Financial Paradigm Research Articles

From standard to evolutionary finance: a literature survey

The traditional financial paradigm seeks to understand financial markets by using models in which markets are perfect, which includes agents who are “rational” and update their beliefs correctly based on new information. By comparison, the new institutional economics approach attempts to provide a more realistic picture of economic processes, even in financial markets, by postulating several market imperfections, including the agents’ limited rationality. In contrast, behavioral finance completely challenges the rationality assumption and aims to improve the understanding of financial markets by assuming that, due to psychological factors, investors’ decisions will contradict the expected utility theory. However, the traditional, new institutional and the behavioral finance models all share one important feature: They are all based on the notion of a representative agent even though this mythological figure is dressed differently. Evolutionary finance suggests a model of portfolio selection and asset price dynamics that is explicitly based on the ideas of investors’ heterogeneity, dynamics and changes, learning and a natural selection of strategies. The paper suggests a systematization of this new approach, which is subsequently used to conduct a state-of-the-art literature survey and an evaluation of evolutionary finance research.

Master's Thesis: Money and the Fiscal Space of Monetarily Sovereign Governments: The Case of Denmark

Since the global financial crisis ten years ago, a mature research programme has developed on the austerity policies imposed, especially in European states, to counter perceived threats from excessive public debt and deficits. While many scholars have criticised austerity for digging the hole deeper, fewer have provided clear alternatives. Yet, the economic school of Modern Money Theory encourages analysis into the operational realities of monetary systems to examine mechanisms, which allow countries with their own currency to spend unhindered. In this paper, the Danish monetary system is analysed to answer to what extent the Danish government is financially constrained and how economic policymaking in Denmark is aligned with the operational realities of the monetary system? First, the two main theories of money, metallism and chartalism, are reviewed to ground the analysis in a monetary ontology in coherence with historical and social scientific proof. The metallist theory conceives money as a market phenomenon, which emerged spontaneously from a money-less barter economy, while states later intervened and compromised the natural monetary system. However, empirical evidence favours chartalism, which takes money as inherently a political phenomenon devised by central authorities to access real resources by levying taxes to be paid in its own unit of account. However, the advent of independent central banking appears to have subjected governments to ‘market discipline’. This puzzle is investigated through a case analysis of the Danish monetary system. Six hypotheses derived from Modern Money Theory guides the analysis into the cooperation between Nationalbanken, the Ministry of Finance and the private banks who hold accounts with Nationalbanken. The monetary system is shown to be quite a closed arrangement, tightly controlled by Nationalbanken in its management of the liquidity in the system. Crucially it is argued that the state’s and Nationalbanken’s balance sheets ought to be viewed in consolidation as one, whereby money is a liability of the Danish government, not an asset to be obtained before spending is possible. The government’s fiscal space is determined by what is for sale in its own currency and not its tax revenues. This consolidated view is substantiated by Nationalbanken’s ongoing activity to establish a benevolent financial environment when the government sells bonds. Yet, Denmark may eventually face domestic constraints due to the self-imposed fixed exchange rate policy, if persistent balance of payment deficits return. Finally, a constructivist case analysis of the ‘Restoration Package’ of 2010 is conducted to highlight how misrepresentation of the government as a currency user, rather than issuer, facilitated the imposition of austerity and fortified a sound finance paradigm. The paradigm was shared by the oppositional coalition and prevented them from later achieving their goal of a strong, equitable recovery.

Financialisation of the transnational food chain: from threat to leverage point?

ABSTRACTThe 2008–2009 spike in food prices brought to the forefront the link between the transnational food system and the mechanisms of finance. However, the interconnections between food and finance go far beyond trading in futures and buying indexes and is redefining the chain from farm to fork. Having identified the main implications of a financialised food system, the article identifies two categories of legal and quasi-legal reaction that differ in objectives and processes: the approach of those who prefer engaging from within the financial paradigm and that of those who call for more stringent regulations. With the use of examples, it then reflects on the potential and limits demonstrated by each approach in engaging with the financialisation of food and suggests that complexity and interconnections of finance may become allies against unsustainable practices. The tactical use of EU Directive 95/2015 on non-financial disclosure is analysed with particular care.

