WARNING: Physics Envy May Be Hazardous To Your Wealth!

The quantitative aspirations of economists and financial analysts have for many years been based on the belief that it should be possible to build models of economic systems - and financial markets in particular - that are as predictive as those in physics. While this perspective has led to a number of important breakthroughs in economics, "physics envy" has also created a false sense of mathematical precision in some cases. We speculate on the origins of physics envy, and then describe an alternate perspective of economic behavior based on a new taxonomy of uncertainty. We illustrate the relevance of this taxonomy with two concrete examples: the classical harmonic oscillator with some new twists that make physics look more like economics, and a quantitative equity market-neutral strategy. We conclude by offering a new interpretation of tail events, proposing an "uncertainty checklist" with which our taxonomy can be implemented, and considering the role that quants played in the current financial crisis.Comment: v3 adds 2 reference

Regional financial integration and its impact on financial sector development : the case of Southern Africa

The study investigated the impact of regional financial integration on financial development with specific focus on the SADC protocols on trade and finance and investment. A total of 14 countries made up the study sample and the panel cointegration fully modified ordinary least squares model alongside the GMM were used to estimate the nature of impact. Study findings showed regional integration through the protocol on trade had a positive and significant impact on size and efficiency of the banking sector using the FMOLS estimator. GMM estimations for the same variables were largely insignificant. The results also showed a positive impact of the trade protocol on stock market capitalization but a negative and insignificant impact on stock turnover. The finance and investment protocol had a negative and insignificant relationship with broad money and a positive and significant impact on private sector credit for both estimators. The protocol was found to have had no significant effect on stock market development. The impact of the finance protocol was not significant enough to be detected in global integration measures, implying their implementation may not have significantly improved global integration for SADC countries. The study also uncovered the complimentary relationship between institutional quality and social capital in the financial development process and recommended the development of outward looking integration policies which focus on regional integration with the outside world.Business ManagementD. Com. (Business Management

The impact of competition and internal corporate governance mechanism on bank performance: the case of North American and European countries

