Recessionary Cycle Research Articles

Financial Engineering in Complex Dynamic Systems

This paper explores the dynamic nature of financial markets through the lens of complex adaptive systems (CAS) theory, aiming to provide a comprehensive understanding of how financial markets deviate from the Efficient Market Hypothesis in extreme events such as bubbles and crashes. Traditional economic models often struggle to capture the intricate dynamics of 'self-organizing' financial markets, particularly the interaction between supply and demand in the face of evolving risks. CAS theory offers a promising framework for modeling asset prices, emphasizing the interconnectedness and adaptability of various agents within the system. The literature review highlights the significance of CAS theory in understanding the collective adaptation that emerges from interactions among heterogeneous agents. Notably, researchers such as Holland (1995) and Axelrod (1997) have demonstrated how simple agent-level rules can lead to sophisticated, self-organizing behaviors at the system level, resulting in more efficient outcomes. This paper also discusses the pivotal role of financial engineering in enhancing the adaptive capacity of socioeconomic systems under extreme stress. In an increasingly unpredictable world characterized by natural disasters, economic crises, and other unforeseen events, risk management serves as a vital mechanism for volatility mitigation and financial protection. By spreading risk collectively through hedging strategies, financial engineering not only provides portfolio security but also contributes to the resilience of financial and economic systems. By merging insights from CAS theory and the role of financial engineering in increasing adaptive capacity, this paper contributes to a more comprehensive understanding of the risk dynamics in financial markets impacting economic activities. Financial engineering tools mitigate negative shocks and reduce the severity of recessionary cycles. An attempt is made to explain how collective adaptation can lead to more efficient risk management and pricing, ultimately helping policymakers, fund managers, and researchers navigate the complexities of modern financial markets and fortify socioeconomic systems against extreme stressors.

The effect of a golden parachute on managed earnings

PurposeThe purpose of this paper is to investigate the influence of executive compensation on the propensity to manage earnings. In particular, the authors examine an executive contractual clause known as a golden parachute (hereafter GP is interchangeably used). Usually, the triggering of a GP occurs for the following reasons: in a takeover, in termination of employment, and if the executive remains with the company through a recessionary cycle. Specifically, the authors ask the following questions: for firms that their CEO have a GP, do these firms manage earnings more? Does the age of the CEO matter for firms that have adopted a GP concerning the managing earnings?Design/methodology/approachThe sample is based on a review of the literature on GPs and managed earnings. the authors’ data come from COMPUSTAT, CRSP, EXECUCOMP and Risk Metrics, and consist of 1,184 US firms from 1992 to 2011. A GP is binary, whereas the authors represent managed earnings through accruals and real activity.FindingsThe authors find that the propensity to manage earnings varies on the type of methods strategically used. However, controlling for the effect of SOX reveals that GP firms are more likely to manage earnings. Younger CEOs are less likely to exacerbate earnings upward.Research limitations/implicationsThe authors are limited to small sample based on when the data were collected.Practical implicationsThe evidence shows that GP alleviates CEOs’ concerns on short-term profits. However, it entrenches CEOs. Particularly, CEOs with a GP are more likely to exacerbate earnings. Thus, there is a need for compensation committees to give considerable attention to how GPs are assigned.Originality/valueTo the authors’ knowledge, this is the first study that explores the effect of a GP on a firm’s propensity to manage earnings.

A Study on ‘Third Cost’ in Banks

Banking is the lifeline of the economy of the country. The health of the banking sector is closely integrated to the health of the economy. The economy is traditionally subjected to the boom and recessionary cycles at frequent intervals. During the period of boom in the economy, the business of banking becomes relatively safer, profitable and robust. Conversely, during the period of recession, the business of banking undergoes stress with soaring impaired assets and reduced profitability. The core business of banks is to accept the deposits for the purpose of lending. The deposits being the resources, carry a cost while the lending constitutes the assets of the banks and hence a source of income. Since the banks are commercial organizations, it is expected that their operations are profitable. Sustainability, Competitiveness, Liquidity and profitability are the general performance indicators of the banks. In this background, it becomes imperative for the banks to undertake a cost-benefit-analysis of their activities, people, processes, products, infrastructure etc., to help determine the areas which are profitable and the areas which are less profitable. Such an exercise will enable the banks to undertake eliminating the wasteful costs, discontinue the loss making business propositions and lay more focus on profitable products and services. Cost control in banks will be more of a strategic planning exercise, whereas, cost reduction will be both strategic and tactical. While introducing cost control strategies, banks would be taking steps to identify their major cost centers, identify major types of cost within each cost centre and choose the costs to focus on first. On expenditure side the highest cost is “Cost of Deposits” followed by Payment to and Provisions for Employees and the Third Cost which is Rent, Taxes & Lighting – RTL (Other than operating expenses relating to insurance business and other expenditure). As spreads of the banking business is decreasing on account of increase in cost of deposits and decrease in yield on advances / investments and increase in NPAs. Control of every cost is essential, other-wise the rating of the banks will decrease and it is difficult to attract or mobilization of additional capital through public issue. If banks adopt good strategies, there is a lot of scope to control overheads by better utilization of alternate delivery channels instead of branch banking channel. This article is focused on how to minimize the Third Cost i.e., Rent, Taxes and Lighting overheads in Banking Sector.

