Managing the crises : how did local governments react to the financial crisis in 2008 and what explains the differences ? The case of Swiss municipalities

Swiss municipalities are, to a large extent, responsible for their financial resources. Since these resources primarily depend on income and property taxes from individuals and enterprises, municipality budgets are likely to be directly affected by the current crisis in the financial sector and the economy. This article investigates how municipalities perceived this threat and how they reacted to it. In a nationwide survey conducted at the end of 2009 in all 2596 Swiss municipalities, we asked local secretaries which measures had been launched in order to cope with expected losses in tax income and a possible increase in welfare spending. Did the municipalities rely on Keynesian measures increasing public spending and accepting greater deficits, or did they try to avoid further deficits by using austerity measures and a withdrawal of planned investments? Our results show that only a few municipalities - mainly the bigger ones - expected to be greatly affected by the crisis. Their reactions, however, did not reveal any clear patterns that theory would lead one to expect. Preferences for austerity measures and deficit spending become visible but many municipalities took measures from both theories. The strongest explanatory factors for determining how/why municipalities react are: the municipality's level of affectedness followed by whether or not the municipality belongs to the French-speaking part of the country. Size also has an impact, whereas the strength of the Social Democrat party is negligible. Explaining what kind of measures municipalities are likely to take is more difficult. However, the more a municipality is affected, the more likely it is to stick to austerity measures.

Managing the crises : How do Swiss municipalities react to the crisis and what explains the differences ?

Swiss municipalities are to an import ant extent responsible for their own resources. Since these resources primarily depend on income and property tax from individuals and enterprises, their budgets are likely to be directly affected by the actual crisis of the financial sector and the economy. This paper investigates how the municipalities perceive this threat and how they reacted to it or plan to do so. In a nationwide survey conducted at the end of 2009 in all 2596 Swiss municipalities, we asked the local secretaries which measures they launch in order to cope with expected losses in tax income and a possible increase of welfare spending. Do the municipalities rather rely on Keynesian measures increasing public spending and accepting greater deficits, or do they try to avoid further deficits by austerity measures and a withdrawal of planned investments? The paper shows that only a few municipalities - mainly the bigger ones - expect to be strongly hit by the crisis. Their reactions, however, do not reveal the clear patterns theory lets to expect. Preferences for austerity measures and deficit spending become visible but many municipalities take measures from both theories. The strongest explaining factor whether municipalities react is the affectedness by the crisis followed by the fact that the municipality belongs to the French speaking part of the country. Size also has an effect whereas the strength of the Social Democrats is negligible. More difficult is it, to explain what kind of measures municipalities are likely to take.

Three essays on the psychology of investment and financial markets

Préface My thesis consists of three essays where I consider equilibrium asset prices and investment strategies when the market is likely to experience crashes and possibly sharp windfalls. Although each part is written as an independent and self contained article, the papers share a common behavioral approach in representing investors preferences regarding to extremal returns. Investors utility is defined over their relative performance rather than over their final wealth position, a method first proposed by Markowitz (1952b) and by Kahneman and Tversky (1979), that I extend to incorporate preferences over extremal outcomes. With the failure of the traditional expected utility models in reproducing the observed stylized features of financial markets, the Prospect theory of Kahneman and Tversky (1979) offered the first significant alternative to the expected utility paradigm by considering that people focus on gains and losses rather than on final positions. Under this setting, Barberis, Huang, and Santos (2000) and McQueen and Vorkink (2004) were able to build a representative agent optimization model which solution reproduced some of the observed risk premium and excess volatility. The research in behavioral finance is relatively new and its potential still to explore. The three essays composing my thesis propose to use and extend this setting to study investors behavior and investment strategies in a market where crashes and sharp windfalls are likely to occur. In the first paper, the preferences of a representative agent, relative to time varying positive and negative extremal thresholds are modelled and estimated. A new utility function that conciliates between expected utility maximization and tail-related performance measures is proposed. The model estimation shows that the representative agent preferences reveals a significant level of crash aversion and lottery-pursuit. Assuming a single risky asset economy the proposed specification is able to reproduce some of the distributional features exhibited by financial return series. The second part proposes and illustrates a preference-based asset allocation model taking into account investors crash aversion. Using the skewed t distribution, optimal allocations are characterized as a resulting tradeoff between the distribution four moments. The specification highlights the preference for odd moments and the aversion for even moments. Qualitatively, optimal portfolios are analyzed in terms of firm characteristics and in a setting that reflects real-time asset allocation, a systematic over-performance is obtained compared to the aggregate stock market. Finally, in my third article, dynamic option-based investment strategies are derived and illustrated for investors presenting downside loss aversion. The problem is solved in closed form when the stock market exhibits stochastic volatility and jumps. The specification of downside loss averse utility functions allows corresponding terminal wealth profiles to be expressed as options on the stochastic discount factor contingent on the loss aversion level. Therefore dynamic strategies reduce to the replicating portfolio using exchange traded and well selected options, and the risky stock.

