Review of Business and Economics Studies, 2017, том 5, № 1

Review of  
Business and 
Economics  
Studies

EDITOR-IN-CHIEF
Prof. Alexander Ilyinsky
Dean, International Finance Faculty, 
Financial University, Moscow, Russia
ailyinsky@fa.ru 

EXECUTIVE EDITOR
Dr. Zbigniew Mierzwa

EDITORIAL BOARD

Dr. Mark Aleksanyan
Adam Smith Business School, 
The Business School, University 
of Glasgow, UK

Prof. Edoardo Croci
Research Director, IEFE Centre for 
Research on Energy and Environmental 
Economics and Policy, Università 
Bocconi, Italy

Prof. Moorad Choudhry
Dept.of Mathematical Sciences, Brunel 
University, UK

Prof. David Dickinson 
Department of Economics, Birmingham 
Business School, University of 
Birmingham, UK

Prof. Chien-Te Fan
Institute of Law for Science and 
Technology, National Tsing Hua 
University, Taiwan

Prof. Wing M. Fok
Director, Asia Business Studies, College 
of Business, Loyola University New 
Orleans, USA

Prof. Konstantin P. Gluschenko
Faculty of Economics, Novosibirsk State 
University, Russia

Prof. George E. Halkos
Associate Editor in Environment and 
Development Economics, Cambridge 
University Press; Director of Operations 
Research Laboratory, University of 
Thessaly, Greece

Dr. Christopher A. Hartwell
President, CASE — Center for Social and 
Economic Research, Warsaw, Poland

Prof. S. Jaimungal
Associate Chair of Graduate 
Studies, Dept. Statistical Sciences 
& Mathematical Finance Program, 
University of Toronto, Canada

Prof. Bartlomiej Kaminski
University of Maryland, USA; 

Rzeszow University of Information 
Technology and Management,  
Poland

Prof. Vladimir Kvint 
Chair of Financial Strategy, Moscow 
School of Economics, Moscow State 
University, Russia

Prof. Alexander Melnikov 
Department of Mathematical and 
Statistical Sciences, University of 
Alberta, Canada

Prof. George Kleiner
Deputy Director, Central Economics and 
Mathematics Institute, Russian Academy 
of Sciences, Russia

Prof. Kwok Kwong
Director, Asian Pacific Business 
Institute, California State University,  
Los Angeles, USA

Prof. Dimitrios Mavrakis
Director, Energy Policy and 
Development Centre, National and 
Kapodistrian University of Athens, 
Greece

Prof. Steve McGuire
Director, Entrepreneurship Institute, 
California State University,  
Los Angeles, USA

Prof. Rustem Nureev
Сhairman for Research of the 
Department of Economic Theory, 
Financial University, Russia

Dr. Oleg V. Pavlov
Associate Professor of Economics and 
System Dynamics, Department of Social 
Science and Policy Studies, Worcester 
Polytechnic Institute, USA

Prof. Boris Porfiriev
Deputy Director, Institute of Economic 
Forecasting, Russian Academy of 
Sciences, Russia

Prof. Svetlozar T. Rachev
Professor of Finance, College of 
Business, Stony Brook University, USA

Prof. Boris Rubtsov
Deputy chairman of Department  
of financial markets and banks for R&D, 
Financial University, Russia

Dr. Minghao Shen
Dean, Center for Cantonese Merchants 
Research, Guangdong University of 
Foreign Studies, China

Prof. Dmitry Sorokin
Chairman for Research, Financial 
University, Russia

Prof. Robert L. Tang
Vice Chancellor for Academic, De La 
Salle College of Saint Benilde, Manila, 
The Philippines

Dr. Dimitrios Tsomocos 
Saïd Business School, Fellow in 
Management, University of Oxford; 
Senior Research Associate, Financial 
Markets Group, London School 
of Economics, UK

