Nerves of steel? Stress, work performance and elite athletes

There is a notable shortage of empirical research directed at measuring the magnitude and direction of stress effects on performance in a controlled environment. One reason for this is the inherent difficulties in identifying and isolating direct performance measures for individuals. Additionally, most traditional work environments contain a multitude of exogenous factors impacting individual performance, but controlling for all such factors is generally unfeasible (omitted variable bias). Moreover, instead of asking individuals about their self-reported stress levels, we observe workers’ behaviour in situations that can be classified as stressful. For this reason, we have stepped outside the traditional workplace in an attempt to gain greater controllability of these factors using the sports environment as our experimental space. We empirically investigate the relationship between stress and performance, in an extreme pressure situation (football penalty kicks) in a winner take all sporting environment (FIFA World Cup and UEFA European Cup competitions). Specifically, we examine all the penalty shootouts between 1976 and 2008 covering in total 16 events. The results indicate that extreme stressors can have a positive or negative impact on individuals’ performance. On the other hand, more commonly experienced stressors do not affect professionals’ performances.

Return distribution predictability and its implications for portfolio selection

The inquiries to return predictability are traditionally limited to conditional mean, while literature on portfolio selection is replete with moment-based analysis with up to the fourth moment being considered. This paper develops a distribution-based framework for both return prediction and portfolio selection. More specifically, a time-varying return distribution is modeled through quantile regressions and copulas, using quantile regressions to extract information in marginal distributions and copulas to capture dependence structure. A preference function which captures higher moments is proposed for portfolio selection. An empirical application highlights the additional information provided by the distributional approach which cannot be captured by the traditional moment-based methods.

The benefits of tree-based models for stock selection

The identification of the primary drivers of stock returns has been of great interest to both financial practitioners and academics alike for many decades. Influenced by classical financial theories such as the CAPM (Sharp, 1964; Lintner, 1965) and APT (Ross, 1976), a linear relationship is conventionally assumed between company characteristics as derived from their financial accounts and forward returns. Whilst this assumption may be a fair approximation to the underlying structural relationship, it is often adopted for the purpose of convenience. It is actually quite rare that the assumptions of distributional normality and a linear relationship are explicitly assessed in advance even though this information would help to inform the appropriate choice of modelling technique. Non-linear models have nevertheless been applied successfully to the task of stock selection in the past (Sorensen et al, 2000). However, their take-up by the investment community has been limited despite the fact that researchers in other fields have found them to be a useful way to express knowledge and aid decision-making...

Jackknife for bias reduction in predictive regressions

One of the fundamental econometric models in finance is predictive regression. The standard least squares method produces biased coefficient estimates when the regressor is persistent and its innovations are correlated with those of the dependent variable. This article proposes a general and convenient method based on the jackknife technique to tackle the estimation problem. The proposed method reduces the bias for both single- and multiple-regressor models and for both short- and long-horizon regressions. The effectiveness of the proposed method is demonstrated by simulations. An empirical application to equity premium prediction using the dividend yield and the short rate highlights the differences between the results by the standard approach and those by the bias-reduced estimator. The significant predictive variables under the ordinary least squares become insignificant after adjusting for the finite-sample bias. These discrepancies suggest that bias reduction in predictive regressions is important in practical applications.

A hybrid approach to combining CART and logistic regression for stock ranking

The benefits of applying tree-based methods to the purpose of modelling financial assets as opposed to linear factor analysis are increasingly being understood by market practitioners. Tree-based models such as CART (classification and regression trees) are particularly well suited to analysing stock market data which is noisy and often contains non-linear relationships and high-order interactions. CART was originally developed in the 1980s by medical researchers disheartened by the stringent assumptions applied by traditional regression analysis (Brieman et al. [1984]). In the intervening years, CART has been successfully applied to many areas of finance such as the classification of financial distress of firms (see Frydman, Altman and Kao [1985]), asset allocation (see Sorensen, Mezrich and Miller [1996]), equity style timing (see Kao and Shumaker [1999]) and stock selection (see Sorensen, Miller and Ooi [2000])...

