Estimating correlation and covariance matrices by weighting of market similarity

We discuss a weighted estimation of correlation and covariance matrices from historical financial data. To this end, we introduce a weighting scheme that accounts for the similarity of previous market conditions to the present situation. The resulting estimators are less biased and show lower variance than either unweighted or exponentially weighted estimators. The weighting scheme is based on a similarity measure that compares the current correlation structure of the market to the structures at past times. Similarity is then measured by the matrix 2-norm of the difference of probe correlation matrices estimated for two different points in time. The method is validated in a simulation study and tested empirically in the context of mean–variance portfolio optimization. In the latter case we find an enhanced realized portfolio return as well as a reduced portfolio risk compared with alternative approaches based on different strategies and estimators.     

May the course of the tuberculosis-mortality chiefly be explained by the movements of the infection-curve (tuberculin-curve)?

Abstract

Let us suppose that we have a population which is kept constant by the birth of 10,000 children annually, and that this has been the case for a number of years.     

The Performance Effect of Feedback Frequency and Detail: Evidence from a Field Experiment in Customer Satisfaction

This paper presents the results from a field experiment that examines the effects of nonfinancial performance feedback on the behavior of professionals working for an insurance repair company. We vary the frequency (weekly and monthly) and the level of detail of the feedback that the 800 professionals receive. Contrary to what we would expect if these professionals conformed to the model of the Bayesian decision maker, more (and more frequent) information does not always help improve performance. In fact, we find that professionals achieve the best outcomes when they receive detailed but infrequent (monthly) feedback. The treatment groups with frequent feedback, regardless of how detailed it is, perform no better than the control group (with monthly and aggregate information). The results are consistent with the information in the latest feedback report being most salient and professionals in the weekly treatments overweighting their most recent performance, hampering their ability to learn.     

The implications of ineffective internal control and SOX 404 reporting for financial analysts

The mandatory reporting of firms’ internal control effectiveness continues to be debated by equity market participants, U.S. regulatory agencies and oversight committees. We investigate the implications of material weaknesses in internal control and SOX 404 required reporting of such for financial analysts because analysts are important intermediaries in the U.S. capital market and it is not known whether analysts’ forecasts or coverage decisions are affected by firms’ internal control problems or reporting, respectively. Results of our empirical tests indicate that analysts provide less accurate forecasts and there is greater forecast dispersion for firms with ineffective internal control. We also find that firms that disclose internal control problems have less analyst coverage and that analyst following declines after the material weakness in internal control is disclosed. The results are robust to controlling for potential self-selection bias and management earnings guidance. Our study documents the consequences of ineffective internal control for an important class of financial statement users and suggests the required reporting on the effectiveness of internal control is beneficial to understanding the properties of analysts’ forecasts.     

The relationship between banking market competition and risk-taking: Do size and capitalization matter?

This paper addresses the effects of bank competition on the risk-taking behaviors of banks in 10 Latin American countries between 2003 and 2008. We conduct our empirical approach in two steps. First, we estimate the Boone indicator, which is a measure of competition. We then regress this measure and other explanatory variables on the banking “stability inefficiency” derived simultaneously from the estimation of a stability stochastic frontier. Unlike previous findings, this paper concludes that competition affects risk-taking behavior in a non-linear way as both high and low competition levels enhance financial stability, while we find the opposite effect for average competition. In addition, bank size and capitalization are essential factors in explaining this relationship. On the one hand, the larger a bank is, the more it benefits from competition. On the other hand, a greater capital ratio is advantageous for banks that operate in collusive markets, while capitalization only enhances the stability of larger banks under high and average competition. These results are of extreme importance when considering bank regulations, especially in light of the recent turmoil in the global financial markets.     

Horizontal inequity under a dual income tax system: principles and measurement

Tax systems with separate taxation of wage and capital income, also called dual income tax systems, have gained relevance through the Mirrlees Review. Obviously, such tax systems are exposed to horizontal equity (HE) failures, or horizontal inequity (HI). HE and HI have a firm grip on assessment of fair tax policies, both from an academic point of view and in general public debate. The dual income tax system of Norway was modified by the tax reform of 2006 precisely because the previous schedule failed to deliver equal tax treatment of equals. This paper discusses the meaning and measurement of HI effects of dual income tax systems, and evaluates the development of HI for Norway over the time period 2000–2008 using microdata. A copula-based identification strategy efficiently establishes a framework for evaluations of HI over time. The dual income tax system and the early announcement of its impending revision during the period under examination created measurement problems which we had to account for by defining a new income concept for the empirical strategy. As expected, we find less HI in Norway after the reform of 2006.     

Increasing Charitable Giving: What Can We Learn from Economics?*

There is growing policy interest in charitable giving in the UK. As part of its Big Society agenda, the current government is keen to encourage a higher level of donations, highlighting new technologies, new social norms and tax incentives as potential mechanisms for raising giving. In the 2012 Budget, however, the Chancellor also proposed limiting tax relief on donations to £50,000, sparking an intense discussion about the effectiveness and desirability of tax incentives for major donors. This paper brings together recent evidence relevant to the ongoing policy debates.     

Attracting Long‐Term Shareholders

Corporate CEOs often say they don't hear enough from shareholders about strategic issues related to long‐term value creation. At the same time, they claim to hear with predictable regularity from short‐term investors about their success (or failure) in hitting consensus earnings targets. But as the authors of this article begin by noting, there is mounting evidence that companies get the shareholders they deserve—that companies that provide quarterly earnings guidance and otherwise focus investor attention on near‐term earnings targets tend to attract more transient investors. The authors go on to argue that companies with a compelling long‐term vision can expect to benefit not only from more farsighted managerial decision‐making, but also from building a base of longer‐term investors who share management's view of success, and how it can and ought to be achieved. Such a shift in strategic focus and disclosure toward longer‐run performance creates a virtuous cycle—one in which companies that gain the interest and backing of investors with longer horizons end up reinforcing management's confidence to undertake value‐adding investments in their company's future. Even if most companies can't pick their shareholders, they can develop an investor engagement strategy designed to attract long‐term investors. In this article, the chairman and president of FCLTGlobal outline the underlying strategy behind long‐term investor relations and the four key components of such an approach.     

What drives support for self-driving car technology in the United States?

Abstract

Recent advances in automotive technology have made fully automated self-driving cars technologically feasible. Despite offering many benefits such as increased safety, improved fuel efficiency, and greater disability access, public support for self-driving cars remains low. While previous studies find that demographic factors such as age and sex influence self-driving car support, limited research has examined variables that are well known to predict public attitudes toward emerging technology. Using self-report data from a quota sample of American adults (N?=?1008), we find that age and sex are not significantly associated with support for self-driving car policies when controlling for these other variables. Instead, significant predictors of support included trust in automotive institutions and regulatory bodies, recognition of self-driving car benefits, positive affect toward self-driving cars, and a greater perception that human-driven cars are riskier than self-driving cars. Importantly, we also find that individualism is negatively associated with support. That is, people who value personal autonomy and limited government regulation may perceive policies encouraging self-driving car use as threatening to their worldviews. Altogether, our results suggest strategies for encouraging greater public support of self-driving vehicles while also forecasting potential barriers as this technology emerges as a fixture in transportation policy.