Prof. Sun Xiaoqin
Dean, Graduate School of Business, 
Guangdong University of Foreign 
Studies, China

REVIEW OF BUSINESS 
AND ECONOMICS STUDIES 
(ROBES) is the quarterly peerreviewed scholarly journal published 
by the Financial University under 
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perspective on wide range of topical 
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ISSN 2308-944X

Вестник 
исследований 
бизнеса  
и экономики

ГЛАВНЫЙ РЕДАКТОР
А.И. Ильинский, профессор, декан 
Международного финансо вого факультета Финансового университета 

ВЫПУСКАЮЩИЙ РЕДАКТОР
Збигнев Межва, д-р экон. наук

РЕДАКЦИОННЫЙ СОВЕТ

М.М. Алексанян, профессор Бизнесшколы им. Адама Смита, Университет 
Глазго (Великобритания)

К. Вонг, профессор, директор Института азиатско-тихоокеанского бизнеса 
Университета штата Калифорния, 
Лос-Анджелес (США)

К.П. Глущенко, профессор экономического факультета Новосибирского 
госуниверситета

С. Джеимангал, профессор Департамента статистики и математических финансов Университета Торонто 
(Канада)

Д. Дикинсон, профессор Департамента экономики Бирмингемской бизнесшколы, Бирмингемский университет 
(Великобритания)

Б. Каминский, профессор, 
Мэрилендский университет (США); 
Университет информационных 
технологий и менеджмента в Жешуве 
(Польша)

В.Л. Квинт, заведующий кафедрой 
финансовой стратегии Московской 
школы экономики МГУ, профессор 
Школы бизнеса Лассальского университета (США)

Г. Б. Клейнер, профессор, член-корреспондент РАН, заместитель директора Центрального экономико-математического института РАН

Э. Крочи, профессор, директор по 
научной работе Центра исследований 
в области энергетики и экономики 
окружающей среды Университета 
Боккони (Италия)

Д. Мавракис, профессор, 
директор Центра политики 
и развития энергетики 
Национального университета  
Афин (Греция)

С. Макгвайр, профессор, директор Института предпринимательства 
Университета штата Калифорния, 
Лос-Анджелес (США)

А. Мельников, профессор  
Депар та мента математических 
и ста тистических исследований 
Университета провинции Альберта 
(Канада)

Р.М. Нуреев, профессор, научный 
руководитель Департамента экономической теории Финансового 
университета

О.В. Павлов, профессор  
Депар та мента по литологии 
и полити ческих исследований 
Ворчестерского политехнического 
института (США) 

Б.Н. Порфирьев, профессор,  
член-корреспондент РАН, заместитель директора Института 
народнохозяйственного прогнозирования РАН

С. Рачев, профессор Бизнес-кол леджа 
Университета Стони Брук (США) 

Б.Б. Рубцов, профессор, заместитель 
руководителя Департамента финансовых рынков и банков по НИР 
Финансового университета

Д.Е. Сорокин, профессор, членкорреспондент РАН, научный 
руководитель Финансового 
университета

Р. Тан, профессор, проректор 
Колледжа Де Ла Саль Св. Бенильды 
(Филиппины) 

Д. Тсомокос, Оксфордский университет, старший научный сотрудник 
Лондонской школы экономики  
(Великобритания)

Ч.Т. Фан, профессор, Институт 
права в области науки и технологии, 
национальный университет Цин Хуа 
(Тайвань)

В. Фок, профессор, директор по 
исследованиям азиатского бизнеса Бизнес-колледжа Университета 
Лойола (США)

Д.Е. Халкос, профессор, Университет 
Фессалии (Греция)

К.А. Хартвелл, президент Центра 
социальных и экономических исследований CASE (Польша)

М. Чудри, профессор, Университет 
Брунеля (Великобритания)

Сун Цяокин, профессор, декан Высшей школы бизнеса Гуандунского 
университета зарубежных исследований (КНР)

