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- Finite dimensional realizations of forward price term structure modelsPublication . Gaspar; Raquel M.In this paper we study a fairly general Wiener driven model for the term structure of forward prices. The model, under a fixed martingale measure, Q, consists of two infinite dimensional stochastic differential equations (SDEs). The first system is a standard HJM model for (forward) interest rates, driven by a multidimensional Wiener process W. The second system is an infinite SDE for the term structure of forward prices on some specified underlying asset driven by the same W. We are primarily interested in the forward prices. However, since for any fixed maturity T, the forward price process is a martingale under the T-forward neutral measure, the zero coupon bond volatilities will enter into the drift part of the SDE for these forward prices. The interest rate system is, thus, needed as input into the forward price system. Given this setup we use the Lie algebra methodology of Bjork et al. to investigate under what conditions on the volatility structure of the forward prices and/or interest rates, the inherently (doubly) infinite dimensional SDE for forward prices can be realized by a finite dimensional Markovian state space model.
- Correlation between intensity and recovery in credit risk modelsPublication . Gaspar, Raquel M.; Slinko, IrinaWe start by presenting a reduced-form multiple default type of model and derive abstract results on the influence of a state variable X on credit spreads, when both the intensity and the loss quota distribution are driven by X. The aim is to apply the results to a concrete real life situation, namely, to the influence of macroeconomic risks on credit spreads term structures. There has been increasing support in the empirical literature that both the probability of default (PD) and the loss given default (LGD) are correlated and driven by macroeconomic variables. Paradoxically, there has been very little effort from the theoretical literature to develop credit risk models that would include this possibility. A possible justification has to do with the increase in complexity this leads to, even for the “treatable” default intensity models. The goal of this paper is to develop the theoretical framework needed to handle this situation and, through numerical simulation, understand the impact on credit risk term structures of the macroeconomic risks. In the proposed model the state of the economy is modeled trough the dynamics of a market index, that enters directly on the functional form of both the intensity of default λ and the distribution of the loss quota q given default. Given this setup, we are able to make periods of economic depression, periods of higher default intensity as well as periods where low recovery is more likely, producing a business cycle effect. Furthermore, we allow for the possibility of an index volatility that depends negatively on the index level and show that, when we include this realistic feature, the impacts on the credit spread term structure are emphasized..
- The influence of factors characterizing the performance of ports, measured by operational, financial and efficiency indicatorsPublication . Caldeirinha, Vitor; Felício, J. AugustoThe purpose of this study is to analyze the performance of a port through its characterizing factors and understand their importance. Both Data Envelopment Analysis (DEA) and statistics of factor analysis were used, as well as linear regression. Based on a sample of 43 European ports, the results of this study indicate the existence of a relationship between performance and several variables that characterize the port. Additionally, they also confirm the impact of location, governance, size, infrastructure, specialization, logistic integration and maritime services in the ports operational and financial performance and efficiency.
- Are latin cultures more prone to crisis?Publication . Gomes, Jorge F.S.; Coelho, Joaquim P.Em 2008 o mundo embarcou numa das suas crises econômicas e financeiras mais graves. A crise levou a que muitos países procurassem ajuda das instituições financeiras internacionais. Exemplos destes países incluem a Islândia, Irlanda, Grécia, Portugal, e Chipre. Em 2012, os problemas internos ameaçavam igualmente de bancarrota a Eslovénia, a Espanha e a Itália. Têm sido propostas várias explicações para a crise de 2008 e sua globalização, que variam desde os motivos políticos e econômicos, aos sociológicos. Neste trabalho argumentamos que os traços culturais de um país podem ter influência sobre a crise, pois podem estimulá-la, enfraquecê-la, ou atrasar a recuperação. Assim, algumas caraterísticas culturais podem revelar-se contrárias ao paradigma econômico vigente, que a prazo tem um efeito negativo sobre a performance financeira do país. Mas num outro paradigma, as mesmas características podem incentivar o desenvolvimento econômico. O texto busca estimular o pensamento sobre a necessidade de ter uma perspectiva contextual, ou seja, uma visão que considere o alinhamento entre o arquétipo econômico dominante e os atributos culturais vigente numa nação.
- Optimal timing of relocationPublication . Pereira, José Azevedo; Couto, Gualter; Nunes, CláudiaIn this paper we tackle the problem of the optimal relocation policy for a firm that faces two types of uncertainty: one about the moments in which new (and more efficient) sites will become available; and the other regarding the degree of efficiency improvement inherent to each one of these new, yet to be known, potential location places. In particular, we derive results concerning the expected optimal timing for relocation, the corresponding volatility and the value of the firm under the optimal relocation policy. Impacts on the final results driven by the characteristics of the firm´s original location site, the market environment and the way in which risk is modeled, are studied numerically. The overall results are in line with economic intuition
- Active agents, passive principals: does high-powered CEO compensation really improve incentives?Publication . Dow, James; Raposo, ClaraIn this paper we use agency theory to study the active role of the CEO in the formulation of corporate strategy. We allow the agent (CEO) to play a role in defining the parameters of the agency problem, in an incomplete contracting model in which the agent can be rewarded based only on financial performance. Contracts can be renegotiated depending on the proposed strategy. We argue that CEOs will have an incentive to propose difficult, ambitious strategies for change. The principal (the shareholders) can mitigate this by pre-committing to pay high compensation regardless of the manager’s chosen strategy, and will prefer to do so in times of change. In a less changeable environment, they will prefer to wait and see what strategy is chosen before setting compensation. In some circumstances, they will also prefer, if possible, to pre-commit never to pay high compensation.
