magazine Fall 2005 tinbergen institute 12 Tinbergen Magazine is published by Tinbergen Institute, the Institute for economic research of Erasmus Universiteit Rotterdam, Universteit van Amsterdam and Vrije Universiteit Amsterdam. On the road to KNAW re-accreditation: Commendation and critique of TI by the International Peer Review Committee An interview with Dale Jorgenson Changing how economists think about risk attitudes Common factors in credit risk Letters from Alumni On the road to KNAW re-accreditation: Commendation and critique of TI by the International Peer Review Committee An interview with Dale Jorgenson Changing how economists think about risk attitudes Common factors in credit risk Letters from Alumni
Transcript
magazine
Fall 2005
tinbergen institute12
Tinbergen Magazine is published
by Tinbergen Institute, the
Institute for economic research of
Erasmus Universiteit Rotterdam,
Universteit van Amsterdam and
Vrije Universiteit Amsterdam.
On the road to KNAW re-accreditation: Commendation and
critique of TI by the International Peer Review Committee
An interview with Dale Jorgenson
Changing how economists think about risk attitudes
Common factors in credit risk
Letters from Alumni
On the road to KNAW re-accreditation: Commendation and
critique of TI by the International Peer Review Committee
An interview with Dale Jorgenson
Changing how economists think about risk attitudes
Common factors in credit risk
Letters from Alumni
In depth
References
Up close
In short
2
www.tinbergen.nl
3
10
18
15
magazine
Fall 2005
tinbergen institute12
Tinbergen Magazine is published
by Tinbergen Institute, the
Institute for economic research of
Erasmus Universiteit Rotterdam,
Universteit van Amsterdam and
Vrije Universiteit Amsterdam.
On the road to KNAW re-accreditation: Commendation and
critique of TI by the International Peer Review Committee
An interview with Dale Jorgenson
Changing how economists think about risk attitudes
Common factors in credit risk
Letters from Alumni
On the road to KNAW re-accreditation: Commendation and
critique of TI by the International Peer Review Committee
An interview with Dale Jorgenson
Changing how economists think about risk attitudes
Common factors in credit risk
Letters from Alumni
Highlighting ongoingresearch at TinbergenInstitute for policymakersand scientists.
7
Letters from Alumni
In this issue
Up close
On the road to KNAW re-accreditation: Commendation and critique ofTI by the International Peer Review Committee
An interview with Dale Jorgenson, Harvard University
Beata Bierut
In depth
Changing how economists think about risk attitudes
Han Bleichrodt and Peter P. Wakker
Common factors in credit risk
André Lucas
Letters from Alumni
Marcel Canoy, European Commission
In short
Papers in journals
Discussion papers
Theses
References
13
14
17
Up
close
By Beata Bierut On the road to KNAW re-accreditation:Commendation and critique of TI by the International Peer Review Committee
An interview with Dale Jorgenson, Harvard University
3
Soon, Tinbergen Institute will apply to the
Royal Netherlands Academy of Arts and
Sciences (KNAW) for re-accreditation as an
official Research School for the period 2006-
2011. Part of the procedure is an evaluation
of the quality of the Institute’s scientific
research and graduate programme by an
International Peer Review Committee.
The Committee, consisting of Professors
Dale W. Jorgenson, David F. Hendry,
Arie Kapteyn, Robert C. Merton, and
Torsten Persson, visited the Institute in
February 2005. This issue of TI Magazine
features an interview with the Chair of
the Committee, Dale Jorgenson from
Harvard University.
This is actually the second time that TI hasbeen evaluated by a committee of distinguishedacademics. In 1999, the committee chaired byProf. Edmond Malinvaud prepared the report“The Tinbergen Institute, a SuccessfulCooperative Graduate School and ResearchCentre”. This year’s report is entitled,“Tinbergen Institute: Building a Top ResearchSchool in Economics”. I suppose the differencebetween ‘successful’ and ‘top’ reflects theCommittee’s assessment of the progress made.
As we emphasise in the report,important progress has been made in bothkey dimensions of graduate training andresearch. We were very impressed.
Let’s then move along to specific areas,beginning with the MPhil programme. Thereport says “... The MPhil degree [now] satisfiesinternational standards for the initial two yearsof doctoral training in economics...” What werethe major improvements that you noted?
Substantial improvement has been madein the core training in microeconomics,macroeconomics and the combination ofeconometrics and statistics. In each of thosethree areas the Malinvaud Committee (onwhich I served) concluded that the earliereducational programme fell short of
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tinbergen magazine 12, fall 2005
international standards. Since then, the firstyear core has been completely restructured,and is now highly demanding. It covers a fullrange of topics with lots of homework,weekly classes to review homework, andexaminations at the end of each of the threesegments. The second year of the MPhil isdevoted to a more specialised training,including an excellent selection of courses onspecific areas of economics taught by toppeople. Finally, the MPhil thesis in the secondyear is taken much more seriously at TI thanany corresponding requirement at NorthAmerican or British graduate schools, even atHarvard. The thesis requirement, in myopinion, greatly smoothes the transitionbetween the coursework of the first two yearsand the PhD research during the remainingthree years of the programme.
But there’s still some work to be done...
Let me focus on the most importantissues. The first is to have a student bodythat would be consistently at the level of 30people entering each year. The second is that
the system used by TI is quite different fromthe traditional Dutch 4:4 system, with fouryears leading to a Doctorandus degree andfour years devoted to PhD research. The TI3:2:3 system is fairly close to the Britishsystem: three years leading to a Bachelor’sdegree, two years of the MPhil programme,and then three years for PhD research. TheCommittee maintains that the old systemshould be phased out as soon as possible. Wethink that new employment contracts forgraduate students should be limited topeople who have MPhil training. Finally, werecommend that students becomeaccustomed to making regular presentationsat informal seminars, where the typicalaudience would be other graduate studentsand two or more faculty members in aparticular area...
The need for “regular presentations” isrepeatedly emphasised throughout the report.Why is it so important?
It is important for students to interactwith other people and to get regular feedbackas they proceed with their research. Thetraditional apprenticeship system involvesone-on-one interaction between the studentand the faculty member, but this is notsufficient. There should be a publicdimension to the research supervisionprocess, and students themselves shouldplay an important role through interactingwith their peers in producing good research.It is vital to have several faculty memberswith an interest in a particular area sharingresponsibility for all of the students workingin that area. That is the way things work in allof the major North American and Britishinstitutions, and this is the best model for TI.
Of course, life does not end with the PhD,and students need to find a job after receivingtheir degree. The report recommendedincreasing the distance between the hiringfaculties and the placement of PhDs.
There should be more internationalisa-tion in PhD placement. Tinbergen students,once they finish their dissertations with solidMPhil training, are going to be able tocompete with students trained in the UK andthe US. They should therefore think aboutcompeting in an international job market. Asfar as the participating institutions areconcerned, they should begin to hire what wecall ‘high impact researchers’: top people inthe international market who have potentiallyhigh impact in the profession. You may wantto consider how to recruit these people andhow to enable them to develop their researchcapabilities. Actually, that is a task for theparticipating institutions. We do not see thisas a responsibility of TI.
