Positive Trade-off Research Articles

Detecting and Measuring Nonlinearity

This paper proposes an approach to measure the extent of nonlinearity of the exposure of a financial asset to a given risk factor. The proposed measure exploits the decomposition of a conditional expectation into its linear and nonlinear components. We illustrate the method with the measurement of the degree of nonlinearity of a European style option with respect to the underlying asset. Next, we use the method to identify the empirical patterns of the return-risk trade-off on the SP500. The results are strongly supportive of a nonlinear relationship between expected return and expected volatility. The data seem to be driven by two regimes: one regime with a positive return-risk trade-off and one with a negative trade-off.

The Profitability in the CDS Market

The strategy by buying the CDS with the most negative past 1-day stock return and selling the CDS with the most positive past 1-day stock return generates 0.26 daily Sharpe ratio from 2002 to 2016. The profitability concentrates on the most liquid CDS with more quote counts, more market makers, and less bid-ask spreads. Our paper challenges this notion by proposing a hypothesis based on informed speculation and partially informed hedging in segmented stock and CDS markets to explain the profitability. One implication of the hypothesis is that CDS-based trading strategy captures information asymmetry of different hedging and speculative demands given distress risk. Consistent with the distress nature of the strategy, we find that the return dynamic represents the distress risk factor, which is priced in U.S. market. Particularly, using portfolio approach following Fama-French (1993), we find the positive distress risk and return trade-off. Additionally, we show that the momentum crashes (by Daniel and Moskowitz (2015)) is because loser stocks bear more distress risk thus earn higher distress risk premium than winner stocks.

Effects of irrigation on the ecological services in an intensive agricultural region in China: A trade-off perspective

The quantification of the effect of irrigation on crop yields and other non-marketed ecological services (ESs) is crucial to maintain a steady increase in agricultural production while minimizing negative environmental effects. We use the modified ES trade-off concept frame to analyze the interrelationships between crop yield income and nitrogen leaching, nitrous oxide emission, and soil organic carbon (SOC) sequestration by simulating crop output and other non-marketed ESs with a process-based denitrification–decomposition model. Results show that positive trade-offs and synergies exist between crop yield income and nitrogen leaching, nitrous oxide emission, and SOC sequestration at the loam site before the irrigation index reaches 0.7. Similarly, a positive trade-off exists between crop yield income and nitrogen leaching at the sandy soil site, and a positive synergy occurs between crop yield income and SOC sequestration at the loam site as the irrigation index increases from 0 to 1. The extended ES trade-off concept frame is a beneficial approach for optimizing current agricultural irrigation management strategies to maintain sustainable agricultural development.

Biomass Decomposition and Phosphorus Release from Residues of Cover Crops under No‐Tillage

Residue decomposition and P release was studied under no tillage field conditions. Cover crop residues releases significant quantities of P for the subsequent cash crop. Phosphorus release from residues is affected by precipitation regime and residue quality. A positive tradeoff was observed between crop residue P dynamics and soil coverage. Under no‐tillage field conditions, cover crop (CC) residues remain on the soil surface and decompose at a slow rate. We used three CC species (oat, Avena sativa L.; rye, Secale cereale L.; and ryegrass, Lolium multiflorum L.) to evaluate the residue biomass decomposition and P pools release–total phosphorus (Pt), inorganic phosphorus (Pi), and organic phosphorus (Po)–under no‐tillage field conditions. The dynamics of biomass and P in CC residues was evaluated through the litterbag method during two annual periods in a long‐term field experiment. Exponential decay models were fitted to each variable. Biomass decomposition and P release followed asymptotic decay models for the less labile residues (oat and rye) and single exponential decay models for the more labile ryegrass residues. Biomass and Pt showed rather equivalent dynamics, but Pi release was faster (Pi rates were three times higher and Pi plateaus were two to four times lower than biomass values). The release of Pt from CC residues reached agronomically significant quantities (2–16 kg ha−1) during the cash crop growing season and most of this Pt was released as Pi (53–100%). A positive tradeoff was observed between the release of Pi, potentially available for subsequent crop, and the residue biomass remaining over the soil. This means that Pi was released from residues, but enough biomass remained on the soil surface for erosion control. These results can be incorporated into predictive models on the contribution of CC residues to soil coverage and P nutrition of subsequent crops.