Value analysis and nursing leadership: Powerful collaboration in the new financial paradigm.

Value analysis and nursing leadership: Powerful collaboration in the new financial paradigm.

Data Mining: a Three-Step of Real-Time Audit Paradigm

One problem in business is the aspect of reporting through the process of financial audit. The problem with conventional audit is highlighted in this research through literature review of Statement of Auditing Standards (SAS) regarding to the issues of (1) risk assessment, (2) sampling methods, and (3) going concern analysis. This research further describes all these issues in the light of efficient audit process. The method used is exploratory, engaging comprehensive literature review from the perspectives of forensic accounting and information system. The output is to build a three-step financial audit paradigm embedding (1) exploratory data analysis and descriptive modelling in risk assessment, (2) predictive and association analysis in sampling, and (3) grounded professional judgement in going concern analysis.

Book Review: Social Capital and Risk Sharing: An Islamic Finance Paradigm

Book Review: Social Capital and Risk Sharing: An Islamic Finance Paradigm

Behavioral finance: the analysis of investor behavior based on belief and feeling and the investor rationality towards LQ 45 stocks

This research analyzes behavioral finance, especially the behavior of investors in Yogyakarta, Indonesia Region. The performance of investor behavior is examined based on the LQ 45 stocks return on Indonesia Stock Exchange and questionnaires that are spread out to five securities agents in Yogyakarta.The performance of LQ 45 stocks return is compared to the questionnaire analysis in the “Belief” part at the first and second stages. The first result shows that LQ 45 stocks are profitable. It can be seen from the average return of the stocks that it has positive value and is statistically identical with the LQ 45 index return. This result is in line with the investors’ opinion that LQ 45 stocks are profitable. The second result shows that most of LQ 45 stocks are profitable and give high return. But, this result is also contrary to the opinion of investors towards traditional finance paradigm that investors still believe “high risk – high return, low risk – low return”. Although most of LQ 45 stocks are considered as low risk stocks, many investors prefer to choose LQ 45 stocks. It means that the traditional finance paradigm has weakness. It is proven that investors sometimes act irrationally.The third and fourth stages of the study are aimed to analyze the relationship between feeling and belief towards frequency of transaction each day based on the questionnaire using regression analysis. The result shows that there is significant relationship between feeling and frequency of transaction each day.

The Philosophical Paradigm of Financial Market Contagion Research

Philosophical underpinning is important in research as this leads to investigation as per a specific paradigm. Every subject domain has a dominant paradigm in which the research is carried out. This paper surveys various journal articles in finance, specifically in financial markets contagion and spillover effects, to find the research paradigms and finds that the dominant paradigm in finance and market contagion research is functionalism-positivist. This provides opportunities to conduct research in other paradigmatic approaches. This paper explores the possibility of using an interpretivist paradigm to the financial market contagion research.

The Philosophical Paradigm of Financial Market Contagion Research

Philosophical underpinning is important in research as this leads to the investigation as per a specific paradigm. Every subject domain has a dominant paradigm in which the research is carried out. This paper surveys various journal articles in finance, specifically in financial markets contagion and spillover effects, to find the research paradigms and finds that the dominant paradigm in finance and market contagion research is functionalism-positivist. This provides opportunities to conduct research in other paradigmatic approaches. This paper explores the possibility of using an interpretivist paradigm to the financial market contagion research.

How Informative Are Stock Prices of Islamic Banks?

Using a sample of 2,210 observations for 170 banks operating in 12 countries with dual banking systems over 2006-2017 period, we find that Islamic banks have lower stock return non-synchronicity, lower illiquidity ratio, and their current returns have lower future earnings prediction ability than conventional banks. Hence Islamic banks have less information content in stock prices than conventional banks that can be due to their lower degree of transparency mandated by their financial paradigm. This suggests that for Islamic banks, market discipline may not be as effective as it is for conventional banks and hence they require more direct supervision. Our findings have important implications for policy-makers and investors.

