nep-bec New Economics Papers
on Business Economics
Issue of 2005‒07‒18
nineteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Financial Asset Returns, Direction-of-Change Forecasting, and Volatility Dynamics By Peter F. Christoffersen; Francis X. Diebold
  2. Determinants of entrepreneurial engagement levels in Europe and the US By Roy Thurik; Isabel Grilo
  3. Realized Beta: Persistence and Predictability By Torben G. Andersen; Tim Bollerslev; Francis X. Diebold; Jin Wu
  4. From Team Spirit to Jealousy: The Pitfalls of Too Much Transparency By Alexander K. Koch; Albrecht Morgenstern
  5. Practical Volatility and Correlation Modeling for Financial Market Risk Management By Torben G. Andersen; Tim Bollerslev; Peter F. Christoffersen; Francis X. Diebold
  6. Analysis of survey data and correlated data By Jeff Pitblado
  7. Competitive Risk Sharing Contracts with One-Sided Commitment By Dirk Krueger; Harald Uhlig
  8. University Invention, Entrepreneurship, and Start-Ups By Celestine Chukumba; Richard Jensen
  9. A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations By Michael W. Brandt; Francis X. Diebold
  10. Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets By Torben G. Andersen; Tim Bollerslev; Francis X. Diebold; Clara Vega
  11. Calibrage économétrique de processus stochastiques avec applications aux données boursières, bancaires et cambiales canadiennes By Francois-Éric Racicot; Raymond Théoret
  12. Banks Lending and Macroeconomic Uncertainty: the Case of Canada By Alejandro Garcia; Christian Calmès
  13. Employee lay-off under different modes of restructuring By Coucke, Kristien; Pennings, Enrico; Sleuwaegen, Leo
  14. New Technologies, Workplace Organisation and the Age Structure of the Workforce: Firm-Level Evidence. By Patrick Aubert; Eve Caroli; Muriel Roger
  15. What makes a Die-Hard Entrepreneur? Trying, or Persisting in, Self-Employment By Andrew E. Burke; Michael A. Nolan; Felix R. FitzRoy
  16. Latent and actual entrepreneurship in Europe and the US: some recent developments By Roy Thurik; Isabel Grilo
  17. Age-Specific Cyclical Effects in Job Reallocation and Labor Mobility By Anne C. Gielen; Jan C. van Ours
  18. Lines of Credit and Consumption Smoothing: The Choice between Credit Cards and Home Equity Lines of Credit By Shubhasis Dey

  1. By: Peter F. Christoffersen (McGill University and CIRANO); Francis X. Diebold (University of Pennsylvania and NBER)
    Abstract: We consider three sets of phenomena that feature prominently – and separately – in the financial economics literature: conditional mean dependence (or lack thereof) in asset returns, dependence (and hence forecastability) in asset return signs, and dependence (and hence forecastability) in asset return volatilities. We show that they are very much interrelated, and we explore the relationships in detail. Among other things, we show that: (a) Volatility dependence produces sign dependence, so long as expected returns are nonzero, so that one should expect sign dependence, given the overwhelming evidence of volatility dependence; (b) The standard finding of little or no conditional mean dependence is entirely consistent with a significant degree of sign dependence and volatility dependence; (c) Sign dependence is not likely to be found via analysis of sign autocorrelations, runs tests, or traditional market timing tests, because of the special nonlinear nature of sign dependence; (d) Sign dependence is not likely to be found in very high-frequency (e.g., daily) or very low-frequency (e.g., annual) returns; instead, it is more likely to be found at intermediate return horizons; (e) Sign dependence is very much present in actual U.S. equity returns, and its properties match closely our theoretical predictions; (f) The link between volatility forecastability and sign forecastability remains intact in conditionally non-Gaussian environments, as for example with time-varying conditional skewness and/or kurtosis.
    Date: 2004–01–08
  2. By: Roy Thurik; Isabel Grilo
    Abstract: Determinants from different streams of literature and spanning different disciplines are used to explain entrepreneurial decisions. A multinomial logit model and survey data from the old 15 EU member states, Norway, Iceland, Liechtenstein and the US are used to establish the effect of demographic and other variables on various entrepreneurial engagement levels. These engagement levels range from "never thought about starting a business" to "thinking about it", "taking steps for starting up", "having a young business", "having an older business" and "no longer being an entrepreneur". Data of two Entrepreneurship Flash Eurobarometer surveys (2002 and 2003) containing over 20,000 observations are used. Other than demographic variables, the set of explanatory variables used includes the perception by respondents of ad-ministrative complexities, of availability of financial support and of risk tolerance, the respondents' prefer-ence for self-employment and country specific effects. The most striking result is that the perception of lack of financial support has no discriminative effect across the various levels of entrepreneurial engagement.
