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State-Contingent Optimality: A Principle for Portfolio Selection
Full text linkThis paper explores a normative framework for portfolio selection, the Principle of State-Contingent Optimality (SCO), recasting the classic challenge of finding a single, robust portfolio as a problem in the geometry of distributions. The objective is formulated as minimizing the expected divergence between a portfolio's realized return distribution and a state-dependent, ideal target distribution across all possible market conditions. By employing a metric like the Wasserstein distance, this approach moves beyond simple moments to compare the full shape and character of outcomes, aiming to identify a strategy that is holistically resilient to an uncertain future.
We acknowledge that the principle, in its purest form, rests on profound idealizations: a Platonic target distribution, a knowable state-space, and the validity of ensemble averaging. Rather than treating these as insurmountable barriers, we frame them as explicit signposts for a structured research program. The framework is therefore offered as a theoretical lens, one that cleanly separates the philosophical act of defining investment goals from the mathematical task of achieving them. In doing so, our hope is to provide a more principled way to critique existing methods and guide future inquiry toward truly robust financial solutions
Institutionelle Transformation im Bankensektor: Multidimensionale Analyse der Auswirkungen von Digitalisierung, ESG, Demografie und Regulierung auf deutsche und europäische Kreditinstitute
Full text linkThe European, and in particular the German, banking sector is in a phase of profound structural transformation that is characterised by the simultaneous impact and interaction of several macro-structural drivers. Advancing digitalisation - particularly through artificial intelligence (AI) and distributed ledger technology (DLT) - ESG integration as a strategic and regulatory imperative, a tightening regulatory framework (including Basel IV, DORA, EU AI Act, MiCA), demographic changes and intensified competition from digital players and changing customer behaviour are presenting banks with profound challenges.
This discussion paper explains the impact of these drivers on business models, risk management, operational resilience, regulatory adjustment requirements and the strategic positioning of banks in the German and European context. It shows that the simultaneous management of these transformations - under conditions of increased complexity and rising demands on capital, technology and personnel - requires integrated management approaches and far-reaching organisational adjustments.In particular, the focus is on: the strategic use of AI, taking into account ethical and regulatory limits, the anchoring of ESG in risk management and product strategy, the impact of Basel IV regulations on the capital structure, and the relevance of demographic shifts for customer interfaces, HR strategies and sales models. The work concludes with the formulation of strategic imperatives for banks as an approach to a future-oriented, resilient and competitive realignment
A note on the mechanism of substitution of labour with capital in the production processes
Full text linkThe theory of substitution is based on the assumption that not the quantity of capital (production equipment) does substitute labor, but rather its ability to substitute workers' efforts through equipment's operation. This is the true content of the substitution of labor by capital. To formulate a correct mechanism of substitution requires considering three factors of production: the amount of production equipment (capital K), human activity (labor L), and the substitutive capacity of equipment (substitutive work P). The technological properties of production equipment are characterized by the technological coefficients, indicating the amount of labor and energy required to operate a unit of equipment. The production function can assume various forms, none of which coincide with the popular Cobb-Douglas expression, which seems to be erroneous in its core
Penalized regression methods for exchange rate forecasting: evidence from the U.S. dollar index
Full text linkThis paper examines the effectiveness of penalized regression techniques in forecasting exchange rate movements. Using daily data for the U.S. Dollar Index (DXY) in 2016, we compare the performance of Ordinary Least Squares (OLS) with Ridge and Lasso regression models. The predictors include gold and silver returns, the S&P 500 Index, short- and long-term Treasury yields, and the EURUSD exchange rate. Results show that while OLS suffers from instability due to multicollinearity, Ridge regression improves coefficient stability and predictive accuracy. Lasso regression provides the best overall performance, with the highest explanatory power and the lowest prediction error, by selecting only the most relevant variables. These findings underscore the value of penalized regression in financial econometrics and highlight its potential for robust exchange rate forecasting
The African Governance Gap: How Societies Cope When the State Falters
Full text linkEconomic governance is measured by economic freedom, while political governance is measured by the electoral competitiveness index. How can political instability and poor governance in SSA be coped with? This is often seen as the overarching problem that exacerbates many others. Systemic corruption at all levels deprives the state of much-needed revenue, increases the cost of doing business and undermines public trust in institutions. In addition, weak institutions, such as an inefficient judiciary, inadequate public administration and barely existing public services, hinder development. Conflict and fragility displace people, destroy infrastructure and tie up resources that could be invested in education or healthcare. Without reliable contracts and property rights, both foreign and domestic investments are at great risk. Poor governance, reflected in a lack of rule of law, property rights, a regulatory burden, political violence and ineffective government, impedes growth in per capita revenue. In African politics, neo-patrimonialism appears to be the default setting, described as the 'moral economy of corruption' or the 'economics of affection. However, bad governance is not culturally specific; it is a universal challenge that affects all nations at some point in their development history. Good governance must be pursued and implemented in all SSA countries. Even with the support of the donor community, governments may develop ambitious plans to improve governance and strengthen institutions, yet fail to improve the standard of living of their citizens. Since the Second World War, Africa, and Sub-Saharan Africa in particular, has had the poorest economic performance of any region in the world. By the end of the 20th century, incomes per capita had barely improved since independence, and in some cases had worsened considerably. The main problem was the failure to improve the efficiency of resource use. In contrast to many other developing countries, total factor productivity was static or negative for much of the time. With few exceptions, African countries have lacked a sound social and political foundation conducive to growth and development, and this foundation has tended to deteriorate over time. Good governance practices are supported by institutions such as the World Bank and the International Monetary Fund. Good governance practices are also supported by such institutions. In order to receive development aid, states must apply and accept the principles of good governance. If they neglect to do so, African states risk not receiving financial aid. Accountability is a positive aspect of good governance. However, African states have developed a 'new culture', especially after decolonisation. There is a significant difference in perspective between Africans and Westerners regarding governance. The clientelist forms of politics that define postcolonial states do not stem from a class project, but are a contemporary manifestation of a dynamic national, African and ethnic culture
