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Technical
Papers
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This is
where the more technical special interest articles are kept.
Please feel free to download and view at your leisure.
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An econometric theory of performance bureaucracy
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Performance bureaucracies are organizational structures that arise in response to internally or externally derived metrics for mission or goal attainment, often associated with public sector accountability. Measurement and certification are key drivers of the internal political process. This becomes counterproductive when goal setting is exposed to hidden or latent variables reflecting incomplete information or coalface disaffection, so that managerial controls are metrically insufficient. An econometric framework is developed that draws on the semiotics in common use by performance oriented management regimes. Nash cooperative budget solutions among managers lead to overinvestment in measurement and control, the problem of the commons, and adverse performance outcomes. |
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Directional entropy and tail uncertainty, with applications to financial hazard
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Financial risk management metrics such as value at risk (VaR) can be illuminated by means of a regime-specific concept of directional entropy. This enables a change of measure via a rescaling function to an equivalent logistic distribution, one that has the same total and directional entropies at the chosen critical point. VaR rescaling adjusts the critical probability to capture the long tail entropy, and the scaling function can be used as a comparative metric for tail length. Directional entropy can be used to identify regions of maximal exposure to new information, which can actually increase entropy rather than collapse it. |
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Multi-scale variation, path risk and long term portfolio management
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Strategic fund management and similar investment styles may be exposed over time to multi-scale variation that can create inconsistencies between portfolio methodology and welfare objectives. This paper utilises a more embracing temporal frame of reference that can reconcile macro-scale variation in investment value with the shorter run, according to welfare preferences as to path risk versus terminal value. Path exposures give rise to path risk, and this is operationally defined in terms of a spectral welfare function, encompassing Fourier and wavelet analysis within a common framework. The approach leads to dynamic analogues of mean-variance such as band pass portfolios that are more sensitive to variability at designated scales. |
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Lifecycle derivatives, defined benefits and retirement income assurance
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As the cost of funding babyboomer retirement under defined benefit schemes has become apparent, the resulting paradigm shift to defined contribution - but undefined rewards - has left pensioners exposed to performance, credit, and longevity risk, as life tables lengthen. Defined benefit schemes can be designed off the back of high grade debt issuance programmes by public long term asset vehicles, as an infrastructure-retirement double play. Derivatives can be used to enhance coupons and to correctly align risk preferences as between income while still alive and bequests. Variable lifetime reinvested coupon options and annuity swaps utilise market pricing to provide unambiguous pricing benchmarks and a necessary underpinning of lifecycle planning certainty. The result is a flexible mix of private and public provision of old age income assurance, which exploits the externalities of a well-designed system of public debt. |
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Bifurcations and bubbly outcomes: The local instability of financial markets
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Concerns about ‘short termism’ associated with hedge funds, and other manifestations of diminishing risk aversion, have revived interest in speculative bubbles and related episodes of financial instability. Earlier models of rational bubbles fell short in explaining why bubbles appear and collapse; nor can their dynamics generate local dependences in volatility or the mean of returns. It is shown that social reflexivity of investor opinions in response to information flows is capable of creating equilibrium bifurcations in the mapping from signals to states, and hence bubbly outcomes. Even serially uncorrelated information results in episodic locally-trapped states, that exhibit serially dependent returns and path dependence. Structural modelling of social influence connects local stickiness propensities to parameters and states of investor unanimity and risk aversion. As to hedge funds, it is suggested that the real risk lies in convergent behaviour. |
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