М. Шен, декан Центра кантонских 
рыночных исследований Гуандунского университета (КНР)

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CONTENTS

Current Stern Issues Fussing Financial Markets

Suetin Alexander A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

A Tentative Behavioral Approach to Real Income Targeting

Gerasimos T. Soldatos, Erotokritos Varelas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Price Movements in Futures and Spot Markets: 

Evidence from the S&P CNX Nifty Index

Kailash Chandra Pradhan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Share-Ownership Distribution and Extraction Rate 

of Petroleum in Oil Fields

Laura Marsiliani, Xiaoyan Liu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42

Assessing the Operating Efficiency for the Vietnam Microfinance 

Institutions and Implication for the Transmission

Pham Hong Linh, Nguyen Thi Thu Trang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54

The Asean Free Trade Agreement and Vietnam’s Trade Efficiency

Hai, Thi Hong Nguyen, Thang, Ngoc Doan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

What Impact Do Currency Exchange Rates Have 

on the M&A Market in BRICS Countries?

Kristina Bondareva . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70

Review of  
Business and  
Economics  
Studies

Volume 5, Number 1, 2017

Вестник 
исследований 
бизнеса  
и экономики

№ 1, 2017

CОДЕРЖАНИЕ

Ажиотаж на финансовых рынках из-за краткосрочных проблем

Суетин Александр Алексеевич . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Предварительный поведенческий подход 

к таргетированию реальных доходов

Герасимос Т. Сольдатос, Эротокритос Варелас . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Движение цен на спотовых и фьючерсных рынках: 

подтверждение индексами S&P CNX NIFTY

Кайлаш Чандра Прадхам . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Структура акционерного капитала 

и степень эксплуатации нефтяных месторождений

Лаура Марсилиани, Ксиаоян Лю . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Оценка текущей эффективности вьетнамских микрофинансовых 

организаций и выводы о путях их развития

Пхам Нонг Линх, Нгуен Тхи Тху Транг . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Соглашение о свободной торговле АСЕАН и эффективность 

внешнеэкономической деятельности Вьетнама

Хаи Тхи Хонг Нгуен, Тханг Нгок Доан . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Влияние обменных курсов на рынок 

слияний и поглощений в странах БРИКС

Кристина Бондарева . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Review of Business and Economics Studies  
 
Volume 5, Number 1, 2017

Current Stern Issues Fussing Financial Markets

Suetin Alexander A. 
Sc.D. in economics, Emeritus Professor
SolBridge International School of Business
Daejeon, South Korea
aasuetin@mail.ru

Abstract. Purpose — The purpose of this paper is to evaluate the current ability and prospects of 
the financial economy to respond to the newest challenges of the world economy with the special 
orientation to the emerging markets.
Design/methodology/approach — The paper revisits the crisis as it is moving from an acute to a 
chronic phase. Meaning no new recession is thinkable top priority today is the euro zone crisis and 
China change.
Findings — The euro zone is afflicted by three ills: a banking crisis, a sovereign-debt crisis and a 
growth crisis. Dealing with one often makes the others worse. Whatever the issue it is not simplifying 
but aggravating the behavior of the financial markets participants, viz. institutional investors. In case 
of China which economic role is expanding and plummeting simultaneously the expectations are even 
more controversial. Research Limitations/Implications — The author’s ability to decipher what went 
wrong in the financial economy could not translate fully into how to fix them. It easier to point out the 
flaws in a system than to correct them. Practical Implications — Some additional snags protrude out of 
the fact that main economic players have no trust in Chinese statistics.
Originality/value — The paper talks broadly about a more balanced economy and adds insight into the 
present and the future of international financial markets.
Keywords: Eurozone; Chinese growth; financial market; hedge funds.

