http://www.dspace.cam.ac.uk:80/handle/1810/221791 Fri, 24 May 2013 04:06:04 GMT 2013-05-24T04:06:04Z http://www.dspace.cam.ac.uk:80/handle/1810/244390 Title: Theoretical and empirical evidence of the influence of economic linkages on stock returns Authors: Meyricke, Ramona Abstract: Inter-linkages between suppliers and customers are a channel by which shocks can spread between firms. When firms buy and sell intermediate goods from one another, they may rely on each other for the supply of input goods or for cash-flow from sales. This is a problem because financially distressed suppliers can pose significant risk to the economic activity of customers that rely on them for goods and services. A case in point is the heavy loss suffered by General Motors when its equipment and parts supplier Delphi went on strike in 1998. Vice-versa, distressed customers can negatively impact suppliers' business operations. Real economic activities are highly related to major stock pricing factors. The main hypothesis of this thesis is that shocks to a firm's direct and indirect suppliers and customers influence its stock price. There is a large amount of research addressing how shocks spread between international financial markets and asset classes influence stock prices during financial crises (financial contagion). Past research has identified the macroeconomic conditions and the types of linkages between markets and assets that make a country or market vulnerable to financial contagion. Little is known, however, about how shocks spread via economic linkages influence firm-level stock returns. Studies find that significant movements in a firm's stock price forecast subsequent movements in the stock price of its major suppliers. Several questions remain open, however, regarding how shocks spread via economic linkages influence stock returns, such as: how shocks spread via economic linkages influence return volatility and correlation; what characteristics of economic linkages (e.g. the degree or the concentration of linkage) are most important in the process of contagion; and whether the spread of shocks via economic linkages increases during recessions. The main objective of this thesis is to increase knowledge of how economic linkages between firms influence stock returns. My approach is to examine how a firm's economic linkages influence three dimensions of its stock returns: volatility, pairwise correlation between linked firms' returns and the cross-sectional distribution of average returns. The research questions addressed are: 1. How does the structure of a firm's economic linkages influence the volatility of its stock returns? 2. How do shocks transmitted via economic linkages increase correlation between linked firms' returns? 3. How do shocks transmitted via economic linkages affect average returns, cross-sectionally and over time? For each dimension of stock returns (volatility, pairwise correlation and average returns) I examine what characteristics of economic linkages are most influential, and whether the influence of economic linkages increases in recessions. I develop a theoretical model explaining how the spread of cash-flow shocks via economic linkages between firms influences the volatility, pairwise correlation and average level of stock returns. The reduced form of the theoretical model corresponds to a factor model of stock returns (based on Arbitrage Pricing Theory), with an additional factor added to allow for non-diversifiable risk created by economic linkages. This model describes the relationship between economic linkages and return volatility, pairwise correlation and average returns. To answer the first research question, I apply the Lindeberg-Feller theorem to derive an explicit relationship between a firm's stock return volatility and the structure of its linkages to other firms. I prove that when the distribution a firm's economic linkages is heavy-tailed (such that it has an extremely high degree of economic linkage to a few firms and a far lower degree of economic linkage to all others), shocks to the firm's key suppliers and/or customers can significantly influence its return volatility. Intuitively, shocks to the most connected suppliers and/or customers are not offset by shocks to less connected suppliers and/or customers, so they can significantly influence a firm's cash-flow and therefore stock returns. Monte Carlo simulations con firm that shocks transmitted via economic linkages are diversified away at rate much slower than the 1/(√N) rate implied by the law of large numbers in many common supply chain structures. In these 'concentrated' supply chain structures, shocks transmitted via economic linkages can create portfolio return volatility in excess of that explained by systematic risk factors, even in large portfolios. To answer the second and third research questions, I use monthly stock return data and annual accounting data on the major customers of all listed US firms between 1990 and 2010 from the CRSP/Compustat database. To investigate how shocks transmitted via economic linkages influence correlation between linked firms' returns, I test the hypothesis that an increase in the degree of linkage between