Goran Karanovic

Application of Fuzzy Logic in Determining Cost of Capital for the Capital Budgeting Process

Abstract The capital budgeting process is based on the technique of reducing future cash flows of the net present value which implies a process of discounting by using the discount rate. Usually, in capital budgeting process the discount rate is presented through the cost of capital. The determination of the cost of capital primarily depends on the capital structure, but since the process of capital budgeting implies a long time period, it also implies uncertainty and vagueness. Subjective perception, thinking, judgment and decision making, including a large number of predicted vague data is often expressed solely in linguistic variables by the management and this is the main characteristic of the capital budgeting process, especially in the determination of the cost of the capital through a long time period. The main intention of this paper is to present the use of fuzzy logic in the process of determining the cost of capital and providing an alternative approach in the appraisal of the cost of capital in the presence of fuzziness. The integration and implementation of linguistic variables i.e. qualitative information in the determination of the cost of capital using fuzzy numbers in the capital budgeting process will also be discussed. Through the formulation of a fuzzy system and the use of fuzzy numbers we will propose a process and methodology * for the use of fuzzy numbers in the process of the cost of capital determination. We examine the presented methods and suggest new ideas that could improve further research and implementation of fuzzy logic in the capital budgeting process.

Developing an Aggregate Index for Measuring Financial Stability in the Balkans

Abstract Financial stability continues to grow in importance and remains a hotly debated topic since the turn of the new century brought a string of financial episodes that culminated with the Global financial crisis of 2007. While the Balkans have traditionally been considered to lie on the periphery of financial phenomena, this wide assessment of the region has changed with the large-scale turmoil caused by the Greek Sovereign Debt crisis. Therefore, to curb nascent instability, financial authorities should remain alert and devise a mechanism able to effectively detect stress in their respective financial systems. So far – in the quest to build a comprehensive and universal Early Warning System – a number of broad measures and indicators have been proposed; however, none of them have been specifically tailored to reflect the distinct character of the Balkan countries with their diverse, yet analogous political, social and economic idiosyncrasies. This paper attempts to tackle this issue from a financial policy standpoint by contributing to the current literature on the subject in three separate ways. First, it builds upon the most recent findings in this area to develop an aggregate financial stability index that measures financial stability levels in nine countries geographically belonging to the Balkan region, entirely or at least in part. Most importantly, this index juxtaposes some well known IMF- backed Financial Soundness and macroprudential indicators with World Bank development indicators and CESifo measures of world economic climate. Second, the authors perform a Chanut-Laroque analysis of contribution to volatility levels in the aggregate stability index in order to explore which sub-indexes can explain the improvement or deterioration of the index value for the 1995-2011 period. Third, this paper compares and contrasts the evolution of financial stability of two sub-indices reflecting the diverging nature of the two groups of countries (Western Balkans vs. EU members) regarding their standing relative to European Union status.

A Comparison of Policy Responses to the Global Economic Crisis in the Balkans: Acceding Versus EU Candidate Countries

Current research shows that the severity of the first global economic crisis of the twenty-first century tested the resilience of even the most developed economies in the world, as it caught them unprepared to battle their own systemic deficiencies. With the biggest and most powerful global economies teetering on the verge of collapse, the question about the fate of the globally insignificant economic players remains unresolved. Yet, many of those small countries survived the financial tsunami, and while not unscathed, they did emerge more robust than earlier. Still not a complete member of the EU bandwagon, but refusing to be branded by its dark Balkan past, these small countries were caught between two contrasting worlds – one not ready to embrace them yet, the other one refusing to let them go without a fight. The purpose of this paper is to examine the various roads taken by a host of very similar, yet very different countries in their pursuits of joining the EU and remaining afloat during the largest financial calamity of recent times. The structure and nature of each economy is contrasted along with the divergent level of integration in global economic flows. The main questions raised center around the changes to the oversight to the financial system and coordination with the already rigid EU policy framework. With one country already an acceding EU member, and the other one in danger of being a perpetual EU candidate yet never a member, the main issue to be discussed is whether this situation is due to the policy responses linked to the economic crisis.

The Day-of-the-Week Effect: Evidence from Selected Balkan Markets

Abstract The main aim of this paper is to investigate the existence of the “day of the week” financial effect in select Balkans stock markets indices. Many findings of market anomalies have corroborated the presence of the “day of the week” effect in developed markets; however, so far scarce research has been presented on this subject for the Balkan capital markets. Hence, an additional objective of this paper is to examine the impact of this market anomaly on the market efficiency hypothesis. The methodology used in this paper employs a regression including dummy variables which will help determine the existence of the effect. The authors use daily mean returns of selected stock indices found to be lower at the beginning of the week but not necessarily on Monday. The results are interpreted and expounded taking into consideration the history and market development. The paper provides academia and investors as well as policy makers new perspective of the market anomalies linked to the financial behavior of the capital markets in select Balkan countries.

IPOs PERFORMANCE ANALYSIS: EVIDENCE FROM EMERGING MARKETS IN THE BALKANS

Abstract The main purpose of this paper is to investigate the performance of initial public offerings (IPOs) in the emerging markets with particular focus on the markets of Balkan countries. The paper provides analysis of long and short performance of IPOs. In the Balkan emerging markets IPOs are relatively rarely used. Although all observed Balkan countries have gone through processes of transition from planned economies to market economies in the past 25 years, just a few state-owned companies have been privatized by use of IPOs. Due to this specific nature of the companies the analyzed sample of IPOs is comprised of state-owned and non-state-owned companies. The results are interpreted and expounded accordingly, taking into consideration the aforementioned conjunction. The findings indicate that company characteristics, signalling variables and financial variables have influence on the IPOs short and long term performance. The paper provides academia and policymakers with new revelations concerning the IPO processes in Balkan emerging economies’ capital markets.

Is there an Education Bubble in the Western Balkans

Bubbles arise in cases where price exceeds the assets intrinsic value, yet they are notoriously hard to detect. In order for them to develop, a displacement in expectations must occur which will impact the rational perception of the assets value. Human capital, although not as tangible as other forms of wealth, represents a distinct asset class which increases ones earning potential through education. As the price of an asset is justified by the expectations of future cash flows, the current value of education can be calculated via discounting the value of the future, education-enhanced, earning potential. The aim of this paper is to analyze the newly emerging patterns in the changing educational landscape of the region known as the Western Balkans and identify the possible formation, if not existence, of a bubble. The authors propose an alternative methodology of detecting these market anomalies and utilize empirical evidence to corroborate the finding that the market price of the investment in human capital in Western Balkan countries has started diverging from its fundamental value. Although the focus of this paper is on uncovering a tendency in a highly specific asset class within a narrow geographical area, the preliminary conclusions and related discussions can be extended to detecting such bubbles in other countries and regions that could possibly warn against the eruption of the next big financial crisis.