The MPhil thesis in the second
year is taken much more
seriously at TI than any
corresponding requirement ...
even at Harvard
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tinbergen magazine 12, fall 2005
The Peer Review Committee
together with some TI students.
Should Tinbergen Institute play some rolein attracting top researchers to the Netherlands,even if only for visiting programmes?
A visiting researcher’s programme wouldbe an excellent idea. It would be desirable forTinbergen Institute to raise private funds forvarious kinds of outreach activities–including visitors (perhaps on a short-termbasis), as well as visits by TI faculty andstudents to other institutions. Since theparticipating faculties are already attracting alot of research support for projects in areasof interest to faculty members, the Institutecould try to attract support for what wecharacterise as outreach. We do not think thatthe participating universities should bedevoting their scarce institutional resourcesto this; their resources ought to beconcentrated on the teaching programme.This is also emphasised in the report.
Let’s now turn to research activities. Thereport applauded a rapid increase in TI’sresearch output, both in terms of quantity andquality. Still, a number of suggestions forimprovement were put forward...
The main thing that we thought wasmissing is that there is no system forbringing to the fore people who are reallygoing to have a major impact on theeconomics profession, people who are goingto be international high-flyers. TheNetherlands should be, as it has beenhistorically, a great centre of economics. Youhave to think about how to recruit anddevelop people of the very highest calibre,like Tinbergen and Theil. This should be
discussed and resolved between now and thenext review five years from now.
On the organisational side, the reportdiscussed more active involvement of TIalumni and the issues of funding.
I think that these two things actually gotogether. TI alumni are representedthroughout Dutch business, government andacademics. They should feel a sense ofaffiliation with TI and understand the way inwhich the institute is evolving. It is again aquestion of outreach, and I think the alumnishould be the first targets of the outreachactivities. Beyond that, I think that it isimportant to reach out to all of the Dutchbusiness organisations in which economicsplays a role. Every Dutch multinational andevery major financial institution has somekind of economic staff. It is vital to reach outto those people because they could help toguide TI’s future development and togenerate financial support. As far as fund-raising is concerned, the report recommendsstrongly that the Board of Tinbergen Instituteplays a key role.
That covers the report, as far as I amconcerned. Unless you feel that we missedsomething important...
Let’s discuss the business end of thereport. We think that the participatinginstitutions are getting extremely good valuefor money in Tinbergen Institute. The reportspells out what we feel are the positivecontributions of TI to the participatinginstitutions– for example, having centralised
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tinbergen magazine 12, fall 2005
Ph.D.-level training of high quality, which Ithink none of the institutions could haveproduced by itself. Most importantly, as aresearch network, TI sets high standards forresearch that have led to upgrading newrecruits into the participating faculties.Participating institutions should be happy torenew their contracts with TI. We eagerlyexpect that KNAW will renew its accreditation.We feel that TI has made a great deal ofprogress in both teaching and research, andthis should be more than sufficient to justifyre-accreditation. Those are two things that Iwould like to emphasise, in conclusion.
I suggest that we finish the interview witha couple of questions regarding your ownwork. Could you please provide us with somebrief insights into the book that has beenpublished this year, “Information technologyand the American growth resurgence”?
This book has grown out of research onproductivity that I have been conductingsince I came to Harvard. What attracted myattention again (if you look at my researchrecord, you will see that I like to move on andnot get stuck in a particular niche) is thespecial role of information technology. Thebook spells out how information technologyhas changed the prospects for growth in theUnited States. On my website I have a versionthat extends the story to the other G7economies. The theory of economic growth,as it is presented in textbooks, still owes a lotto the idea that the main source of economicgrowth is productivity change. I find that thatwas never true historically– and it is evenless true today. The most important source ofgrowth is investment. Capital embodies newtechnologies– that is the key idea. This showsup in the new methods we have developedfor growth accounting, especially adapted toinformation technology.
Last question, again related to yourrecent work: What is ‘A smarter type of tax’?
Tax reform is currently on the agenda inthe United States. The Tax Commissionappointed by the President in January hasdecided to reform our system of incometaxes, rather than to adopt a European-stylevalue-added tax. I think that this is the rightdirection, but that we need to preserveprogressivity and to improve the efficiency ofcapital allocation. The system that I havedeveloped for doing both is called ‘efficienttaxation of income’. It involves two basicprinciples. The first is that capital incomewould be taxed at a rate of about 30%, andlabour income at a rate of about 10%. Thiswould preserve progressivity. The secondprinciple is that all capital income would betaxed at the same effective rate. There is
huge potential for gains from the tax reform,mainly due to increased efficiency in capitalallocation. I estimate that a tax reform basedon the combination of these two principleswould produce an increment to US nationalwealth of about 20 percent.
I am finished with my questions. Thankyou very much for your thoughtful comments.
Let me say on behalf of the EvaluationCommittee that I am pleased that our workwill reach the readership of TI Magazine.Having put a great deal of work into thisreport, we are proud that it will contribute tothe discussion about the future of TinbergenInstitute.
Selected BibliographyAccounting for growth in the information age, in: P.
Aghion and S. Durlauf, eds., Handbook of Economic
Growth, Amsterdam, North-Holland, 2005.
Blueprint for expanded and integrated U.S. national
accounts: Review, assessment, and next steps (with
J.S. Landefeld), in: A New Architecture for the U.S.
National Accounts, 2005.
Efficient taxation of income (with K.-Y. Yun), in: T.J.
Kehoe, T.N. Srinivasan, and J. Whalley, eds.,
Frontiers in Applied General Equilibrium Modeling,
Cambridge, Cambridge University Press, 2005.
Information technology and the Japanese economy
(with K. Motohashi), Journal of the Japanese and
International Economies, 19(4), December 2005.
Information technology and the world economy
(with K. Vu), Scandinavian Journal of Economics,
107(4), December 2005.
Will the U.S. productivity resurgence continue? (with
M.S. Ho and K.J. Stiroh), Current Issues in Economics
and Finance, 10(13): 1-7, December 2004.
Information technology and the G7 economies,
World Economics, 4(4): 139-169, October-December
2003.
Information technology and the U.S. economy,
American Economic Review, 91(1): 1-32, March 2001.
Raising the speed limit: U.S. economic growth in the
information age (with K.J. Stiroh), Chapter 3 in:
Economic Growth in the Information Age, 2001.
U.S. economic growth at the industry level (with K.J.
Stiroh), American Economic Review, 90(2): 161-67,
May 2000.
A new architecture for the U.S. national accounts
(with J.S. Landefeld and W.D. Nordhaus, eds.),
Chicago, University of Chicago Press, 2005.
Information Technology and the American Growth
Resurgence (with M.S. Ho and K.J. Stiroh), Cambridge,
MIT Press, 2005.
Economic Growth in the Information Age, Cambridge,
MIT Press, 2001.