Ажиотаж на финансовых рынках 
из-за краткосрочных проблем

Суетин Александр Алексеевич 
д-р экон. наук, профессор
SolBridge International School of Business
Тэджон, Республика Корея
aasuetin@mail.ru

Аннотация. Целью данной статьи является оценка актуальных возможностей и перспектив 
финансового сектора ответить на вызовы новой мировой экономики с особенным учетом 
развивающихся рынков. Автор статьи заново рассматривает кризис в его переходе от острой 
фазы к хронической. Особое внимание уделено кризису Еврозоны и изменениям в Китае. Что 
касается Еврозоны, то здесь наблюдаются три «болезни»: банковский кризис, кризис суверенных 
долгов и кризис экономического роста. Попытки «лечить» один из недугов приводят к ухудшению 
состояния остальных. Тем более что решение вопросов не только не помогает, но даже 
ухудшает поведение участников финансовых рынков, а именно институциональных инвесторов. 
Относительно Китая, экономическая роль растет и падает одновременно, вопрос становится еще 
более сложным. В статье отражен взгляд автора на более сбалансированную экономику, а также на 
текущее состояние и будущее международных финансовых рынков.
Ключевые слова: Еврозона; экономический рост Китая; финансовый рынок; хедж-фонды.

Review of Business and Economics Studies  
 
Volume 5, Number 1, 2017

INTRODuCTION
Among the minor debates like when the crisis 
began, viz. was it 2006, when America’s housing market peaked; 2007, when money-market 
liquidity froze; or 2008, when Lehman Brothers 
collapsed the contemporary financial world is 
pondering about several quite serious issues.
The crisis has highlighted specific areas of difficulty. Among them are problems with judging the 
sophistication of a client. Then real and potential costs are devastating. Property is the world’s 
biggest asset class. It took 25 years for American 
stocks to regain their 1929 highs and Japanese 
stocks have never made it back to their peak. British households’ property wealth, in today’s prices, 
is around £500 billion ($785 billion) short of its 
peak; American households have lost a whopping 
$9.2 trillion. Measured by real GDP per person a 
third of the 184 countries the IMF collects data 
for are poorer than they were in 2007. These 61 
countries have each lost at least five years.
It becomes clear that the crisis is, in effect, 
moving from an acute to a chronic phase. Of 34 
advanced economies, 28 had lower GDP per head 
in 2011 than they did in 2007. Japan’s household-saving rate has fallen from 14% of disposable income in the early 1990s to only 2% in the 
past couple of years. Its net debt-to-GDP ratio — 
more than 130% in 2011—is second only to that 
of Greece. There is no easy settlement to this. 
Cut the deficit too aggressively, in other words, 
and the negative impact on growth and the rise 
in the cost of debt service from higher spreads 
could result in a higher, not lower, debt-to-GDP 
ratio. Decreasing debt is a marathon, not a sprint 
(Blanchard, 2012).
There is a big difference between the business 
cycle, which typically lasts five to eight years, and 
a long-term (long wave) debt cycle, which can last 
50–70 years. A business cycle usually ends in a 
recession, because the central bank raises the interest rate, reducing borrowing and demand. The 
debt cycle ends in deleveraging because there is a 
shortage of capable providers of capital and/or a 
shortage of capable recipients of capital (borrowers 
and sellers of equity) that cannot be rectified by 
the central bank changing the cost of money. An 
ordinary recession can be ended by the central bank 
lowering the interest rate again. A deleveraging 
is much harder to end. It usually requires some 
combination of debt restructurings and write-offs, 

austerity, wealth transfers from rich to poor and 
money-printing (Taber, 2012).
In this study, I use comprehensive analysis of 
the newest trends to investigate the relative ability of different market participants and specific 
country events to influence potential growth in 
the financial industry. I take the performance as 
reflected in Europe, USA, and Asian countries. I also 
investigate, which types of adjustments of the 
international financial markets, would improve 
wobbling world economy.
Previous empirical research provides contradictory and sometimes ambiguous evidence on 
the value relevance of the actual state of affairs 
disclosures promulgated in different countries. 
Thus, present study using comprehensive analysis 
of the financial market data shed more lights on 
the issue.
In this research, I am going to investigate the 
current position of the financial economy with the 
distinct accent on the activity of the main market 
makers countries and companies included.
The top priority of the study is the euro zone 
crisis.

