Economic capital allocation

For my Licentiate thesis, I conducted research on risk measures. Continuing with this research, I now focus on capital allocation. In the proportional capital allocation principle, the choice of risk measure plays a very important part. In the chapters Introduction and Basic concepts, we introduce three definitions of economic capital, discuss the purpose of capital allocation, give different viewpoints of capital allocation and present an overview of relevant literature. Risk measures are defined and the concept of coherent risk measure is introduced. Examples of important risk measures are given, e. g., Value at Risk (VaR), Tail Value at Risk (TVaR). We also discuss the implications of dependence and review some important distributions. In the following chapter on Capital allocation we introduce different principles for allocating capital. We prefer to work with the proportional allocation method. In the following chapter, Capital allocation based on tails, we focus on insurance business lines with heavy-tailed loss distribution. To emphasize capital allocation based on tails, we define the following risk measures: Conditional Expectation, Upper Tail Covariance and Tail Covariance Premium Adjusted (TCPA). In the final chapter, called Illustrative case study, we simulate two sets of data with five insurance business lines using Normal copulas and Cauchy copulas. The proportional capital allocation is calculated using TCPA as risk measure. It is compared with the result when VaR is used as risk measure and with covariance capital allocation. In this thesis, it is emphasized that no single allocation principle is perfect for all purposes. When focusing on the tail of losses, the allocation based on TCPA is a good one, since TCPA in a sense includes features of TVaR and Tail covariance.

Comparison of allocation approaches in soybean biodiesel life cycle assessment

This work shows the influence of using different allocation approaches when modelling the inventory analysis in a soybean biodiesel life cycle assessment (LCA). Results obtained using mass, energy and economic based allocations are compared, focusing on the following aspects: normalised potential environmental impact (PEI) categories, total PEI and relative contributions to the total PEI from each life cycle stage and environmental impact category. Similar results are obtained either using economic and energy based allocations. However, different results are obtained when mass based allocation is used when compared with the other two. This study also illustrates that using different allocation approaches in biodiesel LCA may influence the final conclusions, especially in comparative assertions, emphasising the need to perform a sensitivity analysis in the LCA interpretation step.

Addressing important econometric issues on how to construct theoretical based exchange rate misalignment estimates

Exchange rate misalignment assessment is becoming more relevant in recent period particularly after the nancial crisis of 2008. There are di erent methodologies to address real exchange rate misalignment. The real exchange misalignment is de ned as the di erence between actual real e ective exchange rate and some equilibrium norm. Di erent norms are available in the literature. Our paper aims to contribute to the literature by showing that Behavioral Equilibrium Exchange Rate approach (BEER) adopted by Clark & MacDonald (1999), Ubide et al. (1999), Faruqee (1994), Aguirre & Calderón (2005) and Kubota (2009) among others can be improved in two following manners. The rst one consists of jointly modeling real e ective exchange rate, trade balance and net foreign asset position. The second one has to do with the possibility of explicitly testing over identifying restrictions implied by economic theory and allowing the analyst to show that these restrictions are not falsi ed by the empirical evidence. If the economic based identifying restrictions are not rejected it is also possible to decompose exchange rate misalignment in two pieces, one related to long run fundamentals of exchange rate and the other related to external account imbalances. We also discuss some necessary conditions that should be satis ed for disrcarding trade balance information without compromising exchange rate misalignment assessment. A statistical (but not a theoretical) identifying strategy for calculating exchange rate misalignment is also discussed. We illustrate the advantages of our approach by analyzing the Brazilian case. We show that the traditional approach disregard important information of external accounts equilibrium for this economy.

Consciência cultural no trabalho das ONGD em Moçambique:dilemas e escolhas

Dissertação de Mestrado em Estudos Africanos

Strategy-proof tie-breaking

We study a general class of priority-based allocation problems with weak priority orders and identify conditions under which there exists a strategy-proof mechanism which always chooses an agent-optimal stable, or constrained efficient, matching. A priority structure for which these two requirements are compatible is called solvable. For the general class of priority-based allocation problems with weak priority orders,we introduce three simple necessary conditions on the priority structure. We show that these conditions completely characterize solvable environments within the class of indifferences at the bottom (IB) environments, where ties occur only at the bottom of the priority structure. This generalizes and unifies previously known results on solvable and unsolvable environments established in school choice, housing markets and house allocation with existing tenants. We show how the previously known solvable cases can be viewed as extreme cases of solvable environments. For sufficiency of our conditions we introduce a version of the agent-proposing deferred acceptance algorithm with exogenous and preference-based tie-breaking.

