This paper is the introduction to the forthcoming book, Recent Developments in Alternative Finance:  Empirical Assessments and Economic Implications, Proceedings of Second International Symposium in Computational Economics and Finance.  The conference was held in Tunis, Tunisia, March 15-17, 2012.  The volume will appear as volume 22 of the Emerald Press monograph series, International Symposia in Economic Theory and Econometrics.  The topic of the conference was alternative approaches to finance

Barnett, William A.

Jawadi, Fredj

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MPRA
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Introduction to Recent Developments in
Alternative Finance: Empirical
Assessments and Economic Implications
William A. Barnett and Fredj Jawadi
30. August 2012
Online at http://mpra.ub.uni-muenchen.de/40971/
MPRA Paper No. 40971, posted 31. August 2012 15:02 UTC
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Introduction to Recent Developments in Alternative Finance: Empirical 
Assessments and Economic Implications 
 
 
William Barnett (University of Kansas and Center for Financial Stability, NY City) 
Fredj Jawadi (University of Evry and Amiens School of Management, France) 
 
Keywords: finance, alternative finance, monetary economics 
JEL Codes:  G00, G10, G20, G30, E41, E51, E52 
 
Abstract:  This paper is the introduction to the forthcoming book, Recent Developments in 
Alternative Finance:  Empirical Assessments and Economic Implications, Proceedings of 
Second International Symposium in Computational Economics and Finance.  The conference 
was held in Tunis, Tunisia, March 15-17, 2012.  The volume will appear as volume 22 of the 
Emerald Press monograph series, International Symposia in Economic Theory and 
Econometrics.  The topic of the conference was alternative approaches to finance. 
 
 
Since the recent global financial crisis began in 2008-2009, there has been strong 
decline in financial markets and investment, huge losses and bankruptcies that have led to a 
major financial downturn, and a significant economic recession for most developed and 
emerging economies.  Some economists and financial analysts now consider this crisis to be 
more harmful in some ways than the Great Depression of 1929. Those economists and 
analysts point to a number of technical issues and limitations associated with the present 
financial systems, monetary institution rules, accounting and rating formulas, and investment 
strategies and choices. To try to overcome the financial downturn and, at the same time, to 
protect the banking systems and financial markets and to reassure investors, central banks 
have attempted various solutions, governments have introduced new plans (e.g., the Paulson 
plan), policymakers have included these topic in their political programs, and several 
conferences and political summits have been organized to discuss the issues. There have been 
two prevailing lines of thought.  According to one line of thought, the extreme risk associated 
with speculation in sophisticated financial products, the nature of the credit-banking economic 
system, the gap between real and financial economies, and the strategic errors of monetary 
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institutions constitute the main sources of the financial crisis.
1
 On the other hand, it is now 
argued that this trend needs to be altered. According to that view, monetary institutions, 
banking and trading systems, rating agencies, and asset pricing modelling need to be 
reassessed.  
Accordingly, there has been a growing search for new forms of alternative finance, 
management, control, accounting, trading and investment. Alternative finance research is an 
ongoing process that incorporates finance and innovation. Relative to conventional financial 
methods, the alternative finance framework enables financial products to be exchanged, but 
proposes different instruments and alternative products. In effect, alternative finance regroups 
private equity, seed funds, spin-off funds, ethical finance, and other concepts not always 
central to conventional finance. Alternative finance also makes use of both private and public 
finance, incorporating subsidies and refundable donations. 
Alternative finance presents challenges and is intended to stimulate investment and 
promote economic growth and development, as well as to provide a return on investment 
during turbulent times. Alternative finance is intended to enable better financial risk 
supervision of derivatives and sophisticated products; control trading, risk management, and 
investment strategies; help rating agencies and monetary institutions to implement appropriate 
tools; protect shareholders; and ensure market liquidity and limit bankruptcy.  
The notion of alternative finance is not new in the literature but has attracted  
increasing interest, since the global financial crisis began (2008-2009). While this framework 
incorporates different investment forms and modalities, including alternative capital, ethical 
business, microfinance, social and responsible investment, and sustainable durable 
investment, all share common characteristics associated with moral values, moderate risk, and 
alternative finance techniques. Several researchers have recently begun to focus on these 
issues, investigating their different instruments, mechanisms, and channels. Preliminary 
findings have suggested their abilities to control risk and increase financial market stability. 
This volume aims to provide the reader with a comprehensive understanding of 
alternative finance in its various forms. On the one hand, it addresses certain aspects of the 
impact of the financial crisis and the failure of monetary and financial institutions to manage 
financial markets and handle the recent downturn. On the other hand, it presents and discusses 
                                                          
1
 Much evidence now exists that rating agencies wrongly evaluated some financial products, such as subprime 
credits, and that monetary instruments and tools used by central banks were inappropriate. See Barnett (2012) 
about major measurement errors in monetary aggregates used by the Federal Reserve.  
 