Financing family firms in the Middle East: the choice between Islamic and conventional finance

PurposeThe purpose of this paper is to investigate the role of non-economic factors on the financing decisions of family firms in the Middle East. To contextualize the study, the authors steer away from the traditional capital structure debate toward the choice of financing paradigm: conventional vs Islamic.Design/methodology/approachThis study uses Ajzen’s theory of planned behavior due to its ability to delineate the influence of non-economic motivational factors on the financing decisions of family firms. This study also examines the influence of “familial stewardship (FS),” another non-economic factor which is highly relevant in a collectivistic context. The authors initially use SEM with Amos to analyze 115 surveys of family firm owner-managers. For deeper probing, the authors undertook an additional post hoc qualitative analysis of six case studies using semi-structured interviews.FindingsThe findings of this study suggest that owner-managers’ attitude toward Islamic finance plays a primary motivational role in influencing their intentions to use it. More importantly, the findings depict a significant influence of “FS” and subjective norm on the attitudes of owner-managers. This implies that financing decisions which involve religious beliefs are directly influenced by the decision maker’s personal attitude, which, in turn, is significantly influenced by familial and social pressures.Originality/valueThis study fills a gap in the family-firm financing literature by suggesting that when choosing religion-related financial products, attitude plays a far more significant role than other motivational factors. This study also contributes to the “familiness” area of research by empirically demonstrating that FS has a significant influence on owner-managers’ attitude toward financing choices.

German Finance Capitalism: The Paradigm Shift Underlying Financial Diversification

ABSTRACTThis article is concerned with the genesis of German financial liberalisation. A refined inventory of financial system change – including new meso-level data on finance pattern and the marketisation of banking – reveals a varied pattern of change across German finance. It is argued that this financial diversification can only be understood with careful reference to the underlying ideational factors. An analytical narrative traces how technocratic ideas of financial modernisation during the 1980s began to open up space for the political program of finance capitalism to absorb liberal and leftist discontents with insider control and bank dominance. Upon reaching a tipping point of discursive dominance, the program was distinctly adopted across the political economy as the result of compartmentally different political, ideational and structural factors; creating a non-hegemonic financial paradigm that became identifiable in the face of recent crises. By developing analytical steps that link incremental and dynamic theories of institutional change in a conceptual framework of belief shifts, the paper contributes to efforts of adapting existing models of change to complex domains and accounting for the dynamic nature of the paradigm-generating process. The findings inform the larger debate about internal capitalist diversity and the coherence of national economic models.

Bringing Balance to the Force? A Comparative Analysis of Institutionalisation Processes in the G20’s Mutual Assessment Process and the EU’s Macroeconomic Imbalances Procedure

ABSTRACTEvents from 2008 onwards have bought the old consensus on the sound money and finance paradigm (the ‘Great Moderation’) into bold relief. One manifestation of this crisis of belief is the increased focus on global imbalances, institutionally reflected in the creation of the Mutual Assessment Process (MAP) at the G20 level and subsequently the Macroeconomic Imbalances Procedure (MIP) at the European Union (EU) level. Comparing both newcomers to international macroeconomic policy coordination, this article analyses four features that shape (and we show, institutionalise) the process of paradigm contestation: presence, position, promotion and plausibility. We argue that although initially the G20’s MAP scored higher in terms of presence, position and promotion, it is the EU’s MIP, which heralds a more substantial shift in macroeconomic management. Collectively, both indicate the increased prominence of global imbalances as the subject of inter- or supranational management, and a broadening of the notion of necessary or legitimate economic governance.

Emotional intelligence and financial decision making: Are we talking about a paradigmatic shift or a change in practices?

