#03-01 The Response of Commercial Banks to Compensation Reform
#03-02 Economic Fundamentals and the Behavior of the Real Effective Exchange Rate of the Cyprus Pound
#03-03 Depts of Cyprus Households: Lessons from the First Survey of Consumer Finances
#03-04 Portfolio Credit Risk Management Using Factor Models
#03-05 Stability Analysis of Portfolio Management with Conditional Value-at-Risk
#03-06 Expert Opinion Elicitation in Option Pricing
#03-07 Capital Investment Decision with Partial Reversibility, Operating Constraints and Stochastic Switching Costs
#03-08 Earnings Management Around Share Repurchases
#03-09 Further Evidence on Compensation Committee Composition as a Determinant of CEO Compensation
#03-10 Length of Board Tenure and Outside Director Independence
#03-11 Contingent Claims on Foreign Assets Following Jump-Diffusion Processes
#03-12 Assessment of Resampling Techniques for Estimating Risk-Return Efficient Frontiers
#03-13 Nonlinear Stochastic Programming Models for Insurance Products with Guarantees
#03-14 Nominal Convergence Within the New Member Countries and the European Union
#03-15 Financial Variables and Real Activity in Canada
#03-16 Greening the Service Profit Chain: the Impact of Environmental Practices
#03-17 Reducing the Cost of Defects in Multistage Production System: A Budget Allocation Perspective
#03-18 Real Options and Investments under Uncertainty: What do we Know?
#03-19 Predicting Corporate Failure: Empirical Evidence for the UK
#03-20 Credit Card Debt Puzzles
#03-21 Risk Management in Emerging Markets: Practical Methodologies and Empirical Tests
Abstracts and downloadables
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The Response of Commercial Banks to Compensation Reform
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Abstract This study assesses changes in the executive compensation policy of 94 commercial banks following the SEC''s expanded compensation disclosure rules and revisions in the Internal Revenue Code regarding deductibility of compensation expense. During the period from 1989–1997, commercial banks experience a significant decline in the number of insiders serving in executive compensation committees. Following compensation reform, banks seem to substitute non-cash for cash compensation, and exhibit a somewhat stronger pay-for-performance relationship. Further, board structures are statistically indistinguishable among banks that were acquired compared to surviving banks, and between banks and a sample of electric utilities. Taken together, our analysis suggests that compensation reform, rather than deregulation or corporate control, led commercial banks to change their governance structures and provides limited evidence that such changes enhanced the incentive effects of compensation contracts.
Review of Quantitative Finance and Accounting, Volume 20, Number 4, pp. 335-354(20), June 2003
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Economic Fundamentals and the Behavior of the Real Effective Exchange Rate of the Cyprus Pound
Charalambos Pattichis, Marios Maratheftis and Stavros A. Zenios, March 2003
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Abstract This paper investigates whether the real effective exchange rate of the Cyprus pound is misaligned by generating measures of the equilibrium rate using the behavioral equilibrium exchange rate (BEER) approach. Several measures of the equilibrium exchange rate were derived and used to check for the existence of exchange rate misalignment. The results suggest that, during the 1990s, the actual real effective exchange rate and the various equilibrium measures generated move closely together and there is no evidence of any significant and persistent misalignment. However, the empirical evidence suggests persistent overvaluation during the 1980s.
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Depts of Cyprus Households: Lessons from the First Survey of Consumer Finances
Michael Haliassos, Christis Hassapis, Alex Karagrigoriou, George Kyriacou, Michalis C. Michael and George Syrichas, March 2003
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Abstract This paper describes participation of Cyprus households in various debts using data from the first (1999) Cyprus Survey of Consumer Finances. It complements our previous paper that described household participation in various types of assets (Haliassos et al., 2001). Debts considered encompass personal unsecured loans, including credit card debt, and loans secured by housing collateral, mainly mortgage debt. Findings are of policy interest, as they show the extent of household participation in various loans, and the indebtedness of various demographic groups. We document considerable popularity of credit cards as borrowing instruments despite their recent introduction, and a continuing parallel presence of antiquated forms of borrowing (informal store credits). There is surprisingly limited use by the young of mortgages, despite very high homeownership rates, and of car loans, despite high car ownership rates. We find evidence of considerable reliance on family transfers for the financing of education, home acquisition, and car purchase by the young. Particularly problematic for equality of opportunities is the limited ability of the young to take student loans and the reliance on their parents to do so in order to finance their post-secondary education. Finally, we have noted a tendency of Cyprus business owners to take out large loans from their business for personal use.
