Essays on Risk Modeling. Applications to Portfolio and Risk Management (summary section only)

In this thesis we deal with the concept of risk. The objective is to bring together and conclude on some normative information regarding quantitative portfolio management and risk assessment. The first essay concentrates on return dependency. We propose an algorithm for classifying markets into rising and falling. Given the algorithm, we derive a statistic: the Trend Switch Probability, for detection of long-term return dependency in the first moment. The empirical results suggest that the Trend Switch Probability is robust over various volatility specifications. The serial dependency in bear and bull markets behaves however differently. It is strongly positive in rising market whereas in bear markets it is closer to a random walk. Realized volatility, a technique for estimating volatility from high frequency data, is investigated in essays two and three. In the second essay we find, when measuring realized variance on a set of German stocks, that the second moment dependency structure is highly unstable and changes randomly. Results also suggest that volatility is non-stationary from time to time. In the third essay we examine the impact from market microstructure on the error between estimated realized volatility and the volatility of the underlying process. With simulation-based techniques we show that autocorrelation in returns leads to biased variance estimates and that lower sampling frequency and non-constant volatility increases the error variation between the estimated variance and the variance of the underlying process. From these essays we can conclude that volatility is not easily estimated, even from high frequency data. It is neither very well behaved in terms of stability nor dependency over time. Based on these observations, we would recommend the use of simple, transparent methods that are likely to be more robust over differing volatility regimes than models with a complex parameter universe. In analyzing long-term return dependency in the first moment we find that the Trend Switch Probability is a robust estimator. This is an interesting area for further research, with important implications for active asset allocation.

Customer Energy in Relationships

All companies have a portfolio of customer relationships. From a managerial standpoint the value of these customer relationships is a key issue. The aim of the paper is to introduce a conceptual framework for customers’ energy towards a service provider. Customer energy is defined as the cognitive, affective and behavioural effort a customer puts into the purchase of an offering. It is based on two dimensions: life theme involvement and relationship commitment. Data from a survey study of 425 customers of an online gambling site was combined with data about their individual purchases and activity. Analysis showed that involvement and commitment influence both customer behaviour and attitudes. Customer involvement was found to be strongly related to overall spending within a consumption area, whereas relationship commitment is a better predictor of the amount of money spent at a particular company. Dividing the customers into four different involvement / commitment segments revealed differences in churn rates, word-of-mouth, brand attitude, switching propensity and the use of the service for socializing. The framework provides a tool for customer management by revealing differences in fundamental drivers of customer behaviour resulting in completely new customer portfolios. Knowledge of customer energy allows companies to manage their communication and offering development better and provides insight into the risk of losing a customer.

Customer Commitment and Key Account Management

What is the nature of customer commitment in business-to-business relationships and what are its antecedents? What Key Account Management practices help to build customer commitment? Commitment is an important element of Key Account Management since customer relationships are built upon a the foundation of commitment. Building long-term key account relationships occurs by enhancing and maintaining their commitment. Customer commitment has various antecedents, and managing commitment involves focusing on these antecedents. This paper explains the nature of commitment and describes its antecedents. It also suggests how to manage each of these antecedents to strengthen customer commitment.

Profitable Customer Management: A Study in Retail Banking

The increasing focus of relationship marketing and customer relationship management (CRM) studies on issues of customer profitability has led to the emergence of an area of research on profitable customer management. Nevertheless, there is a notable lack of empirical research examining the current practices of firms specifically with regard to the profitable management of customer relationships according to the approaches suggested in theory. This thesis fills this research gap by exploring profitable customer management in the retail banking sector. Several topics are covered, including marketing metrics and accountability; challenges in the implementation of profitable customer management approaches in practice; analytic versus heuristic (‘rule of thumb’) decision making; and the modification of costly customer behavior in order to increase customer profitability, customer lifetime value (CLV), and customer equity, i.e. the financial value of the customer base. The thesis critically reviews the concept of customer equity and proposes a Customer Equity Scorecard, providing a starting point for a constructive dialog between marketing and finance concerning the development of appropriate metrics to measure marketing outcomes. Since customer management and measurement issues go hand in hand, profitable customer management is contingent on both marketing management skills and financial measurement skills. A clear gap between marketing theory and practice regarding profitable customer management is also identified. The findings show that key customer management aspects that have been proposed within the literature on profitable customer management for many years, are not being actively applied by the banks included in the research. Instead, several areas of customer management decision making are found to be influenced by heuristics. This dilemma for marketing accountability is addressed by emphasizing that CLV and customer equity, which are aggregate metrics, only provide certain indications regarding the relative value of customers and the approximate value of the customer base (or groups of customers), respectively. The value created by marketing manifests itself in the effect of marketing actions on customer perceptions, behavior, and ultimately the components of CLV, namely revenues, costs, risk, and retention, as well as additional components of customer equity, such as customer acquisition. The thesis also points out that although costs are a crucial component of CLV, they have largely been neglected in prior CRM research. Cost-cutting has often been viewed negatively in customer-focused marketing literature on service quality and customer profitability, but the case studies in this thesis demonstrate that reduced costs do not necessarily have to lead to lower service quality, customer retention, and customer-related revenues. Consequently, this thesis provides an expanded foundation upon which marketers can stake their claim for accountability. By focusing on the range of drivers and all of the components of CLV and customer equity, marketing has the potential to provide specific evidence concerning how various activities have affected the drivers and components of CLV within different groups of customers, and the implications for customer equity on a customer base level.