The paper investigates the extent to which emotional intelligence has an impact on decision making mainly with regard to financial decisions and their outcomes. Its relevance lies in the fact that despite the remarkable evolution of the literature related to the determinants of financial choices, it is not comprehensively apprehended what really guides managers’ decisions.The study offers a wide support for behavioral finance and demonstrates a paradigmatic shift in exploring financial decisions. The paradigmatic evolution of financial theory has yield to an “invisible” part of the reality which in turn generates some “hidden” costs. At this level, the behavioral financial paradigm becomes relevant to shed some light on the real dynamic of financial decisions. An empirical study based on a survey on 50 Tunisian firms confirms the “partial” influence of emotional intelligence on financial decisions and the detection of a potential to be upgraded. Results show that managers who rely on their emotional intelligence can successfully, on one hand, improve firm’s funding opportunities, and on the other hand avoid overreaching the debt target ratio in such a way to maintain the financial stability of their firms.The study offers insights at two levels: First, educators are urged to integrate emotional intelligence competencies in their teaching objectives. Second, human resource management professionals are invited to reconsider hiring techniques and training methods favorably to detect and develop an emotional intelligence capital.

The timing of new corporate debt issues and the risk-return tradeoff

The Modigliani–Miller theorem serves as the standard finance paradigm on corporate capital structure and managerial decision making. Implicitly, it is assumed that the market possesses full information about the firm. However, if firm managers have insider information, they may attempt to ‘signal’ changes in the firm’s financial structure and, in competitive equilibrium, shareholders will draw deductions from such signals. Empirical work shows that the value of underlying firms rises with leverage because investors expect such firms to implement positive NPV projects. We empirically examine this view using a sample of debt issue announcements by publicly traded firms listed on the London Stock Exchange. We argue that the timing of debt issues is fundamental in determining the relationship between leverage and risk-adjusted returns. We show that an announcing firm’s intrinsic value may not rise depending on when management publicly ‘signals’ changes in their firm’s capital structure. Specifically, we show that risk-adjusted returns rise positively for firms that make debt announcements during normal economic conditions while they tend to decline for firms making debt announcements during recessionary periods. During recessionary periods, market risk and loss aversion rise and investors focus less on the potential growth of debt announcing firms and focus more on potential losses instead. We conclude that the timing of new debt is of paramount importance and managers’ inability to prudently time such announcements can lead to exacerbated levels of systematic risk coupled with a significant erosion in shareholder wealth.

Institutional investor behavioral biases: syntheses of theory and evidence

PurposeThis paper aims to review the theory and empirical evidence of institutional investor behavioral biases in the lenses of behavioral finance paradigm. It surveys the research specifically focusing on behavioral biases among institutional investors in investment management activities worldwide.Design/methodology/approachA literature survey is done to gather and synthesize evidence on behavioral biases of institutional investors.FindingsThe survey and analysis reveal the following findings. First, the theoretical underpinning of investors’ irrational behavior has been neglected in behavioral finance research. Second, the behavioral heuristics and biases are dynamic and complex. Third, understanding behavioral biases’ origin, causes and effects requires interdisciplinary perspectives from the fields of psychology, sociology and biology.Originality/valueThe analysis and alternative perspectives drawn in this paper provide new insights into the field of behavioral finance and aims to suggest researchers, practitioners and regulators on the next course of actions.

Enhancing Climate Change Resilience Through Microfinance: Redefining the Climate Finance Paradigm to Promote Inclusive Growth in Africa

Poverty, inequality, unemployment, and unsustainable resource consumption are prevalent in Africa due to a lack of inclusive growth. The impacts of climate change are also considered to have hindered progress on achieving the Millennium Development Goals. Through literature reviews and policy analyses, this article presents suggestions on how inclusive growth can be attained in the post-2015 development agenda, and also presents a framework to enable microfinance institutions to promote both inclusive growth, and climate change mitigation and adaptation. The article shows that microfinance can support the mobilization of resources for climate change programs; hence, financial inclusion should be incorporated in climate change policies.

Financial Crisis, Macro-Stabilization Policy and the Debt Culture: Are We Thinking Out of the Box Yet?

