Contents of Volume 5, Number 2

Special Issue: The Fuzzy Logic in the Financial Uncertainty (Guest Editor: Prof. Dr. Jaime Gil-Aluja)

December 2009

Special Issue Papers

Evolving Fuzzy Modeling of Sovereign Bonds

R. Ballini, A.R.R. Mendonça, F. Gomide

Abstract: Sovereign bond spreads is one among distinct ways of measuring and quantifying sovereign default risk. Additional measures include the distance-to-default, an information implicit in bond prices, sovereign credit ratings and institutional investor rankings of the sovereign creditworthiness. In this paper we focus on distance-to-default, namely, bond spreads modeling using evolving fuzzy systems. The idea is to infer the dynamics of prices and to estimate the distance to default over a time period. Evolving models are particularly appropriate because it gradually develops the model structure and its parameters from a stream of data. Therefore, evolving fuzzy models provide a higher level of system adaptation and learns the system dynamics continuously, an essential attribute in sovereign bonds spread estimation. Evolving fuzzy system is an emerging paradigm that mimics the evolution of individuals in nature, learning from experience, inheritance and gradual change. In particular, we emphasize the use of the evolving participatory learning method. We say that the learning process is participatory if the contribution of each data to the learning process depends upon its acceptance by the current estimate of the bonds spreads as being valid. Implicit in this idea is that, to be useful and to contribute to the learning process, observations must somehow be compatible with current estimates. The model suggested in this paper is compared against autoregression model and alternative evolving fuzzy system approaches using actual data.

Modified Net Final Value: Revisiting the Net Final Value in Uncertainty

M.G. Barberà-Mariné, X. Càmara-Turull, A. Fernández-Bariviera, M.B. Guercio

Abstract: In the present work we propose a methodology for the calculation of the Modified Net Final Value in uncertainty. This methodology will allow us to analyze investment projects that present financial imbalances and require additional financing after the start-up. It supposes a variation of the method developed by Borràs et al. (2001), since it determines in every period the necessity of additional financing. The application of the method of the Modified Net Final Value implies, in some cases, the use of two different interest rates to compound the same triangular fuzzy number. The result of such compounding process is a nontriangular a fuzzy number. With the aim of providing a methodology of easy application, we triangulate this result, subject to the condition of maintaining the same insolvency risk.

Competencies as Options: Determining Competencies Economic Value Through a Fuzzy Real Option Methodology

L. Cannavacciuolo, L. Iandoli, C. Ponsiglione, G. Zollo

Abstract: This work attempts to bridge economic and organizational assessment methodologies to evaluate the economic impact of individual competencies on value creation process. Competencies are considered as active assets needed to nurture value creation in key organization processes (critical capabilities). The aim of the paper is to propose a methodology to compute the cost-value ratio related to the acquisition or development of competencies in a given organizational process. The methodology integrates a cost accounting techniques (Activity Based Costing) to compute the cost and a real option technique to estimate the value of competencies. In particular, a fuzzy real option model is presented. The proposed methodology is based on the idea that acquiring/developing a competence C_i is equivalent to purchase an option allowing a firm to implement a specific productive process P_j. Thus, the value of C_i can be estimated from the economic value that the process P_j generates. Fuzzy logic is used to estimate the value of option volatility based on imprecise data as linguistic assertions and estimations provided by process experts. We present the results of the application of proposed methodology to a case study of a small manufacturing firm operating in the packaging sector.

Optimal Financial Structure in Investment Projects

M.J. Garbajosa, N. Márquez, A. Terceño

Abstract: Investment projects tied to large public infrastructures have proliferated throughout the world. Services and public infrastructures are fundamental elements for the economic and social development of any territory. For this reason, the dimension that this kind of investment require, can be very significant as well as its financing needs. Nevertheless, the financial capacity of the public sector can be limited by budgetary restrictions or the fulfillment of some macroeconomic criteria. In these cases, it becomes clear the necessity of cooperation between public and private sectors in order to finance projects of this nature, materialized for example, by means of financing instruments like Project Finance. Project Finance is a financing instrument for investment projects. Cashflows generated by the project constitute the main guarantee for financing the operation, since they are the main source of income to cover financial obligations. An ad hoc company is built in order to undertake the project under consideration. This company has its own financial structure, which is highly leveraged. In this work, we present a numerical application of the multi-objective program of Barberà  et al. (2005). This multi-objective program can help to determine the optimal financial structure of a project financed by means of Project Finance. In this occasion, we add an extension of Zimmermann’s Max-Min Approach, for the resolution of the program.  

