Contemporary Economics supports GIKA


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Volume 7 Issue 2 (2013)

Consumption as a Factor of Polish Economic Growth During the Global Recession of 2008/2009: A Comparison with Spain and Hungary original article

pp. 5-16 | First published in 25 June 2013 | DOI:10.5709/ce.1897-9254.78

Tomasz Jasiński, Paweł Mielcarz


The economic recession of 2007-2009 proved to be a difficult period for most European economies. Poland was among the few countries that recorded positive gross domestic product (GDP) growth during that period. The main reason for its performance was that private consumption stimulated the GDP. The goal of this study was to explore the reasons that private consumption in Poland did not collapse during the economic recession through the substantial economic literature on this topic. The study compared Spain, Hungary and Poland from 2007 to 2009 to find differences specific to the latter. The most important factors differentiating Poland identified in this study were the confidence of Polish consumers in the economy and a high propensity to spend resulting in lower savings. Additional factors were a relatively low unemployment rate and relatively easy access to credit.

Keywords: Poland; Spain; Hungary; GDP growth; consumption

Price Risk and Risk Management in Agriculture original article

pp. 17-20 | First published in 25 June 2013 | DOI:10.5709/ce.1897-9254.79

Udo Broll, Peter Welzel, Kit Pong Wong


This note studies the risk-management decisions of a risk-averse farmer. The farmer faces multiple sources of price uncertainty. He sells commodities to two markets at two prices, but only one of these markets has a futures market. We show that the farmer’s optimal commodity futures market position, i.e., a cross-hedge strategy, is actually an over-hedge, a full-hedge, or an under-hedge strategy, depending on whether the two prices are strongly positively correlated, uncorrelated, or negatively correlated, respectively.

Keywords: agricultural price risk; risk management; commodity futures; correlation; cross-hedge

First Significant Digits and the Credit Derivative Market During the Financial Crisis original article

pp. 21-29 | First published in 25 June 2013 | DOI:10.5709/ce.1897-9254.80

Paul Hofmarcher, Kurt Hornik


The Credit Default Swap (CDS) market has both been lauded for its ability to stabilize the financial system through credit risk transfers and been the source of regulatory concern due to its size and lack of transparency. As a decentralized over-the-counter market, detailed information about pricing mechanisms is rather scarce. To investigate reported CDS prices (spreads) more closely, we make use of empirical First Significant Digit (FSD) distributions and analyze daily CDS prices for European and US entities during the financial crisis starting in 2007. We find that on a time-aggregated level, the European and US markets obey empirical FSD distributions similar to the theoretical ones. Surprising differences are observed in the development of the FSD distributions between the US and European markets. Whereas the FSD distribution of the US derivative market behaves nearly constantly during the last financial crisis, we find huge fluctuations in the FSD distribution of the European market. One reason for these differences might be the possibility of strategic default for US companies due to Chapter 11 and avoided contagion effects.

Keywords: Benford’s law; first significant digits; CDS market; financial crisis

“Rational” or “Intuitive”: Are Behavioral Biases Correlated Across Stock Market Investors? original article

pp. 31-53 | First published in 25 June 2013 | DOI:10.5709/ce.1897-9254.81

Andrey Kudryavtsev, Gil Cohen, Shlomit Hon-Snir


Human judgments are systematically affected by various biases and distortions. The main goal of our study is to analyze the effects of five well-documented behavioral biases—namely, the disposition effect, herd behavior, availability heuristic, gambler’s fallacy and hot hand fallacy—on the mechanisms of stock market decision making and, in particular, the correlations between the magnitudes of the biases in the cross-section of market investors. Employing an extensive online survey, we demonstrate that, on average, active capital market investors exhibit moderate degrees of behavioral biases. We then calculate the cross-sectional correlation coefficients between the biases and find that all of them are positive and highly significant for both professional and non-professional investors and for all categories of investors, as classified by their experience levels, genders, and ages. This finding suggests that an investor who is more inclined to employ a certain intuitive decision-making technique will most likely accept other techniques as well. Furthermore, we determine that the correlation coefficients between the biases are higher for more experienced investors and male investors, indicating that these categories of investors are likely to behave more consistently, or, in other words, are more likely to decide for themselves whether to rely on simplifying decision-making techniques in general or to reject all of them. Alternatively, this finding may suggest that these investors develop more sophisticated “adaptive toolboxes”, or collections of heuristics, and apply them more systematically.

