Socio-political uprising against land acquisition for industrial projects, in the recent times, has emerged as a major constraining factor leading to time lags, cost over runs, business uncertainties and even shelving of projects. Varied signals from recent (diverse) private experiences right from Tata's Singur project in West Bengal, Posco's Paradeep project in Orissa to Jindal's Raigarh project in Chattisgarh showcase a variety of tactics to gain access to land for private Greenfield projects. This paper analyses the recent land acquisition styles being adopted by few private businesses. It analyzes the successful land acquisition models vs. the not so successful ones and the lessons therein for infrastructure project proponents. We observe that the chances of failure in land acquisition for the private business would be more if the land acquisition style is thickly sandwiched, by multiple layers of political contestation and authority, between the communities giving up their livelihood rights and the private business interested in the deal. This failure can be attributed to non-co-operative stance adopted by the different parties involved, information asymmetry between the locals and the private business, involvement of more number of intermediaries in communication, involvement of self interested parties (political and other rent seeking agents), and wrong signals and misinterpretation of signals between each other (primarily the locals and the private business). On the other hand, we also observe that the key ingredients of successful land acquisitions includes: less reliance on agricultural land; providing attractive compensation to local communities (with a scope for sharing potential upside); direct engagement with stakeholders; avoiding formal political alignments; and keep low profile with planned communication channels resulting in minimal information asymmetry between the key parties. Based on the study, we advocate that successful land acquisition for Greenfield projects go beyond gaining mandatory legal and environmental licenses to gaining social consent to operate from a wider stakeholder base.
{"title":"Insights into Land Acqusition Experiences of Private Businesses in India","authors":"R. Tata, Nutan Shashi Tigga, Ram Kumar Kakani","doi":"10.2139/ssrn.1295407","DOIUrl":"https://doi.org/10.2139/ssrn.1295407","url":null,"abstract":"Socio-political uprising against land acquisition for industrial projects, in the recent times, has emerged as a major constraining factor leading to time lags, cost over runs, business uncertainties and even shelving of projects. Varied signals from recent (diverse) private experiences right from Tata's Singur project in West Bengal, Posco's Paradeep project in Orissa to Jindal's Raigarh project in Chattisgarh showcase a variety of tactics to gain access to land for private Greenfield projects. This paper analyses the recent land acquisition styles being adopted by few private businesses. It analyzes the successful land acquisition models vs. the not so successful ones and the lessons therein for infrastructure project proponents. We observe that the chances of failure in land acquisition for the private business would be more if the land acquisition style is thickly sandwiched, by multiple layers of political contestation and authority, between the communities giving up their livelihood rights and the private business interested in the deal. This failure can be attributed to non-co-operative stance adopted by the different parties involved, information asymmetry between the locals and the private business, involvement of more number of intermediaries in communication, involvement of self interested parties (political and other rent seeking agents), and wrong signals and misinterpretation of signals between each other (primarily the locals and the private business). On the other hand, we also observe that the key ingredients of successful land acquisitions includes: less reliance on agricultural land; providing attractive compensation to local communities (with a scope for sharing potential upside); direct engagement with stakeholders; avoiding formal political alignments; and keep low profile with planned communication channels resulting in minimal information asymmetry between the key parties. Based on the study, we advocate that successful land acquisition for Greenfield projects go beyond gaining mandatory legal and environmental licenses to gaining social consent to operate from a wider stakeholder base.","PeriodicalId":201603,"journal":{"name":"Organizations & Markets eJournal","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-11-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115787655","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I examine the effect of arbitrage risk on the alignment between stock prices and accounting fundamentals, where arbitrage risk is measured as the lack of close substitutes that can be used as a hedge. I find evidence consistent with the disparity between value and price being positively associated with arbitrage risk. Consistent with short-positions being more sensitive to arbitrage risk, my results are more pronounced for strategies that require short positions. I then show that the timeliness of the alignment between stock prices and accounting fundamentals is negatively related to arbitrage risk. My results provide empirical support for the hypothesis that price requires time to reflect accounting information and has implications for research that assumes that prices are measured without error.