    Keywords: entrepreneurship, determinants, nascent entrepreneurship, multinomial logit, barriers to entry, Europe
    JEL: M13 H10 J23 R12
    Date: 2005–06
  3. By: Torben G. Andersen (Department of Finance, Kellogg School, Northwestern University, and NBER); Tim Bollerslev (Departments of Economics and Finance, Duke University, and NBER); Francis X. Diebold (Departments of Economics, Finance and Statistics, University of Pennsylvania, and NBER); Jin Wu (Department of Economics, University of Pennsylvania)
    Abstract: A large literature over several decades reveals both extensive concern with the question of time-varying betas and an emerging consensus that betas are in fact time-varying, leading to the prominence of the conditional CAPM. Set against that background, we assess the dynamics in realized betas, vis-à-vis the dynamics in the underlying realized market variance and individual equity covariances with the market. Working in the recently-popularized framework of realized volatility, we are led to a framework of nonlinear fractional cointegration: although realized variances and covariances are very highly persistent and well approximated as fractionally-integrated, realized betas, which are simple nonlinear functions of those realized variances and covariances, are less persistent and arguably best modeled as stationary I(0) processes. We conclude by drawing implications for asset pricing and portfolio management.
    Keywords: quadratic variation and covariation, realized volatility, asset pricing, CAPM, equity betas, long memory, nonlinear fractional cointegration, continuous-time methods.
    JEL: C1 G1
    Date: 2004–01–16
  4. By: Alexander K. Koch (Royal Holloway, University of London and IZA Bonn); Albrecht Morgenstern (Federal Ministry of Finance and IZA Bonn)
    Abstract: Free riding in team production arises because individual effort is not perfectly observable. It seems natural to suppose that greater transparency would enhance incentives. Therefore, it is puzzling that team production often lacks transparency about individual contributions despite negligible costs for providing such information. We offer a rationale for this by demonstrating that transparency can actually hurt incentives. In the presence of career concerns information on the quality of task execution improves incentives while sustaining a cooperative team spirit. In contrast, making the identity of individual contributors observable induces sabotage behavior that looks like jealousy but arises purely from signal jamming by less successful team members. Our results rationalize the conspicuous lack of transparency in team settings with strong career concerns (e.g., co-authorship, architecture, and patent applications) and contribute to explaining the popularity of group incentive schemes in firms.
    Keywords: teams, reputation, transparency, group incentives, sabotage
    JEL: D82 J30 L14
    Date: 2005–07
  5. By: Torben G. Andersen (Department of Finance, Kellogg School of Management, Northwestern University, Evanston, IL 60208, and NBER); Tim Bollerslev (Department of Economics, Duke University, Durham, NC 27708, and NBER); Peter F. Christoffersen (Faculty of Management, McGill University, Montreal, Quebec, H3A 1G5, and CIRANO); Francis X. Diebold (Department of Economics, University of Pennsylvania, Philadelphia, PA 19104, and NBER)
    Abstract: What do academics have to offer market risk management practitioners in financial institutions? Current industry practice largely follows one of two extremely restrictive approaches: historical simulation or RiskMetrics. In contrast, we favor flexible methods based on recent developments in financial econometrics, which are likely to produce more accurate assessments of market risk. Clearly, the demands of real-world risk management in financial institutions – in particular, real-time risk tracking in very high-dimensional situations – impose strict limits on model complexity. Hence we stress parsimonious models that are easily estimated, and we discuss a variety of practical approaches for high-dimensional covariance matrix modeling, along with what we see as some of the pitfalls and problems in current practice. In so doing we hope to encourage further dialog between the academic and practitioner communities, hopefully stimulating the development of improved market risk management technologies that draw on the best of both worlds.
    JEL: G10
    Date: 2005–01–02
  6. By: Jeff Pitblado (StataCorp LP)
    Abstract: This talk discusses Stata's features for analyzing survey data and correlated data, and will explain how and when to use the three major variance estimators for survey and correlated data: the linearization estimator, balanced repeated replications, and the clustered jackknife (the latter two having been added in Stata 9). The talk will also discuss sampling designs and stratification, including Stata's new features for estimation with data from multistage designs and for applying poststratification. A theme of the seminar will be how you can make inferences with correct coverage from data collected by single stage or multistage surveys or from data with inherent correlation, such as data from longitudinal studies.
