Ideas Of Finance Research Articles

What's Hot in Finance? (2007-2011)

As in years past, to catalyze the students in my Ph.D. F798 class to think of finance ideas, I asked each one of them to read the abstracts of finance articles published in the last 5 years in JF, JFE, RFS and JFQA. Some general observations from the hard data above and the soft data generated from classroom discussions: 1) Classification into sub-topics is even more difficult than last year. There are more papers published which are not only intra-discipline but also inter-disciplinary. Law and finance is the hottest inter-disciplinary topic. Papers on the crisis are trending down. 2) The ratio between empirical to theory remains steady at 4:1. Theory is trending up in corporate finance, but trending down in asset pricing. 3) In corporate finance, the dominance of the old chestnuts – capital structure and corporate governance – is trending up. 4) In asset pricing, the analysis of pricing of specific assets is trending up. 5) In investments, the number of hedge fund papers is increasing. 6) The death of market microstructure has been exaggerated. Liquidity remains popular. 7) There is a small but steady fraction of banking papers published. 8) Finance journals dominate. Amongst finance journals, JF has regained its position as No 1. 9) Top non-finance journals publish many finance papers. With the notable exception of QJE, these journals have similar impact factors as the top 3 finance journals.

A multiscale entropy approach for market efficiency

Motivated by the recently evolutionary economic theories, we propose to study market efficiency from an informational entropy viewpoint. The basic idea is that, rather than being an all-or-none concept as in classic economic theories, market efficiency changes over time and over time horizons. Within this framework, market efficiency is measured in terms of the patterns contained in the price changes sequence relative to the patterns in a random sequence. In line with evolutionary finance ideas, the empirical results for the Dow Jones Index showed that the degree of market efficiency varies over time and is dependent of the time scale. In general, the DJI is more efficient for shorter (about days) than for longer (about months and quarters) time scales. On the other hand, the market efficiency exhibits a cyclic behavior with two dominant periods of about 4.5 and 22years. It is apparent that the 4.5-year cycle is related to inventory (Kitchin-type) effects, while the 22-year cycle to structure inversion (Kondriatev-type) cycles.

A fuzzy modeling for fuzzy portfolio optimization

Conventional portfolio optimization models have an assumption that the future condition of stock market can be accurately predicted by historical data. However, no matter how accurate the past data is, this premise will not exist in the financial market due to the high volatility of market environment. This paper discusses the fuzzy portfolio optimization problem where the asset returns are represented by fuzzy data. A mean-absolute deviation risk function model and Zadeh’s extension principle are utilized for the solution method of portfolio optimization problem with fuzzy returns. Since the parameters are fuzzy numbers, the gain of return is a fuzzy number as well. A pair of two-level mathematical programs is formulated to calculate the upper bound and lower bound of the return of the portfolio optimization problem. Based on the duality theorem and by applying the variable transformation technique, the pair of two-level mathematical programs is transformed into a pair of ordinary one-level linear programs so they can be manipulated. It is found that the calculated results conform to an essential idea in finance and economics that the greater the amount of risk that an investor is willing to take on, the greater the potential return. An example, which utilizes the data from Taiwan stock exchange corporation, illustrates the whole idea on fuzzy portfolio optimization problem.

The mean-absolute deviation portfolio selection problem with interval-valued returns

In real-world investments, one may care more about the future earnings than the current earnings of the assets. This paper discusses the uncertain portfolio selection problem where the asset returns are represented by interval data. Since the parameters are interval valued, the gain of returns is interval valued as well. According to the concept of the mean-absolute deviation function, we construct a pair of two-level mathematical programming models to calculate the lower and upper bounds of the investment return of the portfolio selection problem. Using the duality theorem and applying the variable transformation technique, the pair of two-level mathematical programs is transformed into a conventional one-level mathematical program. Solving the pair of mathematical programs produces the interval of the portfolio return of the problem. The calculated results conform to an essential idea in finance and economics that the greater the amount of risk that an investor is willing to take on the greater the potential return.

SESAR: R&D and Project Portfolios for Airline Business Needs

‘Even the longest journey must begin where you stand.Lao-tzu‘In the long run, we're all dead’J. M. KeynesA version of this paper was first presented at the Royal Institute of Navigation NAV 08 Conference held at Church House, Westminster, London in October 2008.SESAR is Europe's ‘Single European Sky Air traffic Research system’, targeted at post-2020. The vision is to integrate and implement new technologies to improve air traffic management (ATM) performance. The focus for planning and executing system operations will increasingly be aircraft navigating high-quality 4D trajectories: a 4D trajectory is the aircraft path, three space dimensions plus time, from gate-to-gate, i.e. including the path along the ground at the airport. A 20+year ATM plan has to use limited information on the success of innovations and the development of large-scale, often safety critical, software, which by its nature can take markedly longer and cost markedly more than early estimates. SESAR must be sufficiently flexible in deployment to maximise financial benefits to individual stakeholdersusing their specific financial criteria. Airline needs are the main ATM system/business drivers. Airlines do not want to commit to developing an ‘ultra-modern system’per se, but rather to one that makes business-sensible investments in new technologies that are indispensable for achieving improved safety and meeting projected capacity requirements. The approach has been to use simple corporate finance ideas to examine the different viewpoints and business environments of air traffic service suppliers (ANSPs) and individual airlines. The key decision-making point is that ANSPs act as an agent for airlines as a whole. The key financial point is that a typical airline has to work hard to survive and needs quick paybacks on investment. The design of the SESAR R&D and project portfolios can learn lessons from information technology systems design and deployment. ‘Real option analysis’ of systems can increase business value by improving the sequencing and partitioning of projects, helping to ensure that the system is adaptable to technological innovation and changes in business needs.

