A discrete martingale model of pension fund guarantees in

In this paper we present a solution to the problem of pricing guarantees of minimum returns on pension fund contributions. These guarantees exist by law in Colombia and cover all pension fund contributions made to the country's private pension fund administration companies (AFPs). As of September 1997, the funds were collecting contributions of 2.5 million affiliates with an accumulated capital of 1.8 billion dollars starting from zero in 1994. Two types of guarantees exist: on obligatory contributions and on voluntary contributions. The solutions are based on a discrete martingale approach . We show that both guarantees are equivalent to an ''option to exchange.'' However, in the case of voluntary contributions a ceiling on the payoff s must be added. Using a discrete martingale framework and a binomial solution we develop all aspects of the model that are necessary for its practical application in the context of the pension fund guarantees. Binomial formulas are obtained for both forms of guarantees. Besides solving the problem of pricing the guarantees offered by insurance fund, the contributions in terms of options theory of this paper are: i) we adapt the binomila model of options to exchange to relate the relevant parameters of the same to a continuous-time lognormal process; ii) we provide a binomial solution to the problem of an option to exchange with a ceiling. We then investigate the incentives that the current fixed-price system introduces and propose possible systems of incentives that can be used to encourage higher-risk investment by the AFP's and a shift of the fund's portfolio to risky equity and debt. Given the country's effort to encourage capital markets development and the financing of the real sector via private financial markets, this strategy appears to be desirable from the social and economic point of view.Pension funds, guarantees, options pricing, Colombia, Latin America

The Impact of Ethical Ratings on Canadian Security Performance: Portfolio Management and Corporate Governance Implications

One approach that is gaining in popularity among portfolio managers uses ethical ratings, published by specialized research organizations, to screen securities for portfolio selection. Portfolio managers can thus gain a better understanding of the phenomenon and adopt a better and more consistent approach to ethical investment. By the same token, board of directors can measure the impact of their ethical policies on the market performance of the stock of their company. This paper provides new evidence about the impact of ethical ratings published in Canada on the risk-adjusted returns of the securities concerned, within the framework of a multi-factor Capital Asset Pricing Model, and gives an interpretation of the results from the perspective of portfolio composition and of corporate governance.Ethical Ratings and Security Performance

Carcass and meat quality of different pig genotypes in an organic extensive outdoor fatting system

Carcass, meat, and fat quality were evaluated of 37 castrates of 4 different genotypes [Pi*Du*GLR (10), Pi*AS (7), Du (10), Du*GLR (10)] kept on grass clover and fed with coarse meal made up of farm grown cereal and grain legumes without optimising the amount of amino acids and their relation to the energy content. Due to the energy surplus in the diet and in relation to the diminishing muscularity of the genotypes (corresponding to the above-mentioned sequence) lean meat contents were on a low level whereas intramuscular fat contents increased distinctly. Sensory meat quality was only at a medium level and did not differ noticeably between the genotypes. It is concluded that adipose carcasses associated with increased intramuscular fat contents do not lead automatically to higher sensory meat qualities. Therefore the system boundaries of organic pig fattening cannot be used without further efforts supplying market niches for pork of high eating quality

Quantum phase-space representation for curved configuration spaces

We extend the Wigner-Weyl-Moyal phase-space formulation of quantum mechanics to general curved configuration spaces. The underlying phase space is based on the chosen coordinates of the manifold and their canonically conjugate momenta. The resulting Wigner function displays the axioms of a quasiprobability distribution, and any Weyl-ordered operator gets associated with the corresponding phase-space function, even in the absence of continuous symmetries. The corresponding quantum Liouville equation reduces to the classical curved space Liouville equation in the semiclassical limit. We demonstrate the formalism for a point particle moving on two-dimensional manifolds, such as a paraboloid or the surface of a sphere. The latter clarifies the treatment of compact coordinate spaces as well as the relation of the presented phase-space representation to symmetry groups of the configuration space.Comment: 14 pages. Corresponds to published versio

Financial Liberalization Causes Banking System Fragility

This paper explores theoretically and empirically the link between Financial Liberalization (FL) and the banking crisis that often follow. We also investigate the proposition, classical in development economics, that FL should result in an increase in supply of funds to the real sector. To accomplish this we first develop a theoretical model of a banking firm that operates under financial repression and is then subject to FL. The model yields the result that following FL there is an unambiguous increase in risk to the banking firm which implies a higher probability of a banking crisis following FL. Less formally, we also conclude that the presence of a explicit or implict deposit insurance scheme is likely to accentuate the incentives to engage in risk and the risk structure of the banking system. Moral hazard plays an important role in this increase in risk to the banking sector. This questions the ''innocence'' of the bank owners in the crisis that have often followed FL and that had been attributed to either macroeconomic policy, concomitant structural changes in the economy or left-over distortions from the financial repression period. The sign of the change in supply of credit to the real sector, however, is ambiguous. Then we test empirically the propositions resulting from this model using data of 73 banks (some of which may have become technically insolvent) from Greece, Malaysia, Mexico, Taiwan and Thailand. The tests tend to support the conclusions of the theoretical model, i.e. unambiguous increase in risk and, for the sample used, an unambiguous fall in loan supply as a proportion of funds available. Finally we draw policy implication with respect to bank supervision, forbearance and bank failure resolution procedures during the transition period, and about the so-called ''liberalization sequencing.''Financial liberalization, Deregulation, Commercial banking, Systemic risk