{"title":"Arbitrage Risk and the Timeliness of Stock Price Adjustments to Accounting Fundamentals","authors":"Asher Curtis","doi":"10.2139/ssrn.1292533","DOIUrl":"https://doi.org/10.2139/ssrn.1292533","url":null,"abstract":"I examine the effect of arbitrage risk on the alignment between stock prices and accounting fundamentals, where arbitrage risk is measured as the lack of close substitutes that can be used as a hedge. I find evidence consistent with the disparity between value and price being positively associated with arbitrage risk. Consistent with short-positions being more sensitive to arbitrage risk, my results are more pronounced for strategies that require short positions. I then show that the timeliness of the alignment between stock prices and accounting fundamentals is negatively related to arbitrage risk. My results provide empirical support for the hypothesis that price requires time to reflect accounting information and has implications for research that assumes that prices are measured without error.","PeriodicalId":201603,"journal":{"name":"Organizations & Markets eJournal","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123952129","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article argues that corporations and armed opposition groups have obligations under international law. It is suggested that the scope of the obligations turns on the capacity of the entities in question. While there may be no international court to hear complaints against such entities, understanding their legal obligations under international law is important in situations where national courts have jurisdiction over violations of international law committed by non-state actors. Furthermore, it is vital to realizing the potential of claims of corporate complicity in international crimes and the impact such claims may have in the field of ethical investment.
{"title":"Extending International Criminal Law Beyond the Individual to Corporations and Armed Opposition Groups","authors":"A. Clapham","doi":"10.1093/JICJ/MQN076","DOIUrl":"https://doi.org/10.1093/JICJ/MQN076","url":null,"abstract":"This article argues that corporations and armed opposition groups have obligations under international law. It is suggested that the scope of the obligations turns on the capacity of the entities in question. While there may be no international court to hear complaints against such entities, understanding their legal obligations under international law is important in situations where national courts have jurisdiction over violations of international law committed by non-state actors. Furthermore, it is vital to realizing the potential of claims of corporate complicity in international crimes and the impact such claims may have in the field of ethical investment.","PeriodicalId":201603,"journal":{"name":"Organizations & Markets eJournal","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133758762","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies the incentive issues associated with self-enforcing stochastic monitoring in a model of investment and production. The efficient contract features a debt-like payment with a threshold in terms of the reported output in which all of the reported output is taken up to the threshold if monitoring doesn't occur and all of the output is taken if monitoring does occur. An output report above the threshold leads to zero probability of monitoring and just the threshold amount being paid out. The efficiency gap between the self-enforcing contract and the commitment constraint is minimized when the monitors hold no part of the residual claim on the firm, which we associate with equity. Misreporting by the manager is an important component of the efficient contract.
{"title":"Self-Enforcing Stochastic Monitoring and the Separation of Debt and Equity Claims","authors":"Harold L. Cole","doi":"10.2139/ssrn.1159865","DOIUrl":"https://doi.org/10.2139/ssrn.1159865","url":null,"abstract":"This paper studies the incentive issues associated with self-enforcing stochastic monitoring in a model of investment and production. The efficient contract features a debt-like payment with a threshold in terms of the reported output in which all of the reported output is taken up to the threshold if monitoring doesn't occur and all of the output is taken if monitoring does occur. An output report above the threshold leads to zero probability of monitoring and just the threshold amount being paid out. The efficiency gap between the self-enforcing contract and the commitment constraint is minimized when the monitors hold no part of the residual claim on the firm, which we associate with equity. Misreporting by the manager is an important component of the efficient contract.","PeriodicalId":201603,"journal":{"name":"Organizations & Markets eJournal","volume":"67 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123462251","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
By granting intracompany loans to their foreign affiliates, multinational firms may reduce their tax liability abroad. Many countries have legislated thin-capitalization rules (TCRs) that limit the allowable levels of intracompany loans or restrict interest deductibility if certain thresholds are crossed. This paper empirically analyzes the effect of the German TCR on corporate policy. We find that tightening the regulations in 2001 had some limiting effect on leverage. Foreign affiliates reacted by reducing intracompany loans and increasing equity, with no significant evidence of reduced real investment. A possible reason for the limited impact of the TCR was that multinational firms had the option to work around the regulation by using holding company structures. Indeed, holding companies have been used to shift huge amounts of intracompany loans onto the books of German affiliates. At the same time, however, only part of these observed reorganizations seem to have been a reaction to TCR.