- How is the relationship significance brought about? A critical realist approachPublication . Sousa, Filipe J.; Castro, Luis M. deThe markets-as-networks theorists contend, at least tacitly, the significance of business relationships for the focal firm – that is, business relationships contribute somewhat to the focal firm’s survival and growth. We do not deny the existence of significant business relationships but sustain, in contrast to the consensus within the Markets-as-Networks Theory, that relationship significance should not be a self-evident assumption. Significance cannot be a taken-for-granted property of each and every one of the focal firm’s business relationships. We adopt explicitly a critical realist position in this conceptual paper and claim that the relationship significance is an event of the business world, whose causes remain yet largely unidentified. Where the powers and liabilities of business relationships (i.e., their functions and dysfunctions) are put to work, inevitably under certain contingencies (namely the surrounding networks and markets), effects result for the focal firm (often benefits in excess of sacrifices, i.e., relationship value) and as a result the relationship significance is likely to be brought about. In addition, the relationship significance can result from the dual influence that business relationships have on a great part of the structure and powers and liabilities of the focal firm, i.e., its nature and scope respectively
- The China shock and employment in portuguese firmsPublication . Venâncio, Ana; Branstetter, Lee G.; Kovak, Brian K.; Mauro, JacquelineThis paper considers the effects of Chinese import competition on firm-level labor market outcomes in Portugal. We examine direct competition in the Portuguese market and indirect competition Portugal's largest export markets in Western Europe. Using rich employer-employee data matched to firm-level trade transactions, we measure the degree to which different Portuguese firms faced Chinese import competition, based on firm product mix and distribution of sales across countries. We find economically and statistically significant employment declines in firms with more exposure to Chinese competition in European export markets, but minimal effects of direct competition in Portugal. Our findings also suggest a centrally important role for Portugal's stringent labor market regulations in limiting firms' ability to adjust to competitive shocks. In our earlier sample period (1995-2000), firms have limited ability to adjust employment, hours, or wages, and the primary adjustment margin is firm exit. In the later period (2000-2007), when more flexible temporary contracts comprise a larger share of employment, we find employment reductions among more exposed firms. Those employment reductions are entirely accounted for by changes in temporary employment, with no effect on permanent employment. We expect these findings to be informative for other peripheral European countries that had specialized in labor-intensive manufacturing industries operating under inflexible labor market regimes.
- Do entry regulations deter entrepreneurship and job creation? : Evidence from recent reforms in PortugalPublication . Venâncio, Ana; Branstetter, Lee G.; Lima, Francisco; Taylor, Lowell J.Recent research has suggested that the reduction of entry regulation can promote firm entry and job creation, but little is known about the quality of firms and jobs created through these reforms. To shed light on this question, we employ data from Portugal, a country which implemented one of the most dramatic and thorough policies of entry deregulation in the industrialized world. The impact of these major changes can be traced with a matched employer-employee database that provides unusually rich information on the quality of founders and employees associated with the new firms. Our assessment indicates that the short term consequences of the reform were just as one would predict with a standard economic model of entrepreneurship: The reform resulted in increased firm formation and employment, but mostly among "marginal firms" that would have been most readily deterred by existing heavy entry regulations. These marginal firms were typically small, owned by relatively poorly-educated entrepreneurs, operating in the low-tech sector (agriculture, construction, and retail trade). These firms were also less likely to survive their first two years than comparable firms that entered prior to the reform. The social impact of entry deregulation may be limited by the quality of the firms it creates
- General quadratic term structures of bond, futures and forward pricesPublication . Gaspar, Raquel M.For finite dimensional factor models, the paper studies general quadratic term structures. These term structures include as special cases the affine term structures and the Gaussian quadratic term structures, previously studied in the literature. We show, however, that there are other, non-Gaussian, quadratic term structures and derive sufficient conditions for the existence of these general quadratic term structures for bond, futures and forward prices. As forward prices are martingales under the T-forward measure, their term structure equation depends on properties of bond prices’ term structure. We exploit the connection with the bond prices term structure and show that even in quadratic short rate settings we can have affine term structures for forward prices. Finally, we show how the study of futures prices is naturally embedded in a study of forward prices and show that the difference between the two prices have to do with the correlation between bond prices and the price process of the underlying to the forward contract and this difference may be deterministic in some (non-trivial) stochastic interest rate settings..