The Power of Networks: Integration and Financial Cooperative Performance

The purpose of this paper is to perform a cross-country survey of the level of integration of systems of financial cooperatives (FC) and its effect on measures of performance. We develop a classification scheme based on a theoretical framework that builds on published work using transaction cost economics (TCE) to explain integration of large numbers of financial cooperatives into networks. We identify three critical level of increasing integration we call respectively atomized systems, consensual networks and strategic networks. Further, we test some of the propositions that result from the theoretical framework on an international sample of financial cooperative systems. Based on this analysis we can conclude that: i) Integration is less (more) important is developing (more developed) countries and for very small (large) financial cooperatives as a determinant of efficiency. However, integration tends to reduce volatility of efficiency and performance regardless of development. ii) Integration appears to help control measure of managers' expense preferences that tend to affect performance of FC. iii) Despite high costs of running hub-like organizations in highly integrated system, these systems economize in bounded rationality and operate at lower costs that less integrated systems.Transaction cost economics, financial cooperatives, credit unions, networks, corporate governance, technical efficiency, x-efficiency

Theory and Test on the Corporate Governance of Financial Cooperative Systems: Merger vs. Networks

This paper presents a study of the economic organization of systems of financial cooperatives (FC). The first part presents a theoretical framework rooted in principles of transaction cost economics (TCE) that seeks to explain empirical regularities observable in systems of FC worldwide. The second part is an empirical study that compares X-efficiency between members of the Quebec Desjardins movement (DM) and the United States Credit Union system (USCU), the first organized as a tight network of institutions and the second composed largely by independent institutions with few ties. The fundamental proposition is that networks, are a superior form of governance mechanism (over markets and mergers) for relatively wide and relevant ranges of contractual hazard and size of the institutions. Further, that networks provide substitute, hierarchy based, control mechanisms when size of the institution dilutes internal governance mechanisms, discouraging subgoal pursuits and expense preferences by agents, both occurring in large FC. The theory allows us to generate a set of testable hypothesis of which we highlight three: i) For small FC, differences in efficiency will be relatively small, if any. ii) Large institutions should display systematically lower efficiency than similar sized FC members of strategic networks. iii) Networks should display lower variance in the size as well as in performance indicators. Throughout, empirical results are consistent with our central theoretical proposition.Transaction cost economics, financial cooperatives, credit unions, networks, corporate governance, technical efficiency, X-efficiency

From Financial Liberalization to Banking Failure: Starting on the Wrong Foot?

In this paper we attempt to identify the characteristics of banks that are most likely to be at the origin of a banking crisis following a financial liberalization (FL) process. We do this analysis in response to the observed fact that FL processes arse often followed by banking crisis that cost taxpayers large amounts of resources in rescue operations. To accomplish this objective we identify a sample of ''failed'' and ''healthy'' banks following a FL and then compare their financial data at the onset of FL. We also attempt to identify to what extent the quality of the loan portfolio and the management and risk- taking practices of banks affect the outcome. The results are surprisingly robust and they mean that it may be possible to identify with an anticipation of at least 4 years the banks that could be responsible for an eventual banking crisis! Further, both quality of loans and management and risk-taking practices play a role. The results suggest that banks that are more conservative and thus those that are less likely to incur in moral hazard, or are more capable of absorbing important macro shocks given their capitalization, are the ones that are more likely to remain solvent. The study is based on a sample of 82 banks from Greece, Indonesia, Korea, Malaysia, Mexico, Thailand and Taiwan.Financial liberalization, Deregulation, Commercial banking, Systemic risk, Banking crises, Bank failure

Does Corporate Governance Matter in Deposit Insurance? DI and Moral Hazard in Joint Stock and Mutual Financial Intermediaries

In this paper, we analyze the differences of effects of a deposit insurance schemes on financial cooperative and joint stock banks risk taking. We develop a methodology which includes the specifics of the utility function for the financial cooperative and we compare the results to a similar profit maximizing joint stock bank. We find that the introduction of deposit insurance does in fact increase optimal risk level for the financial cooperative but less so than the stock bank. Thus, corporate governance does matter in the level of risk exposure of a deposit insurance scheme. Further, like in joint stock banks, this moral hazard can be curbed through incentives such as risk adjusted premias, risk adjusted regulatory capital and possibly reserve requirements.