{"title":"Thin-Capitalization Rules and Company Responses - Experience from German Legislation","authors":"Alfons J. Weichenrieder, Helen Windischbauer","doi":"10.2139/ssrn.1299533","DOIUrl":"https://doi.org/10.2139/ssrn.1299533","url":null,"abstract":"By granting intracompany loans to their foreign affiliates, multinational firms may reduce their tax liability abroad. Many countries have legislated thin-capitalization rules (TCRs) that limit the allowable levels of intracompany loans or restrict interest deductibility if certain thresholds are crossed. This paper empirically analyzes the effect of the German TCR on corporate policy. We find that tightening the regulations in 2001 had some limiting effect on leverage. Foreign affiliates reacted by reducing intracompany loans and increasing equity, with no significant evidence of reduced real investment. A possible reason for the limited impact of the TCR was that multinational firms had the option to work around the regulation by using holding company structures. Indeed, holding companies have been used to shift huge amounts of intracompany loans onto the books of German affiliates. At the same time, however, only part of these observed reorganizations seem to have been a reaction to TCR.","PeriodicalId":201603,"journal":{"name":"Organizations & Markets eJournal","volume":"65 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114086474","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The hold-up problem has been the source of much investigation by fields ranging from economics to accounting. Despite contractual protection, firms and researchers are still looking for better remedies to hold-ups and searching for ways to encourage firms to make socially optimal specialized investments. In this study, I review and classify analytical and empirical research aimed at finding and testing mitigating mechanisms to hold-ups and I suggest avenues for future research. This research is organized around strategic decision-making with organizational design, trade decisions, and resource allocations. I find that analytical research has focused on formal mitigating mechanisms to hold-ups (i.e., integration, joint ownership, contracts, pricing mechanisms, incentives, and interdependence) and only recently complemented these formal safeguards with informal mechanisms in the form of relational contracting and private information. Empirical research has taken a different approach by focusing overwhelmingly on informal mechanisms. This review also shows that although hold-ups are likely to occur with intra-firm trade and resource allocations, these research streams have not pursued analytical and empirical investigations to the same extent as research on inter-firm trade. As a result, this review not only integrates the findings of the various research streams, but also provides suggestions for future research.