Lifting the Burden: Tax Reform, the Cost of Capital,
and U.S. Economic Growth (with K.-Y. Yun),
Cambridge, MIT Press, 2001.
tinbergen magazine 12, fall 2005
Han Bleichrodt�
and Peter P. Wakker
�
�
Han Bleichrodt, professor of
health economics at Erasmus
Universiteit Rotterdam,
investigates the measurement
of utility in health and
economics.
Peter P. Wakker, professor in
econometrics at Erasmus
Universiteit Rotterdam,
investigates risky decisions in
economics.
This contribution reviews
some important changes in
the current economic
thinking about risk attitudes
and presents the research of
the authors on this topic.
Defining risk aversion:Economists vs. the rest of theacademic world The classical economic theory of
decision under risk is expected utility.Consider a “prospect” (0.3:200, 0.7:100),yielding €200 with probability 0.3 and €100with probability 0.7. The prospect isevaluated through a probability-weightedaverage utility 0.3 � U(200) + 0.7 � U(100),with U denoting the utility function of money.U is a subjective factor, depending on thedecision maker and describing his riskattitude. A classical result is that riskaversion (preferring a prospect less than itsexpectation) then holds if and only if theutility function is concave, implyingdiminishing marginal utility (as in Figure 1).
In other words, the prospect isundervalued relative to its expectationbecause the marginal utility gained throughoutcomes above the expectation is less thanthe marginal utility lost because of outcomesbelow the expectation.
Since economists are trained to expresseverything in life in terms of money, theassertion that “risk aversion means concaveutility of money” does not set alarm bellsringing for economists. For the rest of theacademic world this is different, however. Thepsychologist Lola Lopes (1987), for instance,wrote, “risk aversion is more than thepsychophysics of money” (p. 283). Intuitively,it somehow does not seem natural that riskattitude has to do with how we feel aboutmoney; it seems more natural that it has to dowith how we feel about probabilities. Sincethe 1950s, psychologists have therefore usedan evaluation w(0.3) � U(200) + w(0.7) �U(100) of a prospect (using the prospectdescribed above). The weighting function wcaptures sensitivity towards probability, andcan be non-linear. For example, the weightw(0.7) of 70% probability mass is usually lessthan 70% of the weight w(1) = 1 of certainty.The most prominent theory of this kind wasKahneman and Tversky’s (1979) prospecttheory.
Changing how economists
think about risk attitudes
I n d e p t h
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tinbergen magazine 12, fall 2005
A long wait pays offIt took thirty years for one of the most
important ideas in risk theory to bediscovered-in full depth and generality bySchmeidler (1989; first version 1982), and forthe special case of risk by Quiggin (1981):The prospect mentioned above should beevaluated through the formula w(0.3) � U(200)+ (1–w(0.3)) � U(100), rather than through theformula used by psychologists. We will notexplain the subtlety of replacing the weightw(0.7) used by psychologists by the weight 1–w(0.3) used here. A consequence of this newformula is that the weights of the outcomesalways sum to one, and that the worst outcomeis treated differently than the best outcome(rank dependence). Note that rank dependenceallows people to be risk averse while havinglinear or even convex utility, for instance whenthey heavily overweight the worst outcome.People are also allowed to have concave utilityand to be nevertheless risk seeking (when theyoverweight the best outcome). The relationshipbetween risk attitude and utility curvature isthus no longer one-to-one. Rank dependencewas incorporated in the new version ofprospect theory (Tversky and Kahneman 1992).This new version added to the ideas of Quigginand Schmeidler a different treatment of gainsthan of losses; discussion of the latter topic weleave for another day, and we restrict ourselveshere to a discussion of gains. At long last, atheory has been developed that is bothintuitively satisfactory (through incorporationof the indispensable probabilistic sensitivityinto risk attitudes) and theoretically sound.Thus, only since 1992 do we have asatisfactory theory for risky decisions. Thetheoretical soundness of models is usuallyverified through so-called preferencefoundations. The properties of the model arethen identified in directly observable terms,which are conditions expressed directly interms of preferences that show how to verifyor falsify the model empirically. This wasestablished for the new version of prospecttheory by papers including Wakker andTversky (1993) (for monetary outcomes) andBleichrodt and Quiggin (1997) (for healthoutcomes).
Traditional economics focusEconomists, trained to focus on the
conditions that ensure the existence ofequilibria and risk aversion, have focused onsuch conditions for probability weighting.Given the natural w(0) = 0 and w(1) = 1, a lowand convex w leads to a low weighting of bestoutcomes of a risky prospect and, hence, to arelative under-evaluation of risky prospectswhen compared to sure outcomes. This under-evaluation enhances risk aversion. Convexprobability weighting functions (as in Figure 2),and the corresponding ambiguity aversion forunknown probabilities, have therefore been thefocus of most economic studies so far.
Empirical studies and theinverse-S shapePsychologists, on the other hand, are
more interested in empirical facts than intheoretical wishes. They found that theprobability weighting function is generallynot convex but inversely S-shaped (as inFigure 3). The inverse S-shape reflects thetendency of people to be overly sensitive toprobabilities close to zero (reflecting the shiftfrom something that is impossible tosomething that is possible), and toprobabilities close to one (reflecting the shiftfrom possible to certainty). People tend to beinsensitive to intermediate probabilities.
The journal Management Science receivedtwo independently devised empirical studiesthat found this same phenomenon: Abdellaoui(2000) (for monetary outcomes) and Bleichrodtand Pinto (2000) (for health outcomes). Thepapers were published side by side; the impactof two such independent verifications indifferent domains is usually more far-reachingthan what studies in isolation achieve. Thesetwo papers, together with Gonzalez and Wu(1999), finally established inverse-S as theprevailing empirical phenomenon.
Focussing on known probabilitiesin the health domainOur research concerns theoretical
preference foundations, empirical tests andquantitative measurements of the generalmodels discussed, and the various conceptsin these models. Inverse-S shapes, and theirgeneralisations to the case of unknownprobabilities, suggest that not so muchaversion to risk, but rather cognitive lack ofcomprehension prior to any attraction oraversion, is central in explaining people’sdeviations from rational models. Peoplesimply do not understand adequately theconcepts of probability and uncertainty and,consequently, fail to discriminate sufficientlybetween different levels of likelihood. Thisphenomenon generates the curve in Figure 3,and calls for new concepts and factorsaffecting risk attitudes.
9
tinbergen magazine 12, fall 2005
People simply do not
understand adequately
the concepts of probability
and uncertainty
Decisions taken under risk are central inthe health domain, where symptoms onlypartially signal the relevant disease and yettreatments must be chosen, and wherebudgets have to be allocated to treatmentswith uncertain effects. For instance, the newrisk theories shed new light on quality-of-lifemeasurements where new formulas have beenproposed to improve classical evaluations(Bleichrodt, Pinto and Wakker (2001).