Fuzzy Set Theory in the Social Sciences: A Brief Appreciation

E. Haven

Abstract: Fuzzy set theory has been part of the scientific discourse now for over 40 years when it was launched with Zadeh's pathbreaking paper in 1965. But it seems that it is really in the last 25 years that fuzzy set theory has started making important inroads into the social sciences, notably in preference theory and areas of operations research. This paper provides for a brief overview of some of the fuzzy set theory work in the social sciences. In that respect this paper has no other pretence than to be a survey paper.

Fuzzy Approach to Assessment of Financial Sustainability of Corporation

G.C. İmanov, R.A. Yusifzade

Abstract: In this paper we propose fuzzy approach to estimate level of the financial sustainability of the enterprise or corporation. We use WABL (Weighted Average Based on Levels) defuzzification methods. With the help of this method we can find compact and representative value of parameters of financial sustainability.  

Regular Papers

The Market Reaction to Banks’ Overseas Listing: Evidence from American Depositary Receipts

A.A. Abdallah, W. Abdallah, Y. Zhu

Abstract: This paper investigates the market reaction to banks’ overseas listing, employing a sample of 68 foreign banks from 30 countries, which have cross-listed in the US between 1983 and 2006. We find that cross-listed banks experience market revaluation when they cross-list on the US market via ADR issuance. The average abnormal return declines by 0.05% during the listing period, and by 0.03% throughout the post-listing period. The negative post-listing abnormal return is robust after controlling for the change in risk exposure over time. Our results show a decrease in the local market beta following the ADR issuance while the foreign market beta remains unchanged. We find that banks with state ownership and banks from emerging markets have higher abnormal returns during the ADR listing period. The study suggests that market segmentation can no longer explain the valuation effect of the overseas listing given the trend of globalization of financial markets. Instead, the effect of the overseas listing depends on banks’ specific characteristics and country of origin.

Are Rounded Stock Index Prices a Psychological Barrier? Experimental Study

M. Rosenboim, T. Shavit

Abstract: This paper uses an experimental approach to investigate whether rounded prices are psychological barriers for indices in the stock market. Sixty-six advanced MBA students were asked to fill in 12 point predictions for the chance of a stock index passing above or below a price on the next trading day, based on a series of 10 daily successive returns on the S&P 500 index and on the history of passing the price in the past. We found different predictions for rounded prices compared to non-rounded prices, indicating that rounded stock index prices are a psychological barrier. The direction of passing (above or below) and the history affected the strength of the barriers. Our results can help investors in the markets to understand the different behavior of other investors when indices getting close to rounded price from above and below. They may also use this information to make profits in derivatives markets and futures markets.

Intra-day Returns Transmissions Between US and European Equity Markets 

N.S. Thomaidis, V. Vassiliadis, N. Kondakis

Abstract:  We study intraday returns transmissions between Standard & Poor’s 500 and three European Stock Indexes (FTSE 100, CAC, DAX) using vector autoregressive models. Our purpose is to investigate interMarket dependencies before and after the opening of the New York Stock Exchange. Causality tests on interMarket dynamics are performed by employing maximum likelihood statistics that preserve their asymptotic size under non-Gaussian and heteroskedastic disturbances. This allows us to safely draw conclusions on the conditional mean of the joint Market-returns distribution without reference to higher moments of the conditional distribution. Both robustified causality tests and impulse response analysis reveal strong causalities among the European Markets before and after the opening of the New York Stock Exchange as well as important transmission from the S&P 500 to the continental Indexes.  

Measuring Large Firm’s Profitability with Panel Data Models: Application to Greek Food Industry

A. Karakitsiou, A. Mavrommati

Abstract: The purpose of this paper is to examine the performance of several sectors of the Greek food industry in terms of profitability which is the measure of a firm’s performance in the market. This paper empirically investigates the determinants of profitability for a statistically significant sample of large Greek firms for the years 1998-2005. Various potential determinants are investigated including: market share, industry concentration, capital intensity, the growth of the industry, firm leverage and firm age. We provide the profitability panel data model and factors affecting it, placing emphasis on the combination of the independent variables and in the sample of the observations. Data was provided from I.C.A.P. for the 55 largest companies according to their size in the sector.