Properties of risk capital allocation methods: Core Compatibility, Equal Treatment Property and Strong Monotonicity

In finance risk capital allocation raises important questions both from theoretical and practical points of view. How to share risk of a portfolio among its subportfolios? How to reserve capital in order to hedge existing risk and how to assign this to different business units? We use an axiomatic approach to examine risk capital allocation, that is we call for fundamental properties of the methods. Our starting point is Csóka and Pintér (2011) who show by generalizing Young (1985)'s axiomatization of the Shapley value that the requirements of Core Compatibility, Equal Treatment Property and Strong Monotonicity are irreconcilable given that risk is quantified by a coherent measure of risk. In this paper we look at these requirements using analytic and simulations tools. We examine allocation methods used in practice and also ones which are theoretically interesting. Our main result is that the problem raised by Csóka and Pintér (2011) is indeed relevant in practical applications, that is it is not only a theoretical problem. We also believe that through the characterizations of the examined methods our paper can serve as a useful guide for practitioners.

Hedging under liquidity constraints

Although risk management can be justified by financial distress, the theoretical models usually contain hedging instruments free of funding risk. In practice, management of the counterparty risk in derivative transactions is of enhanced importance, consequently not only is trading on exchanges subject to the presence of a margin account, but also in bilateral (OTC) agreements parties will require margins or collateral from their partners in order to hedge the mark-tomarket loss of the transaction. The aim of this paper is to present and compare two models where the financing need of the hedging instrument also appears, influencing the hedging strategy and the optimal hedging ratio. Both models contain the same source of risk and optimisation criterion, but the liquidity risk is modelled in different ways. In the first model, there is no additional financing resource that can be used to finance the margin account in case of a margin call, which entails the risk of liquidation of the hedging position. In the second model, the financing is available but a given credit spread is to be paid for this, so hedging can become costly.

The Argentine Dilemma: “Vulture Funds” and the Risks Posed to Developing Economies

Post-crisis Argentina is a case study of crisis management through debt restructuring. This article examines how Argentina negotiated the external debt in the wake of the sovereign default in December 2001 and now confronts challenges posed by holdout creditors—the so called “vulture funds”. It argues that debt restructuring has put a straitjacket on the national economy, making it virtually impossible for healthy growth short of a break with the international economic order. While Argentina has successfully restructured a $95 billion debt with an unprecedented “hair cut” (around 70% reduction in “net value of debt”), a sustainable growth appears out of reach as long as reliance on the government debt market prevails. In this cycle, the transmission belt of financial crisis to developing countries is characterized by the entry of highly speculative players such as hedge funds, conflicts of interests embedded in “sovereign debt restructuring” (SDR) and vulnerabilities associated with “emerging market debt”.

Musical commonplace book : manuscript, [approximately 1790-approximately 1810]

Contains songs, partly from English operas, and instrumental music.

The Financialization of Food: An Inquiry into the 2008-2011 Food Price Spikes

This dissertation investigates the question: has financial speculation contributed to global food price volatility since the mid 2000s? I problematize the mainstream academic literature on the 2008-2011 food price spikes as being dominated by neoclassical economic perspectives and offer new conceptual and empirical insights into the relationship between financial speculation and food. Presented in three journal style manuscripts, manuscript one uses circuits of capital to conceptualize the link between financial speculators in the global north and populations in the global south. Manuscript two argues that what makes commodity index speculation (aka ‘index funds’ or index swaps) novel is that it provides institutional investors with what Clapp (2014) calls “financial distance” from the biopolitical implications of food speculation. Finally, manuscript three combines Gramsci’s concepts of hegemony and ‘the intellectual’ with the concept of performativity to investigate the ideological role that public intellectuals and the rhetorical actor the market play in the proliferation and governance of commodity index speculation. The first two manuscripts take an empirically mixed method approach by combining regression analysis with discourse analysis, while the third relies on interview data and discourse analysis. The findings show that financial speculation by index swap dealers and hedge funds did indeed significantly contribute to the price volatility of food commodities between June 2006 and December 2014. The results from the interview data affirm these findings. The discourse analysis of the interview data shows that public intellectuals and rhetorical characters such as ‘the market’ play powerful roles in shaping how food speculation is promoted, regulated and normalized. The significance of the findings is three-fold. First, the empirical findings show that a link does exist between financial speculation and food price volatility. Second, the findings indicate that the post-2008 CFTC and the Dodd-Frank reforms are unlikely to reduce financial speculation or the price volatility that it causes. Third, the findings suggest that institutional investors (such as pension funds) should think critically about how they use commodity index speculation as a way of generating financial earnings.