two firms increases the pairwise correlation between their stock returns. First, I adapt correlation-based tests of contagion to test whether pairwise return correlation is higher when two firms are linked than when they are not linked. Second, I develop measures of the strength of pairwise linkage between firms (using principles from network theory and economic input-output modeling). I then estimate regressions of firm-pairs' return correlation against the strength of their linkage and a number of controls (such as industry-pair fixed-effects and credit usage along the supply chain). The regression results show that an increase in the economic linkage between two firms is associated with increased correlation between their stock returns. Linked firms' returns are more correlated when credit is involved in the supplier-customer relationship and in recessions, implying that it is harder to replace a supplier or customer in these situations. Finally, I test whether shocks spread via economic linkages influence average stock returns over and above other factors that have been shown to influence stock returns. My method is to develop measures of the degree and concentration of a firm's supplier and customer linkages. I include these measures in a factor model of stock returns alongside a number of other factors that have been shown to explain stock returns. Cross-sectional regressions show that, in a given time-period, firms with more concentrated supplier bases have higher average returns than firms with less concentrated supplier bases. Second, time-series regressions showed that an increase in the concentration of a firm's supplier-base lowered realized returns in the following period. These results suggest that investors demand a positive risk premium (higher expected return) for holding the stock of firms whose supplier-base is concentrated. This places downward pressure on prices following an increase in supplier-base concentration. While concentration of a firm's supplier and customer linkages has a significant influence on stock returns, the magnitude of this effect is small compared to the influence of systematic risk factors. The influence of economic linkages on stock returns, however, increases in recessions. Together the results in this thesis provide solid evidence that shocks spread via economic linkages can affect the volatility, correlation and average level of stock returns. The thesis establishes a robust framework for modeling the returns of portfolios in which the underlying securities or firms are linked via economic relationships. This is an important extension to existing models that ignore the potential impact of shocks spread via linkages between firms on stock prices. The model can be used for pricing securities with concentrated supply chain exposures or to identify stock portfolios that are susceptible to contagion. Tue, 05 Feb 2013 00:00:00 GMT http://www.dspace.cam.ac.uk:80/handle/1810/244390 2013-02-05T00:00:00Z http://www.dspace.cam.ac.uk:80/handle/1810/242439 Title: Modelling the economic and social consequences of drought under future projections of climate change Authors: Jenkins, Katie L. Abstract: Drought events and their consequences pose a considerable problem for governments, businesses and individuals. Superimposed on this risk is the danger of future anthropogenic climate change. Climate models are increasingly being used to understand how climate change may affect future drought regimes. However, methodologies to quantify the type and scale of social and economic effects that could occur under these future scenarios are virtually non-existent. Consequently, this study developed a methodology for projecting and quantifying future drought risk in terms of economic damages and numbers of lives lost and affected. In this study, historic drought events were identified in regional precipitation data using the Standardised Precipitation Index, and their magnitude quantified. Drought magnitude was linked to reported historic data on economic damages and the numbers of lives affected and lost, to create country specific economic and social drought damage functions for Australia, Brazil, China, Ethiopia, India, Spain/Portugal and the USA. Future projections of drought magnitude for 2003-2050 were modelled using the integrated assessment model CIAS (Community Integrated Assessment System), for a range of climate and emission scenarios, and applied to the drought damage functions to estimate future economic and social drought effects. Additionally, a preliminary investigation of indirect economic drought damages was conducted using the Adaptive Regional Input-Output model (ARIO). The analysis identified large variability in the scale and trend of economic and social effects from future drought. Economic benefits projected to occur in some countries were outweighed by negative effects elsewhere, with annual losses to global GDP from drought increasing in the first half of the 21st century. The analysis suggested that severe and extreme SPI-6 and SPI-12 drought events could cause additional losses to global GDP of 0.01% to 0.25% annually. Whilst this effect on global GDP may appear small, this is