Quantile regression without the curse of unsmoothness

We consider quantile regression models and investigate the induced smoothing method for obtaining the covariance matrix of the regression parameter estimates. We show that the difference between the smoothed and unsmoothed estimating functions in quantile regression is negligible. The detailed and simple computational algorithms for calculating the asymptotic covariance are provided. Intensive simulation studies indicate that the proposed method performs very well. We also illustrate the algorithm by analyzing the rainfall–runoff data from Murray Upland, Australia.

Justifiability of littering : an empirical investigation

This paper investigates the relationship between voluntary participation in environmental organisations and the justifiability of littering behaviour. Previous empirical work regarding determinants of littering and littering behaviour remains scarce, particularly in socio-economic analysis. We address these deficiencies, demonstrating a strong empirical link between environmental participation and reduced public littering in the European Values Survey (EVS) data for 30 Western and Eastern European countries. The results suggest that membership in environmental organisations is related to a stronger commitment to anti-littering behaviour, thereby supporting improved environmental quality.

Politicians : Be killed or survive

In the course of history, a large number of politicians have been assassinated. To investigate this phenomenon, rational choice hypotheses are developed and tested using a large data set covering close to 100 countries over a period of 20 years. Several strategies, in addition to security measures, are shown to significantly reduce the probability of politicians being attacked or killed: extended institutional and governance quality, democracy, voice and accountability, a well-functioning system of law and order, decentralization via the division of power and federalism, larger cabinet size and a stronger civil society. There is also support for a contagion effect.

Tax morale, Eastern Europe and European enlargement

This study tries to remedy the current lack of tax compliance research analyzing tax morale in 10 Eastern European countries that joined the European Union in 2004 or 2007. By exploring tax morale differences between 1999 and 2008 we show that tax morale has decreased in 7 out of 10 Eastern European countries. This lack of sustainability may support the incentive based conditionality hypothesis that European Union has only a limited ability to influence tax morale over time. We observe that events and processes at the country level are crucial to understanding tax morale. Factors such as perceived government quality, trust in the justice system and the government are positively correlated with tax morale in 2008.

On the efficacy of techniques for evaluating multivariate volatility forecasts

The performance of techniques for evaluating multivariate volatility forecasts are not yet as well understood as their univariate counterparts. This paper aims to evaluate the efficacy of a range of traditional statistical-based methods for multivariate forecast evaluation together with methods based on underlying considerations of economic theory. It is found that a statistical-based method based on likelihood theory and an economic loss function based on portfolio variance are the most effective means of identifying optimal forecasts of conditional covariance matrices.

The mystery of the U-shaped relationship between happiness and age

In this paper, we address the puzzle of the relationship between age and happiness. Whilst the majority of psychologists have concluded there is not much of a relationship at all, the economic literature has unearthed a possible U-shape relationship with the minimum level of satisfaction occurring in middle age (35–50). In this paper, we look for a U-shape in three panel data sets, the German Socioeconomic Panel (GSOEP), the British Household Panel Survey (BHPS) and the Household Income Labour Dynamics Australia (HILDA). We find that the raw data mainly supports a wave-like shape that only weakly looks U-shaped for the 20–60 age range. That weak U-shape in middle age becomes more pronounced when allowing for socio-economic variables. When we then take account of selection effects via fixed-effects, however, the dominant age-effect in all three panels is a strong happiness increase around the age of 60 followed by a major decline after 75, with the U-shape in middle age disappearing such that there is almost no change in happiness between the age of 20 and 50.

