Term Premia and Interest Rate Forecasts in Affine Models

The standard class of affine models produces poor forecasts of future Treasury yields. Better forecasts are generated by assuming that yields follow random walks. The failure of these models is driven by one of their key features: Compensation for risk is a multiple of the variance of the risk. Thus risk compensation cannot vary independently of interest rate volatility. I also describe a broader class of models. These "essentially affine" models retain the tractability of standard models, but allow compensation for interest rate risk to vary independently of interest rate volatility. This additional flexibility proves useful in forecasting future yields.     

The Lowry Model Revisited: Incorporating a Multizonal Input-Output Model into an Urban Land Use Allocation Model

This paper formulates a new generation of Lowry-style models that combine a multizonal input-output model and an urban land use allocation model. Three different types of models are proposed: 1) an unconstrained model, 2) a primal of a linear programming approach that includes land supply constraints, and 3) a modified dual of the linear programming approach that allocates land based on additional conditions of economic efficiency. The modified dual formulation improves upon the limitations of Lowry models and their derivatives. First, the proposed model has sound theoretical underpinnings that incorporate the production theory of input-output models and the behavioral theory of optimization models. Second, the proposed model allocates land on the basis of economic efficiency by imposing a procedure that equalizes shadow prices. And third, the proposed model is an optimization model that fully accounts for the spatial and sectoral relationships of multiplier effects determining land use demand.     

A General Equilibrium Analysis of VAT in India

Indian industry is under pricing pressure after the government cut tariffs in a phased manner as per the WTO agreements. In order to be competitive, the consensus opinion in government, academics and industry is the implementation of a VAT in India. The paper evaluates the welfare implications of a VAT in the static and a sequentially dynamic context after accounting for the political and administrative constraints facing the Indian government in implementing a VAT. Replacing the old indirect tax structure with a VAT is welfare worsening. The increase in final consumer prices on account of reduced tax base leads to higher price of essentials, causing welfare loss. Zero rating v/s exemption plays an important role on welfare, with lower welfare loss if essential commodities are exempt from VAT. Agriculture sector unambiguously plays a crucial role in welfare.     

Is Index Performance Achievable? An Analysis of Australian Equity Index Funds

This article examines the performance of index equity funds in Australia. Despite the significant growth in index funds since 1976, when the first index mutual fund was launched in the U.S., research on their performance is sparse in the U.S. and non-existent in Australia. This study documents the existence of significant tracking error for Australian index funds. For example, the magnitude of the difference between index fund returns and index returns averages between 7.4 and 22.3 basis points per month across index funds operating for more than five years. However, there is little evidence of bias in tracking error implying that these funds neither systematically outperform nor underperform their benchmark on a before cost basis. Further analysis provides evidence that the magnitude of tracking error is related to fund cash flows, market volatility, transaction costs and index replication strategies used by the manager.     

Management and the Professions: How Cracked is That Glass Ceiling?

All prestigious or highly-paid occupations in Britain are dominated by men: this is as true of the public sector as it is of industry. This article examines the evidence for discrimination in the public sector. It deals with both the situation at work and the one at home. It looks at various explanations as to why this is the case, as well as the evidence on how men and women deal with the inequality. The author concludes that there are good reasons why men and women do not see or confront the issues discussed in her article. Unless men and women wake up to the fact that we live in an unequal society and wish to see the glass ceiling well and truly broken, little is likely to change.     

Business Strategy and Poverty Alleviation

Currently, entrepreneurs and corporations overwhelmingly do not view the alleviation of global poverty as a strategic priority. Yet business activity can have a negative as well as a positive effect on each distinctive form of poverty. In order to reduce poverty, entrepreneurs have to find ways of limiting the negative aspects. This might be achieved by deliberately augmenting strategies so that they can achieve a synthesis, in partnership with governments and NGO’s. Alan E. Singer is a reader in strategy at the university of Canterbury. He was the 2004/5 Aram chair of Business Ethics at Gonzaga. He is author of Strategy as Rationality (Avebury), Co editor (with Pat Werhane) of Business Ethics in Theory and Practice (Kluwer) and editor of Business Ethics and Strategy (Ashgate, forthcoming). He has written journal articles on many aspects of strategy and decision making and has served on the editorial boards of Journal of Business Ethics (to 2003), Human Systems Management, Journal of International Entrepreneurship, African Journal of Business Ethics and the Journal of Economic Development and Business Policy.     

Advertising with Subjective Horizontal and Vertical Product Differentiation

In this paper, we analyze the impact of advertising on markets wheresubjective horizontal and vertical product differentiation are important. A simple model showshow advertising can be used to create subjective horizontal and vertical differentiation.The model predicts that firms are likely to be symmetric when advertising creates subjective horizontaldifferentiation and that name and generic brands are most likely to coexist in markets whereadvertising creates subjective vertical differentiation. In all cases, the ability toadvertise creates distance between products which increases the market power of firms. Finally, severalreal world examples are used to illustrate the conditions under which the model is most relevant.     

Measuring Integrated Market and Credit Risk in Bank Portfolios: An Application to a Set of Hypothetical Banks Operating in South Africa

The banking crises of the ‘90s emphasize the need to model the connections between financial environment volatility and the potential losses faced by financial institutions resulting from correlated market and credit risks. Due to the number of variables that must be modeled and the complexity of the relationships an analytical solution is not feasible. We present here a numerical solution based on a simulation model that explicitly links changes in the relevant variables that characterize the financial environment and the distribution of possible future bank capital ratios. This forward looking quantitative risk assessment methodology allows banks and regulators to identify potential risks before they materialize and make appropriate adjustments to bank portfolio credit qualities, sector and region concentrations, and capital ratios on a bank by bank basis. It also has the potential to be extended so as to assess the risks of correlated failures among a group of financial institutions (i.e., systemic risk analyses). This model was applied by the authors to the study of the risk profile of the largest South African Banks in the context of the Financial System Stability Assessment program undertaken by the IMF in 1999. In the current study, we apply the model to various hypothetical banks operating in the South African financial environment and assess the correlated market and credit risks associated with business lending, mortgage lending, asset and liability maturity matches, foreign lending and borrowing, and direct equity, real estate, and gold investments. It is shown to produce simulated financial environments (interest rates, exchange rates, equity indices, real estate price indices, commodity prices, and economic indicators) that match closely the assumed parameters, and generate reasonable credit transition probabilities and security prices. As expected, the credit quality and diversification characteristics of the loan portfolio, asset and liability maturity mismatches, and financial environment volatility, are shown to interact to determine bank risk levels. We find that the credit quality of a bank's loan portfolio is the most important risk factor. We also show the risk reduction benefits of diversifying the loan portfolio across various sectors and regions of the economy and the importance of accounting for volatility shocks that occur periodically in emerging economies. Banks with high credit risk and concentrated portfolios are shown to have a high risk of failure during periods of financial stress. Alternatively, banks with lower credit risk and broadly diversified loan portfolios across business and mortgage lending are unlikely to fail even during very volatile periods. Asset and liability maturity mismatches generally increase bank risk levels. However, because credit losses are positively correlated with interest rate increases, banks with high credit risk may reduce overall risk levels by holding liabilities with longer maturities than their assets. Risk assessment methodologies which measure market and credit risk separately do not capture these various interactions and thus misestimate overall risk levels.