PREVIOuS RESEARCH
The Great recession 2007–09 was excessively 
researched by economists and academics, many 
famous ones including. D. Acemoglu (2009) looks 
into the structural lessons of the crises. Akerlof, G. and Shiller, R. (2009) discover psychology 
drives in its nature. Brunnermeier, M. (2009) tried 
to decipher the credit crunch. As a relevant and 
very popular became a relatively old research by 
H. Minsky (1977). The recession was scrutinized 
from different points of economic view by Ohanian (2010). Reinhart, C. and Rogoff, K. (2009) 
published a kind of bestseller akin to manifesto 
simply saying that this time it was defferent.
Nikolson (2008) recognized that financial crisis 
which initiated in United States has become global 
phenomenon. This crisis apart from affecting the 
developed economies has distressed the economy 
of such a country like Russia as well; in May 2008, 
Russian stock market was fallen by 50% and the 
Russian central bank had to buy ruble in massive 
amount to prevent the severe falling against US 
Dollar and Euro (Erkkilä, 2008).
About the cause of current crisis Bartlett (2008) 
said that crisis was started with the downfall of US 
sub-prime mortgage industry, the intensity of this 

Review of Business and Economics Studies  
 
Volume 5, Number 1, 2017

collapse was significant. He further stated that it is 
“The largest financial loss in history”, as compared 
to Japan’s banking crisis in 1990 about $780 billion, 
losses stemming from the Asian crisis of 1997–98 
approximately $420 billion and the $380 billion 
savings and loan crisis of U.S itself in 1986–95.
lmaz (2008) charged U.S subprime mortgage 
industry to be the major reason of current global 
financial crisis, he also stated that the total loses 
estimated initially up to $300 to $600 billion are 
now considered to be around $1 trillion.
While enlightening the factors that why this US 
sub-prime mortgage crisis turn into global banking 
crisis, Khatiwada and McGirr (2008) stated “Many 
of these sub-prime mortgages actually never made 
it on the balance sheets of the lending institutions 
that originated them”; and they were made attractive to foreign banks by high investment grading, 
“when sub-prime borrowers failed to repay their 
mortgages, the originating institution needed 
to finance the foreclosure with their own money, 
bringing the asset back on its balance sheet. This 
left many banks in a financially unfeasible situation, in a rather short, out of hand timeframe”.
However Hyun-Soo (2008) argues that it was the 
“Trust Crisis” which caused this global predicament. 
DeBoer (2008) believes that it was series of events 
that caused the crisis; it begins with the collapse 
of currencies in East Asia in 1997 and became edgy 
due to the financial crisis of Russia in 1998. Next, 
in USA was the “dot-com” stock collapse in 2001, 
and the final stroke was again in USA, when after a 
swift decline in housing prices and “rapid contraction in credit, it fell into recession.
Rasmus (2008) has the same thoughts; he, while 
discussing the reasons of economic recession of U.S 
said “The ‘real’ ailments afflicting the US economy 
for more than a quarter-century now include sharply rising income inequality, a decades-long real 
pay freeze for 91 million non-supervisory workers, 
the accelerating collapse of the US postwar retirement and healthcare systems, the export of the US 
economy’s manufacturing base, the near-demise 
of its labor unions, the lack of full time permanent 
employment for 40 per cent of the workforce, the 
diversion of massive amount s of tax revenues to 
offshore shelters, the growing ineffectiveness of 
traditional monetary and fiscal policy, and the 
progressive decline of the US dollar in international markets.”