considered a conservative estimate namely as the analysis is representative of six countries only; the estimates do not incorporate the possibility of successive drought events, or compounding effects on vulnerability from interactions with other extreme events such as floods. Additionally, the global economic estimates exclude indirect economic effects, and social and environmental losses; the possibility of increasing vulnerability due to changing socio-economic conditions; and the possibility of irreversible or systemic collapse of economies as, under future climate change, drought magnitude may exceed current experience and surpass thresholds of social and economic resilience. Yet importantly, even just considering direct economic effects of individual drought events on a handful of countries still resulted in a noticeable effect on global GDP. Stringent mitigation had little effect on the increasing economic and social effects of drought in the first half of the 21st century, so in the short-term adaptation in drought ‘hot spots’ is crucial. However, stringent mitigation will be required to reduce increasingly severe drought events that are projected for the second half of the 21st century. A case study of Spain suggested that indirect economic losses increased non-linearly as a function of direct losses, amplifying total economic damages of drought. Importantly the non-linearity seen between direct and indirect economic costs suggests that the benefits of stringent mitigation policies, in terms of avoided indirect losses, may be more substantial than for direct losses in the second half of the 21st century. The main impact of the research is its contribution to the assessment of economic and social damages from drought events through the creation and application of drought damage functions. The drought damage functions could be incorporated into wider economic assessments of climate change or integrated assessment models that currently exclude extreme weather events. The inclusion of drought related economic and social damages could help to guide appropriate levels of climate change mitigation, help to gauge the vulnerability of communities to future drought events, guide drought risk management, and inform drought adaptation strategies. The application of I-O analysis to estimate indirect economic losses from drought is a relatively new and developing area of research. The research highlights how I-O analysis could be used to provide estimates of economic drought damages under future climate change, which are more comprehensive, and useful for assessing benefits of future mitigation and adaptation strategies. Consequently, there are many gains to be seen from the continued development and application of this research methodology for drought. Tue, 10 Jan 2012 00:00:00 GMT http://www.dspace.cam.ac.uk:80/handle/1810/242439 2012-01-10T00:00:00Z http://www.dspace.cam.ac.uk:80/handle/1810/242424 Title: An analysis of judgemental bias in housing choice Authors: Scott, Peter J. Abstract: Buying a home is among the most important choices that any individual is likely to make in their lifetime. It has lasting consequences for happiness, well-being and personal finances. Yet, given the infrequency with which such decisions are made; the difficulty getting information from an opaque and decentralised marketplace; and the high transactions costs involved, there is a significant risk that decision making may depart from the high standard imposed by the normative economic concept of 'rational choice'. This thesis uses the insights of the economic theory of choice - from behavioural economics in particular - to examine housing choice from a new perspective. It considers the potential for estate agents, knowingly or otherwise, to exploit behavioural biases in decision making to influence preference and, ultimately, choices over housing. This naturally is of interest to estate agents and policy makers involved in housing markets; but most importantly to individuals as decision makers: making better decisions relies on understanding when and where vulnerability to manipulation may lie. Using evidence from a series of classroom experiments with 280 student volunteers and from two online surveys with over 4,000 adult respondents, significant areas where individuals may be consistently vulnerable to manipulation of judgement are found and recorded. In particular, both student and adult respondents are susceptible to biases involving manipulation of the decision making context, known as the choice frame. Students also tend to rely on arbitrary `anchor' points to make value estimates, which results in significantly impaired judgements, even in the presence of incentives for accuracy. Finally, evidence of a significant new form of behavioural bias is found, in which elements of the choice frame have an unexpectedly negative impact on perceptions. This new bias is persistent across several experimental scenarios and is labelled the 'choice pollution effect'. Tue, 08 Nov 2011 00:00:00 GMT http://www.dspace.cam.ac.uk:80/handle/1810/242424 2011-11-08T00:00:00Z http://www.dspace.cam.ac.uk:80/handle/1810/241037 Title: Voluntary environmental programmes in