New comprehensive theory of riskattitude calls for paradigm shiftFor the sake of simplicity, we have focused
on known probabilities, a common case in thehealth domain. The case of unknownprobabilities is more important, and morecommon in economics. The importance ofdeveloping separate theories for unknownprobabilities had been understood since Keynes(1921) and Knight (1921) raised the issue. Ittook more than sixty years, however, beforesomeone as creative as Schmeidler (1989) coulddevelop a sensible theory for unknownprobabilities, from which a sensible version ofprospect theory could be derived. Only sincethat time do we have a sound theory of riskattitude, and much of the economics and healthliterature will have to be rewritten in light ofthese new ideas. Given the fact that the (in ouropinion outdated) equation of risk attitude withcurvature of utility– with the index of relativerisk aversion serving as the most commonlyused parameter for risk aversion– permeates allof the economic thinking and literature, such ashift in paradigm will take time. We hope tocontribute to this development, and to receiveand generate such contributions from ourcolleagues and the students of TinbergenInstitute.
Much of the economics and
health literature will have
to be rewritten in light of
these new ideas
ReferencesAbdellaoui, M. (2000), Parameter-free elicitation of
utilities and probability weighting functions,
Management Science 46, 1497-1512.
Bleichrodt, H. and J.L. Pinto (2000), A parameter-free
elicitation of the probability weighting function in
medical decision analysis, Management Science 46,
1485-1496.
Bleichrodt, H., J.L. Pinto and P.P. Wakker (2001),
Making descriptive use of prospect theory to
improve the prescriptive use of expected utility,
Management Science 47, 1498-1514.
Bleichrodt, H. and J. Quiggin (1997), Characterizing
QALYs under a general rank dependent utility
model, Journal of Risk and Uncertainty 15, 151-165.
Gonzalez, R. and G. Wu (1999), On the shape of the
probability weighting function, Cognitive Psychology
38, 129-166.
Kahneman, D. and A. Tversky (1979), Prospect
theory: An analysis of decision under risk,
Econometrica 47, 263-291.
Keynes, J.M. (1921), A treatise on probability.
McMillan, London. Second ed. 1948.
Lopes, L.L. (1987), Between hope and fear: The
psychology of risk, Advances in experimental
psychology 20, 255-295.
Knight, F.H. (1921), Risk, uncertainty, and profit.
Houghton Mifflin, New York.
Quiggin, J. (1981), Risk perception and risk aversion
among Australian farmers, Australian Journal of
Agricultural Economics 25, 160-169.
Schmeidler, D. (1989), Subjective probability and
expected utility without additivity, Econometrica 57,
571-587.
Tversky, A. and D. Kahneman (1992), Advances in
prospect theory: Cumulative representation of
uncertainty, Journal of Risk and Uncertainty 5, 297-
323.
Wakker, P.P. and A. Tversky (1993), An
axiomatization of cumulative prospect theory,
Journal of Risk and Uncertainty 7, 147-176.
10
André Lucas�
�
André Lucas is professor of
Finance at Vrije Universiteit
Amsterdam. His main areas of
interest include risk
management and financial
econometrics. He is a fellow
at Tinbergen Institute and a
member of the European
Academic Panel on credit risk
research of Standard and
Poor’s. What he likes best
about his area of research are
the rapid developments that
take place both academically
and industry wise, which
require the application of up-
to-date technical tools to
answer empirically relevant
questions.
Credit risk management is as old as thebanking profession itself. As part of their roleas intermediaries, banks have always had tokeep track of the market value of their assetportfolio in order to maintain an adequatelevel of solvency and liquidity. An obviousexample is a bank granting a loan to acounterparty (i.e., to a firm or an individual).In the worst case of a default, thecounterparty does not repay its loan (in full).The resulting loss directly translates into areduction in the bank’s cash flows andprofits. It is therefore not surprising thatbanks have always put much effort intoassessing the credit risk of eachcounterparty, both at the outset of each loancontract, and during the loan period itself.This overview touches upon some recentresearch directions in this field of measuringand managing counterparty credit risk.
Credit scoringThe issue of counterparty credit risk
assessment has a long history. The firstcredit-scoring models were introducedalready in the 1960s (see the overview byAltman (1983)). Most scoring models makeuse of accounting variables, such asprofitability and liquidity ratios, to predictfuture default events. More recent empirical
models also include additional informationfrom financial markets (if such information isavailable). Typical examples include stockmarket returns and stock volatility changes.The information from financial markets hasadded significant explanatory power fordefault prediction to the well-establishedaccounting variables.
Changing regulationsChanges in current banking regulation
have led to a strong revival in the attentiondevoted to assessing counterparty defaultand credit risk (see the Basel Committee forBanking Supervision (BCBS, 2004)). Theseregulations require banks to hold capitalbuffers in line with inter alia the credit riskof their activities. The earlier supervisoryframework, effective since 1988, had asimilar objective, but was too unrefined. Forexample, firms had to hold more capital forcorporate exposures than for OECDgovernment exposures, but capitalrequirements for large, internationally activecompanies were identical to those for smallneighbourhood retail shops. The economicincentives created by this incongruity, theincreased liquidity in financial markets, andthe extended set of products available infinancial markets to shift risk between
I n d e p t h
Common factors in credit riskCommon factors in credit risk
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tinbergen magazine 12, fall 2005
market participants, made a change in theregulations unavoidable. The key novelty inthe new capital accord is that (under strictconditions) banks are allowed to come upwith their own estimates of defaultprobability for each counterparty. Thisapproach is called the internal modelling(IRB) approach. The internal estimates ofdefault probabilities are translated directlyinto a capital requirement for that specificcounterparty. As a consequence, thesupervisor’s role has shifted from prescribingthe capital requirements for each exposure,to using historical and current data in orderto assess the performance of the bank’sinternal model in predicting default. Methodsfor constructing reliable credit scores, andevaluation techniques for assessing theiradequacy, therefore enjoy obvious popularity.
From counterparties to portfoliosThus far, the focus has been on
individual counterparty credit risk. A bank,however, maintains a portfolio of manydifferent exposures. While some of these maybe non-listed bonds, others may consist oflisted securities, like bonds, stocks, andinterest rate derivatives. Each of theseinstruments may be subject to counterpartydefault risk. If all exposures in the bank’sportfolio were independent, and the numberof exposures sufficiently large, then onecould easily compute an expected loss for theportfolio as a whole. Capital buffers andinterest rate spreads could be determinedaccordingly. The independence assumption,however, obviously needs to be relaxed.Figure 1 presents default rates forcounterparties of different credit quality,
which are (in this case) determined byStandard and Poor’s (one of the major ratingagencies). The figure clearly shows thatdefault probabilities are higher during badeconomic times. The presence of suchcommon risk factors has importantconsequences for credit risk management atthe portfolio level. In particular, whateverthe size of the portfolio, the common orsystematic risk factors can never becompletely diversified. This results in aportfolio credit loss rate that remainsstochastic, irrespective of the portfolio size.The effect is illustrated using the followingsimple experiment. Consider a large portfolioof counterparties and a bank that has anidentical exposure to each. A counterpartydefaults if it experiences an asset return dropof more than two standard deviations. Weassume that returns are normally distributedand that they have a constant pairwisecorrelation of R2. Figure 2 presents theresulting portfolio loss distribution for variouslevels of correlation. As the correlationdecreases, the portfolio loss distributionbecomes more peaked at the expected loss.For larger correlations, portfolio losses clearlyremain stochastic, with their typical long tailtowards large losses.
