Cross-country effects of regulatory capital arbitrage

One reason for the recent asset price bubbles in many developed countries could be regulatory capital arbitrage. Regulatory and legal changes can help traditional banks to move their assets off their balance sheets into the lightly regulated shadows and thus enable regulatory arbitrage through the securitized sector. This paper adopts a global vector autoregression (GVAR) methodology to assess the effects of regulatory capital arbitrage on equity prices, house prices and economic activity across 11 OECD countries/ regions. A counterfactual experiment disentangles the effects of regulatory arbitrage following a change in the net capital rule for investment banks in April 2004 and the adoption of the Basel II Accord in June 2004. The results provide evidence for the existence of an international finance multiplier, with about half of the countries overshooting U.S. impulse responses. The counterfactual shows that regulatory arbitrage via the U.S. securitized sector may enhance the cross-country reallocation of capital from housing markets towards equity markets.

Credit and liquidity components of corporate CDS spreads

This paper investigates the role of credit and liquidity factors in explaining corporate CDS price changes during normal and crisis periods. We find that liquidity risk is more important than firm-specific credit risk regardless of market conditions. Moreover, in the period prior to the recent “Great Recession” credit risk plays no role in explaining CDS price changes. The dominance of liquidity effects casts serious doubts on the relevance of CDS price changes as an indicator of default risk dynamics. Our results show how multiple liquidity factors including firm specific and aggregate liquidity proxies as well as an asymmetric information measure are critical determinants of CDS price variations. In particular, the impact of informed traders on the CDS price increases when markets are characterised by higher uncertainty, which supports concerns of insider trading during the crisis.

Neural correlates of cognitive dissonance and choice-induced preference change

According to many modern economic theories, actions simply reflect an individual's preferences, whereas a psychological phenomenon called “cognitive dissonance” claims that actions can also create preference. Cognitive dissonance theory states that after making a difficult choice between two equally preferred items, the act of rejecting a favorite item induces an uncomfortable feeling (cognitive dissonance), which in turn motivates individuals to change their preferences to match their prior decision (i.e., reducing preference for rejected items). Recently, however, Chen and Risen [Chen K, Risen J (2010) J Pers Soc Psychol 99:573–594] pointed out a serious methodological problem, which casts a doubt on the very existence of this choice-induced preference change as studied over the past 50 y. Here, using a proper control condition and two measures of preferences (self-report and brain activity), we found that the mere act of making a choice can change self-report preference as well as its neural representation (i.e., striatum activity), thus providing strong evidence for choice-induced preference change. Furthermore, our data indicate that the anterior cingulate cortex and dorsolateral prefrontal cortex tracked the degree of cognitive dissonance on a trial-by-trial basis. Our findings provide important insights into the neural basis of how actions can alter an individual's preferences.

A word of caution on calculating market-based minimum capital risk requirements

This paper demonstrates that the use of GARCH-type models for the calculation of minimum capital risk requirements (MCRRs) may lead to the production of inaccurate and therefore inefficient capital requirements. We show that this inaccuracy stems from the fact that GARCH models typically overstate the degree of persistence in return volatility. A simple modification to the model is found to improve the accuracy of MCRR estimates in both back- and out-of-sample tests. Given that internal risk management models are currently in widespread usage in some parts of the world (most notably the USA), and will soon be permitted for EC banks and investment firms, we believe that our paper should serve as a valuable caution to risk management practitioners who are using, or intend to use this popular class of models.

The importance of the volatility risk premium for volatility forecasting

In this paper, we study the role of the volatility risk premium for the forecasting performance of implied volatility. We introduce a non-parametric and parsimonious approach to adjust the model-free implied volatility for the volatility risk premium and implement this methodology using more than 20 years of options and futures data on three major energy markets. Using regression models and statistical loss functions, we find compelling evidence to suggest that the risk premium adjusted implied volatility significantly outperforms other models, including its unadjusted counterpart. Our main finding holds for different choices of volatility estimators and competing time-series models, underlying the robustness of our results.

The regulation of cyber warfare under the jus ad bellum

This chapter evaluates the potential for legal regulation of the resort to cyber warfare between states under the ‘jus ad bellum’ (the law on the use of force). Debate in the literature has largely concerned whether cyber warfare falls within the scope of Article 2(4) UNC. The first part of this chapter sets out this debate. It then goes on to argue that the ‘Article 2(4) debate’ often misses the fact that an act of cyber warfare can be considered a breach of a different legal rule: the principle of non-intervention. The chapter further considers some of the issues in applying either the prohibition of the use of force or the principle of non-intervention to cyber warfare, and then concludes by arguing that the debate should be reoriented to focus on another existing international legal obligation: the duty to prevent cyber-attacks.

Non-cinema: the location of politics in film

Philosophy has repeatedly denied cinema in order to grant it artistic status. Adorno, for example, defined an ‘uncinematic’ element in the negation of movement in modern cinema, ‘which constitutes its artistic character’. Similarly, Lyotard defended an ‘acinema’, which rather than selecting and excluding movements through editing, accepts what is ‘fortuitous, dirty, confused, unclear, poorly framed, overexposed’. In his Handbook of Inaesthetics, Badiou embraces a similar idea, by describing cinema as an ‘impure circulation’ that incorporates the other arts. Resonating with Bazin and his defence of ‘impure cinema’, that is, of cinema’s interbreeding with other arts, Badiou seems to agree with him also in identifying the uncinematic as the location of the Real. This article will investigate the particular impurities of cinema that drive it beyond the specificities of the medium and into the realm of the other arts and the reality of life itself. Privileged examples will be drawn from various moments in film history and geography, starting with the analysis of two films by Jafar Panahi: This Is Not a Film (In film nist, 2011), whose anti-cinema stance in announced in its own title; and The Mirror (Aineh, 1997), another relentless exercise in self-negation. It goes on to examine Kenji Mizoguchi’s deconstruction of cinematic acting in his exploration of the geidomono genre (films about theatre actors) in The Story of the Last Chrysanthemums (Zangigku monogatari, 1939), and culminates in the conjuring of the physical experience of death through the systematic demolition of film genres in The Act of Killing (Joshua Oppenheimer et al., 2012).