Exchange-Trade Funds Evaluation using Performance Measures Distribution

In this study we propose the use of the performance measure distribution rather than its punctual value to rank hedge funds. Generalized Sharpe Ratio and other similar measures that take into account the higher-order moments of portfolio return distributions are commonly used to evaluate hedge funds performance. The literature in this field has reported non-significant difference in ranking between performance measures that take, and those that do not take, into account higher moments of distribution. Our approach provides a much more powerful manner to differentiate between hedge funds performance. We use a non-semiparametric density based on Gram-Charlier expansions to forecast the conditional distribution of hedge fund returns and its corresponding performance measure distribution. Through a forecasting exercise we show the advantages of our technique in relation to using the more traditional punctual performance measures.

Select, Link and Rank: Diversified Query Expansion and Entity Ranking using Wikipedia

A search query, being a very concise grounding of user intent, could potentially have many possible interpretations. Search engines hedge their bets by diversifying top results to cover multiple such possibilities so that the user is likely to be satisfied, whatever be her intended interpretation. Diversified Query Expansion is the problem of diversifying query expansion suggestions, so that the user can specialize the query to better suit her intent, even before perusing search results. We propose a method, Select-Link-Rank, that exploits semantic information from Wikipedia to generate diversified query expansions. SLR does collective processing of terms and Wikipedia entities in an integrated framework, simultaneously diversifying query expansions and entity recommendations. SLR starts with selecting informative terms from search results of the initial query, links them to Wikipedia entities, performs a diversity-conscious entity scoring and transfers such scoring to the term space to arrive at query expansion suggestions. Through an extensive empirical analysis and user study, we show that our method outperforms the state-of-the-art diversified query expansion and diversified entity recommendation techniques.

An Environment for Rapid Derivatives Design and Experimentation

In the highly competitive world of modern finance, new derivatives are continually required to take advantage of changes in financial markets, and to hedge businesses against new risks. The research described in this paper aims to accelerate the development and pricing of new derivatives in two different ways. Firstly, new derivatives can be specified mathematically within a general framework, enabling new mathematical formulae to be specified rather than just new parameter settings. This Generic Pricing Engine (GPE) is expressively powerful enough to specify a wide range of stand¬ard pricing engines. Secondly, the associated price simulation using the Monte Carlo method is accelerated using GPU or multicore hardware. The parallel implementation (in OpenCL) is automatically derived from the mathematical description of the derivative. As a test, for a Basket Option Pricing Engine (BOPE) generated using the GPE, on the largest problem size, an NVidia GPU runs the generated pricing engine at 45 times the speed of a sequential, specific hand-coded implementation of the same BOPE. Thus a user can more rapidly devise, simulate and experiment with new derivatives without actual programming.

Sex Education: Challenges and Choices

Noting public concern about sexual exploitation, abuse and sexualisation, we argue that sex education in the United Kingdom needs revision. Choice is a feature of current sex education policy and, acknowledging that choice can be problematic, we defend its place in an approach to sex education premised on informed deliberation, relational autonomy, a particular view of personhood and moral literacy. We argue, however, that choice and the approach outlined must be located in the realities of young people’s lives.

Asset Management and Investment Banking

We find evidence that conflicts of interest are pervasive in the asset management business owned by investment banks. Using data from 1990 to 2008, we compare the alphas of mutual funds, hedge funds, and institutional funds operated by investment banks and non-bank conglomerates. We find that, while no difference exists in performance by fund type, being owned by an investment bank reduces alphas by 46 basis points per year in our baseline model. Making lead loans increases alphas, but the dispersion of fees across portfolios decreases alphas. The economic loss is $4.9 billion per year.