This thesis examined the effect of antitrust law and bank concentration on European and North American bank performance and managerial slack. This study empirically investigated the interrelated issues of antitrust policy, competition, and corporate governance and showed their significant roles in maximising shareholder wealth. Our analysis also examined the impact of concentration, antitrust law, internal corporate governance, and bank-specific and macro-economic factors on European and North American banking industry performance. With attention to E.U. commercial banks (1998-2014), European savings banks (2001-2014), European cooperative banks (2005-2014), United States commercial banks, Canada commercial banks, and European/North-American listed commercial banks (Part A – Data analysis with no governance variable [1995-2018]; Part B – Data with governance variables [2006-2018]). The higher level of property and agricultural loans, loan loss allowance, loan charges off, and non-performing loans to total asset ratio contributed to United States commercial bank failures (Alali and Romero, 2012). Also, in years leading to the 2007-09 financial crisis, banks failed to comply with the minimum capital requirements for risk-weighted capital ratio, and many banks held an excessive level of capital on the balance sheet above the minimum regulatory threshold (Lindquist, 2004; Jokipii and Milne, 2008; Ayuso et al., 2004). The holding of excessive capital buffer signified managerial risk aversion, under-investment, and reduced bank competitiveness. This study investigated how antitrust policy helped increase bank competitiveness and profitability in the European Union and North America. Our study found evidence that antitrust policies increased bank profitability and minimised managerial slack. In addition, many studies showed that the management ownership structure aligned the managers' interests with that of the shareholders (Saunders et al., 1990; Gorton and Rosen, 1995; Houston and James, 1995). Our study explored new empirical evidence for the nineteen European listed and unlisted banks with different bank specialisations. Bank profitability is proxied by return-on-average-equity, return-on-equity, and equity returns, which are the dependent variables in this study. The explanatory variables considered are bank-specific, macro-economic, internal corporate governance proxies, age, bank concentration, antitrust law, and financial crisis dummy variables. We utilised different panel data estimators (such as pooled ordinary least, between estimator, population average, fixed effects, first differences, and random effects estimators) and other estimation techniques (probit/logit regression, principal-component-analysis, difference-in-difference (DID) estimation, and instrumental variable regression) to examine the causal effect of bank longevity, antitrust policy, bank concentration, internal corporate governance, bank-specific factors, macro-economic factors and dummies of year, country and specialisation on bank profitability. The difference-in-difference estimation assists in exploring the effects of concentration (HHI) interaction with antitrust policy and governance measures on bank performance. We also examined the effects of other explanatory variables and interactions on managerial slack. Our fixed effect analysis showed that liquidity ratio, cost-income ratio, net-loan-to-total-asset, non-earning-assets-to-total-asset, asset utilisation, income diversification (BAAM), inflation, and credit risk had significant beneficial effects on cooperative bank performance. However, certain interactions (mHHIxAge, lHHIxAge), bank-specific (age, total-earning-asset-to-total-asset, capital-fund-liabilities, burden-total-asset) and macro-economic factors (GDP per capita) have significant and negative effects on EU co-operative banks performance. The bank-specific, exogenous factors (anti-trust-policy), and macro-economic factors that positively influence savings banks' performance are, for ROAE, Age-HHI-interactions, antitrust-policy, and total assets. On the other hand, the following explanatory factors negatively influenced E.U. saving bank performance, GDP per capita, credit risk, market share, net-loan-to-total-asset (NLTA), and cost-income ratio. The following bank-specific and exogenous factors improved European commercial bank performance. For ROAE, we confirmed antitrust-policy, capital-funding-liabilities (CFL), burden-total-asset, asset utilisation, income diversification (BAAM). The capital strength, cost-income ratio, and financial crisis adversely influenced European commercial bank performance. The United States commercial banks shared a similar beneficial influence of antitrust policy and CFL on profitability. Our random effect analysis showed that liquidity ratio, CFL, NEATA, and asset utilisation influenced Canada's commercial bank beneficially. On the other hand, average bank concentration, capital strength, cost-income ratio, and credit risk hampered Canadian commercial bank performance. According to the managerial slack (QLTTTA) findings, our random-effects modelling of European cooperative banks showed age, average concentration, high-concentration-age interaction, CFL, overheads, total assets, market