Sustainability of livestock sector in Punjab

Livestock sector is one of the most important and fastest growing agricultural subsectors in Punjab. Owing to the changing dynamics of the sector, present study was conducted to assess the sustainability of the sector in the state. The study was carried out for three agro-climatic zones (Zone-I, Zone-II, and Zone-II) for four periods (1997, 2003 and 2007, 2012). Sustainability was measured by developing an index quantifying the basic three pillar model of sustainability; social, economic and ecological dimensions. The results revealed that the sustainability of the state is increasing over the study period. The main reasons attributed are increase in highly productive stock with improvement in ecological externalities. Significant negative trade-off between livestock sustainability and economic sustainability and positive trade-off with ecological was observed. Three scenarios for development of the sector was postulated for three agro-climatic zones in the state. The sector is a viable option for promotion for sustainable income generation among agricultural subsectors in the state.

The Risk-Return Tradeoff Among Equity Factors

We examine the risk-return trade-off among several long-short equity factors. We obtain a positive trade-off for the operating profitability (RMW) and investment (CMA) factors, and a negative relationship for the market (RM) and momentum factors. The estimated trade-off subsists by accounting for the covariance with RM, and tends to be stronger in recessions. The out-of-sample forecasting power (of factor variances for own returns) is economically significant for both RMW and CMA. This suggests that the risk-return trade-off is stronger within segments of the stock market than for the whole. The factor risk-return trade-off is weaker among most international stock markets.

Interplay between past market correlation structure changes and future volatility outbursts.

We report significant relations between past changes in the market correlation structure and future changes in the market volatility. This relation is made evident by using a measure of “correlation structure persistence” on correlation-based information filtering networks that quantifies the rate of change of the market dependence structure. We also measured changes in the correlation structure by means of a “metacorrelation” that measures a lagged correlation between correlation matrices computed over different time windows. Both methods show a deep interplay between past changes in correlation structure and future changes in volatility and we demonstrate they can anticipate market risk variations and this can be used to better forecast portfolio risk. Notably, these methods overcome the curse of dimensionality that limits the applicability of traditional econometric tools to portfolios made of a large number of assets. We report on forecasting performances and statistical significance of both methods for two different equity datasets. We also identify an optimal region of parameters in terms of True Positive and False Positive trade-off, through a ROC curve analysis. We find that this forecasting method is robust and it outperforms logistic regression predictors based on past volatility only. Moreover the temporal analysis indicates that methods based on correlation structural persistence are able to adapt to abrupt changes in the market, such as financial crises, more rapidly than methods based on past volatility.

Downside Risk and Stock Returns: An Empirical Analysis of the Long-Run and Short-Run Dynamics from the G-7 Countries

This paper presents a fractionally cointegrated vector autoregression (FCVAR) model to examine various relations between stock returns and downside risk. Evidence from major advanced markets supports the notion that downside risk measured by value-at-risk (VaR) has significant information content that reflects lagged long-run variance and higher moments of risk for predicting stock returns. The evidence supports the positive tradeoff hypothesis and the leverage effect in the long run and for some markets in the short run. We find that US downside risk accounts for 54.36% of price discovery, whereas the own effect from the country itself contributes only 27.06%.

Fixing the Fed

This paper reviews recent developments in US monetary policy and then discusses some possible reforms that might be considered to modify the behavior of the Federal Reserve System. Since its creation a century ago, the Federal Reserve System has grown from a narrowly defined central bank dominated by JP Morgan and other large banks into a Soviet style economic planning and management agency run by and for academic economists. The Fed's actions since the 2008 crisis have taken on a quasi-fiscal character and often exceed the agency's legal authority, but so far nobody in the White House or the Congress has objected. Meanwhile, many of the policies put in place by the Fed have arguably hurt economic growth and increased systemic risk in the financial markets, suggesting that there is no positive trade-off between the cost of Fed manipulation of asset prices and credit spreads and whatever benefits these activities provide. How do we think about the relationship between the Fed and the other arms of our federal government? Is talking about "fixing" the Fed overly ambitious given's the agency's growing power?

