Our faculty are involved in a wide range of research projects.
Here is just a sample of some of issues being addressed through recent studies within the theme of accounting and finance.
- Quantile Uncertainty and Value-at-Risk Model Risk
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The finance industry’s reliance on Value-at-Risk (VaR) has been supported by decades of academic research. Especially during the last 10 years there has been an explosion of articles published on this subject. The stark failure of many banks to set aside sufficient capital reserves during the banking crisis of 2008 sparked an intense debate on using VaR models for the purpose of computing the market risk capital requirements of banks.
Critics of VaR have warned about its application in risk assessment; the uncertainty surrounding these estimates has long been recognized. Nevertheless VaR remains the global standard for assessing risk in all types of financial firms.
The study
Professor Carol Alexander & J.M. Sarabia’s paper develops a methodology for quantifying model risk in quantile risk estimates and provides a novel and elegant framework whereby quantile estimates are adjusted for model risk, relative to a benchmark which represents the state of knowledge of the authority that is responsible for model risk. A simulation experiment in which the degree of model risk is controlled illustrates how to quantify Value-at-Risk model risk and compute the required regulatory capital add-on for banks.Methodology
An empirical example based on real data shows how the methodology can be put into practice, using only two time series (daily Value-at-Risk and daily profit and loss) from a large bank. The methodology has the potential to be applied to nonfinancial risks, including environmental risk assessment and statistical process control too.The framework was validated and illustrated by a numerical example that considers three common VaR models in a simulation experiment where the degree of model risk has been controlled. A further empirical example describes how the model-risk adjustment could be implemented in practice given only two time series.
Findings
The paper develops a statistical methodology that provides a practical solution to the problem of quantifying the regulatory capital that should be set aside to cover the risk of producing inaccurate VaR estimates.There is potential for extending the methodology to the quantile-based metrics that are commonly used to assess nonfinancial risks in hydrology, climate change, statistical process control and reliability analysis.
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Alexander, Carol and Sarabia, José María (2012) Quantile uncertainty and value-at-risk model risk. Risk Analysis: An International Journal, 32 (8). pp. 1293-1308. ISSN 1539-6924 - Management Models and Priorities in Member Associations: Is Credit Unions’ Community Involvement Crowded-Out
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Credit unions are membership-based cooperative financial services organizations run by and for their members. Traditionally, in the ‘old’ management model the emphasis is on fostering community development through philanthropy and volunteering. However, they have been encouraged to adopt a 'new' management model, which encourages for-profit financial management practices. Does the emphasis in the new management model on the adoption of for-profit financial management practices diminish the community involvement of credit unions?
The study
With colleagues from the Universities of Ulster and Bath, Professor John Forker has conducted the first comparative evaluation of the impact of the choice of management model by credit unions on their financial management and community involvement. The study investigates the differential effect of the‘new’ compared to the ‘old’ management model on financial management and community contribution.Methodology
The study focuses on the credit union sector in Northern Ireland, using data extracted from 2,275 annual returns of 188 credit unions over the period from 1996 to 2008.Findings
Whilst the study focuses on a country with a uniquely restrictive regulatory environment, the key findings of the study indicate that:- Increased emphasis on growth and financial efficiency in the credit union sector from the adoption of the ‘new’ model does not diminish the industry’s role in community involvement (crowding-out effect is absent)
- The emphasis on for-profit financial management and community involvement can be complementary
The research suggests that the pursuit of improved financial performance can benefit credit union management, without affecting their commitment toward community involvement and development. In fact, organisations may find that improved financial performance helps them improve their services to their members.
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Forker, John, Grosvold, Johanne and Ward, Anne Marie (2014) Management models and priorities in member associations: is credit unions' community involvement crowded-out? Nonprofit and Voluntary Sector Quarterly, 43 (25). 105S-123S. ISSN 0899-7640Financial support for this research was obtained by the Principle Investigator, Professor Anne Marie Ward, from the Irish Accounting Education Trust (Chartered Accountants Ireland).