    Date: 2005–07–12
  7. By: Dirk Krueger (Goethe University Frankfurt, Mertonstr. 17, PF 81, 60054 Frankfurt); Harald Uhlig (Humboldt University, Wirtschaftswissenschaftliche Fakultät, Spandauer Str. 1, 10178 Berlin)
    Abstract: This paper analyzes dynamic equilibrium risk sharing contracts between profit-maximizing intermediaries and a large pool of ex-ante identical agents that face idiosyncratic income uncertainty that makes them heterogeneous ex-post. In any given period, after having observed her income, the agent can walk away from the contract, while the intermediary cannot, i.e. there is one-sided commitment. We consider the extreme scenario that the agents face no costs to walking away, and can sign up with any competing intermediary without any reputational losses. We demonstrate that not only autarky, but also partial and full insurance can obtain, depending on the relative patience of agents and financial intermediaries. Insurance can be provided because in an equilibrium contract an up-front payment e.ectively locks in the agent with an intermediary. We then show that our contract economy is equivalent to a consumption-savings economy with one-period Arrow securities and a short-sale constraint, similar to Bulow and Rogo. (1989). From this equivalence and our characterization of dynamic contracts it immediately follows that without cost of switching financial intermediaries debt contracts are not sustainable, even though a risk allocation superior to autarky can be achieved.
    Keywords: Long-term Contracts, Risk Sharing, Limited Commitment, Competition
    JEL: G22 E21 D11 D91
    Date: 2005–01–07
  8. By: Celestine Chukumba; Richard Jensen
    Abstract: This paper develops a game-theoretic model that predicts when a university invention is commercialized in a start-up firm rather than an established firm. The model predicts that university inventions are more likely to occur in start-ups when the technology transfer officers (TTOs) search cost is high, the cost of development or commercialization is lower for a start-up, or the inventor's effort cost in development is lower in a start-up. We test the theory using data from the Association of University Technology Managers, the National Research Council, and the National Venture Capital Association. Licensing is more likely in general, and especially so in start-ups, by universities with higher quality engineering faculty and older TTOs. Start-ups are more likely by universities in states with larger levels of venture capital. TTO size has no effect on start-ups, but does increase licenses. Conversely, universities that earn greater licensing royalties have fewer start-ups but more licenses. The number of start-ups is decreasing in the interest rate, increasing in the S&P 500, and unaffected by levels of industrial research funding and the presence of a medical school. All of these results are consistent with the predictions of our theory.
    JEL: L31 O31 O32
    Date: 2005–07
  9. By: Michael W. Brandt (Department of Finance, University of Pennsylvania, and NBER); Francis X. Diebold (Departments of Economics, Finance and Statistics, University of Pennsylvania, and NBER)
    Abstract: We extend the important idea of range-based volatility estimation to the multivariate case. In particular, we propose a range-based covariance estimator that is motivated by financial economic considerations (the absence of arbitrage), in addition to statistical considerations. We show that, unlike other univariate and multivariate volatility estimators, the range-based estimator is highly efficient yet robust to market microstructure noise arising from bid-ask bounce and asynchronous trading. Finally, we provide an empirical example illustrating the value of the high-frequency sample path information contained in the range-based estimates in a multivariate GARCH framework.
    Keywords: Range-based estimation, volatility, covariance, correlation, absence of arbitrage, exchange rates, stock returns, bond returns, bid-ask bounce, asynchronous trading
    Date: 2004–01–07
  10. By: Torben G. Andersen (Department of Finance, Northwestern University and NBER); Tim Bollerslev (Departments of Economics and Finance, Duke University and NBER); Francis X. Diebold (Departments of Economics, Finance and Statistics, University of Pennsylvania and NBER); Clara Vega (Department of Economics, University of Rochester)
    Abstract: We characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. Our analysis is based on a unique data set of high-frequency futures returns for each of the markets. We find that news surprises produce conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. The details of the linkages are particularly intriguing as regards equity markets. We show that equity markets react differently to the same news depending on the state of the economy, with bad news having a positive impact during expansions and the traditionally-expected negative impact during recessions. We rationalize this by temporal variation in the competing “cash flow” and “discount rate” effects for equity valuation. This finding helps explain the time-varying correlation between stock and bond returns, and the relatively small equity market news effect when averaged across expansions and recessions. Lastly, relying on the pronounced heteroskedasticity in the high-frequency data, we document important contemporaneous linkages across all markets and countries over-and-above the direct news announcement effects.