Modeling the Relationship between Bank Efficiency, Capital and Risk in Albanian Banking System

Abstract Bank efficiency is considered to be very important in the relationship between risk and capital. It affects both capital and risk and it is seen as one of the factors that determine them. On the other side, capital regulation and risk-taking behaviour influenced by it have an impact on efficiency. This paper gives an overview of theoretical and empirical studies that are going to be used on modelling the relationship between efficiency, capital and risk-taking behaviour of commercial banks operating in Albania during the period 2002-2014. Based on previous works worldwide, a three stage model is found to be a proper one for such analysis about Albanian banking system. According to this model: first, the regression of efficiency and variables indicating risk and capital has to be analysed, second capital will be regressed against variables indicating efficiency and risk and in the third stage risk-taking will be regressed against variables indicating efficiency and capital. Based on previous studies related to this issue there are findings of a positive trade off between inefficiency and bank risk-taking (such as US evidences) and also negative one (such as European banks that seem to hold more capital and take on less risk in case of inefficiency). Defined independent factors of efficiency, capital and risk-taking are going to be used on an empirical study, subject of prospective research. To my knowledge there is no previous study on this issue for Albanian banking system. This model enables testing of different hypotheses about risk, capital, efficiency and relationship between them. It is going to respond to the effects that reduction in cost efficiencies might have on future risks of Albanian commercial banks. Furthermore, this model gives the possibility to test the bad management hypothesis and efficiency version of moral hazard hypotheses for targeted banks and banking system. It also responds to the questions whether bank cost efficiency makes the foundation of banks’ capital position and risk-taking and also whether there is an evidence of relationships between capital and risk-taking in line with moral hazard hypothesis.

An Experimental Study on the Effects ofWinglets on the Wake and Performance of a ModelWind Turbine

Wind tunnel experiments were performed to investigate the effects of downstream-facing winglets on the wake dynamics, power and thrust of a model wind turbine. Two similar turbines with and without winglets were operated under the same conditions. Results show an increase in the power and thrust coefficients of 8.2% and 15.0% for the wingletted case. A simple theoretical treatment of a two-turbine system suggests a possible positive tradeoff between increasing power and thrust coefficients at a wind farm scale. The higher thrust coefficient created a region of enhanced mean shear and turbulence in the outer portion of the wake. The winglets did not significantly change the tip-vortex strength, but higher levels of turbulence in the far wake decreased the tip-vortex strength. Because of the increased mean shear in the wingletted turbine’s wake, the Reynolds stresses were higher, potentially leading to a higher energy flux downstream.

Predicting Stock Returns in the Presence of Uncertain Structural Changes and Sample Noise

Expected returns are believed to be persistent and mean-reverting, and therefore often modeled as an AR(1) process. We propose to use instead a CIR model, which preserves the former behavior but implies additional important economically motivated characteristics such as a positive risk-return trade-off and a time-varying volatility. A CIR-based predictive system without predictors also reproduces the counter-cyclicality of the dividend-price ratio's predictive power, and presents significantly lower out-of-sample forecast errors than the historical mean. Furthermore, the Bayesian estimation indicates that the persistence parameter of expected returns has been declining over the last few decades in tandem with the autocorrelation of realized returns.

Population Control Policies and Human Capital Investment: China's One-Child Policy Revisited

This paper re-examines the issue of whether population control policies induce more human capital investment per child. It is widely believed that China’s one-child policy promotes the human capital level of the new generation. According to the quantity-quality tradeoff theory, there is a tradeoff between the number of children and child quality; thus a reduction in fertility would contribute to Chinese human capital enhancement. However, the quantity-quality tradeoff may be not the whole story, because another crucial factor relates to which segment of the population is reduced. China’s one-child policy is more strict in urban areas than in rural areas, where human capital investment in children is much lower; thus, it might induce a rural birth rate that is much higher than the urban one, which would have a negative effect on human capital. In our paper, we first define and stress the importance of the population structural change effect on human capital investment. We construct a theoretical model and discover the mathematical formula of the population structural change effect and quantity-quality tradeoff effect together, which are similar to the income effect and substitution effect in microeconomic theory. Then we empirically prove that China’s one-child policy induced a much higher rural birth rate, implying a negative population structural change effect that might offset the potentially positive quantity-quality tradeoff effect on human capital. Finally, we further investigate the relative sizes of the two effects and find it is very likely that China’s one-child policy reduced the human capital level of the new generation.

