Laurent Cavenaile

An empirical analysis of income convergence in the European Union

In this article, we investigate the convergence process within the European Union. More particularly, we study the convergence process of the new entrants from Central and Eastern Europe and of the 15 Western countries between 1990 and 2007. Applying a panel approach to the convergence equation derived from the Solow model, we show that new entrants and former members of the European Union can be seen as belonging to different groups of convergence. The existence of heterogeneity in the European Union or the Eurozone might affect their stability as the recent Greeces sovereign debt crisis illustrates it.

The Impact of Illiquidity and Higher Moments of Hedge Fund Returns on Their Risk-Adjusted Performance and Diversification Potential

This article studies the joint impact of smoothing and fat tails on the risk–return properties of hedge fund strategies. First, the authors adjust risk and performance measures for illiquidity and the non-Gaussian distribution of hedge funds returns. They use two risk metrics: the Modified Value-at-Risk and a preference-based measure retrieved from the linear exponential utility function. Second, they revisit the hedge fund diversification effect with these adjustments for illiquidity. Their results report similar fund performance rankings and optimal hedge fund strategy allocations for both adjusted metrics. They also show that the benefits of hedge funds in portfolio diversification persist but tend to weaken after adjustments for illiquidity are made.

A Note on the Use of the Modified Value-at-Risk

While modified value-at-risk (or Cornish–Fisher value-atrisk) has been quite extensively used by practitioners and academics since its introduction, the authors show that it can be consistently used only over a limited interval of confidence levels. Confidence levels below 95.84% should never be used if one wishes to be consistent with investors’ preferences for kurtosis. In addition, the use of higher confidence levels is restricted by the value of the skewness. Failure to respect these restrictions on confidence levels results in misassessing risk and potentially overweighting assets that exhibit undesirable properties in terms of higher moments.

Financial development and economic growth: an empirical investigation of the role of banks and institutional investors

This article gives a new light on the finance-growth nexus through the investigation of the role of institutional investors as providers of risk diversification in the process of economic growth. We make use of panel cointegration techniques to study the potential long-run relationship between economic growth, banking development and institutional investors in six Organization for Economic Co-operation and Development (OECD) countries. Our results highlight some heterogeneity in the long-run relationship between financial development and growth. Institutional investors are shown to support long-run economic growth in only two countries. We also report a negative long-run relationship between both indicators of financial development.

A Growth Model of Global Imbalances

Recent empirical evidence shows that gross official capital transactions flow upstream in the international financial markets due to government policy objectives and that they account for the current account surpluses observed in the last decade in the fast-growing emerging economies. Following the Asian financial crisis, the governments of these countries have used national wealth to create a financial buffer to stave off or to confront new balance-of-payments crises by accumulating foreign reserves. We argue that government intervention in the capital market has led to forced saving in these countries generating large global imbalances. This paper builds a two-country neoclassical growth model, which takes public saving into account. Calibrated on IMF data and forecasts between 1981 and 2016, the model rightly predicts the reversal and the size of current account balances observed between the advanced economies and other countries from 1998 onwards. Contrary to the recent theoretical literature on global imbalances, our results support the explanatory and predictive power of the neoclassical growth model when it focuses on national saving and not only on private saving.

Climate Change, Directed Technical Change and Exhaustible Resources

Data shows increasing oil extraction rates accompanied by increasing proven reserves over the last decades. This suggests the existence of research by oil companies aimed at increasing their stocks (e.g. exploration or improved extraction techniques). Increasing oil prices act as an incentive to perform that kind of research and hence potentially postpone the development of clean alternative energies. This has consequences for optimal environmental policies. We propose a model of directed technical change with clean and dirty energy in production which is able to replicate the recent trends in the data on oil production and reserves. Our results show that ignoring research in extraction technologies leads to suboptimal climate policy and in particular carbon taxes that are too high and research subsidies that are too low.