Putting the pieces back together again: an illustration of the problem of interpreting development indicators using an African case study

Indicators are commonly recommended as tools for assessing the attainment of development, and the current vogue is for aggregating a number of indicators together into a single index. It is claimed that such indices of development help facilitate maximum impact in policy terms by appealing to those who may not necessarily have technical expertise in data collection, analysis and interpretation. In order to help counter criticisms of over-simplification, those advocating such indices also suggest that the raw data be provided so as to allow disaggregation into component parts and hence facilitate a more subtle interpretation if a reader so desires. This paper examines the problems involved with interpreting indices of development by focusing on the United Nations Development Programmes (UNDP) Human Development Index (HDI) published each year in the Human Development Reports (HDRs). The HDI was intended to provide an alternative to the more economic based indices, such as GDP, commonly used within neo-liberal development agendas. The paper explores the use of the HDI as a gauge of human development by making comparisons between two major political and economic communities in Africa (ECOWAS and SADC). While the HDI did help highlight important changes in human development as expressed by the HDI over 10 years, it is concluded that the HDI and its components are difficult to interpret as methodologies have changed significantly and the 'averaging' nature of the HDI could hide information unless care is taken. The paper discusses the applicability of alternative models to the HDI such as the more neo-populist centred methods commonly advocated for indicators of sustainable development. (C) 2003 Elsevier Ltd. All rights reserved.

Border tax adjustments: Can energy and carbon taxes be adjusted at the border?

Will die Schweiz mit unilateralen energie- und klimapolitischen Massnahmen ambitionierte Ziele verfolgen, dann erfahren energieintensive Sektoren Nachteile im internationalen Wett- bewerb. Produktionsverlagerungen und „carbon leakage“ sind die Folgen, was nicht im Sinne der Schweizer Wirtschaft und der globalen Klimaziele ist. Mit Grenzausgleichsmassnahmen (BAM) kann die Schweiz ihre energieintensiven Betriebe nicht vor internationalen Wettbe- werbsnachteilen schützen. Weiter kommt hinzu, dass die Einführung von BAM aus rechtli- cher Sicht „riskant“ ist und bei einem Schweizer Alleingang mit hohen Vollzugshürden ge- rechnet werden muss. Für die Schweiz macht eine Einführung von BAM nur im Rahmen ei- ner grösseren Klimakoalition Sinn (bspw. zusammen mit der EU). Alternativen zu BAM sind die einfacher und autonom umsetzbaren Ausnahmeregelungen für energieintensive Betriebe oder Output-based-allocation-Systeme.

Risk sharing with Multilateral Financial Institutions in infrastructure and energy project financing : effect on capital relief for commercial banks