the developing world: an examination of the ISO 14001 environmental management system certification in Thailand Authors: Tambunlertchai, Kanittha Abstract: This dissertation studies one of the newest tools in environmental policy in the developing world context – that of voluntary environmental programmes (VEPs). Developed and promoted in the past few decades by policy practitioners looking to regulate environmental pollution without saddling enterprises and governments with high regulatory costs, VEPs remain vastly under-studied, especially when compared with market instruments and the long-standing command and control approach. Fundamental questions such as who the likely participants are, why firms would voluntarily take on added costs of environmental improvement, and whether any financial and environmental benefits arise from participation remain largely unanswered. This gap in the literature is particularly severe for the case of developing countries. While VEPs in general and ISO 14001 in particular have rapidly increased across the developing world, the understanding of their implications in the academic literature trail far behind. This dissertation aims to fill some of this gap in the existing literature by using unique firm level data and applying rigorous empirical micro-econometric methods to analyse the adoption of the ISO 14001 international voluntary scheme in Thailand. The study focuses on three core manufacturing industries – food and beverages, textiles and wearing apparel, and electronics and electrical appliances, chosen to represent three main types of manufacturing activities in the country. The study finds that both macroeconomic and industry-specific factors influence firms’ participation in the ISO 14001 scheme. It also finds that the degrees of environmental impact from programme adoption vary by industry, and that although participation in the programme requires non-trivial commitments of the firm’s resources, participating firms are not placed at a financial disadvantage when compared with non-adopting firms. Tue, 08 Nov 2011 00:00:00 GMT http://www.dspace.cam.ac.uk:80/handle/1810/241037 2011-11-08T00:00:00Z http://www.dspace.cam.ac.uk:80/handle/1810/236997 Title: Institutional change in the forest sector : the Russian experience Authors: Ulybina, Olga Abstract: This dissertation explores patterns of institutional change in the Russian forest sector and examines the process of nascency and development of both formal and informal institutions. It argues that development of the Russian forest sector has been pathdependent and significantly influenced by informal institutions, which the recent reform carried out by the state also failed to transform. Using the case study of the forest sector, the dissertation (1) identifies major drivers of post-Soviet institutional change, and (2) compares different patterns of agency particularly state forest reform and non-state ‘private modernisation’ projects). The thesis explores opportunities for institutional path-creation in the Russian forest sector and concludes that the major drivers of change in today’s Russian forest sector are: i) local ecological agency, and ii) the changing global (political, economic, ideological) environment. It is argued that roots of the problems of the recent forest reform lie in the lack of agency within (mostly federal) state structures and local communities. The dissertation argues that although non-state forms of governance (such as certification and model forests) have proved to be more powerful and effective than state initiatives in overcoming ‘path-dependent’ institutional embeddedness, their ultimate results are severely limited by and highly dependent on evolution of state agencies and more generally on the nature of relationships between state authorities and society. At the conceptual level, the research adopts the institutional (NIE) framework and combines it with classical sociological literature (on the problem of structure vs agency), as well as with a historical perspective (path-dependence vs path-creation). Moreover, it emphasizes the importance of ecological dimension of analysis for understanding societal change. As for its policy relevance, the research challenges the recently popular and overly optimistic view on the role of civil society and non-state governance in institutional modernisation. It encourages policy makers to study national history and to build upon existing initiatives taking into account the path-dependent environment and informal institutional embeddedness of implemented projects. Mon, 01 Mar 2010 00:00:00 GMT http://www.dspace.cam.ac.uk:80/handle/1810/236997 2010-03-01T00:00:00Z http://www.dspace.cam.ac.uk:80/handle/1810/229766 Title: Land reform, regional planning and socioeconomic development in Brazil Authors: Souza, Saulo Abstract: In this dissertation, we examine the socioeconomic impact of land reform schemes and discuss the policy implications of combining aspects of both state-led and market-based approaches to land reallocation through regional planning. We focus on land reform settlements in Northeast Brazil, where both approaches operated over the same time frame (1997-2002). Empirically, we identify the effects of various indicators on the socioeconomic growth of a sample of rural territories and localities, giving emphasis to the influence of the market-based Land Bill Programme (PCT) and the traditional state-led scheme (INCRA) on that growth through panel data analysis, cross-section regressions and field-based analysis. It has been concluded that: i) The scope for plan-led strategies towards sustainable development in the countryside has been given less than sufficient emphasis in the land reform literature; ii) There is not clear evidence that the market-based approach leads to higher socioeconomic growth regionally than does the state-led approach, or vice versa; iii) Although the market-based scheme contributed to improved access to title, the PCT settlements failed to impact positively settlers’ welfare in the majority of sites; iv) Securing both higher access to land rights and better living conditions through land reform requires an approach that combines both state-led and market-based elements; v) Securing measurable positive impacts on the regional economy requires a land reform strategy that has a regional scope. As a policy implication, the work suggests the adoption of a plan-led land reform strategy that is coordinated at all government levels and between the public and private sectors, and one that involves establishing strategic portfolios of potentially sustainable areas, defining spending priorities for those areas along with funding possibilities through regional planning. Differently from the commonsense literature on land reform in developing countries, this work demonstrates that regional planning has an essential part to play in land reform through proposing a plan-led strategy that combines elements of both market-based and state-led approaches to the benefit of the regional economy. Tue, 11 Jan 2011 00:00:00 GMT http://www.dspace.cam.ac.uk:80/handle/1810/229766 2011-01-11T00:00:00Z http://www.dspace.cam.ac.uk:80/handle/1810/224484 Title: International monetary flows of non-declared origin Authors: Madsen, Frank G Abstract: Through an analysis of the presence and nature of international monetary flows of non-declared origin and their relation to deviant knowledge, the thesis determines that both terrorism and organised crime are nurtured by a constant trickle from minor sources rather than by large financial transfers; and that anti-money laundering provisions are misapplied, taken too far, too expensive, and incapable of demonstrating their effectiveness. In lieu of more traditional policy recommendations, the thesis develops a complexity-theory based intelligence function, capillary intelligence, to improve the present information-gathering systems and generate consistent and context-relevant intelligence for the consideration of policy-makers. The intelligence function takes into account also the concept of self-organised criticality. The thesis fully adheres to the principle that efficiently applied intelligence-led approaches for detection of organised crime are demonstrably superior to a “follow the money” approach. An extended concept of deviant knowledge is developed and five methodological techniques employed: Complexity theory, network theory, self-organised criticality, scaling theory, and intelligence treatment. The thesis is multidisciplinary and calls on contributions from International Law, Economics, Criminal Justice Studies, and Governance and Ethics. Its approach is illustrative and fits Baudrillard’s 1981 methodological principles known as bricolage. Using five methodologies and six major case studies, the thesis reaches four conclusions. First, the rapid expansion in the currency component of the US money supply (M1) has no domestic explanation and can best be explained by an increase in overseas illegal traffics of various sorts. Second, terrorism and major organised crime are, for a large part, nurtured by a constant trickle of funds originating from minor crime, such as, respectively, smuggling of tobacco product and retail fencing, and sale of counterfeit luxury goods. Third, calculation of the cost of the application of anti-money laundering shows these to be cost-inefficient, apart from being highly intrusive. The thesis’ calculations as well as prior literature makes it certain that such provisions, although inefficient, are enforced in a forceful exemplification of the deviant knowledge concept. Fourth, the thesis demonstrates the importance of organised crime in resource depletion and emphasises the nefarious consequences of such criminal behaviour, in particular as regards deforestation, since organised crime can apply the necessary pressure on the local population—in conjunction with extensive corruption of police or military personnel—and provide the managerial expertise to have the trees felled, transported internationally by ship and sold in another country often with false documentation as to the origins of the forest product. In a final case study, the tragic concept of resource curse is considered, in casu the island of Bougainville, PNG. Tue, 17 Nov 2009 00:00:00 GMT http://www.dspace.cam.ac.uk:80/handle/1810/224484 2009-11-17T00:00:00Z