Does China's Birth Control Policy Really Induce More Human Capital Investment? A New Perspective Based on Population Structural Change Effect

This paper reexamines the issue of whether China's birth control policy induces more human capital investments per child. Rosenzweig and Zhang(2009) found there was significant tradeoff between number of children and child quality in China thus concluded that the contribution of China’s one-child policy to the development of its human capital was modest at best. However, quantity-quality tradeoff effect may be not the whole story, while which part of population is reduced also matters. In practice the one-child policy is more strict in urban areas than in rural areas, thus it may induce that birth rate in backward rural areas where human capital investment in children is lower is far higher than urban areas. In our paper we first define and stress the importance of population structural change effect on human capital investment. We construct a theoretical model and find out the math form of population structural change effect and quantity-quality tradeoff effect together, which are similar to income effect and substitution effect in microeconomic theory. Finally we empirically prove that China's birth control policy induced that rural birth rate rural was far higher than urban, implicating a negative population structural change effect which may offset the potentially positive quantity-quality tradeoff effect on human capital. Thus China’s birth control policy may not induce more human capital investment of the country.

C- and L-band SAR interoperability: Filling the gaps in continuous forest cover mapping in Tasmania

This paper addresses the shortfall in L-band SAR data availability for the purpose of extracting spatially explicit information on forest cover, and the capacity to fill the gap using shorter wavelength C-band data. Specifically, comparisons are made of forest/non-forest (F/NF) extent derived from independent classification of ALOS PALSAR and RADARSAT-2 data acquired over Tasmania. Focussing on a temperate forest landscape, it was demonstrated that C-band SAR data can be used interchangeably with L-band data to produce a comparable estimate of forest/non-forest cover. Only partial interoperability is achieved however, given the limitations of dual polarisation C-band SAR in discerning forests of different growth stage and biomass.Ambiguities in F/NF status were more prevalent in the C-band classification, despite inclusion of topographic (surface elevation and slope) and textural features in the training dataset, with the key observations as follows: (i) Reduced dynamic range and greater overlap amongst F/NF classes; (ii) Similarities in volume scattering from harvested/regrowth eucalyptus areas and background native forest; (iii) Confusion between young pine plantation and harvested/regrowth areas due to comparable roughness; (iv) Less variation in backscatter and poorer separation of intact and managed eucalyptus forest; and (v) Reduced capacity for discrimination of forest types. In almost every case, the use of L-band data was preferable. The one exception was the limited separation of young pine plantation and harvested/regrowth areas in both C- and L-band data. A similar level of performance was achieved in the discrimination of mature pine plantation, and between young eucalyptus plantation and harvested/regrowth.The findings were restricted to single-date classification of C- and L- band data. The potential to extend a time-series of L-band observations over forest using dense time-series (i.e., intra-annual) C-band observations acquired in dual or quad polarisation mode, warrants further investigation. Where a positive trade-off exists between the benefits and costs of integrating these data, multi-frequency (e.g., C- and L-band) and multi-sensor approaches (e.g., SAR and optical) are a viable way forward for operational forest monitoring and carbon accounting.