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Credit Risk Optimisation Using Factor Models
David Saunders, Costas Xiouros and Stavros A. Zenios, 2003
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Abstract We study portfolio credit risk management using factor models, with a focus on optimal portfolio selection based on the tradeoff of expected return and credit risk. We begin with a discussion of factor models and their known analytic properties, paying particular attention to the asymptotic limit of a large, finely grained portfolio. We recall prior results on the convergence of risk measures in this "large portfolio approximation" which are important for credit risk optimization. We then show how the results on the large portfolio approximation can be used to reduce significantly the computational effort required for credit risk optimization. For example, when determining the fraction of capital to be assigned to particular ratings classes, it is sufficient to solve the optimization problem for the large portfolio approximation, rather than for the actual portfolio. This dramatically reduces the dimensionality of the problem, and the amount of computation required for its solution. Numerical results illustrating the application of this principle are also presented.
Annals of Operations Research, Volume 152, Number 1, pp.49-77, July 2007
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Stability Analysis of Portfolio Management with Conditional Value-at-Risk
Michal Kaut, Stein W. Wallace, Hercules Vladimirou and Stavros A. Zenios, 2003
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Abstract We examine the stability of a portfolio management model based on the conditional value-at-risk (CVaR) measure; the model controls risk exposure of international investment portfolios. We use a moment-matching method to generate discrete distributions (scenario sets) of asset returns and exchange rates so that their statistical properties match corresponding values estimated from historical data. First, we establish that the scenario generation procedure does not bias the results of the optimization program, and we determine the required number of scenarios to attain stable solutions. We then investigate the sensitivity of the CVaR model to mis-specifications in the statistics of stochastic parameters: mean, standard deviation, skewness, kurtosis, as well as correlations. The results are most sensitive to estimation errors in the means of the stochastic parameters (asset returns and currency exchange rates). Mis-specifications in the standard deviation, skewness and correlations of the random parameters also have considerable impact on the solutions. The effect of mis-specifications in the values of kurtosis, although less than that of the other statistics, is still not negligible.
Quantitative Finance, Volume 7, Issue 4, pp. 397 - 409, August 2007
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Expert Opinion Elicitation in Option Pricing: A Bayesian Approach
Athanassios Katsis, Spiros Martzoukos, and Athanassios Yannacopoulos, 2003
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Abstract In this paper we propose a model for option pricing where expert opinion is used to elicit estimates of unobserved volatilities of the underlying assets. We suggest two different pricing approaches based on the Black-Scholes model (Black and Scholes (1972)). The results of the paper shed light on the effect of uncertainty and choice of volatility probability distribution on European Option prices. We examine the case of financial and real option. For financial options we demonstrate that even under the assumption of constant volatility and investor homogeneity, as well as without the need to resort to more complex assumption for the underlying's stochastic process, a smile effect is justified. For the more complex case of real options we demonstrate that by neglecting parameter uncertainty we can easily missprice options by 15-20%, and that misspricing is almost a linear function in time-to-maturity and the degree to which the option is in-the-money.
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Capital Investment Decision with Partial Reversibility, Operating Constraints and Stochastic Switching Costs
Spiros H. Martzoukos, Nayia Pospori, and Lenos Trigeorgis, 2003
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Abstract We study dynamic investment strategy in a network of a discrete set of sequential and partially reversible decisions (i.e., optimal technology or capacity choice, optimal sequence of expansion, contraction, temporary shutdown, etc.) in the presence of hysteresis-inducing switching costs. We allow time intensive (time-to-build) decisions, and operating constraints (e.g., exhaustible resources or contractual limitations). More importantly, we incorporate a proper treatment of economic depreciation -- a mostly ignored factor in the contingent claims analysis of investments under uncertainty -- and we provide for switching costs and recovery (abandonment) values that are themselves path (utilization) dependent, and thus stochastic. We provide two illustrative examples, one with learning-by-doing in sequential investments, and one with a search for dominant technologies when introducing a new product/technology in shipping. It is seen that economic depreciation can be a very significant factor in valuation, with striking effects especially for the most important for decision-makers range of at- or near out-of-the-money investment options. Our other results are intuitive but sometimes non-conventional, e.g., in the presence of flexibility, an increase in uncertainty often can lead to investing earlier instead of waiting. Similar results are often observed with a decrease in the asset payout yield (a result not observed in earlier literature). In addition to previous literature we demonstrate that such non-conventional results may decrease or vanish in the presence of factors like operating constraints that limit flexibility.
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Earnings Management Around Share Repurchases: A Note
Nikos Vafeas, Adamos Vlittis, Philippos Katranis, and Kanalis Ockree, 2003
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Abstract This work examines a subset of the important area of earnings management. Specifically, it seeks to identify the extent of earnings management preceding self-tender offers for a sample of U.S. firms. Pre-repurchase total accruals and discretionary current accruals were found to be somewhat lower for a sample of self-tendering firms compared to a sample of industry- and performance-matched control firms. Weak evidence of post-buyback accruals reversal is also presented. The evidence is weakly consistent with the notion that share repurchases are employed by managers to exploit shareholders through earnings management.