share, GDP per capita, and financial crisis reduced managerial slack significantly. On the other hand, high-HHI, liquidity ratio, cost-income, NLTA, BURDENTA, TEATA, NEATA, asset utilisation (AU), BAAM, inflation, and credit risk significantly increased cooperative bank managerial slack. Our fixed effect analysis of United States commercial banks showed that antitrust policy, ETA, inflation, government debt significantly reduced managerial slack. The effect of age and total assets on QLTTTA is similar to our European cooperative bank findings. The adverse effects of our control variables on managerial slack follow the same pattern as European cooperative banks in some respect. For listed commercial banks, our fixed effect modelling showed that the loan-loss-reserve, capital expenditure, and the interaction of low HHI with structural changes in antitrust policy significantly minimised the likelihood of negative return-on-equity. The marginal effect analysis also confirmed that the structural change in antitrust policy at low bank concentration minimised the possibility of negative ROE empirically and graphically. The DID analysis also confirmed that the interaction of high HHI with the structural change in antitrust policy and dividend-per-share significantly increased listed bank ROE. The probit/logit analysis showed that earnings-per-share, board-specific skills, and the interaction of high-HHI with the independent board members significantly reduce the likelihood of negative returns. As the non-executive total compensation increased, the marginal effects of independent board members on the probability of negative returns increased. Our thesis implied that the non-executive board members must be optimally incentivised to ensure effective oversight. This thesis contributed to previous bodies of empirical studies on bank efficiency and profitability in four ways. Firstly, we measure bank concentration proxied by the Herfindahl-Hirschman-Index method on total assets [chapter 4 and 5], return-on-invested-capital [Chapter 6 Part A], and price [Chapter 6 Part B]. Secondly, we assumed the interaction of bank concentration with antitrust policy and the interaction of concentration with corporate governance proxies had not been explored at the time of this study. The first empirical chapter examined the impact of the HHI-Antitrust law on bank performance and managerial slack. The process of interacting governance proxies with competition measures contributed to policy efforts to improve corporate governance. Finally, this study contributes to the literature by examining the impact of income diversification as part of the control variables on bank performance. This study presents conclusive findings on changes in bank performance around the antitrust policy in European and North American banks. The coefficients of the antitrust policy dummy (AT2004) for European commercial banks, United States commercial banks, and European savings banks are positive and significant, which implies that the antitrust policy significantly increased return-on-average-equity. The findings provided a contrasting view to Giroud and Mueller (2010) that empirically showed that business combination laws significantly minimised return-on-asset in North American banks. As expected, the results are not homogeneous in the European Union. For instance, the antitrust policy was not significant for Cypriot commercial banks and significantly negative for the returns on assets of Swedish savings banks. The negative effects of antitrust policy on bank performance may explain the less competitive banking industry in Cypriot and the European savings banks are generally less competitive than commercial banks. In previous studies, the impact of HHI and business-law interaction on managerial quiet life had been explored in the United States (Giroud and Mueller, 2010). Their analysis indicated overhead, input, and real incomes surge due to business law introductions. There is a significant positive relationship between the HHI-BC-Law interaction and some quiet life proxies in non-competitive industries, i.e., the ratio of overhead costs to total assets; the cost of goods sold to sales; and the ratio of real wages to the number of employees, deflated by inflation. This type of research had not been conducted in Europe, and there are no comparative studies on North American Banks and Europe. In Table 19, 22-24, our findings are similar to Giroud and Mueller's (2010) study. Structural changes since the antitrust regulatory changes only significantly increased the negative ROE or the likelihood of poor bank performance. Contrary to Giroud and Mueller's findings, there is a significant negative relationship between the antitrust policy and QLTTTA (for European savings banks, U.S. commercial banks), while previous studies found no link. Our findings indicated that the overheads and employee wages decreased due to antitrust laws for less competitive and competitive banking industries. QLPEE (Ratio of personnel expenses to no of employees, deflated by CPI) – In support of previous literature (Bertrand and Mullainathan, 1999; 2003; Giroud and Muller, 2010), our REM model findings found a positive relationship between U.S. commercial banks QLPEE and antitrust policy