Key Account Management in Paper and Board Industry- Identification of Key Accounts for Stora Enso Graphical Boards

Tutkimuksen tarkoituksena oli tunnistaa nykyiset sekä potentiaaliset avainasiakkaat case yritykselle. Avainasiakkaat tunnistettiin Chevertonin tunnistamis- ja valintamatriisin avulla, jossa asiakkaan sijoittumista matriisiin arvioidaan asiakkaan houkuttelevuuden sekä toimittajan suhteellisten vahvuuksien avulla. Kriteereiksi avainasiakkaiden tunnistamiseen valittiin asiakkaan vuotuinen ostovolyymi, asiakkaan business-potentiaali sekä case-yrityksen toimittajaosuus. Asiakkaat luokiteltiin avainasiakkaisiin, kehitettäviin avainasiakkaisiin, ylläpidettäviin asiakkaisiin sekä satunnaisiin asiakkaisiin. Tutkimus tarjosi lähtökohdan case-yrityksen uusille avainasiakaspäälliköille sekä osoitti suunnan tulevaisuuden tutkimustarpeille. Aktiivisen tiedonvaihdannan kautta eri myyntikonttoreiden johtohenkilöstön sekä myös yrityksen eri funktionaalisten divisioonien välillä voidaan saavuttaa kilpailuetua kun lähestytään asiakasta toimintojaan järkiperäisesti koordinoineena toimittajana samalla kun asiakkaat keskittävät ostojaan. Jotta yrityksen tavoitteet, markkinamahdollisuudet sekä resurssit olisivat hyvin tasapainossa, tulisi myös asiakaskannattavuutta sekä asiakkaiden strategista merkittävyyttä arvioida ja mitata säännöllisesti tässä tutkimuksessa käytettyjen tunnistuskriteereiden lisäksi.

Az ügyfélszerzési mód hatásának vizsgálata a vevőelégedettségre és a lojalitásra a szervezeti piacon (Analyzing the impact of the customer acquisition mode to the customer satisfaction and loyalty on the corporate market – assessing the effect of recommendation with applying structural equation modelling)

A kutatás célja a marketingeszközök hosszú távú hatásának pontosabb megértése szervezetközi viszonylatban a vevőértékelési modellek egyik nehezen számszerűsíthető tényezője, az ajánlás hatásának vizsgálata által. A hatások elemzésére a strukturális egyenlőségek módszerét (Structural Equation Modelling) alkalmazta a szerző. Rámutatott, hogy az ajánlással szerzett ügyfelek elégedettebbek, lojálisabbak és gyakrabban ajánlják a vállalatot a más módon szerzett ügyfeleknél. Az összefüggések feltárása és bizonyítása különösen az ajánlás kumulatív hatása miatt jelentős. Az eredmények gyakorlati alkalmazásával lehetőség nyílik az ügyfélkör differenciáltabb, értékalapú szegmentációjára, amely pontosabb célcsoport-meghatározást lesz lehetővé, és hosszú távon hozzájárul a vállalat optimális ügyfélportfóliójának kialakításához. ______ The research is aimed at more precise understanding of longterm effects of marketing tools in business to business relations by analysing the impacts of recommendation potential, one of the hardly measurable factors of customer value concept. Structural Equation Modelling is applied for conducting effect analysis. The results show that customers acquired with recommendation are more satisfied, more loyal, and make more recommendation that other customer. These results are more interesting if we take the cumulative effect of recommendation in account. They provide bases for a more differentiated segmentation of customers, which results in a more accurate identification of target groups. In the long-run, the application of the customer-value concept considerably contributes to creating an optimal customer portfolio for companies.

Visitor Relationship Management (VRM) - Repeat Visitation Opportunities for Destination Marketing Organisations

In competitive tourism markets the consumer-traveller is spoilt by choice of available destinations. Successfully differentiating a destination and getting noticed at decision time is arguably the focus of activities by destination marketing organisations (DMOs). In pursuit of differentiation, three emergent themes in the marketing literature during the past decade have been branding, integrated marketing communications (IMC), and customer relationship management (CRM) a fundamental goal of each being stimulating customer loyalty. However there has been little attention given to destination loyalty in the tourism literature. The purpose of this paper is to report an exploratory investigation of visitor relationship management (VRM) by DMOs. Based on interviews with the management of 11 regional tourism organisations (RTO) in Queensland, Australia, the opportunities for, and immediate challenges of, VRM are discussed. While each RTO recognised the potential for VRM, none had yet been able to develop a formal approach to engage in meaningful dialogue with previous visitors from their largest market.

