infonet-economy

Purpose - The failure of the Efficient Market Hypothesis has a direct bearing on the Geometric Brownian Motion model of asset returns. The current paper investigates the effect that the autocorrelation in the time series of returns has on the calculation of Expected Shortfall for an asset-liability investor.

Design/methodology/approach - To uncover the appropriate autocorrelation structure an autoregressive model is estimated. The model selection is guided by the Akaike and the Schwarz Information Criterion. The AR model is estimated using a rolling window and a series of tests are used to check the stability of the autocorrelation parameters. Autocorrelation-adjusted formulas for volatility and cross-asset correlations are then employed to compute the risk bearing capital.

Findings - The presence of autocorrelation changes the values of most of the correlation parameters used in the calculation of the Expected Shortfall (ES) of the Risk Bearing Capital - in some cases the cross-asset correlation parameters double. Once the presence of smoothing is accounted for, the ES increases by 1% in relative value.

Research limitations/implications - The present study focuses on the effect of smoothing in the time series of transaction-based property returns. Other asset classes may also feature smoothed time series requiring thus a further analysis of their autocorrelation structure and the way these interact with the real estate asset class. Furthermore, an analysis of the time stability of the cross-asset correlations may further improve the estimation of the optimal risk bearing capital.

Practical implications - The paper provides a routine to check if the assumption of independent and identically distributed asset returns is fulfilled. The failure of this assumption leads to the failure of the Geometric Brownian Motion model and in sequence to a miscalculation of the optimal risk capital of an asset-liability investor. If the former occurs the paper indicates a procedure one may adopt to account for this failure in the calculation of the volatility and cross-asset correlations needed to compute the optimal risk capital.

Originality/value - The proposed method focuses on the proper calculation of the risk bearing capital through the judicious estimation of the cross-asset correlation parameters and the asset volatility for an investor who, while not having access to the underlying data pool from which the property index is computed, cannot adjust the index for the potential presence of temporal aggregation and market illiquidity.

Competent public agencies are associated with better economic outcomes. Beyond competence, political leaders need to secure the loyalty of their agencies. Unfortunately, several theories predict a tradeoff between these two valued features. This paper finds that recruitment into agencies is meritocratic where (1) agency officials have poor outside options, (2) careers in agencies are long-lasting, and (3) agency loyalty is important. Moreover, agency competence is lower when (4) loyalty is important but the time horizon is short, and (5) outside opportunities improve but the time horizon is long. This evidence fits best with a theory of loyalty as non-contractible behavior.

This paper analyzes board independence and competence as distinct, but inextricably linked aspects of board effectiveness. Competent directors add shareholder value because they have better information about the quality of projects. While a CEO cares about shareholder value, he also wants his board to behave loyally to him by agreeing to projects that give him private benefits. Because many aspects of the CEO-board relationship are not contractible, the paper studies a model of relational contracts, a tool that has hitherto been rarely used in work on corporate governance. The analysis reveals a tradeoff: Inefficient loyalty is endogenously easier to obtain from a less competent board. The implied conflict of interest between shareholders and the CEO is particularly pronounced in difficult times. Fortunately, the tradeoff does not arise with respect to efficient loyalty. Several empirical predictions flow from the model, some of which explain existing empirical facts while others are new.

The main focus of this paper is to previous termstudynext term empirically the previous termimpact of terrorismnext term on the behavior of stock, bond and commodity previous termmarkets.next term We consider terrorist events that took place in 25 countries over an 11-year time period and implement our analysis using different methods: an event-previous termstudynext term approach, a non-parametric methodology, and a filtered GARCH–EVT approach. In addition, we compare the effect of terrorist attacks on previous termfinancial markets with the impactnext term of other extreme events such as previous termfinancialnext term crashes and natural catastrophes. The results of our analysis show that a non-parametric approach is the most appropriate method among the three for analyzing the previous termimpact of terrorism on financial markets.next term We demonstrate the robustness of this method when interest rates, equity previous termmarketnext term integration, spillover and contemporaneous effects are controlled. We show how the results of this approach can be used for investors’ portfolio diversification strategies against previous termterrorismnext term risk.

In this paper we identify conditions under which the introduction of a pay-as-you-go social security system is ex-ante Pareto-improving in a stochastic overlapping genera-
tions economy with capital accumulation and land. We argue that these conditions are consistent with realistic specifications of the parameters of the economy. In our model, financial markets are complete and competitive equilibria are interim Pareto e¢ cient.
Therefore, a welfare improvement can only be obtained if agents' welfare is evaluated ex ante, and arises from an improvement in intergenerational risk sharing.
We examine the various effects of social security, on the prices of long-lived assets and the stock of capital, and hence on output, wages and risky rates of returns, can
be clearly identified. In addition, we analyze the optimal size of a given social security system as well as its optimal reform.

As early as 1934 Graham and Dodd conjectured that excess returns from value investment originate from a tendency of stock prices to converge towards a fundamental value. This paper confirms their insights within the evolutionary finance model of Evstigneev et al. (Econ Theory 27:449–468, (Evstigneev et al. 2006)). Our empirical results show the predictive power of the evolutionary benchmark valuation for the relative market capitalization and its dynamics in the sample of firms listed in the Dow Jones Industrial Average index in 1981–2009.

We develop an incomplete contracts model to study the extent to which control rights of different financings affect corporate growth. The model admits a standard hold-up problem under equity financing; insiders may be disincentivized to do R&D because outside investors can use their control rights to expropriate large parts of the returns by hiring more efficient managers in the future. Debt financing may give rise to a double moral hazard problem; both managers and shareholders may divert corporate resources to themselves before debt is serviced. However, in many cases, these phenomena do not occur in equilibrium and control rights are irrelevant. Cross-sectional predictions are derived from those cases where control rights matter. Consistent with the empirical evidence, leverage is inversely related to growth and to profitability.

We study the optimal policies and mean-variance frontiers (MVF) of a multiperiod mean-variance optimization of assets and liabilities (AL). This makes the analysis more challenging than for a setting based on purely exogenous liabilities, in which the optimization is only performed on the assets while keeping liabilities fixed. We show that, under general conditions for the joint AL dynamics, the optimal policies and the MVF can be decomposed into an orthogonal set of basis returns using exterior algebra. This formalism, novel to financial applications, allows us to study analytically the structure of optimal policies and MVF representations under endogenous liabilities in a multidimensional and multiperiod setting. Using a numerical example, we illustrate our methodology by analysing the impact of the rebalancing frequency on the MVF and by highlighting the main differences between exogenous and endogenous liabilities.