Recovering common credit riskfactorsGiven the importance of dependence in
credit exposures for risk management,several interesting questions can be asked.What concept of dependence is mostappropriate for credit risk? How importantare credit risk correlations empirically? Towhat extent do common credit risk factorscoincide with macro-economic variables? Andwhat are the dynamic properties of commoncredit risk factors? Some of our recent papershave contributed to this literature from atime-series perspective (see Koopman et al.(2005a,b,c) and Koopman and Lucas (2005)).The main idea is to use default and ratingdata from the major rating agencies directlyto retrieve the common credit risk factors.This can be contrasted with an approach
The bank supervisor’s role has shifted from
prescribing the capital requirements for each
exposure, to using historical and current data in order
to assess the performance of the bank’s internal
model in predicting default.
Figure 1: Default probabilities
per rating class in expansions
and recessions (based on data
from Nickell, Perraudin,
Varotto (2000))
Figure 2: Portfolio credit loss
distributions for correlated
firms. Losses as a percentage
of portfolio value on the
horizontal axis.
12
tinbergen magazine 12, fall 2005
where one a priori imposes the restrictionthat the credit cycle should coincide with thebusiness cycle. A key result is shown inFigure 3 in the form of the estimated creditcycle. The common credit risk factor showsclear troughs in the high default years in themid-1980s, early 1990s, and early 2000s.Moreover, the common risk factor shows astrong persistence over time. This requires acareful distinction between conditional andunconditional variances of the common riskfactor. This distinction appears to be muchmore blurred in the new supervisoryframework Basel II. In particular, theconditional variability of default rates at theportfolio level may be much less pronouncedthan the prescribed values of the supervisor.It also appears that one should be verycareful in mapping business cycles one-on-
one to credit cycles (see Couderc and Renault(2005)). Alternative dynamics such asbanking competition in lending conditions,availability of alternative sources of funding,and even aggregate rating dynamics may alsoplay an important role.
OutlookMany interesting questions remain in
this area, some of which have direct policyimplications. The sticky nature of commoncredit risk factors should obviously beincluded in any sound portfolio credit riskmanagement system. Interest in thedynamics of this risk factor then arisesnaturally. Another open issue is themagnitude and potential mismatch in defaultdependencies. The potential mismatchbetween empirically relevant estimates ofdefault correlations and those imposed byregulators, may spur a new range of financialinnovations similar to the one prompted bythe previous Capital Accord of 1988. Ifprescribed regulatory correlations are higherthan their empirical estimates (or market-implied estimates), then banks may have anincentive to transfer the exposures with (too)low correlations to the market in order toobtain capital relief. This may jeopardizefinancial stability (despite the sophisticated,model-based approach), and thus be of majorconcern to all parties involved.
ReferencesAltman, E. (1983), Corporate financial distress. A
complete guide to predicting, avoiding, and dealing
with bankruptcy. New York: Wiley.
Basel Committee on Bank Supervision (2004), Basel
II: International convergence of capital
measurement and capital standards: a revised
framework, Report 107, Bank of International
Settlements, Basel.
Couderc, F., and O. Renault (2005), Times-to-default:
Life cycle, global and industry cycle impacts, FAME
working paper, University of Geneva.
Koopman, S.J., and A. Lucas (2005), Business and
default cycles for credit risk, Journal of Applied
Econometrics, 20, 311-323.
Koopman, S.J., A. Lucas and R. Daniels (2005b),
A non-Gaussian panel time series model for
estimating and decomposing default risk, TI
Discussion Paper TI 2005-060/4.
Koopman, S.J., A. Lucas and P. Klaassen (2005a),
Empirical credit cycles and capital buffer formation,
Journal of Banking and Finance, forthcoming.
Koopman, S.J., A. Lucas and A. Monteiro (2005c),
The multi-state latent factor intensity model for
credit rating transitions, TI Discussion Paper TI
2005-071/4.
Nickell, P., W. Perraudin and S. Varotto (2000),
Stability of rating transitions, Journal of Banking
and Finance, 24(1-2), 203-227.
Figure 3: Common credit risk
factor estimated from
Standard and Poor’s rating
and default data
Tell a storyMarcel Canoy
�
European Commission
Tell a story: my leitmotif for many years. During my years as a PhD student at UvA, I wondered what the fun was in writing stuff that nobody reads. So I tried a few dialoguesbetween a fox and an owl, illustrated by my sister (“Bertrand meets the fox and the owl”). I’venever regretted this creative detour– there’s nothing wrong with science, but there is a world out there.
This world was opened for me after a few post docs in Leuven, Paris and Maastricht. Untilrecently I worked at CPB Netherlands Bureau for Economic Policy Analysis, which has anexcellent mix of scientifically and analytically based economics and the policy world. I was luckyenough to work in a field that has become increasingly important (competition and regulation).The knowledge in the Netherlands of this field was (and to a certain extent still is) rather poor.
Recently, I joined the European Commission, replacing André Sapir as the chief economist of the Bureau of European Policy Advisers (BEPA), the think tank of President Barroso. How doesBEPA compare with CPB? Well, both think tanks rely on the quality of their work as the principalsource of their reputation. BEPA is paradoxically both more influential and less influential than CPB.
It is less influential than CPB, since it has less tradition and (much) less outside exposure. Itis more influential, since it works directly for the President and is therefore closer to the political‘heat’. I experienced both aspects recently. I worked the entire summer on the so-called ‘EuropeanSocial Model’, which was discussed on October 26 at an informal Summit in Hampton Courtbetween Barroso and the Heads of State (the ‘heat’). At the same time, I also saw the other side ofthe coin, however, since nobody realised the work that BEPA did (and probably nobody has everheard of BEPA to start with!).
Getting back to storytelling... Within the Social Model discussion a story needed to be told,too. The political debate is dominated by vested interests preaching fear that their social modelwill be destroyed by neo-liberals. The real story is that appropriate economic modernisationyields both social and economic benefits– albeit at the expense of (some) vested interests (thinkof early retirements), but ultimately to the benefit of many.
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tinbergen magazine 12, fall 2005
Letters from Alumnilife after the PhD thesis defense
�Marcel Canoy
graduated in 1993 with
a thesis entitled,
“Bertrand meets the fox
and the owl: essays in
the theory of price
competition.”
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tinbergen magazine 12, fall 2005
How (not) to raise money
What do Eric Clapton’sguitar, Margaret Thatcher’shandbag, and Britney Spears’pregnancy test kit have incommon? The answer: allwere auctioned for thebenefit of charity. Charitiesnot only use auctions, butalso organise lotteries andvoluntary contributions tocollect money. The co-existence of thesemechanisms raises theobvious question: “Whichmechanism is superior atraising money?” This articleshows that “all-pay” auctionsare better fundraisingmechanisms than “standard”auctions, lotteries andvoluntary contributions.
