Current Issue

CONTENTS of Volume 25, Number 2, December 2019

  • ROUBA IBRAHIM and SONG-HEE KIM

  • Is Expert Is Expert Input Valuable? The Case of Predicting Surgery Duration

  • ABSTRACT

    Most data-driven decision support tools do not include input from people. We study whether and how to incorporate physician input into such tools, in an empirical setting of predicting the surgery duration. Using data from a hospital, we evaluate and compare the performances of three families of models: models with physician forecasts, purely data-based models, and models that combine physician forecasts and data. We find that combined models perform the best, which suggests that physician forecasts have valuable information above and beyond what is captured by data. We also find that applying simple corrections to physician forecasts performs comparably well.

  • KEYWORDS

    healthcare operations, operating room, predicting surgery duration, expert input, discretion

  • DONG BEOM CHOI

  • Risk Sharing and Interbank Market Fragilities

  • ABSTRACT

    Risk sharing among banks helps them diversify idiosyncratic risks, but their interbank borrowing costs can become more volatile and bring financial fragility. Banks facing liquidity shortages need to pay an extra cost of credit when their lenders have bargaining powers, which depends on the likelihood of fire-sale and the fire-sale price discount. Risk sharing can decrease likelihood of liquidity shortage and lower the borrowing cost. However, the fire-sale discount increases, since joint distress arises and more assets are liquidated simultaneously. Though the interbank borrowing cost decreases with risk sharing, it may become more sensitive to changes in aggregate uncertainty.

  • KEYWORDS

    risk sharing, interbank market, network, financial crisis

  • JAEHO CHO

  • Heterogeneous Expectations, Asset Prices, and Trading Volume under a Non-expected Utility Function with CARA

  • ABSTRACT

    Using a non-expected utility function that exhibits constant relative risk aversion (CRRA), Cho (2001) explores a theoretical model of asset pricing under heterogeneous beliefs in the case where only one risky asset is traded. This paper extends his work into the case where agents trade a risky asset and the riskless asset as well, adopting a non-expected utility function that exhibits constant absolute risk aversion (CARA). In a variant of the general equilibrium setting of Lucas (1978), major findings of the paper are as follows: (i) When agents differ only in expectations about future dividends, the question of who is the buyer and who is the seller of each asset depends solely on the degree of optimism. Unlike the case of Cho (2001), there is no role of intertemporal substitution. (ii) Increased dispersion of expectations will raise the risk-free rate and lower the risky asset’s price. This result is consistent with that of Abel (1990). (iii) Although the equity premium goes up as a consequence of result (ii), heterogeneity per se does not help to resolve the puzzle posed by Mehra & Prescott (1985) and Weil (1989). (iv) The trading volume of the risky asset increases proportionately with the cross-sectional variance of expectations, and the same is true for the riskless asset. (iv) An increase in the risk-free interest rate will reduce the trading volume of the riskless asset unless the intertemporal substitution parameter is less than 1/2. In addition to these findings, many more comparative statics results are obtained from closed-form solutions for asset prices and trading volume.

  • KEYWORDS

    Heterogeneous Expectations, Non-expected Utility Function, Constant Absolute Risk Aversion, Asset Prices, Trading Volume

  • HYEJIN AHN and YOUNG JUN KIM

  • Value Relevance of Add-back of Loan Loss Reserves

  • ABSTRACT

    Under the current bank regulatory capital framework, loan loss reserves (LLR) are added back to regulatory capital up to a certain limit (henceforth, ‘add-backs’). This study examines how equity investors value these addbacks. Decomposing LLR into add-backs and other LLR, we find that add-backs have positive value relevance if such add-backs increase total regulatory capital and other LLR has negative value relevance. This positive value relevance of add-backs is driven by banks with low capital levels. Our finding indicates that the market perceives add-backs as capital rather than as an expense.

  • KEYWORDS

    Add-backs, regulatory capital, loan loss reserves, value relevance