    Keywords: Asset Pricing; Macroeconomic News Announcements; Financial Market Linkages; Market Microstructure; High-Frequency Data; Survey Data; Asset Return Volatility; Forecasting.
    JEL: F3 F4 G1 C5
    Date: 2004–01–19
  11. By: Francois-Éric Racicot (Département des sciences administratives, Université du Québec (Outaouais)); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal))
    Abstract: In this paper, we show how to calibrate the most usual stochastic processes: arithmetic and geometric Brownian motions,, mean-reverting processes and jump processes. This paper contains also many applications to Canadian financial data. We observe, among other phenomena, that a mean-reverting process is very appropriate to estimate the return on assets of the six biggest Canadian banks. Finally, we estimate a monofactorial model of interest rate.
    Keywords: Stochastic processes, financial econometrics, banks, derivatives, financial engineering
    JEL: G11 C22
    Date: 2005–07–13
  12. By: Alejandro Garcia (Department of Monetary and Financial Analysis, Bank of Canada); Christian Calmès (Département des sciences administratives, Université du Québec en Outaouais and LRSP)
    Abstract: This paper studies the changes in the portfolio allocation of Canadian banks resulting from macroeconomic uncertainty. Statistical evidence suggest that banks reduce the composition of loans as a percentage of their total assets when macroeconomic uncertainty increases. This behaviour has been previously studied for the U.S by Baum et al. (2002). In their paper, the authors find that the cross-sectional variance of banks allocation of loans with respect to other assets (loan-to-asset-ratio) decreases during episodes of greater macroeconomic uncertainty. According to this result, banks allocate their portfolio in an homogenous manner where there is greater uncertainty, and chose more heterogeneous allocations under normal economic conditions. The contribution of this paper is to confirm their findings in the context of Canadian banking. Based on the conditional variance of monthly industrial production, we find that Canadian banks displays a herding behaviour when uncertainty is more pronounced.
    Keywords: Banks portfolio, Macroeconomic uncertainty, herding
    JEL: G11 C22
    Date: 2005–03–09
  13. By: Coucke, Kristien; Pennings, Enrico; Sleuwaegen, Leo
    Abstract: In recent years, there has been a growing concern about the effect of globalisation on employment in most West European countries. More and more firms had to drastically restructure their operations in order to survive the rise in global competition. Restructuring often leads to a collective lay-off of employees. We use a theoretical model to examine how firm and industry characteristics have an impact on different modes of restructuring. (1) Close down part of its activities and relocate abroad, (2) Downsizing through a significant decrease in employees or (3) Dismiss all employees and exit the market. Using a unique sample of Belgian firms reporting collective layoffs, we test empirically the predictions of the model. Relocating firms are found to be most profitable among the restructuring firms, have invested more in the recent past, operate in sectors with significant economies of scale and belong more often to a multinational group than firms opting for downsizing or exit. Downsizing firms are more capital intensive than relocating firms, while exiting firms are less profitable, smaller, younger and more labour intensive than downsizing or relocating firms. Note
    Keywords: exit, relocation, downsizing
    Date: 2005–07–14
  14. By: Patrick Aubert; Eve Caroli; Muriel Roger
    Abstract: This paper investigates the relationships between new technologies, innovative workplace practices and the age structure of the workforce in a sample of French manufacturing firms. We find evidence that the wage-bill share of older workers is lower in innovative firms and that the opposite holds for younger workers. This age bias affects both men and women. It is also evidenced within occupational groups, thus suggesting that skills do not completely protect workers against the labour-market consequences of ageing. More detailed analysis of employment inflows and outflows shows that new technologies essentially affect older workers through reduced hiring opportunities as compared to younger workers. In contrast, organisational innovations mainly affect the probability of exit, which decreases much more for younger than for older workers following reorganisation.
    Date: 2005
  15. By: Andrew E. Burke; Michael A. Nolan; Felix R. FitzRoy
    Abstract: The paper makes three contributions to the economics literature on entrepreneurship. We offer a new measure of entrepreneurship which accounts for variations in persistence in self-employment. We outline an econometric methodology to account for this approach and find that it is superior to probit/logit models which have dominated the literature. While our results indicate that this existing literature is good at explaining an individual's propensity to try self-employment, we find that entrepreneurial persistence is determined by a different model and unearth some new insights into the roles of early career experience, finance, role models, gender and the unemployment push effect.