"Periodic crises": Clément Juglar between theories of crises and theories of business cycles

Business cycle theory is normally described as having evolved out of a previous tradition of writers focusing exclusively on crises. In this account, the turning point is seen as residing in Clément Juglar's contribution on commercial crises and their periodicity. It is well known that the champion of this view is Schumpeter, who propagated it on several occasions. The same author, however, pointed to a number of other writers who, before and at the same time as Juglar, stressed one or another of the aspects for which Juglar is credited primacy, including the recognition of periodicity and the identification of endogenous elements enabling the recognition of crises as a self-generating phenomenon. There is indeed a vast literature, both primary and secondary, relating to the debates on crises and fluctuations around the middle of the nineteenth century, from which it is apparent that Juglar's book Des Crises Commerciales et de leur Retour Périodique en France, en Angleterre et aux États-Unis (originally published in 1862 and very much revised and enlarged in 1889) did not come out of the blue but was one of the products of an intellectual climate inducing the thinking of crises not as unrelated events but as part of a more complex phenomenon consisting of recurring crises related to the development of the commercial world - an interpretation corroborated by the almost regular occurrence of crises at about 10-year intervals.

Paper money and national distress: William Huskisson and the early theories of credit, speculation and crises

This paper examines the explanation of commercial crises offered by William Huskisson in 1810 in the wake of the debate on the Bullion Report. Huskisson argued that the suspension of convertibility made it possible to extend issues of paper currency beyond its proper limits. Such an expansion, being in the interest of all parties concerned, would actually take place and stimulate excessive speculations, which would eventually prove unsustainable and bring generalized ruin and distress. Although some elements of this explanations were not new (having been anticipated by writers sucha as James Currie in 1793, William Roscoe in 1793, William Anderson in 1797 and an anonymous in 1796), Huskisson's explanation is more systematic and better organized, and his emphasis on the endogenous character of the crisis and on the instability of the dynamics of trade and credit makes it an interesting foreshadower of the theories of crises that were advanced half a century later.

Vom Finanz- zum Wissenschaftsbetrug : Methode, den Irrungen in der medizinischen Literatur beizukommen [From financial to scientific fraud : Methods to detect discrepancies in the medical literature].

Fraud is as old as Mankind. There are an enormous number of historical documents which show the interaction between truth and untruth; therefore it is not really surprising that the prevalence of publication discrepancies is increasing. More surprising is that new cases especially in the medical field generate such a huge astonishment. In financial mathematics a statistical tool for detection of fraud is known which uses the knowledge of Newcomb and Benford regarding the distribution of natural numbers. This distribution is not equal and lower numbers are more likely to be detected compared to higher ones. In this investigation all numbers contained in the blinded abstracts of the 2009 annual meeting of the Swiss Society of Anesthesia and Resuscitation (SGAR) were recorded and analyzed regarding the distribution. A manipulated abstract was also included in the investigation. The χ(2)-test was used to determine statistical differences between expected and observed counts of numbers. There was also a faked abstract integrated in the investigation. A p<0.05 was considered significant. The distribution of the 1,800 numbers in the 77 submitted abstracts followed Benford's law. The manipulated abstract was detected by statistical means (difference in expected versus observed p<0.05). Statistics cannot prove whether the content is true or not but can give some serious hints to look into the details in such conspicuous material. These are the first results of a test for the distribution of numbers presented in medical research.

Financial impact of introducing the Swiss-DRG reimbursement system on potentially avoidable readmissions at a university hospital.

QUESTION UNDER STUDY: Thirty-day readmissions can be classified as potentially avoidable (PARs) or not avoidable (NARs) by following a specific algorithm (SQLape®). We wanted to assess the financial impact of the Swiss-DRG system, which regroups some readmissions occurring within 18 days after discharge within the initial hospital stay, on PARs at our hospital. METHODS: First, PARs were identified from all hospitalisations recorded in 2011 at our university hospital. Second, 2012 Swiss-DRG readmission rules were applied, regrouped readmissions (RR) were identified, and their financial impact computed. Third, RRs were classified as potentially avoidable (PARRs), not avoidable (NARRs), and others causes (OCRRs). Characteristics of PARR patients and stays were retrieved, and the financial impact of PARRS was computed. RESULTS: A total of 36,777 hospitalisations were recorded in 2011, of which 3,140 were considered as readmissions (8.5%): 1,470 PARs (46.8%) and 1,733 NARs (53.2%). The 2012 Swiss-DRG rules would have resulted in 910 RRs (2.5% of hospitalisations, 29% of readmissions): 395 PARRs (43% of RR), 181 NARRs (20%), and 334 OCRRs (37%). Loss in reimbursement would have amounted to CHF 3.157 million (0.6% of total reimbursement). As many as 95% of the 395 PARR patients lived at home. In total, 28% of PARRs occurred within 3 days after discharge, and 58% lasted less than 5 days; 79% of the patients were discharged home again. Loss in reimbursement would amount to CHF 1.771 million. CONCLUSION: PARs represent a sizeable number of 30-day readmissions, as do PARRs of 18-day RRs in the 2012 Swiss DRG system. They should be the focus of attention, as the PARRs represent an avoidable loss in reimbursement.