- Advancing the universality of quadrature methods to any underlying process for option pricing
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Numerical techniques are often employed in derivatives pricing due to the lack of analytic solutions or accurate analytic approximations. One of the available numerical techniques is quadrature in the form of the QUAD technique. Basic quadrature was known and used in the natural sciences and in engineering long before its introduction into finance.
The study
QUAD is a flexible and robust pricing method across option models and option types. It is usually overwhelmingly fast which makes it preferable over computation with other, slower methods, which are also more expensive. Research by Dr Ding Chen attempts to show how to widen the application of QUAD as a method for option pricing.Methodolody
Work was carried out on a university high performance computing service, using one node of eight cores at 3.0 GHz. Parallel codes were compiled using an Intel C++ compiler and OpenMPI. The researchers sought high intrinsic speed and fast convergence for test cases, such that more complex cases requiring intensive calculations are completed in reasonable time periods.Findings
The study found that using closed-form approximations we can price complex combinations of option features. The distinguishing quality of QUAD has been its exceptional speed combined with flexibility in handling any option feature or combinations of features.Many option pricing models and option types cannot be priced analytically, numerical methods are therefore employed to solve these problems. QUAD is a fast and robust pricing method across option models and option types, and requires less computational cost than other conventional methods. It provides practitioner a viable tool in valuing option related products with moderate computing equipment.
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Chen, Ding, Härkönen, Hannu J and Newton, David P (2014) Advancing the universality of quadrature methods to any underlying process for option pricing. Journal of Financial Economics. ISSN 0304-405X - Cross-border acquisitions of state-owned enterprises
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All cross border deals present their own set of challenges to bidders as they encounter new business practices, cultures and laws. There are considerable differences in the sophistication of capital markets around the world that are linked to the extent to which a government can be viewed as ‘business-friendly’ on a number of dimensions. Firm valuations are likely to be more market based where it is easier to do business.
In countries characterized by strong government control, foreign corporations often join forces with state-owned enterprises (SOEs) in order to penetrate the local market and/or to obtain preferential treatment. What factors affect the decisions of private sector enterprises from developed counties to acquire state-owned enterprises abroad?
The study
Research by Dr Surendranath Jory considers the wealth effects of firms acquiring SOEs overseas and the factors influencing their choice of targets. The study examines how the location of the SOE will affect the stock price and the operating performance, and what conditions require acquisition of a SOE rather than a non-SOE.Methodology
To test the effects of location, the paper uses the Economic Freedom of the World (EFQ) index to identify prosperity of a nation. The sample used is of SOEs and non-SOEs acquired by US corporations, taken from the Thomson One Banker Deals database from the years 1987-2009. The final sample comprises 186 acquisitions of SOE targets and 4702 acquisitions of non-SOE targets abroad by US corporations.Statistical analytics are employed to evaluate the market reaction to the announcements of SOE acquisitions. Furthermore, the researchers cross examine this data with the statistics from the EFQ Index to test whether bidder attitudes towards the purchase of a SOE target is influenced by the target location.
Findings
The results of the study show that bidders of SOEs earn normal returns, while bidders of non-SOEs earn abnormally high returns. Therefore, investors perceive acquisitions of non-SOEs to add more value than acquisitions of SOEs.However, the results also indiciate that bidders favor SOEs in countries that rate poorly in economic freedom. This supports the hypothesis that the bidders’ selection of a SOE target is strongly influenced by the quality of the target countries’ business, economic and legal environment.
In the face of these environmental constraints, the findings should reassure investors about the soundness of the bidders’ decisions since the stock and operating performance of bidders of SOEs are inversely related to the chosen measure of economic freedom in the target countries.
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Jory, Surendranath and Ngo, Thanh Ngoc (2014) Cross-border acquisitions of state-owned enterprises. Journal of International Business Studies, 45 (9). pp. 1096-1114. ISSN 0047-2506