival intensity. In this paper we analyze the conditions under which this approach can be extended to the situation of a portfolio of several obligors, with a particular focus on the so-called top-down approach. We introduce the natural ℍ-hypothesis of this setup (the successive ℍ-hypothesis) and show that it is equivalent to a seemingly weaker one-step ℍ-hypothesis. Furthermore, we provide a canonical construction of a loss process in this setup and provide closed-form solutions for some generic pricing problems. Financial support by the National Centre of Competence in Research “Financial Valuation and Risk Management” (NCCR FINRISK) is gratefully acknowledged. NCCR FINRISK is a research program supported by the Swiss National Science Foundation (SNSF). The authors would like to thank Monique Jeanblanc and two anonymous referees for their helpful comments and suggestions. Parts of this paper were presented at RiskDay 2006, Zurich. All remaining errors are our own. Comments and suggestions are very welcome.     

How Do Media Companies Gain Legitimacy? An Experimental Study on the (Ir)Relevance of CSR Communication

Due to structural changes in the media industry, the topic of CSR has gained more and more attention among media companies. Our research question was whether media companies can gain legitimacy through CSR disclosures. There is reason to assume that CSR disclosures both directly increase and indirectly decrease a media company’s legitimacy. On one hand, CSR is regarded as a means of strengthening legitimacy; on the other hand, stakeholders might become skeptical and distrust disclosures about generous deeds. The experimental study detailed here considers both possibilities by using five CSR disclosures of a fictional media company as the stimuli, ranging from low- to high-communicated CSR engagement (single-factor between-groups design, 274 participants). According to the results of the Structural Equation Model (SEM), both assumptions are incorrect: CSR is not the crucial factor in determining whether or not stakeholders perceive a media company as legitimate, but rather its corporate credibility.     

Inflation and interest rate derivatives for FX risk management: Implications for exporting firms under real wealth

Firms that export goods face risks such as product price, cost, and exchange rate risks. Price and cost risks can substantially reduce the FX hedging performance in real wealth. We thus investigate hedging strategies that are intended to improve the performance of the FX hedge in real terms using inflation and interest rate derivatives. The impact of these additional instruments is not clear and has only been briefly analyzed in the hedging literature so far. For this purpose, we derive variance-minimizing hedge positions of an exporting firm. A cointegrated VAR and bootstrap methods are used to evaluate the efficiencies of several hedging strategies. While inflation derivatives work better in the short run, interest rate derivatives perform better over longer hedge horizons.     

Risikobewertung bei Investitionen in Offshore-Windanlagen

The German “Energiewende” is progressing more slowly than intended. Despite of high feed-in tariffs, private investors remain cautious due to the risk profiles, especially in offshore wind. Sensitivities of DCF-based investment models confirm material risk impact, especially from lower wind availability and construction cost overruns. Political focus on the timely grid connection of regional feed-in tariff differentiation may not address investor needs, with the result that this will remain costly. The forthcoming updates to the renewable energy law should seek to mitigate wind availability risk; ease contributions from insurance companies, pension funds and private equity; and support financial innovation.