Every global crisis presents a new learning experience for the humanity. Some crises also have paradigm-shifting significance. The last crisis of 2008 might be one of those. Yet, the macro-policy approach of the major industrialized economies seems to be still based on macro-stabilization or counter-cyclical policy frameworks within the well-established, conventional economic and financial paradigms. Fiscal stimulus packages are to revive the economy as fast as possible and the monetary policies have tinkered with the lowest interest rate in many decades. As per fiscal policy, more debt is incurred by the governments and as per monetary policy, especially resorting to Quantitative Easing (QE), more private sector debt is encouraged and facilitated. More debts to cure excessive debt! Might these policies still be effective, even though so far their effects have been non-sustaining throughout history? In future there will be better assessment of the situation. However, the general solutions that continue to be applied by the leading conventional economists representing various mainstream schools and pursued by the governments to counter the negative effects of the crisis have a fundamental disconnect with the reality in regard to why such crisis occurred and how it can be prevented in future. This paper examines the conventional framework for macro-stabilization policy and makes the case that while these policies might bring some non-sustainable reprieve from this contagion, one area that needs to be identified and probed into further is the role debt culture plays in modern, industrialized societies. This paper also draws on the theories of indebtedness from both cultural, moral and structural/legal perspective and experience in our modern time. Understanding the current crisis in light of the interaction between cultural, moral and structural factors in fostering a debt-prone culture – a culture that is debt-seeking, debt-promoting, debt creating and debt-proliferating - provides critical insight into why economic policies that are delinked from some fundamental wisdom and principles of healthy and sustainable lifestyle, especially in the grip of financialization and ignoring the real economy, might not be that effective.

ИНФОРМАЦИОННАЯ АСИММЕТРИЯ И “БОЛЬШИЕ ДАННЫЕ”: ГРЯДЕТ ЛИ ПЕРЕСМОТР ПАРАДИГМЫ ФИНАНСОВОГО РЫНКА?

The article deals with the behavioral mechanisms of functioning of modern financial market. Author points out to the formation of a permanent latent information asymmetry as well as fragmentation of information preferences of different investors’ groups. This leads to concentration of “bid data” and related technologies with the professional market participants. However, such intellectualization of financial transactions does not preclude the investors from fallacy in asset selection and financial losses. Laypersons as well as professionals continue to follow their subjective motivations (gut feelings, intuition) and all of them are proving to be irrational. Author cites the results of studies showing that overconfidence of professionals worsens their investment results. Meantime, non-professional retail investors can not only move the market prices, but also outperform the professionals. The likelihood that professionals will outperform laypersons in all financial transactions is doubtful. This behavior increases overall market uncertainty and reduces the accuracy of market forecasts. Author agrees with conclusions of Western researchers that irrational behavior of professional well-informed investors may reduce negative impact of information asymmetry on the non-professional and not informed investors. Under these conditions, the development of “big data” processing and analyzing technologies cannot radically change the behavior of investors and increase the rationality of the financial market. However, penetration of mobile technologies in capital markets can increase the ability of retail investors to monitor the market as well as their ability to select assets. These technologies may help principals in agent–principal relations to protect their interests. As for the professional investors and financial institutions, “big data” helps them to establish more flexible and friendly client relation with retail customers. Still, the author concludes that the basic financial market paradigm is not yet to be revised.

Behavioral Finance: A Paradigm Shift

The evaluation of behavioral finance attempts to better understand and explain how emotions and cognitive errors influence investors and the decision making process. This study gives an overview of the concept of classical finance and behavioral finance in the beginning and thereafter throws light upon the need and origin of behavioral finance. This paper also presents that how behavioral finance can help investors and financial analysts to better understand the market mechanism of functioning as well as the investment behavior of the stakeholders to this process. Behavioral finance is not a replacement to the classical finance paradigm, but an alternative solution to explain the market inefficiency and the irrational behavior of investor. Also investment decision is seen as a result of an interaction between the investor and the investment environment.