(Matsukawa and Habeck, 2007) analyse the main instruments for risk mitigation in infrastructure financing with Multilateral Financial Institutions (MFIs). Their review coincided with the global financial crisis of 2007-08, and is highly relevant in current times considering the sovereign debt crisis, the lack of available capital and the increases in bank regulation in Western economies. The current macroeconomic environment has seen a slowdown in the level of finance for infrastructure projects, as they pose a higher credit risk given their requirements for long term investments. The rationale for this work is to look for innovative solutions that are focused on the credit risk mitigation of infrastructure and energy projects whilst optimizing the economic capital allocation for commercial banks. This objective is achieved through risk-sharing with MFIs and looking for capital relief in project finance transactions. This research finds out the answer to the main question: "What is the impact of risk-sharing with MFIs on project finance transactions to increase their efficiency and viability?", and is developed from the perspective of a commercial bank assessing the economic capital used and analysing the relevant variables for it: Probability of Default, Loss Given Default and Recovery Rates, (Altman, 2010). An overview of project finance for the infrastructure and energy sectors in terms of the volume of transactions worldwide is outlined, along with a summary of risk-sharing financing with MFIs. A review of the current regulatory framework beneath risk-sharing in structured finance with MFIs is also analysed. From here, the impact of risk-sharing and the diversification effect in infrastructure and energy projects is assessed, from the perspective of economic capital allocation for a commercial bank. CreditMetrics (J. P. Morgan, 1997) is applied over an existing well diversified portfolio of project finance infrastructure and energy investments, working with the main risk capital measures: economic capital, RAROC, and EVA. The conclusions of this research show that economic capital allocation on a portfolio of project finance along with risk-sharing with MFIs have a huge impact on capital relief whilst increasing performance profitability for commercial banks. There is an outstanding diversification effect due to the portfolio, which is combined with risk mitigation and an improvement in recovery rates through Partial Credit Guarantees issued by MFIs. A stress test scenario analysis is applied to the current assumptions and credit risk model, considering a downgrade in the rating for the commercial bank (lender) and an increase of default in emerging countries, presenting a direct impact on economic capital, through an increase in expected loss and a decrease in performance profitability. Getting capital relief through risk-sharing makes it more viable for commercial banks to finance infrastructure and energy projects, with the beneficial effect of a direct impact of these investments on GDP growth and employment. The main contribution of this work is to promote a strategic economic capital allocation in infrastructure and energy financing through innovative risk-sharing with MFIs and economic pricing to create economic value added for banks, and to allow the financing of more infrastructure and energy projects. This work suggests several topics for further research in relation to issues analysed. (Matsukawa and Habeck, 2007) analizan los principales instrumentos de mitigación de riesgos en las Instituciones Financieras Multilaterales (IFMs) para la financiación de infraestructuras. Su presentación coincidió con el inicio de la crisis financiera en Agosto de 2007, y sus consecuencias persisten en la actualidad, destacando la deuda soberana en economías desarrolladas y los problemas capitalización de los bancos. Este entorno macroeconómico ha ralentizado la financiación de proyectos de infraestructuras. El actual trabajo de investigación tiene su motivación en la búsqueda de soluciones para la financiación de proyectos de infraestructuras y de energía, mitigando los riesgos inherentes, con el objeto de reducir el consumo de capital económico en los bancos financiadores. Este objetivo se alcanza compartiendo el riesgo de la financiación con IFMs, a través de estructuras de risk-sharing. La investigación responde la pregunta: "Cuál es el impacto de risk-sharing con IFMs, en la financiación de proyectos para aumentar su eficiencia y viabilidad?". El trabajo se desarrolla desde el enfoque de un banco comercial, estimando el consumo de capital económico en la financiación de proyectos y analizando las principales variables del riesgo de crédito, Probability of Default, Loss Given Default and Recovery Rates, (Altman, 2010). La investigación presenta las cifras globales de Project Finance en los sectores de infraestructuras y de energía, y analiza el marco regulatorio internacional en relación al consumo de capital económico en la financiación de proyectos en los que participan IFMs. A continuación, el trabajo modeliza una cartera real, bien diversificada, de Project Finance de infraestructuras y de energía, aplicando la metodología CreditMet- rics (J. P. Morgan, 1997). Su objeto es estimar el consumo de capital económico y la rentabilidad de la cartera de proyectos a través del RAROC y EVA. La modelización permite estimar el efecto diversificación y la liberación de capital económico consecuencia del risk-sharing. Los resultados muestran el enorme impacto del efecto diversificación de la cartera, así como de las garantías parciales de las IFMs que mitigan riesgos, mejoran el recovery rate de los proyectos y reducen el consumo de capital económico para el banco comercial, mientras aumentan la rentabilidad, RAROC, y crean valor económico, EVA. En escenarios económicos de inestabilidad, empeoramiento del rating de los bancos, aumentos de default en los proyectos y de correlación en las carteras, hay un impacto directo en el capital económico y en la pérdida de rentabilidad. La liberación de capital económico, como se plantea en la presente investigación, permitirá financiar más proyectos de infraestructuras y de energía, lo que repercutirá en un mayor crecimiento económico y creación de empleo. La principal contribución de este trabajo es promover la gestión activa del capital económico en la financiación de infraestructuras y de proyectos energéticos, a través de estructuras innovadoras de risk-sharing con IFMs y de creación de valor económico en los bancos comerciales, lo que mejoraría su eficiencia y capitalización. La aportación metodológica del trabajo se convierte por su originalidad en una contribución, que sugiere y facilita nuevas líneas de investigación académica en las principales variables del riesgo de crédito que afectan al capital económico en la financiación de proyectos.

Transmission costs allocation based on optimal re-dispatch

Congestion management of transmission power systems has achieve high relevance in competitive environments, which require an adequate approach both in technical and economic terms. This paper proposes a new methodology for congestion management and transmission tariff determination in deregulated electricity markets. The congestion management methodology is based on a reformulated optimal power flow, whose main goal is to obtain a feasible solution for the re-dispatch minimizing the changes in the transactions resulting from market operation. The proposed transmission tariffs consider the physical impact caused by each market agents in the transmission network. The final tariff considers existing system costs and also costs due to the initial congestion situation and losses. This paper includes a case study for the 118 bus IEEE test case.