EuROZONE HITCHES AND FuTuRE
The euro zone is afflicted by three ills: a banking 
crisis, a sovereign-debt crisis and a growth crisis. 
Dealing with one often makes the others worse.
A big problem is that the euro zone is only 
partly integrated. Its members have given up economic tools, such as currency devaluation and 
monetary policy, yet lack “federal” instruments 
to cope with shocks. So redressing the imbalances must come through “internal devaluation”: 
bringing down real wages and prices relative to 
competitors.
The deeper roots of the euro-zone crisis lie with 
the loss of competitiveness in the region’s trouble 
spots.
Although the euro might still survive in the core 
countries like Germany and the Netherlands, the 
prospect of a stronger euro shorn of its weakest 
links would take years to materialise.
Important problems stand out. One is the scale 
of European public spending. If America is a defence superpower, spending almost as much on 
defence as the rest of the world combined, Europe 
is a “lifestyle superpower”, spending more than 
the rest of the world put together on social protection. Ageing will add to the burden. Europeans can 
still choose to work shorter days and take longer 
holidays than Americans, but they can no longer 
afford to retire early.
The Germans know what they do not want: no 
transfer union, no Eurobonds and no transformation of the European Central Bank into a lender of 
last resort.
The Spanish illness might harm the euro zone’s 
convalescence. Portugal and Ireland are in recession, and may need second bail-outs; Greece will 
probably require a third rescue (and the restructuring of official debt). 20% of the productivity slowdown in Spanish manufacturing between could be 
pinned 1992 and 2005 on temporary work (Doladoy 
et al., 2012).
Even if almost all of Greece’s private creditors 
agreed to write off half of what they are owed, its 
debt would still be about 120% of GDP by 2020. 
More likely, participation in any write-off would 
be lower than that, leaving debt above 145% of 
GDP in 2020. That implies new debt restructurings would be needed. And since Greece’s economic news has been worse than expected of late, 
even these numbers are optimistic. The European 

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Central Bank (ECB) is now thought to be Greece’s 
biggest bondholder.
Far from stable is the economic situation in 
France. Public debt stands at 90% of GDP and rising. Public spending, at 56% of GDP, gobbles up a 
bigger chunk of output than in any other euro-zone 
country — more even than in Sweden. France now 
has the euro zone’s largest current-account deficit 
in nominal terms.
Between the third quarter of 2009 and the same 
period 2011, the euro’s share of central-bank reserves fell from 27.9% to 25.7% and the dollar’s 
proportion nudged up slightly from 61.5% to 61.7%. 
It is probable that the European Central Bank will 
eventually be forced to adopt quantitative easing 
(QE) as the only way of helping the region out of 
its debt crisis (the provision of three-year liquidity 
to the banks is a step along that road).
It is hard to be sure whether quantitative easing in Europe would be bullish or bearish for the 
currency. The conventional assumption is that 
creating more currency is bad for its value: QE in 
America is generally agreed to have been negative 
for the dollar. But if QE is perceived to stabilise 
the European economy, it could end up being 
positive for the euro, at least in the short term.
One can fix the value of money internally, via a 
gold standard, or externally, via a fixed exchange 
rate. The point is that, neither fixing nor floating 
the currency is a panacea; countries still need to 
keep themselves competitive.
Back in 2008 the monetary base of the euro zone 
(in effect notes and coins plus reserves held at the 
region’s central banks) was around 10% of GDP; 
the equivalent figures for the Federal Reserve and 
the Bank of England were in the 4–6% range. Now 
the monetary base in all three places is between 
16% and 18% of GDP.
A crisis for some is an opportunity for others. 
The decline in short-term rates is not surprising, 
given the excess liquidity washing around the eurozone banking system: banks have almost €500 
billion on overnight deposit with the ECB earning 
interest of 0.25%.