Gondauri Index (GI): Methodology for a Clay Millennium-Problems-Driven Macro-Financial Index
Full text linkThe Gondauri Index (GI) is introduced as a novel macro-financial composite index, grounded in the Millennium Development Goals and applied to economic modeling. It integrates three sub-indices: the Inequality-Ricci Subindex (IRS), which measures income distribution stability through Ricci flow dynamics; the Liquidity-Navier-Stokes Resilience (LNSR), capturing systemic robustness via fluid dynamics analogies; and the Inflation FPAS+ζ Credibility (IFC), which enhances inflation forecasting through hybrid FPAS-Riemann zeta methods. Each subindex is normalized on a 0-100 scale, with the final GI computed as a weighted geometric mean (35% IRS, 35% LNSR, 30% IFC). The methodology combines statistical calibration, normalization, and error-reduction benchmarks, ensuring reliability and policy applicability. The GI provides a consolidated, forward-looking metric for evaluating inequality, financial stability, and inflation expectations, offering policymakers and researchers a robust tool for decision-making in complex socioeconomic environments
Impacts of South Asian Free Trade Agreement on global value chains’ participations in South Asia: A structural gravity trade model analysis
Full text linkThis study aims to examine the impacts of South Asian Free Trade Agreement (SAFTA) on global value chains (GVCs)’ participations in South Asian economies (Bangladesh, India, and Pakistan), by applying a structural gravity trade model and using the Trade in Value Added database (TiVA 2023) of the Organization for Economic Cooperation and Development (OECD). The study contributes to the literature by enriching the evidence on the nexus between SAFTA and GVCs in South Asia, whereas previous works have rarely addressed the issue. The study found that the SAFTA has facilitated the GVC backward participations in terms of the increases in the foreign value added (FVA) inputs from India in the exports of Bangladesh and Pakistan and the FVA input from Pakistan in Bangladesh’s esports. The policy implication is that there should be much room to explore the GVC activities in South Asia because the other bilateral GVC linkages have been still sluggish
Choc exogène et stabilité macroéconomique
Full text linkThis article analyzes the impact of exogenous shocks on the macroeconomic stability of the Democratic Republic of Congo (DRC), highlighting the country's high vulnerability due to its overreliance on mineral exports and limited economic diversification. Using a multi-sectoral econometric approach, the study reveals that external shocks such as global crises, pandemics, and commodity price fluctuations result in prolonged economic adjustments up to eight years. Key sectors like monetary aggregates and banking profitability are highly sensitive to international conditions, whereas public debt, largely concessional, shows limited responsiveness. The paper calls for ambitious structural reforms, including economic diversification, counter-cyclical policies, improved management of mining revenues, investment in human capital, and stronger governance to address institutional weaknesses and enhance the DRC’s economic resilience
Dynamic implications of fiscal policy on NPLs: theoretical analysis and panel-regression empirics
Full text linkThis paper examines the interplay between fiscal policy and non-performing loans (NPLs), a topic which is not widely considered in the existing literature. Using Guyanese bank-level and quarterly data from 2009: Q4 to 2024: Q4, the paper finds an inverse relationship between the overall fiscal balance – defined as total government revenues minus total government expenditures – and NPLs (or bad loans), implying that an improvement in the fiscal balance reduces credit risk and a fiscal expansion increases the percentage of bad loans (credit risk). Expanding the industrial organization model of banking and drawing on liquidity preference theory, the paper proposes a generalized theoretical framework to explain why a fiscal contraction might decrease NPLs in a bank’s portfolio. Panel-regression estimates also reveal several auxiliary results consistent with the existing literature: oil price and an oil production dummy variable are negatively associated with NPLs, while capital adequacy and inflation are positively related to NPLs. Other macroeconomic factors, such as economic growth, real effective exchange rate, inflation, as well as bank-specific variables that capture diversification, liquidity, and efficiency, are not important determinants of NPLs, according to our estimates
Market-based variance of market portfolio and of entire market
Full text linkWe present the unified market-based description of returns and variances of the trades with shares of a particular security, of the trades with shares of all securities in the market, and of the trades with the market portfolio. We consider the investor who doesn’t trade the shares of his portfolio he collected at time t0 in the past. The investor observes the time series of the current trades with all securities made in the market during the averaging interval. The investor may convert these time series into the time series that model the trades with all securities as the trades with a single security and into the time series that model the trades with the market portfolio as the trades with a single security. That establishes the same description of the returns and variances of the trades with a single security, the trades with all securities in the market, and the market portfolio. We show that the market-based variance, which accounts for the impact of random change of the volumes of consecutive trades with securities, takes the form of Markowitz’s (1952) portfolio variance if the volumes of consecutive trades with all market securities are assumed constant. That highlights that Markowitz’s (1952) variance ignores the effects of random volumes of consecutive trades. We compare the market-based variances of the market portfolio and of the trades with all market securities, consider the importance of the duration of the averaging interval, and explain the economic obstacles that limit the accuracy of the predictions of the returns and variances at best by Gaussian distributions. The same methods describe the returns and variances of any portfolio and the trades with its securities