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new research findings associated with alternative forms of investment and finance, and their 
economic and political implications.  This introduction provides a brief overview of 
alternative finance and then of the book’s chapters, along with some broad areas for future 
research. 
The book’s first chapter, entitled “Divisia Monetary Aggregates for the GCC 
Countries,” is by Ryadh Alkhareif and William Barnett. Using modern aggregation and index 
number theory, the chapter builds monthly Divisia monetary aggregates for the Gulf area. The 
authors point to the superiority of the Divisia indexes over the officially published simple-sum 
monetary aggregates in monitoring business cycles. The originality of this chapter lies in its 
being the first study to produce theoretical monetary aggregates for the GCC countries. The 
study also provides evidence of the potential usefulness of the data in policy, notably when an 
economy is subject to monetary and technology shocks. 
In the second chapter, Iuliana Matei also focuses on the money market and, in 
particular, the bond market, exploring the “Euro Zone Bond Market and Economic Growth: 
Evidence from Time-Series Analysis.” The chapter investigates the relationships between 
government bond markets and real GDP growth for 16 Eurozone countries, using Granger 
causality and cointegration tests. The author shows the time-varying feedback effects of 
financial development through bond markets on economic growth and variations across the 
countries under consideration. Such heterogeneity can explain the differences in shock 
transmissions of financial crises to real activity from one country to another within the Euro 
area. 
In the third chapter, the study by Makram Bellalah and Sonia Ben Said, entitled 
“International Portfolio Choice: the Case of Market Competition,” investigates investment 
decisions of firms that invest in both home and foreign activities in two countries, when 
markets for final goods and services are imperfect. Using the Hamilton-Jacobi-Bellman 
approach, the authors permit the degree of imperfect competition to be different in the two 
countries under consideration. Overall, the authors find that investment proportions and 
opportunities and asset pricing relationships can vary across countries, and explain these 
results by the presence of different types of alternative finance and investment.   
 In the fourth chapter, entitled “Can the Wealth-to-Income Ratio Be a Useful Predictor 
in Alternative Finance? Evidence from the Housing Risk Premium,” Manuel Armada and 
Ricardo Sousa focus on asset wealth and housing risk premium relationships. Using 
cointegration techniques, the authors show that deviations of asset wealth from equilibrium 
can track time-variation in expected housing returns in a set of industrialized countries. In 
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particular, the housing risk premium can be driven by shocks to the wealth-to-income ratio, 
and the size and signs of variations in housing risk premia depend upon whether housing 
assets are complements or substitutes for financial assets. These findings can have different 
implications. For example, the development of investment strategies for hedging against the 
risk of unfavorable housing fluctuations may depend on the nature of the relationship between 
financial and housing assets.  
Chapters 5 and 6 look at mutual finance approaches. Chapter 5, entitled “The 
Challenges to the Mutual Financial Sphere: Statues to the Test Development,” by Michel 
Roux investigates the characteristics of mutual finance industries and insurance companies. 
The author discusses the main challenge facing mutual finance and investigates the impact of 
the financial crisis through cooperative banks and mutual insurance companies. Chapter 6, 
entitled “The Origins of Mutualists Finance,” by Philippe Naszalyi discusses the origins of 
mutual finance and its future role. According to the author, mutual finance can be a basis for 
alternative finance, reflecting its ethical aspects. He suggests that mutual finance can help us 
to grasp the challenges of alternative finance. Chapter 7 by Daniel Bachet, entitled “Can 
Cooperative Banking Become an Alternative to Capitalistic Finance,” compares privately 
owned and cooperative banks. The author explains the differences between cooperative and 
private ownership banks in terms of their socially-oriented origins and purpose. The authors 
present the institutional conditions underlying the forms of cooperative finance that can 
stimulate alternative finance and investment.  
Chapters 8-12 focus on different forms of alternative finance and investment. While 
chapters 8 and 9 focus on Islamic finance, chapters 9-12 discuss employee savings, energy 
finance, and microfinance investment. Chapter 8, entitled “Alternative Financial Decision 
Principles: Theoretical Foundations of Islamic Bank Capital Structure,” by Kaouther Toumi, 
Wael Louhichi, and Jean-Laurent Viviani examines ethical principles in a bank’s financial 
decision-making processes. In particular, the authors focus on how the adoption of Sharia 
principles can affect the capital structure of Islamic banks. The chapter argues that trade-off 
theory is more suitable for Islamic banks and that information asymmetry and agency 
conflicts might be less important for Islamic institutions than for conventional institutions. 