FINANCIAl INDuSTRY AND THE 
MARKET
Finance is a very specific and an industry out of 
the ordinary.
For example, in a global ranking of firms assigned patents in America in 2011 the first financial 

firm in the list was American Express — only in 
joint 259th place (Hardman, 2012).
Finance is at its most dangerous when it is perceived to be safe. Securitisation is an important 
source of credit to the real economy. Scale is what 
makes finance worrying. When products or techniques become systemic, everyone has a stake in 
ensuring that they are well managed.
Financial industry literally seizes the world 
economy. Take for instance LIBOR that was developed in the 1980s to simplify the pricing of interestrate derivatives and syndicated loans. Accurate 
benchmarks are vital if risk is to be correctly priced. 
Contracts worth around $360 trillion, five times 
global GDP, are based on LIBOR.
LIBOR rates are needed, every day, for 15 different borrowing maturities in ten different currencies. But hard data on banks’ borrowing costs 
are not available every day, and this is the root of 
the LIBOR problem. Suspicions that something 
was wrong with LIBOR were aroused in 2008 when 
financial risks began to pick up but the benchmark, which ought to have ticked upwards too, 
did not move. That same year a group of American academics circulated a paper showing that 
banks’ individual estimates of their borrowing 
costs were surprisingly close, given their different levels of risk.
Studies have shown that institutions that are 
seen as too big to fail pay lower prices for funding 
(although post-crisis efforts to ensure that institutions can be resolved in case of failure are meant 
to remove that subsidy).
Generally financial landscape is full of oddities. 
Quite possible is the prospect of America being 
paid interest by its creditors when its national 
debt is rocketing. The Treasury recently disclosed 
it is exploring how to let investors enter negative 
yields when bidding at debt auctions. Clearly, demand for American government debt is driven by 
much more than a hunger for returns. Financialmarket participants use Treasury bonds and bills 
as collateral to secure lending, for instance. And for 
risk-averse investors such as foreign central banks, 
money-market funds and retirees, America’s debt 
is uniquely suited to storing savings without much 
due diligence. In short, its government debt is a 
lot like money. That is analogous to the dollar’s 
role as reserve currency, which obliges America 
to issue debt securities in which foreigners can 
invest those dollars.

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Politicians seem to have three main beefs with 
the financial sector. The first is that bankers earn 
too much. The second is that banks take reckless 
risks and then need rescuing by governments. And 
the third complaint is that investors in financial 
markets have undue influence over an economy 
through their ability to affect bond yields and equity prices.
Rather a big issue affecting financial market 
potentials with big social component embraces 
the bankers pay.
Pay at the top grew by over 300% between 1998 
and 2010. At the same time, the median British 
worker’s real wage has been pretty stagnant. These 
trends mean the ratio of executive to average pay 
at FTSE100 firms jumped from 47 to 120 times 
in 12 years. Bosses’ pay has gone up not because 
corporate governance is failing but because of globalization. Getting and keeping a good boss matters 
more to a firm’s owners than how much he or she 
is paid; and they invest internationally, so they 
know how much good bosses need to be paid. This 
looks more like a market rate than a market failure.
The pay of bank bosses correlated well with 
returns on equity, but not with returns on assets — 
in other words, managers prospered by gearing up 
bank balance-sheets. That is now harder to pull off.
Mistrust of mainstream finance is all the rage. 
But lean economic times also make get-rich-quick 
schemes more tempting, and desperation breeds 
gullibility. As investors in Bernie Madoff’s funds 
found out to their cost, frauds are more prone to 
exposure in a weak economy — when it becomes 
clear who has been swimming naked. The FBI is 
currently probing 1,000 cases of investment fraud, 
more than double the number in 2008. Meanwhile 
America’s Securities and Exchange Commission 
filed more than twice as many Ponzi cases in 2010 
as in 2008.
Though figures are notoriously hard to come by, 
the amount of fraud based on stolen card numbers 
in the United States is around $14 billion a year 
(Light of Bytes, 2012).
With the rest of the developed world having 
embraced more secure “smart cards” (or at least 
in the process of doing so), America remains the 
only major country that still relies on antiquated 
payment cards that encode their sensitive data in 
a magnetic stripe on the back. In security terms, 
that is about as safe as writing your account details 
on a post-card and sending it through the mail. 