Smaller portfolio returns and the risk-return trade-off for the whole market

Empirical evidence on the risk-return trade-off in stocks has been conflicting. Several studies estimate a positive risk-return trade-off (see French et al., 1987; Campbell and Hentschel, 1992) but other researchers find the opposite (see Nelson, 1991; Glosten et al., 1993) and most of the results have been statistically insignificant regardless of the sign of the risk-return trade-off. Using bivariate GARCH-M models, we investigate (1) the risk-return trade-off for the market portfolio and (2) the relation between the expected return of individual portfolios and time-varying covariance with the market portfolio. Our bivariate models using individual portfolios yield results with positive, significant estimated risk-return trade-offs for the market portfolio and strong evidence of a positive relation between expected return and the time-varying covariance for individual portfolios. We also construct a robust estimate for the risk-return trade-off across model specifications using Bayesian model averaging ...

Expected return, time-varying risk, and hedging demand in the US REITs market

This paper explores the time-varying relationship between the return and risk for the portfolios in the US real estate investment trusts (REITs) market. Three classes of REITs portfolios are sorted on size, momentum and book-to-market. The empirical results place a positive trade-off between the return and predictable covariation in all REITs portfolios. Furthermore, this paper examines the significance of intertemporal hedging demand in each REITs portfolio by extending the Intertemporal Capital Asset Pricing model (ICAPM) with a set of prevailing macroeconomic variables and financial market indicators, which indicate that the predictable movements in return could be attributed to the change in covariances with these innovations. The conclusive results show that innovations in inflation rate, de-trended short-term interest rate, Fama-French momentum factor, S&P/Case-Shiller home price index, and Barclay Capital long-term government/corporate bond index play a crucial role in hedging demand for REITs portfolios.

Does Military Spending Crowd Out Social Welfare Expenditures? Evidence from a Panel of OECD Countries

This article examines the relationship between defense and social welfare expenditures using a panel of 29 OECD countries from 1988 to 2005. It is quite difficult to take into account the simultaneous channels empirically through which the eventual allocation of defense and welfare spending is determined for the guns-and-butter argument. Taking advantage of our collected panel data-set, the panel generalized method of moments method is adopted to control the country-specific heterogeneity and to mitigate the potential simultaneity problem. The main finding of this article suggests a positive trade-off between military spending and two types of social welfare expenditures (i.e. education and health spending). One of the reasons may be that the OECD countries are more supportive of the social welfare programs; therefore, when the military spending is increased (e.g. military personnel and conscripts), the government may raise the health and education spending as well.

Corn Residue Removal Effects on Soybean Yield and Nitrogen Dynamics in the Upper Mississippi River Basin

Considerations for using corn (Zea mays L.) residues for biofuel should include impacts on the subsequent soybean [Glycine max (L.) Merr.] crop. We used the Agricultural Policy Environmental Extender (APEX) model to study the effects of: four rates of corn residue removals, 0%, 40%, 60%, and 80%, across site-specific conditions of two land types, highly erodible land (HEL) and non-HEL; three soil textural classes, clayey, loamy, and sandy; and the four soil hydrologic groups, A, B, C, and D, on soybean yield and nitrogen (N) dynamics, for 3703 farm fields within the Upper Mississippi River Basin. Overall, residue removal reduced soybean yield, N fixation, uptake, losses, and soil storage by 8%, 6%, 7%, and 5%, respectively. There is a positive tradeoff of residue removal, that is, it reduces the pool of nutrients available for loss, which resulted in a 9% decline in N losses when compared to no residue removal. Corn residue removal-induced reduction in soil organic N storage could affect the magnitude of the soybean N credit, implying that increased fertilization rates could be needed to sustain corn productivity in corn/soybean rotation systems. Responses were however subject to site-specific conditions, key considerations when determining residue removal thresholds.

Behavioral decision-making in finance: An overview and assessment of selected research

ABSTRACTEveryday financial decisions are the product of diverse factors, including instinct, habit, emotion, reason, and social interaction. Psychologists have long aspired to unravel the determinants of intuitive judgment and choice. Slowly but surely, they have identified various psychological mechanisms that cause predictable decision biases. This survey puts special emphasis on behavioral research in finance that investigates information overload, emotion, social influence, and ambiguity aversion. It also discusses selected cognitive models that attempt to integrate the way individuals interpret and act upon information. In general, behavioral research casts serious doubt on the validity of some of the key insights of mainstream finance such as portfolio theory, the positive risk-return trade-off, and efficient markets.