Honest Labor Bears a Lovely Face: Will Late-Life Unemployment Impact Health and Satisfaction in Retirement?

Unemployment among older adults during recessionary cycles has been tied to early retirement decisions and negative health outcomes. This study explored episodes of unemployment experienced between age 50 and retirement as predictors of retirement age and health outcomes. A total of 1540 participants from the U.S. Health and Retirement Study aged 50 years and older who transitioned from workforce to retirement were analyzed with descriptive statistics and multiple regression controlling for unemployment, demographics, and health status. Late-life unemployment significantly related to earlier retirement age and lowered life satisfaction, independent of income effects. We found no main effect for late-life unemployment on physical health status. Potential improvements in future life satisfaction might be gained if job search obstacles are removed for older unemployed adults, reducing reliance on involuntary early retirement as an income source.

The impact of innovation and technology on microfinance sustainable governance

Technical or social innovation, concerning also the creation and commercialization of new products, strategies and management, has a deep actual - and especially trendy - impact on microfinance institutions (MFIs), contributing to reshape their business model, with an impact on their overall risk profile. Innovation is mostly an opportunity even for MF risk mitigation, considering its pervasive impact on risk factors. This original analysis is addressing, in a multidisciplinary and innovative comprehensive way, apparently weakly related topics such as MF governance, and IT issues, within recessionary cycles. This hardly investigated frontier faces key trendy issues, which are likely to deeply reengineer the relationship among different stakeholders, as it has already happened, on a different and more sophisticated scale, with traditional banking. To the extent that technology (with access to Internet, social networks, cashless electronic payments, etc.) reshapes the equilibriums among different stakeholders, it is likely to have important – albeit under-investigated - corporate governance consequences, softening the conflicts of interest among stakeholders and reinforcing the business model, making it more resilient during recessions, with positive externalities on both sustainability and outreach.

Private Equity, Buy-Outs and Insolvency Risk

Private Equity restructuring of companies using debt finance has been criticised for increasing financial distress and bankruptcy in the corporate sector and this was especially so in the aftermath of the financial crisis. We build a unique data set comprising the population of over eight million company year observations and 153,000 instances of insolvency covering the period 1995-2010 and encompassing the recessionary cycle. We examine the whole spectrum of buyout ownership types (pre and post buyout) in comparison with the private and public corporate population and over time. We provide direct evidence relating to whether buyouts and buy-ins, private equity backed or not, are more or less likely to fail in terms of entering formal insolvency proceedings than other firms and how this varies over the economic cycle. Controlling for size, age, sector and macro-economic conditions (base hazard) we find that private-equity backed buyouts are no more prone to insolvency than the non-buyout population and pre-buyout credit risk. Conditioning on company performance and operational characteristics we show that PE-backed companies do not carry more insolvency risk than other (distressed) companies and other buyout types. We find that leverage does not distinguish buyouts that fail from those that survive.

Does recession reduce global health aid? Evidence from 15 high-income countries, 1975–2007

To test the hypothesis that economic recessions lead to reduced global development assistance for health (DAH). Data obtained from the Creditor Reporting System of the Organisation for Economic Co-operation and Development (OECD) for 15 OECD countries were used to model the percentage change (relative difference) in commitments and disbursements for DAH as a function of three measures of economic recession: recessionary year (as a dummy variable with 0 for no recession and 1 for recession), percentage change in per capita gross domestic product and percentage point change in unemployment rate for recessionary cycles from 1975 through 2007. We looked for an association both during the concurrent recessionary year and one and two years later. No statistically significant association was found in the short or long run between measures of economic recession and the amount of official DAH committed or disbursed. Any important decrease in overall DAH following the current economic recession would have little historical precedent and claims of inevitability would be unjustifiable.

Human Resources and the Adjustment Process

Lasting economic adjustment in Latin America will require comprehensive worker framing programs that respond to changing private sector needs. Human Resources and the Adjustment Process examines whether drops in output are associated with structural, adjustment, identifies the labour categories hardest hit, and analyses the efforts of national institutions to retrain the work force and cushion the impact of adjustment. Studies of Brazil, Chile, Colombia and Uruguay find that none has yet designed a retraining program that deals adequately with an the effects of adjustment. Better co-ordination is needed between restructured firms and the educational system, and countries must move beyond cyclical funding for training 'programs. Human resource development tends to surge during boom periods but wither during recessionary cycles. Institutional mechamsms are needed to consistently track demand for different types of labour and to ensure that training not only meets current demand but anticipates future labour needs as well.

Chemicals show a few second-quarter pluses

Chemical companies showed some signs of recovery in the second quarter of 1992. Mixed financial results industrywide suggest that not all companies have pulled out of the recessionary cycle. But specialty chemical producers showed stronger results. And pharmaceutical firms continued to post gains in both sales and earnings for the second quarter and first half of the year. For about 20 companies reporting by press time, sales and earnings on average were up for the quarter, compared with last year's second quarter. But companies with energy-related or commodity chemical sales—hit hardest by downturns in the economy—report sizeable drops in financial performance. However, comparisons to a year ago are complicated by the lingering impact of the Gulf War on the chemical economy at that time. The outlook for the rest of the year is at best cautiously optimistic, because recovery in the chemical industry generally lags that in the general economy by as much as six ...