A Theory of Financing Knowledge Assets

This paper develops an incomplete contracting theory of financing choices by integrating the incentive effects of knowledge sharing in corporate VC, independent VC, and angel financing together with the incentive effects of financing ideas inside or outside the boundaries of an existing firm. I model these financing choices using (i) ownership of the idea; and (ii) reciprocal access between the financier's and the innovator's knowledge. The theory provides the following key insight: while ownership asymmetrically increases the incentives of the owner and dampens those of the non-owner, access symmetrically enhances the incentives of both agents. By distinguishing the financing of knowledge assets from that for physical assets, the theory rationalizes why venture capital financing is dominant in the knowledge intensive sectors but not in the traditional sectors. The theory generates the following novel empirical predictions. First, independent VC financing of startups is more likely than corporate VC but less likely than angel financing if intellectual property (IP) protection is stronger or if product market competition is more intense. An increase in the strength of IP protection affects these financing choices disproportionately more when product market competition is intense. Second, whether an idea is optimally financed inside or outside an existing firm is determined by the relative abilities of the innovator and the financier and how easily their knowledge can be expropriated. Absent IP protection, this choice between financing ideas inside or outside existing firms is irrelevant.

Earning from Risks

Fischer Black and the Revolutionary Idea of Finance . By Perry Mehrling . Wiley, Hoboken, NJ, 2005. 392 pp. $29.95, C$38.99, £19.99. ISBN 0-471-45732-9. This biography weaves together an informative portrait of an eccentric theorist and his work on the pricing of risk that played a crucial role in the development of derivatives markets.

The Early History of Financial Economics, 1478–1776. By Geoffrey Poitras. Cheltenham and Northampton: Edward Elgar, 2000. Pp. x, 522.

Economic historians usually have to explain to their economist colleagues the difference between economic history, which focuses on facts, and history of economic thought, which focuses on ideas. Our colleagues in finance departments, typically fascinated by episodes in financial history treated by economic historians, are bound to be disappointed in the lack of attention given to the development of ideas in finance by historians of economic thought. Geoffrey Poitras, a professor of finance at Simon Fraser University, makes a valiant effort to remedy these oversights in his collection of vignettes that highlight the sophistication of financial instruments and analysts of financial markets well before the time of Adam Smith. Starting in 1478 with the publication of the Treviso Arithmetic, a typical textbook of commercial arithmetic for Italian merchants, and ending with brief snippets from the Wealth of Nations, Poitras treats the reader to a fascinating potpourri of excerpts from various manuals, brief biographies of pioneers in financial analysis, and historical discursions on foreign-exchange and stock markets.

Finance: A Selective Survey

Ever since the publication in 1565 of Girolamo Cardano's treatise on gambling, Liber de Ludo Aleae (The Book of Games of Chance), statistics and financial markets have become inextricably linked. Over the past few decades many of these links have become part of the canon of modern finance, and it is now impossible to fully appreciate the workings of financial markets without them. This selective survey covers three of the most important ideas of finance---efficient markets, the random walk hypothesis, and derivative pricing models---that illustrate the enormous research opportunities that lie at the intersection of finance and statistics

What's new in financial strategy?

What's happening in the field of financial strategy? Have Chief Financial Officers forsworn synergy in favor of the holding company model? Have planning teams adopted most of the best ideas of finance—such as shareholder value analysis—as their own? Do the finance and strategy functions compete or cooperate to steer their corporate ship?

Risk as a History of Ideas

The perception of risk throughout history has reflected the temper and times in each society as the emphasis has swung from gut to measurement and back to gut. As long as people sensed they had no control over their futures, chance explained the entire outcome of risk taking. Then, the collection of ideas we call the Renaissance freed the human spirit for experimentation and exploration, demonstrating that choice is a valid human activity and that risk is something to be taken as well as faced. Quantification became essential, leading to the development of the laws of probability. In more modern times, uncertainty has replaced many of the neat concepts of probability and has even begun to attack the roots of the capital ideas of finance: mean–variance, the efficient market hypothesis, and the capital asset pricing model.

SOME MONEY GAMES

ABSTRACTThe authors consider three games which come directly to grips with important ideas in finance, are complex enough to be interesting, yet sufficiently simple to be explained and played in less than one class period. Their purpose is to help students become more involved in the art of economic model building and to impart a better understanding of the demand for money. It seems likely that these games can be used to test specific hypotheses about the learning process and human decision making under conditions of uncertainty.