Portfolio size effect in retirement accounts : what does it imply for lifecycle asset allocation funds?

Lifecycle funds offered by retirement plan providers allocate aggressively to risky asset classes when the employee participants are young, gradually switching to more conservative asset classes as they grow older and approach retirement. This approach focuses on maximizing growth of the accumulation fund in the initial years and preserving its value in the later years. The authors simulate terminal wealth outcomes based on conventional lifecycle asset allocation rules as well as on contrarian strategies that reverse the direction of asset switching. The evidence suggests that the growth in portfolio size over time significantly impacts the asset allocation decision. Due to the portfolio size effect that is observed by the authors, the terminal value of accumulation in retirement accounts is influenced more by the asset allocation strategy adopted in later years relative to that adopted in early years. By mechanistically switching to conservative assets in the later years of a plan, lifecycle strategies sacrifice significant growth opportunity and prove counterproductive to the participant's wealth accumulation objective. The authors' conclude that this sacrifice does not seem to be compensated adequately in terms of reducing the risk of potentially adverse outcomes.

Embedded tax liabilities and portfolio choice

his study presents an improved method of dealing with embedded tax liabilities in portfolio choice. We argue that using a risk-free discount rate is appropriate for calculating the present value of future tax liabilities. Supportive of recent research, our results found a taxation-induced preference of holding equities over bonds, and a location preference of holding equities in the taxable account and bonds in retirement accounts. These important findings contrast with traditional investment advice which suggests a greater capacity for risk in retirement accounts.

In pursuit of tourism destination brand loyalty : visitor relationship management orientation of destination marketing organisations

The proposition underpinning this study is engaging in meaningful dialogue with previous visitors represents an efficient and effective use of resources for a destination marketing organization (DMO), compared to above the line advertising in broadcast media. However there has been a lack of attention in the tourism literature relating to destination switching, loyalty and customer relationship management (CRM) to test such a proposition. This paper reports an investigation of visitor relationship marketing (VRM) orientation among DMOs. A model of CRM orientation, which was developed from the wider marketing literature and a prior qualitative study, was used to develop a scale to operationalise DMO visitor relationship orientation. Due to a small sample, the Partial Least Squares (PLS) method of structural equation modelling was used to analyse the data. Although the sample limits the ability to generalise, the results indicated the DMOs’ visitor orientation is generally responsive and reactive rather than proactive.

Agility of the firm : customer's perspective

Agility is emerging as an important determinant of success and achieving sustained competitive advantage in hyper-competition. Whilst the digital natives are on the rise, ubiquitous technologies, networks and associated systems are increasingly weaving themselves into the very fabric of everyday life of both individuals and corporations. With a global shift towards “everywhere retailing”, ubiquitous contemporary information systems such as mobile CRM systems (C-CRMS) are evolving. Unlike in traditional CRMS, customers are becoming an important user group in this new paradigm. Draws on agility literature, this study examine how customers’ use of C-CRMS influence firm’s customer sensing capability, firm’s customer responding capability, and how customer-perceived firm’s responsiveness influence customers use of C-CRMS. Following the notions of agility we theorized firm’s customer agility from customers’ standpoint where we use customers’ use of C-CRMS and customer-perceived firm’s responsiveness for sensing and responding components of agility respectively. This research-in-progress paper investigates how C-CRMS facilitates firm’s customer agility, and reports the approach pursued in adopting sense and response measures of customer agility taking the customers perspective derived through extant literature.

Specifying information systems for business process integration : a management perspective

Supply chain management and customer relationship management are concepts for optimizing the provision of goods to customers. Information sharing and information estimation are key tools used to implement these two concepts. The reduction of delivery times and stock levels can be seen as the main managerial objectives of an integrative supply chain and customer relationship management. To achieve this objective, business processes need to be integrated along the entire supply chain including the end consumer. Information systems form the backbone of any business process integration. The relevant information system architectures are generally well-understood, but the conceptual specification of information systems for business process integration from a management perspective, remains an open methodological problem. To address this problem, we will show how customer relationship management and supply chain management information can be integrated at the conceptual level in order to provide supply chain managers with relevant information. We will further outline how the conceptual management perspective of business process integration can be supported by deriving specifications for enabling information system from business objectives.

Provision of customer knowledge to supply chains

Knowledge about customers is vital for supply chains in order to ensure customer satisfaction. In an ideal supply chain environment, supply chain partners are able to perform planning tasks collaboratively, because they share information. However, customers are not always able or willing to share information with their suppliers. End consumers, on the one hand, do not usually provide a retail company with demand information. On the other hand, industrial customers might consciously hide information. Wherever a supply chain is not provided with demand forecast information, it needs to derive these demand forecasts by other means. Customer Relationship Management provides a set of tools to overcome informational uncertainty. We show how CRM and SCM information can be integrated on the conceptual as well as technical levels in order to provide supply chain managers with relevant information.