IFRS 9 ‘Financial instruments’: Anticipated effects of the standard change at Kesko Group

IFRS 9 Financial instruments presents the classification and measurement, the impairment and the hedge accounting requirements for accounting of financial instruments. The standard was set by the International Accounting Standards Board to replace IAS 39 Financial instruments: Recognition and Measurement on 1 January 2018. Hence, the long-criticized and complexly experienced requirements for accounting of financial instruments will undergo the most significant reform. This thesis addresses anticipated effects of IFRS 9, focusing on the challenges the new classification and measurement requirements bring forth in the case organization Kesko. This thesis was conducted as an action research, in which, a case study method was applied. The thesis was conducted with a twofold manner, which involved general analysis of IFRS 9 and further covered distinct ambitions related to the case organization. For the general part, empirical data was gathered by interviewing two IFRS experts from KPMG and PwC, while the interviews within the case organization constituted for the case study. Further, the literature on the IFRS 9 was such scant that the theoretical examination was merged with the IFRS experts’ quotations that also strived to contribute to the overall objective of reinforcing the body of research related to the subject. This thesis indicates that IFRS 9 will most fundamentally reform the impairment and the hedge accounting requirements of financial instruments. Regard to impairment, the changes are anticipated to increase the amount of loan-loss provisions, whereas the relaxed hedge accounting requirements are expected to encourage more companies to commence the application of hedge accounting. The thesis provides empirical support on that the term business model for managing financial assets, introduced in IFRS 9, is ably hard to comprehend and remains ambiguous. It goes on to argue that the most prominent issue in defining the business model for managing financial assets is the limits set in IFRS 9 for selling financial assets. In consideration of Kesko, this thesis finds that the key effects of IFRS 9 are anticipated to be the reshaping of the organization’s treasury policy and further examination of the possibility to apply hedge accounting for foreign exchange derivatives. What is more, the thesis presumes that complying the requirements of IFRS 9 Kesko will apply the hold to collect and sell model for managing financial assets in future.

Cambios de CEO y presidentes de directorio en el Perú : un enfoque para las empresas peruanas con mayor frecuencia de negociación en la BVL de 1992 al 2014

Esta investigación tiene como objetivo determinar si los anuncios de cambios de CEO y presidentes de Directorio de las empresas listadas en la Bolsa de Valores de Lima (BVL) afectan el valor de la firma en los días cercanos al anuncio. Fue la pronta salida de Steve Jobs como CEO de Apple Inc., a causa de una enfermedad mortal, lo que nos generó el cuestionamiento respecto a cuál sería el desempeño que tienen las acciones cuyas compañías pasan por eventos similares. Como se sabe, el mercado castigó la acción de Apple el día de la muerte de Steve Jobs, con caídas superiores al 2% el día del anuncio. ¿Tendrían los mercados desarrollados y emergentes el mismo comportamiento?, ¿los eventos de cambio de CEO generan las mismas reacciones en los países emergentes? Grande fue nuestra sorpresa al observar, a nivel local, cambios en la gerencia general como en Backus & Johnston (3/9/2013) sin un efecto significativo en el mercado, pues incluso el mercado no negoció dicho valor hasta el 19/9/2013. Con el objetivo de obtener una respuesta a las consultas inicialmente planteadas, se aplicó la metodología denominada Event Analysis, la cual ya ha sido utilizada para evaluar la existencia de retornos anormales ante cambios en CEO y presidentes de Directorio en mercados desarrollados como EE. UU., Países Bajos, Australia, España, etc., y también en mercados emergentes como Colombia, Chile y México. Nuestro estudio para el mercado peruano consistió en una muestra conformada por las cincuenta empresas cuyas acciones son las de mayor frecuencia de negociación en la BVL. Se tomó en consideración todos los eventos de cambio de CEO y presidentes de Directorio entre 1992 y el 2014. De acuerdo con los resultados de la investigación realizada, la existencia de retornos anormales en los cambios de CEO y presidentes de Directorio no son estadísticamente significativos, por lo que no podrían ser usado para generar estrategias del tipo Event-driven por parte de los hedge funds. La razón predominante es la alta volatilidad de los resultados y la poca profundidad del mercado que cuenta con poca liquidez; asimismo, el hecho de tener eventos relevantes que no son tomados en cuenta por el mercado.