Data security in cloud storage services

Cloud Computing is considered to be the next-generation architecture for ICT where it moves the application software and databases to the centralized large data centers. It aims to offer elastic IT services where clients can benefit from significant cost savings of the pay-per-use model and can easily scale up or down, and do not have to make large investments in new hardware. However, the management of the data and services in this cloud model is under the control of the provider. Consequently, the cloud clients have less control over their outsourced data and they have to trust cloud service provider to protect their data and infrastructure from both external and internal attacks. This is especially true with cloud storage services. Nowadays, users rely on cloud storage as it offers cheap and unlimited data storage that is available for use by multiple devices (e.g. smart phones, tablets, notebooks, etc.). Besides famous cloud storage providers, such as Amazon, Google, and Microsoft, more and more third-party cloud storage service providers are emerging. These services are dedicated to offering more accessible and user friendly storage services to cloud customers. Examples of these services include Dropbox, Box.net, Sparkleshare, UbuntuOne or JungleDisk. These cloud storage services deliver a very simple interface on top of the cloud storage provided by storage service providers. File and folder synchronization between different machines, sharing files and folders with other users, file versioning as well as automated backups are the key functionalities of these emerging cloud storage services. Cloud storage services have changed the way users manage and interact with data outsourced to public providers. With these services, multiple subscribers can collaboratively work and share data without concerns about their data consistency, availability and reliability. Although these cloud storage services offer attractive features, many customers have not adopted these services. Since data stored in these services is under the control of service providers resulting in confidentiality and security concerns and risks. Therefore, using cloud storage services for storing valuable data depends mainly on whether the service provider can offer sufficient security and assurance to meet client requirements. From the way most cloud storage services are constructed, we can notice that these storage services do not provide users with sufficient levels of security leading to an inherent risk on users\u27 data from external and internal attacks. These attacks take the form of: data exposure (lack of data confidentiality); data tampering (lack of data integrity); and denial of data (lack of data availability) by third parties on the cloud or by the cloud provider himself. Therefore, the cloud storage services should ensure the data confidentiality in the following state: data in motion (while transmitting over networks), data at rest (when stored at provider\u27s disks). To address the above concerns, confidentiality and access controllability of outsourced data with strong cryptographic guarantee should be maintained. To ensure data confidentiality in public cloud storage services, data should be encrypted data before it is outsourced to these services. Although, users can rely on client side cloud storage services or software encryption tools for encrypting user\u27s data; however, many of these services fail to achieve data confidentiality. Box, for example, does not encrypt user files via SSL and within Box servers. Client side cloud storage services can intentionally/unintentionally disclose user decryption keys to its provider. In addition, some cloud storage services support convergent encryption for encrypting users\u27 data exposing it to “confirmation of a file attack. On the other hand, software encryption tools use full-disk encryption (FDE) which is not feasible for cloud-based file sharing services, because it encrypts the data as virtual hard disks. Although encryption can ensure data confidentiality; however, it fails to achieve fine-grained access control over outsourced data. Since, public cloud storage services are managed by un-trusted cloud service provider, secure and efficient fine-grained access control cannot be realized through these services as these policies are managed by storage services that have full control over the sharing process. Therefore, there is not any guarantee that they will provide good means for efficient and secure sharing and they can also deduce confidential information about the outsourced data and users\u27 personal information. In this work, we would like to improve the currently employed security measures for securing data in cloud store services. To achieve better data confidentiality for data stored in the cloud without relying on cloud service providers (CSPs) or putting any burden on users, in this thesis, we designed a secure cloud storage system framework that simultaneously achieves data confidentiality, fine-grained access control on encrypted data and scalable user revocation. This framework is built on a third part trusted (TTP) service that can be employed either locally on users\u27 machine or premises, or remotely on top of cloud storage services. This service shall encrypts users data before uploading it to the cloud and decrypts it after downloading from the cloud; therefore, it remove the burden of storing, managing and maintaining encryption/decryption keys from data owner\u27s. In addition, this service only retains user\u27s secret key(s) not data. Moreover, to ensure high security for these keys, it stores them on hardware device. Furthermore, this service combines multi-authority ciphertext policy attribute-based encryption (CP-ABE) and attribute-based Signature (ABS) for achieving many-read-many-write fine-grained data access control on storage services. Moreover, it efficiently revokes users\u27 privileges without relying on the data owner for re-encrypting massive amounts of data and re-distributing the new keys to the authorized users. It removes the heavy computation of re-encryption from users and delegates this task to the cloud service provider (CSP) proxy servers. These proxy servers achieve flexible and efficient re-encryption without revealing underlying data to the cloud. In our designed architecture, we addressed the problem of ensuring data confidentiality against cloud and against accesses beyond authorized rights. To resolve these issues, we designed a trusted third party (TTP) service that is in charge of storing data in an encrypted format in the cloud. To improve the efficiency of the designed architecture, the service allows the users to choose the level of severity of the data and according to this level different encryption algorithms are employed. To achieve many-read-many-write fine grained access control, we merge two algorithms (multi-authority ciphertext policy attribute-based encryption (MA- CP-ABE) and attribute-based Signature (ABS)). Moreover, we support two levels of revocation: user and attribute revocation so that we can comply with the collaborative environment. Last but not least, we validate the effectiveness of our design by carrying out a detailed security analysis. This analysis shall prove the correctness of our design in terms of data confidentiality each stage of user interaction with the cloud