The study assumes thatbidders obtain extra utilityfor every dollar that istransferred to a charitableorganisation. It was found
that in standard auctions (inwhich only the winner pays),revenues are relatively low.The reason is that all biddersforgo the extra utility theyobtain from a high bid byone bidder if they top thisbid. Bids are suppressed as aresult, and so are revenues.This problem does not occurin lotteries and all-payauctions, where bidders payirrespective of whether theywin or lose. Bidders arewilling to bid more in all-payauctions than in lotteries,moreover, because in all-payauctions, the highest bidderalways wins (in contrast tolotteries). The studyintroduces a general class ofall-pay auctions, ranks theirrevenues, and illustrates howthey dominate lotteries,standard auctions, andvoluntary contributions. Theoptimal fundraisingmechanism is an all-payauction augmented with anentry fee and reserve price.
The findings of this study arenot merely of theoreticalinterest. The frequent use oflotteries as fundraisersindicates that people arewilling to accept an obligationto pay even though they maylose. All-pay auctions may becharacterised as incorporating“voluntary contributions” intoa standard auction. They areeasy to implement and mayrevolutionise the way in whichmoney is raised.
Jacob K. Goeree (California
Institute of Technology), Emiel
Maasland (EUR), Sander Onderstal
(UvA), and John L. Turner
(University of Georgia), 2005,
How (not) to raise money,
Journal of Political Economy
113(4), 897-918.
Business and defaultcycles for credit risk
Various economic theoriesare available to explain theexistence of credit anddefault cycles. Someempirical ambiguity remains,however, regarding whetherthese cycles coincide. Recentpapers suggest that defaultsand credit spreads tend toco-move with macroeconomicvariables. If true, thistendency is important forcredit risk management aswell as for regulation andsystemic risk management.
This paper studies thedynamic behaviour of twoimportant determinants ofcredit risk (namely thedefault rate and the creditspread) in their relation tobusiness cycle developments.A multivariate unobservedcomponents approach makesit possible to disentanglelong-term patterns fromshorter-term cyclicalpatterns. The paper exploreswhether cycles in credit riskfactors coincide withbusiness cycles. Toward thisend, the model explicitlyallows for different cyclicalmovements in credit riskfactors and economicactivity, as measured by real
GDP. Under investigation isthe claimed lead relationshipof credit spreads overgrowth, the (in)congruencebetween credit and businesscycles, and the dynamics ofdefault rates in one unifiedframework. The model uses1933-1997 US data on realGDP, credit spreads andbusiness failure rates to shednew light on the empiricalevidence. Two types of cyclesare found. The first has afrequency of around sixyears. There is clear (positive)co-cyclicality betweenspreads and businessfailures, and (negative) co-cyclicality between spreadsand GDP. The relationbetween GDP and businessfailures is insignificant at thisfrequency. The second typeof cycle has a longer periodof around 11 years. Thisfrequency features a clearpositive relation betweenspreads and failures, and anegative relation betweenGDP, on the one hand, andspreads and failures, on theother.
Siem Jan Koopman and André
Lucas (VU), 2005, Business and
default cycles for credit risk,
Journal of Applied Econometrics,
20, 2, 311-323.
Comparativeadvantage, relativewages, and theaccumulation ofhuman capital
How do changes in thecomposition of labour supplyaffect the relative wages forvarious skill types? A typicalexample is a reduction of theminimum wage, whicheffectively raises the laboursupply of the least skilledworkers. One would expectthis to reduce the wages ofthis group. But what happensto the wages of other workertypes? Again, one wouldexpect this to depend on thedegree of similarity of these
papers in journals
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tinbergen magazine 12, fall 2005
workers to the least skilled:the more similar, the bettersubstitutable, and thegreater the extent that theirwages move parallel to thoseof the least skilled. Moregenerally: the degree ofsubstitutability betweenworker types declines withtheir ‘distance’ in skill level.Although this idea seemsobvious, none of theaggregate productionfunctions currently in useyields this result. This papershows that a simpleproduction function, basedon Ricardo’s notion ofcomparative advantage ofhigh-skilled workers incomplex jobs, yields exactlythis implication. Further,investment in the humancapital of almost any workertype is shown to reducewage differentials, except inthe extreme left tail of theskill distribution. The latterexception helps to explainwhy active labour marketprogrammes aiming toincrease the human capitalof the least skilled tend to beso ineffective: they run intoadverse general equilibriumeffects.
Coen Teulings (UvA, SEO), 2005,
Comparative advantage, relative
wages, and the accumulation of
human capital, Journal of
Political Economy, 113 (2), 425.
25 years of IIF time-series forecasting: A selective review
What do daily stock prices,monthly rainfall figures,weekly sales data and annualgross domestic product havein common? Answer: all aretime series. That is, they aredata observed at regularintervals over time. Whilethese data may arise in verydifferent contexts, they are,from a mathematicalperspective, all very similar.People who collect such datausually want to know onething: what does the futurehold? Predicting the futurevalues of such data is knownas “time series forecasting”.
Modern time seriesforecasting is a highlyadvanced computationalscience, involving complexmathematical models andfast computers. But 25 yearsago, time series forecastingwas in its infancy; themodels on hand were muchsimpler and the computersavailable were primitivecompared to the home PC.
This paper explores theevolution and developmentof time series forecastingover the past 25 years. Thepaper marks the 25thanniversary of the formationof the International Instituteof Forecasters (IIF) and thefounding of the firstscholarly journal offorecasting. It reviews over300 academic papers and 17books that have beenpublished on the topic.
One major advance duringthis period is the use ofprediction intervals. Anexample: rather than give asingle value for tomorrow’spredicted maximumtemperature, forecasters nowroutinely provide an intervalwithin which the temperature
is expected to fall withprobability 95%. Thisprovides a measure ofuncertainty associated withthe forecast. A great deal ofwork in the past 25 years hasgone into methods forcalculating such intervalsaccurately.
The paper concludes withsome forecasts of its own- regarding the future of forecasting. The authorspredict that time seriesforecasting in the future willinvolve even heaviercomputation and thatmethods will be developed todeal with hundreds of timeseries simultaneously.