Essays in corporate finance

China has been growing rapidly over the last decades. The private sector is the driving force of this growth. This thesis focuses on firm-level investment and cash holdings in China, and the chapters are structured around the following issues. 1. Why do private firms grow so fast when they are more financially constrained? In Chapter 3, we use a panel of over 600,000 firms of different ownership types from 1998 to 2007 to find the link between investment opportunities and financial constraints. The main finding indicates that private firms, which are more likely to be financially constrained, have high investment-investment opportunity sensitivity. Furthermore, this sensitivity is relatively lower for state-owned firms in China. This shows that constrained firms value investment opportunities more than unconstrained firms. To better measure investment opportunities, we attempt to improve the Q model by considering supply and demand sides simultaneously. When we capture q from the supply side and the demand side, we find that various types of firms respond differently towards different opportunity shocks. 2. In China, there are many firms whose cash flow is far greater than their fixed capital investment. Why is their investment still sensitive to cash flow? To explain this, in Chapter 4, we attempt to introduce a new channel to find how cash flow affects firm-level investment. We use a dynamic structural model and take uncertainty and ambiguity aversion into consideration. We find that uncertainty and ambiguity aversion will make investment less sensitive to investment opportunities. However, investment-cash flow sensitivity will increase when uncertainty is high. This suggests that investment cash flow sensitivities could still be high even when the firms are not financially constrained. 3. Why do firms in China hold so much cash? How can managers’ confidence affect corporate cash holdings? In Chapter 5, we analyse corporate cash holdings in China. Firms hold cash for precautionary reasons, to hedge frictions such as financing constraints and uncertainty. In addition, firms may act differently if they are confident or not. In order to determine how confidence shocks affect precautionary savings, we develop a dynamic model taking financing constraints, uncertainty, adjustment costs and confidence shocks into consideration. We find that without confidence shocks, firms will save money in bad times and invest in good times to maximise their value. However, if managers lose their confidence, they tend to save money in good times to use in bad times, to hedge risks and financing constraint problems. This can help explain why people find different results on the cash flow sensitivity of cash. Empirically, we use a panel of Chinese listed firms. The results show that firms in China save more money in good times, and the confidence shock channel can significantly affect firms’ cash holdings policy.

Lipid and lipid carbon stable isotope composition of the hydrothermal vent shrimp Mirocaris fortunata: evidence for nutritional dependence on photosynthetically fixed carbon

Mirocaris fortunata were sampled from the Lucky Strike hydrothermal vent area (Eiffel Tower site) on the mid-Atlantic ridge during the French DIVA 2 cruise (June 1994). Small adults (17 to 22 mm total length), although morphologically identical, could be divided into 2 categories on the basis of pigmentation, lipid composition and C-13/C-12 stable isotope ratios of fatty acids. Highly pigmented small adults (8.6 to 9.2 mu g carotenoid shrimp(-1)) contained higher levels of total lipid than similar-sized individuals containing lower levels of pigment (0.9 to 2.9 mu g carotenoid shrimp(-1)). Lipid class analysis indicated that wax esters comprised 62.5% of total lipid in the former group. These pigmented shrimp also contained high proportions of polyunsaturated fatty acids (PUFA), particularly the phototrophic microplanktonic markers 20:5(n-3) and 22:6(n-3) (14.0 and 33.5% respectively). By contrast small adults (22 mm) and adult shrimp (25 to 26 mm) with low levels of carotenoid pigmentation contained lower amounts of total lipid, little or no wax ester and low levels of 20:5(n-3) and 22:6(n-3), but did contain 16:2(n-4) and 18:2(n-4) and the non-methylene interrupted dienes 20:2 Delta 5,13 and 22:2 Delta 7,15. GC-IRMS analysis of all fatty acids and fatty alcohols in the pigmented small adults indicated delta(13)C values of -18.2 to -27.7 parts per thousand, which is consistent with a photosynthetic carbon source for these compounds. The C-13/C-12 isotope composition of fatty acids from low-pigmented small adults and adults was more variable (-12.5 to -33.1 parts per thousand) and suggests a bimodal distribution which may be attributable to differing nutritional sources or the physiological/reproductive status of these shrimp. Samples of eggs, which are carried by the female on the pleopods, represented approximately 57% of total somatic lipid which indicates a substantial reproductive investment by this species. The egg lipids comprised high proportions of triacylglycerols (64.4 to 78.0% of total lipid) whilst the fatty acid composition was dominated by the monounsaturated fatty acids 16:1(n-7), 18:1(n-7) and 18:1(n-9), which accounted for 65.7 to 33.5% of total fatty acids. By contrast, PUFA were relatively minor components of egg lipids, particularly 20:5(n-3) and 22:6(n-3), which accounted for only 1.1 and 2.9% of total egg fatty acids respectively. This indicates that the reproductive investment by this species is supported mainly by material derived from bacterial chemosynthesis. The potential for M. fortunata hedge betting by producing larvae which either metamorphose at the vent site or adopt a bathypelagic lifestyle and delay metamorphosis to facilitate more widespread dispersal is discussed.