PERFORMANCE ANALYSIS OF A TACTICAL ASSET ALLOCATION – Evidence from the Black–Litterman model based fixed income portfolio

Over time the demand for quantitative portfolio management has increased among financial institutions but there is still a lack of practical tools. In 2008 EDHEC Risk and Asset Management Research Centre conducted a survey of European investment practices. It revealed that the majority of asset or fund management companies, pension funds and institutional investors do not use more sophisticated models to compensate the flaws of the Markowitz mean-variance portfolio optimization. Furthermore, tactical asset allocation managers employ a variety of methods to estimate return and risk of assets, but also need sophisticated portfolio management models to outperform their benchmarks. Recent development in portfolio management suggests that new innovations are slowly gaining ground, but still need to be studied carefully. This thesis tries to provide a practical tactical asset allocation (TAA) application to the Black–Litterman (B–L) approach and unbiased evaluation of B–L models’ qualities. Mean-variance framework, issues related to asset allocation decisions and return forecasting are examined carefully to uncover issues effecting active portfolio management. European fixed income data is employed in an empirical study that tries to reveal whether a B–L model based TAA portfolio is able outperform its strategic benchmark. The tactical asset allocation utilizes Vector Autoregressive (VAR) model to create return forecasts from lagged values of asset classes as well as economic variables. Sample data (31.12.1999–31.12.2012) is divided into two. In-sample data is used for calibrating a strategic portfolio and the out-of-sample period is for testing the tactical portfolio against the strategic benchmark. Results show that B–L model based tactical asset allocation outperforms the benchmark portfolio in terms of risk-adjusted return and mean excess return. The VAR-model is able to pick up the change in investor sentiment and the B–L model adjusts portfolio weights in a controlled manner. TAA portfolio shows promise especially in moderately shifting allocation to more risky assets while market is turning bullish, but without overweighting investments with high beta. Based on findings in thesis, Black–Litterman model offers a good platform for active asset managers to quantify their views on investments and implement their strategies. B–L model shows potential and offers interesting research avenues. However, success of tactical asset allocation is still highly dependent on the quality of input estimates.

Marine protected areas in artisanal fisheries: a spatial bio-economic model based on observations in Costa Rica and Tanzania

In many lower-income countries, the establishment of marine protected areas (MPAs) involves significant opportunity costs for artisanal fishers, reflected in changes in how they allocate their labor in response to the MPA. The resource economics literature rarely addresses such labor allocation decisions of artisanal fishers and how, in turn, these contribute to the impact of MPAs on fish stocks, yield, and income. This paper develops a spatial bio-economic model of a fishery adjacent to a village of people who allocate their labor between fishing and on-shore wage opportunities to establish a spatial Nash equilibrium at a steady state fish stock in response to various locations for no-take zone MPAs and managed access MPAs. Villagers’ fishing location decisions are based on distance costs, fishing returns, and wages. Here, the MPA location determines its impact on fish stocks, fish yield, and villager income due to distance costs, congestion, and fish dispersal. Incorporating wage labor opportunities into the framework allows examination of the MPA’s impact on rural incomes, with results determining that win-wins between yield and stocks occur in very different MPA locations than do win-wins between income and stocks. Similarly, villagers in a high-wage setting face a lower burden from MPAs than do those in low-wage settings. Motivated by issues of central importance in Tanzania and Costa Rica, we impose various policies on this fishery – location specific no-take zones, increasing on-shore wages, and restricting MPA access to a subset of villagers – to analyze the impact of an MPA on fish stocks and rural incomes in such settings.

Self-Organizing Mechanisms for Task Allocation in a Knowledge-Based Economy

A prevalent claim is that we are in knowledge economy. When we talk about knowledge economy, we generally mean the concept of “Knowledge-based economy” indicating the use of knowledge and technologies to produce economic benefits. Hence knowledge is both tool and raw material (people’s skill) for producing some kind of product or service. In this kind of environment economic organization is undergoing several changes. For example authority relations are less important, legal and ownership-based definitions of the boundaries of the firm are becoming irrelevant and there are only few constraints on the set of coordination mechanisms. Hence what characterises a knowledge economy is the growing importance of human capital in productive processes (Foss, 2005) and the increasing knowledge intensity of jobs (Hodgson, 1999). Economic processes are also highly intertwined with social processes: they are likely to be informal and reciprocal rather than formal and negotiated. Another important point is also the problem of the division of labor: as economic activity becomes mainly intellectual and requires the integration of specific and idiosyncratic skills, the task of dividing the job and assigning it to the most appropriate individuals becomes arduous, a “supervisory problem” (Hogdson, 1999) emerges and traditional hierarchical control may result increasingly ineffective. Not only specificity of know how makes it awkward to monitor the execution of tasks, more importantly, top-down integration of skills may be difficult because ‘the nominal supervisors will not know the best way of doing the job – or even the precise purpose of the specialist job itself – and the worker will know better’ (Hogdson,1999). We, therefore, expect that the organization of the economic activity of specialists should be, at least partially, self-organized. The aim of this thesis is to bridge studies from computer science and in particular from Peer-to-Peer Networks (P2P) to organization theories. We think that the P2P paradigm well fits with organization problems related to all those situation in which a central authority is not possible. We believe that P2P Networks show a number of characteristics similar to firms working in a knowledge-based economy and hence that the methodology used for studying P2P Networks can be applied to organization studies. Three are the main characteristics we think P2P have in common with firms involved in knowledge economy: - Decentralization: in a pure P2P system every peer is an equal participant, there is no central authority governing the actions of the single peers; - Cost of ownership: P2P computing implies shared ownership reducing the cost of owing the systems and the content, and the cost of maintaining them; - Self-Organization: it refers to the process in a system leading to the emergence of global order within the system without the presence of another system dictating this order. These characteristics are present also in the kind of firm that we try to address and that’ why we have shifted the techniques we adopted for studies in computer science (Marcozzi et al., 2005; Hales et al., 2007 [39]) to management science.