Bank efficiency and bank competition: empirical evidence from Ghana's banking industry

The Ghanaian banking industry has undergone considerably transformation since 1988 as a result of the gradual but steady implementation of financial service reforms. The main purpose of implementing the financial reforms is to build competitive and stable banking industry to enhance banks’ efficiency and ultimately stimulate economic growth and development. Using annual data spanning from 2001 to 2010, this study investigates the level of bank efficiency and the degree of bank competition and their determinants in Ghana. In addititon, the study also examines the causal relationship between bank efficiency and competition. The results suggest that Ghana’s banks are, on average, inefficient and competitively weak, but the level of efficiency has increased significantly from 2001 to 2010. This study also reveals that well-capitalized banks in Ghana are pure technically efficient and competitve but are cost inefficient. In addition, bank size influences bank pure technical efficiency suggesting that larger banks are pure technically efficient but have no influence on cost efficiency and competition. There is no indication that fee income has an impact on bank competition. The findings also exhibit that loan loss provision ratio has no effect on bank efficiency and competition in Ghana. Furthermore, this study finds GDP growth negatively influences bank cost efficiency while the rate of inflation positively affect bank pure technical efficiency, but has no impact on bank cost efficiency and bank competition. The results also reveal that lagged cost efficiency tends to persist from year to year. Similarly, market power persistence exists in banking industry of Ghana. The findings also reveal that bank capitalization has a negative impact on bank market power. There is evidence that cost efficiency positively Granger-causes market power and hence causality negatively runs from cost efficiency to competition indicating that bank cost efficiency precedes competition. However, the reverse causality running from competition to cost efficiency is not supported. The findings also indicate that there is no causal relationship between bank pure technical efficiency and competition in Ghana

Distributed Collaborative Prognostics

Managing large fleets of machines in a cost-effective way is becoming more important as corporations own increasingly large amounts of assets. The steady improvement in cost and reliability of sensors, processors and communication devices has helped the spread of a new paradigm: the Internet of Things. This paradigm allows for real-time monitoring of countless physical objects, obtaining data that can be fed to machine learning algorithms to predict their future state and take managerial decisions. Despite rapid technological change, industries have been slow to react, and it has been only recently that many have transitioned towards a new business model: servitisation. Servitisation is based on selling the services that assets provide, instead of the assets themselves. Although more companies are adopting this business model, there is a lack of solutions aimed to maximise its economic value. This thesis presents one such solution capable of predicting failures in real time, thus reducing a crucial cost contribution to asset ownership: unexpected failures. This new approach, Distributed Collaborative Prognostics, consists of providing each machine with its own particular agent, that enables it to communicate with other similar machines in order to improve its failure predictions. This thesis implements Distributed Collaborative Prognostics in three different scenarios: (i) using a multi-agent simulation framework, (ii) using synthetic data from a well-established prognostics data set, and (iii) using real data from a fleet of industrial gas turbines. Each of these scenarios is used to study different elements of the prognostics problem. Multi-agent simulations allow for the calculation of the cost of predictive maintenance coupled with Distributed Collaborative Prognostics, and for the estimation of the cost of agent failures in different architectures. Synthetic data is used as a test bench and to study assets operating in dynamic situations. Real industrial data from the Siemens industrial gas turbine fleet serves to test the applicability of the tool in a real scenario. This thesis concludes that Distributed Collaborative Prognostics is the adequate solution for large and heterogeneous fleets of assets operating dynamically. Its cost effectiveness depends on the value of the assets; in general, highly-valued assets are more conducive to Distributed Collaborative Prognostics, as the savings from improved failure predictions compensate the cost of enabling them with Internet of Things technologies.This PhD Thesis has been supported by a “la Caixa" Fellowship (ID 100010434), with code LCF/BQ/EU17/11590049