Tax evasion, inequality, and progressive taxes : a political economy perspective

The standard approach to tax compliance applies the economics-of-crime methodology pioneered by Becker (1968): in its first application, due to Allingham and Sandmo (1972) it models the behaviour of agents as a decision involving a choice of the extent of their income to report to tax authorities, given a certain institutional environment, represented by parameters such as the probability of detection and penalties in the event the agent is caught. While this basic framework yields important insights on tax compliance behavior, it has some critical limitations. Specifically, it indicates a level of compliance that is significantly below what is observed in the data. This thesis revisits the original framework with a view towards addressing this issue, and examining the political economy implications of tax evasion for progressivity in the tax structure. The approach followed involves building a macroeconomic, dynamic equilibrium model for the purpose of examining these issues, by using a step-wise model building procedure starting with some very simple variations of the basic Allingham and Sandmo construct, which are eventually integrated to a dynamic general equilibrium overlapping generations framework with heterogeneous agents. One of the variations involves incorporating the Allingham and Sandmo construct into a two-period model of a small open economy of the type originally attributed to Fisher (1930). A further variation of this simple construct involves allowing agents to initially decide whether to evade taxes or not. In the event they decide to evade, the agents then have to decide the extent of income or wealth they wish to under-report. We find that the ‘evade or not’ assumption has strikingly different and more realistic implications for the extent of evasion, and demonstrate that it is a more appropriate modeling strategy in the context of macroeconomic models, which are essentially dynamic in nature, and involve consumption smoothing across time and across various states of nature. Specifically, since deciding to undertake tax evasion impacts on the consumption smoothing ability of the agent by creating two states of nature in which the agent is ‘caught’ or ‘not caught’, there is a possibility that their utility under certainty, when they choose not to evade, is higher than the expected utility obtained when they choose to evade. Furthermore, the simple two-period model incorporating an ‘evade or not’ choice can be used to demonstrate some strikingly different political economy implications relative to its Allingham and Sandmo counterpart. In variations of the two models that allow for voting on the tax parameter, we find that agents typically choose to vote for a high degree of progressivity by choosing the highest available tax rate from the menu of choices available to them. There is, however, a small range of inequality levels for which agents in the ‘evade or not’ model vote for a relatively low value of the tax rate. The final steps in the model building procedure involve grafting the two-period models with a political economy choice into a dynamic overlapping generations setting with more general, non-linear tax schedules and a ‘cost-of evasion’ function that is increasing in the extent of evasion. Results based on numerical simulations of these models show further improvement in the model’s ability to match empirically plausible levels of tax evasion. In addition, the differences between the political economy implications of the ‘evade or not’ version of the model and its Allingham and Sandmo counterpart are now very striking; there is now a large range of values of the inequality parameter for which agents in the ‘evade or not’ model vote for a low degree of progressivity. This is because, in the ‘evade or not’ version of the model, low values of the tax rate encourages a large number of agents to choose the ‘not-evade’ option, so that the redistributive mechanism is more ‘efficient’ relative to the situations in which tax rates are high. Some further implications of the models of this thesis relate to whether variations in the level of inequality, and parameters such as the probability of detection and penalties for tax evasion matter for the political economy results. We find that (i) the political economy outcomes for the tax rate are quite insensitive to changes in inequality, and (ii) the voting outcomes change in non-monotonic ways in response to changes in the probability of detection and penalty rates. Specifically, the model suggests that changes in inequality should not matter, although the political outcome for the tax rate for a given level of inequality is conditional on whether there is a large or small or large extent of evasion in the economy. We conclude that further theoretical research into macroeconomic models of tax evasion is required to identify the structural relationships underpinning the link between inequality and redistribution in the presence of tax evasion. The models of this thesis provide a necessary first step in that direction.

Output and productivity comparisons of the Singapore and Hong Kong wholesale and retail trade sectors, 2001–2008

This paper employs the industry of origin approach to compare value-added and labour productivity of Singapore and Hong Kong’s wholesale and retail sectors for the period 2001–08. The direct comparison between these two economies was motivated by the statement of the Singapore Government that its services sector, especially the retail sector, lagged behind Hong Kong’s productivity levels. The results show that since 2005, Singapore’s wholesale and retail sector performance in terms of labour productivity has been below Hong Kong’s level, largely due to the poor performance of its retail sector arising from an influx of foreign workers. Results from total factor productivity analysis of these two economies also suggest that Hong Kong’s better performance (since 2005) was largely due to its ability to employ more educated and trained workers with limited use of capital. The results suggest that polices that have worked in Hong Kong may not work in Singapore because its population is more diverse, which poses a challenge to policymakers in raising its productivity level.