How a regulatory capital requirement affects banks' productivity: an application to emerging economies

© 2015, Springer Science+Business Media New York. This paper presents a novel approach to measure efficiency and productivity decomposition in the banking systems of emerging economies with a special focus on the role of equity capital. We model the requirement to hold levels of a fixed input, i.e. equity, above the long run equilibrium level or, alternatively, to achieve a target equity-asset ratio. To capture the effect of this under-leveraging, we allow the banking system to operate in an uneconomic region of the technology. Productivity decomposition is developed to include exogenous factors such as policy constraints. We use a panel data set of banks in emerging economies during the financial upheaval period of 2005–2008 to analyse these ideas. Results indicate the importance of the capital constraint in the decomposition of productivity

Duality in mean-variance frontiers with conditioning information

Portfolio and stochastic discount factor (SDF) frontiers are usually regarded as dual objects, and researchers sometimes use one to answer questions about the other. However, the introduction of conditioning information and active portfolio strategies alters this relationship. For instance, the unconditional portfolio frontier in Hansen and Richard (1987) is not dual to the unconditional SDF frontier in Gallant, Hansen and Tauchen (1990). We characterise the dual objects to those frontiers, and relate them to the frontiers generated with managed portfolios, which are commonly used in empirical work. We also study the implications of a safe asset and other special cases.Asset Pricing, Dynamic Portfolio Strategies, Representing portfolios, Stochastic Discount Factors

Optimal Dynamic Portfolio with Mean-CVaR Criterion

Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR) are popular risk measures from academic, industrial and regulatory perspectives. The problem of minimizing CVaR is theoretically known to be of Neyman-Pearson type binary solution. We add a constraint on expected return to investigate the Mean-CVaR portfolio selection problem in a dynamic setting: the investor is faced with a Markowitz type of risk reward problem at final horizon where variance as a measure of risk is replaced by CVaR. Based on the complete market assumption, we give an analytical solution in general. The novelty of our solution is that it is no longer Neyman-Pearson type where the final optimal portfolio takes only two values. Instead, in the case where the portfolio value is required to be bounded from above, the optimal solution takes three values; while in the case where there is no upper bound, the optimal investment portfolio does not exist, though a three-level portfolio still provides a sub-optimal solution

Parameterized Construction of Program Representations for Sparse Dataflow Analyses

Data-flow analyses usually associate information with control flow regions. Informally, if these regions are too small, like a point between two consecutive statements, we call the analysis dense. On the other hand, if these regions include many such points, then we call it sparse. This paper presents a systematic method to build program representations that support sparse analyses. To pave the way to this framework we clarify the bibliography about well-known intermediate program representations. We show that our approach, up to parameter choice, subsumes many of these representations, such as the SSA, SSI and e-SSA forms. In particular, our algorithms are faster, simpler and more frugal than the previous techniques used to construct SSI - Static Single Information - form programs. We produce intermediate representations isomorphic to Choi et al.'s Sparse Evaluation Graphs (SEG) for the family of data-flow problems that can be partitioned per variables. However, contrary to SEGs, we can handle - sparsely - problems that are not in this family

Testing SDRT's Right Frontier

The Right Frontier Constraint (RFC), as a constraint on the attachment of new constituents to an existing discourse structure, has important implications for the interpretation of anaphoric elements in discourse and for Machine Learning (ML) approaches to learning discourse structures. In this paper we provide strong empirical support for SDRT's version of RFC. The analysis of about 100 doubly annotated documents by five different naive annotators shows that SDRT's RFC is respected about 95% of the time. The qualitative analysis of presumed violations that we have performed shows that they are either click-errors or structural misconceptions

Mean-risk models using two risk measures: A multi-objective approach

This paper proposes a model for portfolio optimisation, in which distributions are characterised and compared on the basis of three statistics: the expected value, the variance and the CVaR at a specified confidence level. The problem is multi-objective and transformed into a single objective problem in which variance is minimised while constraints are imposed on the expected value and CVaR. In the case of discrete random variables, the problem is a quadratic program. The mean-variance (mean-CVaR) efficient solutions that are not dominated with respect to CVaR (variance) are particular efficient solutions of the proposed model. In addition, the model has efficient solutions that are discarded by both mean-variance and mean-CVaR models, although they may improve the return distribution. The model is tested on real data drawn from the FTSE 100 index. An analysis of the return distribution of the chosen portfolios is presented

Generalized asset pricing: Expected Downside Risk-Based Equilibrium Modelling

We introduce an equilibrium asset pricing model, which we build on the relationship between a novel risk measure, the Expected Downside Risk (EDR) and the expected return. On the one hand, our proposed risk measure uses a nonparametric approach that allows us to get rid of any assumption on the distribution of returns. On the other hand, our asset pricing model is based on loss-averse investors of Prospect Theory, through which we implement the risk-seeking behaviour of investors in a dynamic setting. By including EDR in our proposed model unrealistic assumptions of commonly used equilibrium models - such as the exclusion of risk-seeking or price-maker investors and the assumption of unlimited leverage opportunity for a unique interest rate - can be omitted. Therefore, we argue that based on more realistic assumptions our model is able to describe equilibrium expected returns with higher accuracy, which we support by empirical evidence as well.Comment: 55 pages, 15 figures, 1 table, 3 appandices, Econ. Model. (2015

Liquidity Shocks and the Business Cycle

This paper studies the properties of an economy subject to random liquidity shocks. As in Kiyotaki and Moore [2008], liquidity shocks affect the ease with which equity can be used as to finance the down-payment for new investment projects. We obtain a liquidity frontier which separates the state-space into two regions (liquidity constrained and unconstrained). In the unconstrained region, the economy behaves according to the dynamics of the standard real business cycle model. Below the frontier, liquidity shocks have the effects of investment shocks. In this region, investment is under-efficient and there is a wedge between the price of equity and the real cost of capital. As with investment shocks, we argue that liquidity shocks are not an important source of business cycle fluctuations in absence of other frictions affecting the labor market.Business Cycle, Asset Pricing, Liquidity