{"title":"Using Formal and Informal Mechanisms to Limit Opportunism - Review and Classification of the Hold-Up Literature","authors":"F. Miller","doi":"10.2139/ssrn.1216022","DOIUrl":"https://doi.org/10.2139/ssrn.1216022","url":null,"abstract":"The hold-up problem has been the source of much investigation by fields ranging from economics to accounting. Despite contractual protection, firms and researchers are still looking for better remedies to hold-ups and searching for ways to encourage firms to make socially optimal specialized investments. In this study, I review and classify analytical and empirical research aimed at finding and testing mitigating mechanisms to hold-ups and I suggest avenues for future research. This research is organized around strategic decision-making with organizational design, trade decisions, and resource allocations. I find that analytical research has focused on formal mitigating mechanisms to hold-ups (i.e., integration, joint ownership, contracts, pricing mechanisms, incentives, and interdependence) and only recently complemented these formal safeguards with informal mechanisms in the form of relational contracting and private information. Empirical research has taken a different approach by focusing overwhelmingly on informal mechanisms. This review also shows that although hold-ups are likely to occur with intra-firm trade and resource allocations, these research streams have not pursued analytical and empirical investigations to the same extent as research on inter-firm trade. As a result, this review not only integrates the findings of the various research streams, but also provides suggestions for future research.","PeriodicalId":201603,"journal":{"name":"Organizations & Markets eJournal","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-10-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133806851","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This note presents my position regarding the hidden ownership schemes currently employed by the Schaeffler group to build up stakes in Continental AG in preparation for an unsolicited surprise cash-bid for Continental's shares. It summarizes the information publicly available on the Schaeffler / Continental case as of 19 August 2008, providing a useful source on hidden ownership schemes in general. Furthermore, it puts the Continental vs. Schaeffler pattern in context of Judge Kaplan's recent ruling in CSX / The Children's Investment Fund (TCI) as well as the FSA's forthcoming rule with respect to the disclosure of CFD long positions. Prompted by the Schaeffler group's current takeover bid for Continental, I hint at some of the results in two forthcoming articles of mine, titled 'Empty voting and Hidden Ownership - The European Perspective' and 'Challenging Wolf Packs - Thoughts on Efficient Enforcement of Shareholder Transparency Rules'. I conclude that: 1) European law mandates disclosure of hidden ownership; 2) Hidden ownership issues are, in fact, those of enforcement in multi-party schemes (i.e. wolf packs or contractual acquisition networks organized by investment banks) where adverse incentives prevent all participants from disclosure; 3) Enforcement must shift from ex-post measures that insufficiently re-arrange the benefits of secrecy to an ex-ante self-regulatory approach that considers the incentive structure in multi-party schemes. A look at the leniency programs of antitrust law provides a starting point for a self-regulatory disclosure regime with respect to shareholder transparency rules.
{"title":"Continental AG vs. Schaeffler, Hidden Ownership and European Law - Matter of Law or Enforcement?","authors":"D. Zetzsche","doi":"10.2139/SSRN.1170987","DOIUrl":"https://doi.org/10.2139/SSRN.1170987","url":null,"abstract":"This note presents my position regarding the hidden ownership schemes currently employed by the Schaeffler group to build up stakes in Continental AG in preparation for an unsolicited surprise cash-bid for Continental's shares. It summarizes the information publicly available on the Schaeffler / Continental case as of 19 August 2008, providing a useful source on hidden ownership schemes in general. Furthermore, it puts the Continental vs. Schaeffler pattern in context of Judge Kaplan's recent ruling in CSX / The Children's Investment Fund (TCI) as well as the FSA's forthcoming rule with respect to the disclosure of CFD long positions. Prompted by the Schaeffler group's current takeover bid for Continental, I hint at some of the results in two forthcoming articles of mine, titled 'Empty voting and Hidden Ownership - The European Perspective' and 'Challenging Wolf Packs - Thoughts on Efficient Enforcement of Shareholder Transparency Rules'. I conclude that: 1) European law mandates disclosure of hidden ownership; 2) Hidden ownership issues are, in fact, those of enforcement in multi-party schemes (i.e. wolf packs or contractual acquisition networks organized by investment banks) where adverse incentives prevent all participants from disclosure; 3) Enforcement must shift from ex-post measures that insufficiently re-arrange the benefits of secrecy to an ex-ante self-regulatory approach that considers the incentive structure in multi-party schemes. A look at the leniency programs of antitrust law provides a starting point for a self-regulatory disclosure regime with respect to shareholder transparency rules.","PeriodicalId":201603,"journal":{"name":"Organizations & Markets eJournal","volume":"55 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-10-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127975728","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Theory pluralism has become apparent in the field of strategic management. The traditional business policy framework is increasingly being subjected to criticism, and a variety of streams of research with different theoretical perspectives have emerged. Theory pluralism is common and accepted in many fields of scientific research (Daft & Buenger, 1990; Gioia & Pitre, 1990; Thomas & Pruett, 1993). In particular, organization theorists have developed models to describe and classify competing theories (Burrell & Morgan 1979, Van de Ven & Astley 1981, Pfeffer 1982). However, we contend that theory pluralism or "incommensurability" (Kuhn 1962, 1970) is problematic for strategic management research and practice, since most strategy scholars are interested in developing and testing theories that will assist firms in developing sustainable competitive advantage. Theory-pluralism makes it particularly difficult for managers to use the output of academic research since there may be different answers for the solution of a given practical problem. In this paper, we present a potential way to reconcile problems of theory-pluralism by using ideas from the "constructivist" philosophy of the Erlangen School. This philosophy offers a methodological approach that will clearly be distinguished from the logical positivist approach that has become common in organizations studies and strategic management.