The main originality of the chapter lies in its comparison between conventional and Islamic 
bank structures. Chapter 9 by Geneviève Causse, entitled “Islamic Finance: an Alternative 
Finance or an Antidote to the Crisis of Capitalism,” also focuses on Islamic finance. The 
chapter concludes that Islamic banking cannot replace conventional finance systems, but can 
help to reform and ratify them.  The author investigates different hypotheses: coexistence, 
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integration, and substitution among conventional and Islamic financial systems. The main 
conclusion is that Islamic financial principles provide a possible means for improving and 
reforming the conventional system. These findings can clarify investment opportunities and 
portfolio diversification benefits associated with Islamic financial products.  
Chapter 10 by Aude d’Andria looks at “The Emergence of Solidarity Employee 
Savings in France.”  The author discusses a new alternative investment associated with 
solidarity savings. After describing the main characteristics of this financial product, she 
discusses the key implications of such initiatives for French employees. In chapter 11, entitled 
“Mood-Misattribution Effect on Energy Finance: a Biorhythm Approach,” Marc Joëts 
describes energetic finance, another approach to alternative finance. The chapter focuses on 
the relationship between emotions and European energy forward prices of oil, gas, coal and 
electricity. Using a biorhythm approach and quantile regression, the author shows that the use 
of psychological background theory can help to explain the evolution of energy price 
dynamics. She suggests that taking the emotion effect into consideration can be relevant to 
developing alternative investment opportunities and improving energy portfolio allocation. 
The twelfth chapter, entitled “Is Microcredit a Real Innovation,” by Laurence Attuel-Mendès 
presents microfinance as a promising form of alternative finance, and assimilates microcredit 
with real innovation. The author argues that microcredit practices offer potentially promising 
methods for finance institutions to guide their projects and development.  
The three last chapters in this volume focus on hedge fund products. Although several 
analysts have criticized this type of product, these chapters propose ways to reform and better 
control such products. In particular, chapter 13, “Estimation of Non Gaussian Returns: The 
Hedge Fund Case,” by Naceur Naguez and Jean-Luc Prigent describes a new approach to 
measurement of hedge fund returns. Applying the Johnson distributions within parametric and 
nonparametric methods, the authors explore hedge fund dynamics modelling. The study 
shows that taking asymmetric and non-Gaussian characteristics into account in hedge fund 
data can help to improve modelling, forecasting of future dynamics, and risk management. 
In chapter 14, “Hedge Funds and Dynamic Risk Modeling,” Wafa Kammoun 
Masmoudi points to the limitations of conventional models for evaluating hedge fund 
performance. She develops a framework using a Bayesian, time-varying, CAPM-based beta 
model within a state-space technology, with the objective of modelling the dynamic risk 
structures of hedge funds. The author shows that such modelling can help to explain the 
relationship between hedge funds and risk factors.  
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Finally, the last chapter, “Evaluation of Hedge Fund Return Value at Risk Using 
GARCH Models,” by Sabrina Khanniche also focuses on hedge fund market risk. The author 
highlights the fact that hedge fund dynamics exhibit asymmetry, ARCH effect, and 
nonlinearity. These phenomena may induce time-variation of hedge fund volatility. To test 
this hypothesis, the author applies GARCH models and concludes that GARCH-VAR 
techniques are well suited to model hedge fund risk, to improve risk management for hedge 
funds, and to define appropriate financial strategies. 
This book’s chapters explore implications of the dynamics of economic and financial 
series, properties of the financial crisis, and consequences of its main outcomes. The 
empirical findings provide evidence of limitations in standard modelling and conventional 
financial instruments. Although alternative finance covers several types and forms of 
investment and capital, all of chapters share common emphasis on moderate risk and 
decreased speculation. Alternative finance seeks to help to reform and improve conventional 
finance,e but not to replace it.  
Overall, the research topics discussed in these chapters provide a rapid overview of 
major areas of alternative finance and open up areas for future research. For example, chapter 
1 offers challenging avenues for understanding new monetary aggregates and instruments.  
 
ACKNOWLEDEGEMENT 
Fredj Jawadi would like to thank Amiens School of Management and ESTIM for helping to 
finance the Second International Symposium in Computational Economic and Finance 
(ICEF2012), which was organized in Tunis (Tunisia) on March, 15-17, 2012 
(www.iscef.com). Most of the chapters in this volume are selected from the papers presented 
at the ISCEF2012. We would also like to thank the symposium participants for the quality of 
their feedback. 
 
REFERENCES 
William A. Barnett (2012), Getting It Wrong: How Faulty Monetary Statistics Undermine the 
Fed, The Financial System, and the Economy, MIT Press, Boston. 
 


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