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Measuring value sensitivity in medicine

Description: 

Background: Value sensitivity – the ability to recognize value-related issues when they arise in practice – is an indispensable competence for medical practitioners to enter decision-making processes related to ethical questions. However, the psychological competence of value sensitivity is seldom an explicit subject in the training of medical professionals. In this contribution, we outline the traditional concept of moral sensitivity in medicine and its revised form conceptualized as value sensitivity and we propose an instrument that measures value sensitivity.
Methods: We developed an instrument for assessing the sensitivity for three value groups (moral-related values, values related to the principles of biomedical ethics, strategy-related values) in a four step procedure: 1) value identification (n = 317); 2) value representation (n = 317); 3) vignette construction and quality evaluation (n = 37); and 4) instrument validation by comparing nursing professionals with hospital managers (n = 48).
Results: We find that nursing professionals recognize and ascribe importance to principle-related issues more than professionals from hospital management. The latter are more likely to recognize and ascribe importance to strategy-related issues.
Conclusions: These hypothesis-driven results demonstrate the discriminatory power of our newly developed instrument, which makes it useful not only for health care professionals in practice but for students and people working in the clinical context as well.

Robust normal mixtures for financial portfolio allocation

Description: 

A new approach for multivariate modelling and prediction of asset returns is proposed. It is based on a two-component normal mixture, estimated using a fast new variation of the minimum covariance determinant (MCD) method made suitable for time series. It outperforms the (shrinkage-augmented) MLE in terms of out-of-sample density forecasts and portfolio performance. In addition to the usual stylized facts of skewness and leptokurtosis, the model also accommodates leverage and contagion effects, but is i.i.d., and thus does not embody, for example, a GARCH-type structure. Owing to analytic tractability of the moments and the expected shortfall, portfolio optimization is straightforward, and, for daily equity returns data, is shown to substantially outperform the equally weighted and classical long-only Markowitz framework, as well as DCC-GARCH (despite not using any kind of GARCH-type filter).

Asymmetric stable Paretian distribution testing

Description: 

Two new tests for the symmetric stable Paretian distribution with tail index 1 < α < 2 are proposed. The test statistics and their associated approximate p-values are instantly computed and do not require use of the stable density or distribution or maximum likelihood estimation. They exhibit high power against a variety of alternatives, and much higher power than the existing test based on the empirical characteristic function. The two tests are combined to yield a test that has substantially higher power. A fourth test based on likelihood ratio is also studied. Extensions are proposed to address the asymmetric case and are shown to have reasonable actual size properties and high power against several viable alternatives.

How Much Is the Gap? Efficient Jump Risk-Adjusted Valuation of Leveraged Certificates

Description: 

This paper develops a novel and highly efficient numerical algorithm for the gap risk-adjusted valuation of leveraged certificates. The existing literature relies on Monte Carlo simulations, which are not fast enough to be used in a market making environment. This is because issuers need to compute thousands of price updates per second. By valuing leveraged certificates as multi-window barrier options, we explicitly model random jumps that occur at known times, such as between the exchange closing and re-opening. Our algorithm combines the one-day transition probability with Simpson's numerical integration rule. This yields a backward induction scheme which requires a significantly coarser spacial and time grid than finite difference methods. We confirm its robustness and accuracy through Monte Carlo simulations.

A Simple Macroeconomic Model with Extreme Financial Frictions

Description: 

We develop a simple macroeconomic model with extreme financial frictions (no credit markets) and show that poverty traps can emerge even in the absence of leverage. In our model, farmers produce fruit by renting land from landlords. Crops are exposed to aggregate shocks (weather risk). To guarantee themselves a positive consumption level even after a bad crop, farmers store fruit as precautionary savings and adjust their scale of activity to the level of these savings. The land that is not rented to farmers is cultivated by landlords, who are less productive. We show that there is a unique Markov competitive equilibrium, in which the rental price of land increases with the level of farmers’ savings. A decline in savings, caused by a bad crop, may bring the economy into a ”poverty trap”, even in the absence of any leverage. Fluctuations of output are caused by productivity shocks and amplified by fluctuations in the level of activity of farmers. The simplicity of our model allows us to study analytically why the long run behavior of the economy may differ markedly from the one predicted by the steady state paradigm. Specifically, we show that when the risk-adjusted productivity of farmers is high and the elasticity of the land supply is low, using the steady state paradigm leads to serious mis-estimations of the long run average state of the economy.

A Climate stress-test of the financial system

Description: 

The urgency of estimating the impact of climate risks on the financial system is increasingly recognized among scholars and practitioners. By adopting a network approach to financial dependencies, we look at how climate policy risk might propagate through the financial system. We develop a network-based climate stress-test methodology and apply it to large Euro Area banks in a ‘green’ and a ‘brown’ scenario. We find that direct and indirect exposures to climate-policy-relevant sectors represent a large portion of investors’ equity portfolios, especially for investment and pension funds. Additionally, the portion of banks’ loan portfolios exposed to these sectors is comparable to banks’ capital. Our results suggest that climate policy timing matters. An early and stable policy framework would allow for smooth asset value adjustments and lead to potential net winners and losers. In contrast, a late and abrupt policy framework could have adverse systemic consequences.

Pricing and Disentanglement of American Puts in the Hyper-Exponential Jump-Diffusion Model

Description: 

We analyze American put options in a hyper-exponential jump-diffusion model. Our contribution is threefold. Firstly, by following a maturity randomization approach, we solve the partial integro-differential equation and obtain a tight lower bound for the American option price. Secondly, our method allows us to disentangle the contributions of jump and diffusion for the American early exercise premium. Finally, using American-style options on S\&P 100 index from 2007 until 2013, we estimate a range of hyper-exponential specifications and investigate the implications for option pricing and jump-diffusion disentanglement. We find that jump risk accounts for a large part of early exercise premium.

Estimating cumulative prospect theory parameters from an international survey

Description: 

We conduct a standardized survey on risk preferences in 53 countries worldwide and estimate cumulative prospect theory parameters from the data. The parameter estimates show that significant differences on the cross-country level are to some extent robust and related to economic and cultural differences. In particular, a closer look on probability weighting underlines gender differences, economic effects, and cultural impact on probability weighting. The data set is a useful starting point for future research that investigates the impact of risk preferences on the market level.

The Impact of Culture on Loss Aversion

Description: 

Based on the literature on the relationship between culture, emotion, and loss aversion, we derive that culture can influence the degree of loss aversion. To test our hypotheses, we conduct a standardized survey in 53 countries worldwide that includes the questions from the Hofstede survey on cultural dimensions as well as lottery questions on loss aversion. The results show that individualism, power distance, and masculinity increase loss aversion as predicted, whereas the impact of uncertainty avoidance is less significant. Moreover, we also find a relation between the distribution of major religions in a country and loss aversion. In comparison, the connection of loss aversion to macroeconomic variables seems to be much smaller.

Portfolio Diversification and Systemic Risk in Interbank Networks

Description: 

The recent credit crisis of 2007/08 has raised a debate about the so-called knife-edge properties of financial markets. The paper contributes to the debate shedding light on the controversial relation between risk-diversification and financial stability. We model a financial network where assets held by borrowers to meet their obligations, include claims against other borrowers and securities exogenous to the network. The balance-sheet approach is conjugated with a stochastic setting and by a mean-field approximation the law of motion of the system's fragility is derived. We show that diversification has an ambiguous effect and beyond a certain levels elicits financial instability. Moreover, we find that risk-sharing restrictions create a socially preferable outcome. Our findings have significant implications for future policy recommendation.

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