The private supply ofhighway capacity offers onealternative to deal withgrowing traffic congestionwhen there are insufficientpublic funds to finance newcapacity, and insufficientsupport for public roadpricing. Proclaimed potentialadvantages of private over
public highways include cost-efficiency, innovativeness,and availability of funds. Amain disadvantage is thedivergence between theprivate objective of profitmaximisation and the socialobjective of welfaremaximisation. An importantquestion is therefore whetherthere are ways, particularlythrough the design ofauctions for highwayconcessions, to make theprivate operator behavemore in line with welfare-maximising price- andcapacity setting. Moreover,since the use of auctions orcomparable allocationmechanisms seems to beunavoidable in the awardingof concessions for privatehighways, one needs to
understand of the potentialefficiency impacts of thedesign of such auctions.This paper considers thewelfare impacts of a range offranchising regimes forcongested highways. For asingle road in isolation, a
discussionpapers
competitive auction, with thelevel of road use as thedecision criterion, is shownto produce the sociallyoptimal road (in terms ofcapacity and toll level) as theequilibrium outcome,provided neutral scaleeconomies characterisehighway operations. Theauction outperforms variousalternatives in which thebidders are asked tominimise the toll level or tollrevenues, or to maximisecapacity or the bid for thefranchise. When second-bestnetwork aspects are takeninto account, the patronage-maximising auction is nolonger optimal. Whenunpriced congestion onparallel capacity dominates(i.e., there are unpricedroads or lanes parallel to theone under consideration),the second-best highwaywould generate losses, andthe zero-profit conditionbecomes binding. Theauction produces a below-optimal capacity. Whenunpriced congestion onserial capacity dominates(i.e., there are unpricedroads or lanes upstream ordownstream of the oneunder consideration), theauction produces an above-optimal capacity. In bothcases, however, the auctionremains second-best optimal:it produces the highestefficiency possible under azero-profit constraint for theroad operator.
By Erik T. Verhoef (VU),
Second-best road pricing
through highway franchising
TI DP05-082/3
Characterisations ofnetwork powermeasures
Networks play an importantrole in economics and socialsciences. This study considerssymmetric networks, in whichthe roles of the two positionson each link are symmetric.
Examples are exchange-,communication- and disease-transmission networks. Apower measure for networksassigns to every position in anetwork a real number thatsomehow reflects theimportance of the positions.One of the best-known powermeasures is the degree-measure, assigning to everyposition its number of directneighbours. Another measureis the beta-measure, whichdistributes the power overeach position equally amongits direct neighbours.
Taking the process one stepfurther, the second-order beta-measure distributes the beta-power value of each positionequally among its directneighbours. By repeating thisprocedure, each timedistributing the newlyobtained power values, thestudy shows that thisprocedure has a limit, which isequal to the degree-measure.Although the degree-measureis usually considered to be alocal power measure, thestudy thus shows that it alsocan be seen as a globalmeasure within power-dependence theory.
Finally, the study provides fullaxiomatic characterisations ofthe two measures mentionedabove, showing that theydiffer only in thenormalisation that is used.The conclusion: choosing thenormalisation in particularapplications should be donecarefully, since differentnormalisations yield differentpower distributions.
The stance of monetary policyin industrialised countries iscommonly summarised interms of changes in a short-run nominal interest ratetarget. Less attention is paidto the behaviour of monetaryaggregates, although moneysupply still serves as the maininstrument of many real-world central banks.According to the conventionalview on monetary policy, arise in the supply of money isexpected to lead to a declinein the interest rate.
A closer look at the struc-tural relation between moneysupply and interest rates inthe standard generalequilibrium model used formacroeconomic policyanalysis casts doubts on thisview. An increase in themoney growth rate is actuallyassociated with highernominal interest rates. Inthese models, highly stylisedinterest rate targets(specifically, forward-lookingTaylor rules: policy rules thatare designed to stabiliseinflation) cannot beimplemented by non-destabilising money supplyadjustments (for example,those that avoidhyperinflation equilibria).However, an interest ratetarget rule can beimplemented by stabilisingmoney supply changes if therule is sufficiently inertial.
This observation can be usedto reconcile theory with thedata. Empirical studiesusually find short-runinterest rates to be highlyinertial. Standardmacroeconomic theory,however, can hardlyrationalise why a centralbanker smoothes interestrates. Efficiency requiresnon-inertial policy responses.The analysis in this paperprovides an alternative
explanation for interest rateinertianamely, that it iscaused by policyimplementation constraints(rather than it beingattributed to the centralbanker’s preference forinterest rate smoothing).
By Andreas Schabert (UvA),
Money supply and the
implementation of interest rate
targets TI 05-059/2
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The quality ofpolitical decision-making
In representativedemocracies, citizens givepoliticians the authority todecide on theimplementation of a varietyof policies. Althoughdelegation has clearadvantages in terms ofbenefits of specialisation, itmay also create agencyproblems between citizensand the representativepoliticians. Politicians mayexert too little effort,implement inefficientpolicies, extract rents, orotherwise perform badly.Principal-agent problemsbetween citizens andpoliticians are thus central tothe analysis of this thesis.The main objective is toexplain several institutionalarrangements, observed ingovernments, in light of theagency problems. Particularattention is paid to the roleof information andpoliticians’ motivation in thepolitical decision-makingprocess.
The thesis also examines theincentives of office holdersto admit to a policy failure.The electoral consequencesfrom admitting a mistake aremore severe in anenvironment in which otherpoliticians hardly ever admitpolicy failures, than if otherpoliticians are likely to put atrisk their reputation as well.An opportunistic politicalculture may consequentlybreed opportunistic
behaviour. Further understudy are the incentives for aparty leader and a party’srank-and-file to replacesitting members ofparliament. An incompetentleader replaces competentparliamentarians and retainsother incompetentcolleagues in order to reducethe risk that a future policyfailure is discovered. In adecentralised party,parliamentarians are moreoften replaced to improvethe quality of decision-making. Empirical resultsfrom the Netherlands showthat political turnover ishigher if parties areorganised in a decentralisedmanner. Finally, the thesisalso provides an explanationfor the observed variety inthe composition ofcommittees in the U.S.Congress and for thesequential nature ofinformation collection inbudgetary systems.
Risk measures have for manyyears been important objectsof study. Mathematically, arisk measure is a mappingfrom a class of randomvariables to the real line.Economically, a risk measureshould capture thepreferences of the decisionmaker in the economicsituation under study. New postulates of riskmeasures should beequipped with rigorousjustificative arguments. Theappropriate tool to justify arisk measure is an axiomaticcharacterisation, which is
intended to demonstrate theessential assumptions thatmust be imposed. A riskmeasure is appropriate if andonly if its characterisingaxioms are.
This thesis presents two newaxiomatic characterisationsof risk measures. The first isan axiomatisation of riskmeasures that are additivefor independent randomvariables. The second is anaxiomatisation of riskmeasures that aresubadditive (superadditive)for comonotonic randomvariables. Once a riskmeasure has been selected(or rather: axiomatised), thenext step is to actuallycalculate it. This can be anon-trivial exercise,particularly in a multivariatesetting, when there isstochastic dependencebetween the risks underconsideration.
Many problems found in theareas of insurance andfinance feature sums ofdependent random variables.Under law invariance, themeasurement of risk in suchproblems is reduced todetermining the distributionfunction of the sum.However, distributionfunctions of sums of(dependent) randomvariables are typically of acomplex form. Moreover,appropriately capturing thedependence structure withina random vector is a problemin its own right. For several
law-invariant risk measures,such as the Value-at-Risk andthe Tail-Value-at-Risk, it is inpractice only the tail of thedistribution function that isrelevant. This work studiesthe limiting behaviour of thetail distribution for specificsums of dependent randomvariables encountered ininsurance: in particular, thediscounted sums of heavy-tailed losses. The study theninvestigates applications ofrisk measures to two mainproblems in insurance andfinance: valuation inincomplete markets andsolvency capital allocation.