理论的多元化在战略管理领域已经显现出来。传统的商业政策框架正日益受到批评，并出现了各种不同理论视角的研究流。理论多元主义在许多科学研究领域是普遍和被接受的(Daft & Buenger, 1990;Gioia & Pitre, 1990;Thomas & Pruett, 1993)。特别是，组织理论家开发了模型来描述和分类竞争理论(Burrell & Morgan 1979, Van de Ven & Astley 1981, Pfeffer 1982)。然而，我们认为理论多元化或“不可通约性”(Kuhn 1962, 1970)对于战略管理研究和实践来说是有问题的，因为大多数战略学者都对开发和测试有助于企业发展可持续竞争优势的理论感兴趣。理论多元主义使管理者特别难以利用学术研究的成果，因为对于一个给定的实际问题的解决方案可能有不同的答案。在本文中，我们提出了一种潜在的方法，通过使用埃尔兰根学派的“建构主义”哲学的思想来调和理论多元主义的问题。这种哲学提供了一种方法论方法，它将明显区别于在组织研究和战略管理中已经变得普遍的逻辑实证主义方法。
{"title":"Towards a Reconciliation of the Theory Pluralism in Strategic Management - Incommensurability and the Constructivist Approach of the Erlangen School","authors":"A. Scherer, M. Dowling","doi":"10.2139/ssrn.1291189","DOIUrl":"https://doi.org/10.2139/ssrn.1291189","url":null,"abstract":"Theory pluralism has become apparent in the field of strategic management. The traditional business policy framework is increasingly being subjected to criticism, and a variety of streams of research with different theoretical perspectives have emerged. Theory pluralism is common and accepted in many fields of scientific research (Daft & Buenger, 1990; Gioia & Pitre, 1990; Thomas & Pruett, 1993). In particular, organization theorists have developed models to describe and classify competing theories (Burrell & Morgan 1979, Van de Ven & Astley 1981, Pfeffer 1982). However, we contend that theory pluralism or \"incommensurability\" (Kuhn 1962, 1970) is problematic for strategic management research and practice, since most strategy scholars are interested in developing and testing theories that will assist firms in developing sustainable competitive advantage. Theory-pluralism makes it particularly difficult for managers to use the output of academic research since there may be different answers for the solution of a given practical problem. In this paper, we present a potential way to reconcile problems of theory-pluralism by using ideas from the \"constructivist\" philosophy of the Erlangen School. This philosophy offers a methodological approach that will clearly be distinguished from the logical positivist approach that has become common in organizations studies and strategic management.","PeriodicalId":201603,"journal":{"name":"Organizations & Markets eJournal","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-10-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128373334","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Many identify inflated credit ratings as one contributor to the recent financial market turmoil. We develop an equilibrium model of the market for ratings and use it to examine possible origins of and cures for ratings inflation. In the model, asset issuers can shop for ratings -- observe multiple ratings and disclose only the most favorable -- before auctioning their assets. When assets are simple, agencies' ratings are similar and the incentive to ratings shop is low. When assets are sufficiently complex, ratings differ enough that an incentive to shop emerges. Thus, an increase in the complexity of recently-issued securities could create a systematic bias in disclosed ratings, despite the fact that each ratings agency produces an unbiased estimate of the asset's true quality. Increasing competition among agencies would only worsen this problem. Switching to an investor-initiated ratings system alleviates the bias, but could collapse the market for information.