Abacus, A Journal of Accounting, Finance and Business Studies, Volume 39, Issue 2, pp. 262-272, June 2003
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Further Evidence on Compensation Committee Composition as a Determinant of CEO Compensation
Nikos Vafeas, 2003
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Abstract I use more than 1,500 firm-year observations for 271 U.S. firms between 1991-1997 to examine the relation between insider membership on compensation committees and CEO pay. I find a steady decline in the number of committees with insider participation during the sample period, and uncover some opportunism by insiders in setting pay prior to the compensation disclosure and tax reforms. Finally, I document changes in pay practices that would be consistent with the intent of these reforms. Based on this evidence, however, I cannot definitively conclude whether the reforms were efficient.
Financial Management, Volume 32, Number 2, pp. 53-70, Summer 2003
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Length of Board Tenure and Outside Director Independence
Nikos Vafeas, 2003
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Abstract I posit and test two competing views on the significance of outside director tenure lengths; the expertise hypothesis suggesting that extended board service time is a sign of director commitment, experience, and competence and the management-friendliness hypothesis suggesting that extended board service time marks directors who befriend management at the expense of shareholders. I find evidence that Senior directors, defined as directors with twenty or more years of board service, are almost twice as likely to occupy a "management-affiliated" profession compared to the rest, and that they are also more likely to staff the firm's nominating and compensation committees. Senior director participation in the compensation committee is associated with higher pay for the CEO, especially when the CEO is more powerful in the firm. These results are consistent with the management-friendliness hypothesis, and highlight a need for setting term limits for directors
Journal of Business Finance & Accounting, Volume 30, Issue 7-8, pp. 1043–1064, September 2003
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Contingent Claims on Foreign Assets Following Jump-Diffusion Processes
Spiros H. Martzoukos, 2003
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Abstract In this paper we price contingent claims on several foreign assets that follow jump-diffusion processes. Discontinuities (jumps) arise due to the assets? movement in the respective countries, or the exchange rates, or both. We assume the existence of multiple classes (sources) of jumps. Each jump can affect one or more state-variables and is defined by its intensity of arrival and by the joint probability distribution of its magnitude. The existence of jumps gives rise to significant deviations from the joint lognormality assumptions of the multivariate geometric Brownian motion, and affords more flexibility in capturing the empirically observed asymmetry and fat tails in asset returns. Analytic solutions are provided for the European option on the best of several assets without or with exchange rate (quanto-type) protection. A Markov-chain numerical method that can also handle American claims is given and its accuracy is demonstrated. Neglecting the effect of jumps causes serious misspricing and leads to erroneous decision-making when purchasing or exercising such options.
Review of Derivatives Research, Volume 6, Number 1, pp. 27-45(19), January 2003
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Assessment of Resampling Techniques for Estimating Risk-Return Efficient Frontiers
Maria Siopacha, Hercules Vladimirou, Costas Xiouros, and Stavros A. Zenios, 2003
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Nonlinear Stochastic Programming Models for Insurance Products with Guarantees
Andrea Consiglio, David Saunders, and Stavros A. Zenios, 2003
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Abstract Increasing competition has lead the insurance industry to introduce more complicated and innovative policies. Modern policies come with guarantees on the minimum rate of return, bonus provisions and surrender options. We study the problem of asset and liability management for participating insurance policies with guarantees. Earlier work has focused on the products issued by Italian insurers, which have fixed participation rate. In this work, we study the products offered by UK insurance companies, where the insurer has greater freedom in determining the bonus policy. This greater freedom constitutes and embedded optionality which significantly complicates the ALM problem as well as the pricing of the products. The asset and liability management problem results in a nonlinear stochastic programming problem. We present extensive numerical results for the ALM problem, as well as discussing methods fro pricing the products.
Insurance Mathematics & Economics, Volume 32, Issue 1, pp. 154-154, 2003
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Nominal Convergence Within the New Member Countries and the European Union
Christis Hassapis, 2003
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Financial Variables and Real Activity in Canada
Christis Hassapis, 2003
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Abstract In this paper we utilize Canadian and U.S. data to investigate the relationship between financial market variables (Canadian and U.S.) and Canadian output growth, using a non-parametric technique. The financial variables examined are those that are often associated with future output growth, namely, stock prices, interest rates, interest rate spreads and monetary aggregates. Our results show that as the number of autocovariances that are assigned a non-zero weight increases, the feedback from selected="true"="true"="true"="true" Canadian or U.S. financial variables to future Canadian output growth increases. In particular, we find that stock prices as well as yield spreads and monetary aggregates are useful predictors of output growth. This is in line with earlier parametric studies in the literature that find these variables to be good predictors of economic activity.