Keywords: availability heuristic; disposition effect; gambler’s fallacy; herd behavior; hot hand fallacy

Does Beta Explain Global Equity Market Volatility – Some Empirical Evidence original article

pp. 55-66 | First published in 25 June 2013 | DOI:10.5709/ce.1897-9254.82

Radosław Kurach


The purpose of this study is to assess the diversification benefits resulting from international asset allocation. In this study, we examine Capital Asset Pricing Model (CAPM) in its international context (ICAPM) using the monthly equity returns for 26 countries (18 developed and 8 emerging markets) between July 1996 and June 2011 and adopting the US investor’s perspective. We verify the beta-return trade-off employing two approaches: the unconditional trade-off and the conditional relationship. In this latter case, we find the country beta to be a significant variable explaining the cross-country variation of returns. Next, we test the degree of market integration in the light of the ICAPM. The results of this test indicate that country-idiosyncratic risks are generally not priced. In the subsidiary outcomes of our verification procedure, we argue that country betas are time-varying and that currently, global factors are the dominant source of equity market volatility. Consequently, the opinion regarding emerging market assets and their role in global portfolio management should be reconsidered. The results of the entire study may provide essential implications for fund managers because the decreasing international diversification gains have been identified.

Keywords: international CAPM; country betas; time-varying betas; equity markets integration; diversification gains

From Cost-Benefit to Institutional Analysis in The Economics of the Environment original article

pp. 67-75 | First published in 25 June 2013 | DOI:10.5709/ce.1897-9254.83

Lenka Slavikova


Economics of the environment as an applied field of economics was established during the 1960s. At the time of its foundation, neoclassical environmental economics represented the mainstream view regarding the explanation of the causes of environmental problems and their solutions. Since then, however, two other competing approaches - the free market and institutional ecological economics - have evolved. These two new approaches present different analytical focuses as they stress the role of institutions (property rights and/or management regimes) in environmental protection. As a result, environmental research based on cost-benefit analysis was substituted by the application of various forms of institutional (often qualitative) analyses. The goal of the paper is to justify the importance of this methodological shift that is sometimes minimized by mainstream economists. The research focus of competing approaches and their methods are mapped through comparative analysis, and the theoretical description is connected with the practical examples of the EU environmental policy.

Keywords: institutional analysis; environmental economics; qualitative research; interdisciplinarity

Tax-related and Economic Consequences of Selecting the Method of Debt Financing of Companies with Regard to Thin Capitalisation in OECD Member Countries original article

pp. 77-83 | First published in 25 June 2013 | DOI:10.5709/ce.1897-9254.84

Dominik Gajewski


The following paper explores the issue of thin capitalisation in Organisation for Economic Co-operation and Development (OECD) member countries. There are two methods used by financing companies that are strongly related to this phenomenon: debt and equity financing. The tax-related consequences arising from choosing the debt financing method in companies with regard to thin capitalisation are analysed in this paper. It is argued that it is the tax policy of a company that directly influences the economic consequences of its operation. The taxation of thin capitalisation may be carried out in various forms depending on the adopted method. The tax-related implications point to the complexity of this process regardless of the country in which it takes place. However, the problem becomes even more complicated in the case of taxation of this process in companies undertaking cross-border activity.

Keywords: corporate income tax; thin capitalisation; OECD

Does Factor Accumulation or Productivity Change Drive Output Growth in the Indian Sugar Industry? An Inter-state Analysis original article

pp. 85-98 | First published in 25 June 2013 | DOI:10.5709/ce.1897-9254.85

Nitin Arora, Sunil Kumar


The study endeavors to break down output growth in the Indian sugar industry into the ‘perspiration’ component that corresponds to factor accumulation and the ‘inspiration’ component that corresponds to the total factor productivity (TFP) growth. The bootstrapped Malmquist productivity index has been used as a technique to obtain the TFP growth from the period 1974/75 to 2004/05. Empirical analysis reveals that output growth in the Indian sugar industry is equally driven by the inspiration component (i.e., TFP growth) and the perspiration component (i.e., factor accumulation), but in opposite directions. The inspiration component is observed to contribute to output growth positively, whereas the perspiration component contributes negatively. Given substantial TFP growth, the potential output growth in the Indian sugar industry has been restricted primarily by the negative growth of inputs during the entire study period and particularly in the post-reform period.

Keywords: malmquist productivity index; data envelopment analysis; Indian sugar industry.