Thesis: ‘Essays on Risk Measures
and Stochastic Dependence, with
Applications to Insurance and
Finance’
by Roger J.A. Laeven
Published in the Tinbergen
Institute Research Series # 360
theses
18
Theses
353 YIU CHUNG CHEUNG (31/5/2005), Essays on
European bond markets.
354 ALJA_ULE (7/6/2005), Exclusion and
Cooperation in Networks.
355 IBOLYA SCHINDELE (20/5/2005), Three Essays
on Venture Capital Contracting.
356 MARTIJN VAN DER HEIDE (5/7/2005), An
Economic Analysis of Nature Policy.
357 YONGJIAN HU (16/6/2005), Essays on Labour
Economics: Empirical Studies on Wage Differentials
across Categories of Working Hours, Employment
Contracts, Gender and Cohorts.
358 SIMONETTA LONGHI (9/9/2005), Open Regional
Labour Markets and Socio-economic Developments.
Studies on Adjustment and Spatial Interaction.
359 KLAAS JAN BENIERS (1/9/2005), The Quality of
Political Decision-making: Information and
Motivation.
360 ROGER LAEVEN (21/09/2005), Essays on Risk
Measures and Stochastic Dependence. With
Applications to Insurance and Finance.
361 NEELTJE VAN HOREN (9/9/2005), Economic
Effects of Financial Integration for Developing
Countries.
Papers in TI-ranked journals
by TI Fellows 2005
AA-ranked JournalsGoeree, J.K., E. Maasland, S. Onderstal and J.L. Turner,
2005, How (not) to raise money, Journal of Political
Gaussian Panel Time Series Model for Estimating and
Decomposing Default Risk
05-066/4
Bruno Gaujal, INRIA Rhône-Alpes, Montbonnot Saint
Martin, France, Arie Hordijk, Leiden University,
Dinard van der Laan, VU, On the Optimal Policy for
Deterministic and Exponential Polling Systems
05-067/4
Yebin Cheng, Jan G. de Gooijer, UvA, Bahadur
Representation for the Nonparametric M-Estimator
Under Alpha-mixing Dependence
05-068/4
Jan G. de Gooijer, UvA, Rob J. Hyndman, Monash
University, Australia, 25 Years of IIF Time Series
Forecasting: A Selective Review
05-071/4
Siem Jan Koopman, André Lucas, André Monteiro,
VU, The Multi-State Latent Factor Intensity Model for
Credit Rating Transitions
05-081/4
Siem Jan Koopman, Kai Ming Lee, VU, Measuring
Asymmetric Stochastic Cycle Components in U.S.
Macroeconomic Time Series
05-084/4
J.S. Cramer, UvA, Omitted Variables and Misspecified
Disturbances in the Logit Model
05-086/4
Bernd Heidergott, VU, Arie Hordijk, Leiden
University, Miranda van Uitert, VU, Series Expansions
for Finite-State Markov Chains
05-089/4
Michiel de Pooter, Martin Martens, Dick van Dijk, EUR,
Predicting the Daily Covariance Matrix for S&P 100
Stocks Using Intraday Data - But Which Frequency to
Use?
05-091/4
Siem Jan Koopman, Marius Ooms, VU, M. Angeles
Carnero, University of Alicante, Periodic Seasonal
Reg-ARFIMA-GARCH Models for Daily Electricity Spot
Prices
05-092/4
Jurgen A. Doornik, Nuffield College, University of
Oxford, Marius Ooms, VU, Outlier Detection in
GARCH Models
tinbergen magazine 12, fall 2005
Tinbergen Research InstituteFour themes distinguish Tinbergen
Institute’s research programme:I. Institutions and Decision AnalysisII. Financial and International MarketsIII. Labour, Region and the EnvironmentIV. Econometrics and Operations Research
Each theme covers the whole spectrumof economic analysis, from theoretical to empirical research. Stimulating discussionson theories, methodologies and empiricalresults arise from the interaction of theInstitute’s faculty– comprised ofapproximately 96 fellows. These fellows arefaculty members with excellent track recordsin economic research, active in organisingresearch activities, teaching graduate coursesand supervising Ph.D. students.
Discussion PapersResearch is pre-published in the
institute’s own Discussion Paper Series.Download discussion papers athttp://www.tinbergen.nl (section ‘Publications’).E-mail address for correspondence:[email protected]
Tinbergen Graduate SchoolTinbergen Institute offers a five-year
graduate programme, consisting of two yearsof intensive graduate coursework in itsMaster of Philosophy (M.Phil.) in Economicsprogramme and three years of Ph.D. thesisresearch.
The M.Phil. programme is a two-yearresearch master in economics, econometrics,and finance that leads to an M.Phil. degree ineconomics. Due to the demanding nature ofthe programme, the M.Phil. is open only toa rigorously selected group of students. An excellent preparation for Ph.D. thesisresearch, the M.Phil. programme is connectedto three-year Ph.D. positions in theeconomics departments of the ErasmusUniversiteit Rotterdam, the Universiteitvan Amsterdam and the Vrije UniversiteitAmsterdam.
The M.Phil. in Economics has beenaccredited by the Dutch and FlemishAccreditation Organisation for highereducation (NVAO), and eligible studentscan claim two years of financial aid(“studiefinanciering”). In addition, TinbergenInstitute allocates a limited number ofscholarships each year basedon academic merit.
Detailed information on the institute’sgraduate programme and the applicationprocedure can be found in the GraduateSchool section of www.tinbergen.nl.Please sent any questions [email protected].
BoardA.G.Z. Kemna (Chair), J.-W. Gunning, H. Oosterbeek, J.J.M. Kremers, C.G. de Vries.
General DirectorM.C.W. Janssen
Director of Graduate StudiesJ.H. Abbring
Research Programme Co-ordinatorsInstitutions and Decision Analysis:G. van der Laan, O.H. SwankFinancial Economics and InternationalMarkets:F.C.J.M. de Jong, J.-M. ViaeneLabour, Region and the Environment:J.C.J.M. van den Bergh, E. PlugEconometrics:R. Dekker, S.J. Koopman
Scientific Council D.W. Jorgenson (Harvard University),
M. Dewatripont (CORE), P. de Grauwe (LeuvenUniversity), D.F. Hendry (Oxford University),R.C. Merton (Harvard University), D.Mortensen (Northwestern University),S. Nickell (London School of Economics), T. Persson (Stockholm University), L. Wolsey(CORE)
Social Advisory CouncilC.A.J. Herkströter (Chair), R.G.C. van
den Brink (ABN-AMRO), H.J. Brouwer (DNB),M.J. Cohen (Mayor of Amsterdam), F.J.H. Don(CPB), C. Maas (ING), F.A. Maljers, I.W. Opstelten (Mayor of Rotterdam), A.H.G. Rinnooy Kan (ING), H. Schreuder (DSM),R.J. in ’t Veld, P.J. Vinken, L.J. de Waal