Canadian Journal of Economics, Volume 36, Number 2, pp. 421-442(22), May 2003
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Greening the Service Profit Chain: The Impact of the Environmental Practices
A. C. Soteriou and G .C. Kassinis, 2003
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Abstract This paper explores the relationship between environmental practices and performance in services and the impact of such practices on the external portion of the service profit chain. Using structural equation modeling, it tests the hypotheses developed with data from the European hospitality industry. The findings suggest that environmental practices are positively related to performance through the mediating effect of enhanced customer satisfaction and loyalty. The paper's contributions include: the conceptual development of the relationship between environmental practices and performance in services, the incorporation of environmental practices within the service profit chain, and the testing of their impact on customer satisfaction.
Production and Operations Management, Volume 12, Issue 3, pp. 386-403, 2003
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Reducing the Cost of Defects in Multistage Production Systems: A Budget Allocation Perspective
Goerge C. Hadjinicola and Andreas C. Soteriou, 2003
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Abstract Manufacturing firms are frequently concerned with operational improvements of their production system. As such, firms are often called to address the following question: How should they allocate their limited capital resources to the various stages of a multistage production system in order to improve the yield of the production stages and, at the same time, minimize the annual cost incurred from defects? In this paper, we provide a mathematical foundation for managerial decision making, which addresses this important operational problem. The approach we present is generalizable to any multistage production system, including existing and start-up systems, and considers the interplay of four factors on the allocation of capital resources. For each stage, these factors include the current mean yield, the cost of achieving the yield improvement, the cost incurred to the firm from a defect observed at each production stage, and the annual number of products processed. The formulation results in a budget allocation tool that allows managers to consider tradeoffs on the aforementioned factors across all stages. A sensitivity analysis identifies cases where a particular production stage is more likely to have a higher yield improvement compared to other stages. The sensitivity analysis is particularly useful for decision making in cases where the model parameters can not be accurately estimated, and management can only provide an estimate of a range of possible values. We demonstrate the applicability of the budget allocation approach using data from a real life multistage production system.
European Journal of Operational Research, Volume 145, Issue 3, pp. 621-634, 2003
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Real Options and Investment Under Uncertainty: What do we Know?
Lenos Trigeorgis, 2003
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In Firms' Investment and Finance Decisions, ed. P. Butzen and C. Fuss, Edward Elgar (2003), 153-166.
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Predicting Corporate Failure: Empirical Evidence for the UK
A. Charitou, E. Neophytou, and C. Charalambous, 2003
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Abstract The main purpose of this study is to examine the incremental information content of operating cash flows in predicting financial distress and thus develop reliable failure prediction models for UK public industrial firms. Neural networks and logit methodology were employed to a dataset of fifty-one matched pairs of failed and non-failed UK public industrial firms over the period 1988-97. The final models are validated using an out-of-sample-period ex-ante test and the Lachenbruch jackknife procedure. The results indicate that a parsimonious model that includes three financial variables, a cash flow, a profitability and a financial leverage variable, yielded an overall correct classification accuracy of 83% one year prior to the failure. In summary, our models can be used to assist investors, creditors, managers, auditors and regulatory agencies in the UK to predict the probability of business failure.
European Accounting Review, Volume 13, Number 3, pp. 465 – 497, September 2004
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Credit Card Debt Puzzle
Michael Haliassos and Michael Reiter, 2003
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Abstract Most US credit card holders revolve high-interest debt, often combined with substantial (i) asset accumulation by retirement, and (ii) low-rate liquid assets. Hyperbolic discounting offers a way to resolve the former puzzle (Laibson et al., 2003). Bertaut and Haliassos (2002) sketched an 'accountant-shopper' model with exogenous shopper behavior and offered it as an explanation for the latter, providing empirical evidence in support. The current paper shows that a fully-specified accountant-shopper model can actually generate both types of co-existence, as well as target credit card utilization rates consistent with Gross and Souleles (2002). Comparison of costs of potential self-control mechanisms over the life cycle, including use of debit cards, support the view that high-interest credit card balances may be motivated partly by consumption smoothing and partly by self- or partner control for households who have difficulty controlling credit card expenditures.
(Also as CFS Working Paper No. 2005/26)
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Risk Management in Emerging Markets: Practical Methodologies and Empirical Tests
M. Neroupos, David Saunders, Costas Xiouros, and Stavros A. Zenios, 2003
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