    Keywords: Self-employment, entrepreneurial persistence, count data
    JEL: C25 J23
  16. By: Roy Thurik; Isabel Grilo
    Abstract: This paper uses 2004 survey data from the 15 old EU member states and the US to explain country differences in latent and actual entrepreneurship. Other than demographic variables such as gender, age and education, the set of covariates includes the perception by respondents of administrative complexities, of availability of financial support and of risk tolerance as well as country-specific effects. A comparison is made with results using a similar survey in 2000. While a majority of the surveyed population identifies lack of financial support as an obstacle to starting a new business, the role of this variable in both latent and actual entrepreneurship appears to be even more counterintuitive in 2004 than in 2000: it has no impact on actual entrepreneurship and is positively related to latent entrepreneurship. Administrative complexities, also perceived as an obstacle by a large majority of the population, have the expected negative impact both for latent and actual entrepreneurship in both years. Country-specific effects are important both for latent and actual entrepreneurship and the comparison of 2000 and 2004 results suggests that, once all other factors are controlled for, an improvement in actual entrepreneurship in the EU relative to the US has taken place in the last four years. However, in terms of unweighted averages actual entrepreneurship remained about the same. Latent entrepreneurship dropped while this drop seems to have occurred evenly in the US and the EU member states.
    Keywords: entrepreneurship; latent entrepreneurship; nascent entrepreneurship; determinants; Europe
    JEL: M13 H10 J23 R12
    Date: 2005–07
  17. By: Anne C. Gielen (Tilburg University, CentER); Jan C. van Ours (Tilburg University, CentER, CEPR and IZA Bonn)
    Abstract: We present an empirical analysis of job reallocation and labor mobility using matched workerfirm data for the Netherlands to investigate how firms adjust their workforce over the cycle. Our data cover the period 1993-2002. We find that cyclical adjustments of the workforce occur mainly through fluctuations in job creation for young and prime-age workers while for old workers they occur mainly through fluctuations in job destruction. Moreover, we find that business cycle fluctuations are used to rejuvenate the workforce. Workforce reductions are most harmful for old workers; for them the flow out of employment is a one-way street.
    Keywords: job creation, job destruction, accessions, separations, matched worker-firm data
    JEL: J23 J62 J63
    Date: 2005–07
  18. By: Shubhasis Dey
    Abstract: The author models the choice between credit cards and home equity lines of credit (HELOCs) within a framework where consumers hold lines of credit as instruments of consumption smoothing across state and time. Flexible repayment schemes for lines of credit induce risk-averse consumers with sufficiently high discount rates to underinsure and hold lines of credit instead as a buffer, even when they have access to full and fair insurance markets. Weighing the fixed upfront fees and higher default costs of HELOCs against the advantages of low and income-tax-deductible interest payments, the author finds a threshold level of potential borrowing belowwhich consumers prefer to use credit cards exclusively. Above that threshold, consumers decide touse HELOCs and consolidate all outstanding credit card debt into them; however, a rising probability of default and the resulting loss of equity in the home will put an upper bound on the potential HELOC borrowing that will prevent full debt consolidation.
    Keywords: Credit and credit aggregates
    JEL: D1 D81
    Date: 2005
  19. By: Jon Mikel Zabala Iturriagagoitia (Institute of Innovation & Knowledge Management, INGENIO CSIC-UPV); Mónica García Melón (Departamento de Proyectos de Ingeniería, DPI, Universidad Politécnica de Valencia)
    Abstract: The decisions made during the design process have a critical impact both on the design solution obtained but also on the design process itself. It can be observed that while the way in which products are developed differs not only across firms but within the same firm over time, what is being decided seems to remain fairly consistent [2]. After a thorough Literature research many references addressing decision processes developed within the NPD have been found. In the paper by Krishnan and Ullrich [4] an extensively list the most common decisions made in each phase of the development process of new products is presented. While rigorous at a bibliographical level, this work has not been empirically verified yet. Therefore, an empirical study to inquire whether decisions considered usual in the literature were actually common within the framework of innovative companies in the Valencia region (Spain) has been carried out. The empirical study has covered a representative sample of innovative companies in this region. A questionnaire including all decisions identified was prepared and sent by mail to all the companies belonging to the sample, whose aim was to determine the frequency these decisions are usually made. At the same time this study has been used to find out the patterns of decision-making processes in those innovative companies. The analysis of the results obtained confirmed that the decisions identified in the literature do correspond to the decisions mostly made in innovative companies of the Valencia Region and that they all follow a specific pattern.
    Keywords: New Product Development (NPD), Innovative firms, decision making, survey.
    JEL: C44 D70 O32 R11
    Date: 2005–07–15

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