{"title":"Ratings Shopping and Asset Complexity: A Theory of Ratings Inflation","authors":"Vasiliki Skreta, Laura L. Veldkamp","doi":"10.2139/ssrn.1295503","DOIUrl":"https://doi.org/10.2139/ssrn.1295503","url":null,"abstract":"Many identify inflated credit ratings as one contributor to the recent financial market turmoil. We develop an equilibrium model of the market for ratings and use it to examine possible origins of and cures for ratings inflation. In the model, asset issuers can shop for ratings -- observe multiple ratings and disclose only the most favorable -- before auctioning their assets. When assets are simple, agencies' ratings are similar and the incentive to ratings shop is low. When assets are sufficiently complex, ratings differ enough that an incentive to shop emerges. Thus, an increase in the complexity of recently-issued securities could create a systematic bias in disclosed ratings, despite the fact that each ratings agency produces an unbiased estimate of the asset's true quality. Increasing competition among agencies would only worsen this problem. Switching to an investor-initiated ratings system alleviates the bias, but could collapse the market for information.","PeriodicalId":201603,"journal":{"name":"Organizations & Markets eJournal","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-10-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122664413","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper compares the pricing and hedging performance of the LMM model against two spot-rate models, namely Hull-White and Black-Karasinski, and the more recent Swap Market Model from an Asset-Liability-Management (ALM) perspective. In contrast to previous studies in the literature, our emphasis here is on ALM and we use hedging performance on Bermudan swaptions to proxy risk management outcome of long-term mortgage loans. Our tests involve calibrating the four interest rate models to European swaption prices for EURO and USD over the period February 2005 to September 2007. The calibrated models are then used to price and hedge a constant 11-year Bermudan swaption portfolio using a series of interest rate swaps and a 1-year holding-revision period. Our empirical results show that, the calibrated parameters of all four models are stable and their pricing errors are small and comparable. No single model dominates in the pricing exercise. The hedging performance of all four models is similar for the Euro market. For the USD market, the short rate models perform marginally better than SMM and LMM. The HW model is marginally better than BK model in terms of model parameter stability and smaller pricing and hedging errors.
{"title":"Choice of Interest Rate Term Structure Models for Assets and Liability Management","authors":"Zhenke Guan, Bing Gan, Aisha Khan, S. Poon","doi":"10.2139/ssrn.1286854","DOIUrl":"https://doi.org/10.2139/ssrn.1286854","url":null,"abstract":"This paper compares the pricing and hedging performance of the LMM model against two spot-rate models, namely Hull-White and Black-Karasinski, and the more recent Swap Market Model from an Asset-Liability-Management (ALM) perspective. In contrast to previous studies in the literature, our emphasis here is on ALM and we use hedging performance on Bermudan swaptions to proxy risk management outcome of long-term mortgage loans. Our tests involve calibrating the four interest rate models to European swaption prices for EURO and USD over the period February 2005 to September 2007. The calibrated models are then used to price and hedge a constant 11-year Bermudan swaption portfolio using a series of interest rate swaps and a 1-year holding-revision period. Our empirical results show that, the calibrated parameters of all four models are stable and their pricing errors are small and comparable. No single model dominates in the pricing exercise. The hedging performance of all four models is similar for the Euro market. For the USD market, the short rate models perform marginally better than SMM and LMM. The HW model is marginally better than BK model in terms of model parameter stability and smaller pricing and hedging errors.","PeriodicalId":201603,"journal":{"name":"Organizations & Markets eJournal","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-10-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117188416","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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