Quantiles of the Euler Scheme for Diffusion Processes and Financial Applications

In this paper we briefly present the results obtained in our paper ( Talay and Zheng 2002a ) on the convergence rate of the approximation of quantiles of the law of one component of  ( X_t )  , where  ( X_t )  is a diffusion process, when one uses a Monte Carlo method combined with the Euler discretization scheme. We consider the case where  ( X_t )  is uniformly hypoelliptic (in the sense of Condition (UH) below), or the inverse of the Malliavin covariance of the component under consideration satisfies the condition (M) below. We then show that Condition (M) seems widely satisfied in applied contexts. We particularly study financial applications: the computation of quantiles of models with stochastic volatility, the computation of the VaR of a portfolio, and the computation of a model risk measurement for the profit and loss of a misspecified hedging strategy.     

Short reviews

Bynner, J. and Roberts, K. (eds), 1991: Youth and Work: Transition to Employment in England and Germany, London: Anglo-German Foundation, £17 paper. Available from BEBC, 15 Albion Close, Parkstone, Poole, Dorset BH12 3LL

Brah, A. and Shaw, S. 1992: Working Choices: South Asian Young Muslim Women and the Labour Market, Sheffield: Department of Employment Research Paper No 91, free.     

THE MEASUREMENT OF INCOME DISTRIBUTION DYNAMICS WHEN DEMOGRAPHICS ARE CORRELATED WITH INCOME

We show how to account for differentials in demographic variables, in particular mortality, when performing welfare comparisons over time. The idea is to apply various ways of "correcting" estimated income distribution measures for "sample selection" due to differential mortality. We distinguish the direct effect of mortality, i.e. individuals who die leave the population and no longer contribute to monetary welfare, from the indirect effect, i.e. the impact on survivors in the deceased's household who may experience a decrease or increase in monetary welfare. In the case of Indonesia, we show that the direct and indirect effects of mortality on income distribution have opposite signs, but are roughly the same in magnitude. Moreover, the effects of other demographic changes dominate the effects of mortality, whether direct or indirect. However, in the post-crisis period these demographic changes also explain a substantial part of the overall change in the distribution of income.     

Proactive Leverage Increases and The Value of Financial Flexibility

Traditional tradeoff models of corporate capital structure, although still featured prominently in finance textbooks and widely accepted by practitioners, have been criticized by financial economists for doing a poor job of explaining observed debt ratios. Moreover, the observed ratios are far less stable than what would be predicted by the standard tradeoff models. In a study published several years ago in the Review of Financial Studies, the authors of this article aimed to shed more light on the underlying forces governing capital structure decisions by analyzing a set of major changes in capital structure in which companies initiated large increases in leverage through substantial new borrowings. They then attempted to explain why these companies chose to increase leverage and how their capital structures changed during the years after the large debt issues. As summarized in this article, the authors' findings indicate, first of all, that the large debt financings were used primarily to fund major corporate investments—and not, for example, to make large distributions to shareholders. And the changes in leverage ratios that came after the debt offerings were driven far more by the evolution of the companies' realized cash flows and their investment opportunities than by deliberate or decisive attempts to rebalance their capital structures toward a stationary target. In fact, many of the companies chose to take on even more debt when faced with cash‐flow deficits, despite operating with leverage that was already well above any reasonable estimate of their estimated target leverage. At the same time, companies that generated financial surpluses used them to reduce debt, even when their leverage had fallen well below their estimated targets. Taken as a whole, the findings of the authors' study support the idea that unused debt capacity represents an important source of financial flexibility, and that preserving such flexibility—and making use of it when valuable investment opportunities materialize—may well be the critical missing link in connecting capital structure theory with observed corporate behavior.     

TRUE UPPER BOUNDS FOR BERMUDAN PRODUCTS VIA NON-NESTED MONTE CARLO

We present a generic non-nested Monte Carlo procedure for computing true upper bounds for Bermudan products, given an approximation of the Snell envelope. The pleonastic "true" stresses that, by construction, the estimator is biased above the Snell envelope. The key idea is a regression estimator for the Doob martingale part of the approximative Snell envelope, which preserves the martingale property. The so constructed martingale can be employed for computing tight dual upper bounds without nested simulation. In general, this martingale can also be used as a control variate for simulation of conditional expectations. In this context, we develop a variance reduced version of the nested primal-dual estimator. Numerical experiments indicate the efficiency of the proposed algorithms.     

Regulatory induced performance persistence: Evidence from hedge funds

This paper tests the idea that financial regulation can impact performance persistence in the context of the hedge fund industry in 48 countries over the years 1994–2008. The data show evidence of three types of regulation influencing performance persistence: (1) minimum capital restrictions, which restrict lower quality funds and hence increase the likelihood of performance persistence, (2) restrictions on location of key service providers, which restrict human capital choices and hence tend to mitigate performance persistence, and (3) distribution channels, which make fund performance more opaque, decrease the likelihood of performance persistence. We do not find evidence that distribution channels, that promote fund presence to institutional investors, enhance performance persistence. Finally, we show differences in the effect of regulation on persistence by fund quartile ranking.     

Estimating the effect of a retraining program on the re-employment rate of displaced workers

In this article, we estimate the effects of a French retraining program on the re-employment rate of displaced workers by matching techniques. This program, called ‘Conventions de conversion’, was intended to improve re-employment prospects of displaced workers by proposing them retraining and job seeking assistance for a period of 6 months beginning just after the dismissal. Our empirical analysis is based upon non-experimental data collected by the French Ministry of Labour. Matching estimates show that this program succeeded in increasing the employment rate of trainees by approximately 6 points of percentage in the medium-term, namely in the 2nd and 3rd years after the date of entry into the program. This improvement is essentially due to an increase of their re-employment rate in regular jobs, namely jobs under long-term labour contracts.     

The Influence of Constraints and Self-Efficacies on Participation in Regular Active Recreation

This study examined the ways in which perceived constraints and self-efficacies associated with participation in active recreation influenced Hong Kong and Australian university students' interest, intention, and participation in regular active recreation. The study indicated that perceived constraints have weak negative effects whereas self-efficacies have stronger positive effects on students' interest, intention, and participation in regular active recreation. Time efficacy, persistence efficacy, and activity efficacy emerged as important indirect motivators of active recreation engagement. The influences of constraints and self-efficacies on active recreation participation mainly occurred indirectly through adjustments in participation interest and intention.