Cost-based pricing in the NHS internal market : accounting choices and the achievement of economic efficiency

Since 1988, quasi-markets have been introduced into many areas of social policy in the UK, the NHS internal market is one example. Markets operate by price signals. The NHS Internal Market, if it is to operate efficiently, requires purchasers and providers to respond to price signals. The research hypothesis is - cost accounting methods can be developed to enable healthcare contracts to be priced on a cost-basis in a manner which will facilitate the achievement of economic efficiency in the NHS internal market. Surveys of hospitals in 1991 and 1994 established the cost methods adopted in deriving the prices for healthcare contracts in the first year of the market and three years on. An in-depth view of the costing for pricing process was gained through case studies. Hospitals had inadequate cost information on which to price healthcare contracts at the inception of the internal market: prices did not reflect the relative performance of healthcare providers sufficiently closely to enable the market's espoused efficiency aims to be achieved. Price variations were often due to differing costing approaches rather than efficiency. Furthermore, price comparisons were often meaningless because of inadequate definition of the services (products). In April 1993, the NHS Executive issued guidance on costing for contracting to all NHS providers in an attempt to improve the validity of price comparisons between alternative providers. The case studies and the 1994 survey show that although price comparison has improved, considerable problems remain. Consistency is not assured, and the problem of adequate product definition is still to be solved. Moreover, the case studies clearly highlight the mismatch of rigid, full-cost pricing rules with both the financial management considerations at local level and the emerging internal market(s). Incentives exist to cost-shift, and healthcare prices can easily be manipulated. In the search for a new health policy paradigm to replace traditional bureaucratic provision, cost-based pricing cannot be used to ensure a more efficient allocation of healthcare resources.

Economic well-being and poverty among the elderly: an analysis based on a collective consumption model

We apply the collective consumption model of Browning, Chiappori and Lewbel (2006) to analyse economic well-being and poverty among the elderly. The model focuses on individual preferences, a consumption technology that captures the economies of scale of living in a couple, and a sharing rule that governs the intra-household allocation of resources. The model is applied to a time series of Dutch consumption expenditure surveys. Our empirical results indicate substantial economies of scale and a wifeís share that is increasing in total expenditures. We further calculated poverty rates by means of the collective consumption model. Collective poverty rates of widows and widowers turn out to be slightly lower than traditional ones based on a standard equivalence scale. Poverty among women (men) in elderly couples, however, seems to be heavily underestimated (overestimated) by the traditional approach. Finally, we analysed the impact of becoming a widow(er). Based on cross-sectional evidence, we find that the drop (increase) in material well-being following the husbandís death is substantial for women in high (low) expenditure couples. For men, the picture is reversed.

Transmission loss allocation based on optimal power flow and sensitivity analysis

This paper presents a new approach to the transmission loss allocation problem in a deregulated system. This approach belongs to the set of incremental methods. It treats all the constraints of the network, i.e. control, state and functional constraints. The approach is based on the perturbation of optimum theorem. From a given optimal operating point obtained by the optimal power flow the loads are perturbed and a new optimal operating point that satisfies the constraints is determined by the sensibility analysis. This solution is used to obtain the allocation coefficients of the losses for the generators and loads of the network. Numerical results show the proposed approach in comparison to other methods obtained with well-known transmission networks, IEEE 14-bus. Other test emphasizes the importance of considering the operational constraints of the network. And finally the approach is applied to an actual Brazilian equivalent network composed of 787 buses, and it is compared with the technique used nowadays by the Brazilian Control Center. (c) 2007 Elsevier Ltd. All rights reserved.