Stolen credit-cards details are sold in bulk, ranging in price from ten cents to nearly a dollar per 
item. To date, more than 1.3 billion EMV cards have 
been issued globally, and some 21m point-of-sale 
terminals can now accept them. This represents 
nearly one out of two payment cards in use globally, and three out of four terminals on merchants 
premises around the world.
Tax evasion costs governments $3.1 trillion 
annually. Switzerland’s banks house around $2.1 
trillion, or 27%, of offshore wealth (Werdiger, 2011).
In some cases fraud spreading looks as a systemic one. Korea’s Fair Trade Commission (FTC) 
detected over 3,500 cases of price-fixing in 2010, 
but only 66 led to fines.
I am far of blaming the role of financial innovations. The good society requires an effective financial sector, and the way to extend the good life to 
more people is not to shrink the sector nor restrain 
financial innovation but instead to release it.
Nevertheless it is easy to find some glaring negative events because of those innovations.
So, on February 3rd 2010, at 1.26.28 pm, an automated trading system operated by a high-frequency 
trader (HFT) called Infinium Capital Management 
malfunctioned. Over the next three seconds it entered 6,767 individual orders to buy light sweet 
crude oil futures on the New York Mercantile Exchange (NYMEX), which is run by the Chicago Mercantile Exchange (CME). Enough of those orders 
were filled to send the market jolting upwards.
But the fact that they happen at all feeds the 
perception that today’s equity markets have turned 
into something more akin to science fiction than a 
device for the efficient allocation of capital. HFTs 
do not have clients but operate with their own capital. Now the complaints are about the milliseconds 
HFTs gain over ordinary investors by putting their 
servers right next to the exchanges’ data centres; 
then they were about the monopolistic privileges of 
the specialists and the advantages of being on the 
floor. Meanwhile the industry itself pushes inexorably forward. That certainly entails greater speed: 
the industry used to think in terms of milliseconds 
(it takes you 300–400 of these to blink) but is now 
fast moving to microseconds, or millionths of a 
second. It also means smarter algorithms.
People have gone from trading in open-outcry 
pits to trading via screens to programming algorithms. The next stage could be self-learning systems, in which sentient algorithms mine the capital 

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markets, spotting correlations that are too complex 
for humans to see and suggesting trading ideas as 
a result. Humans will still be needed to validate 
these ideas, he says reassuringly. Innovation is 
often triggered by a client coming to a bank with 
a specific headache. Software has a nasty habit of 
developing bugs.
The Chicago Mercantile Exchange, which 
launches over 400 new derivatives products a year, 
outlines a three-stage process for innovation: investigation, creation and validation.
It is a tradition among investors to assert that 
equities are the best asset for the long run. Buy a 
diversified portfolio, be patient and rewards will 
come. Holding cash or government bonds may offer 
safety in the short term but leaves the investor at 
risk from inflation over longer periods.
Such beliefs sit oddly with the performance 
of the Tokyo stockmarket, which peaked at the 
end of 1989 and is still 75% below its high. Over 
the 30 years ending in 2010, a “long run” by any 
standards, American equities beat government 
bonds by less than a percentage point a year. The 
data for 19 countries from 1900 to 2011 shows that 
the equity risk premium relative to Treasury bills 
(short-term government debt) ranged from just 
over two-and-a-half percentage points a year in 
Denmark to six-and-a-half points in Australia. In 
the period 1900–2011, the average world dividend 
yield was 4.1%; real dividend growth was just 0.8%; 
and the rerating of the market added 0.4%. Gold 
was the only asset that had a positive correlation 
with inflation.
Countries are specific in their attitude to the 
financial sphere. So unlike those in charge of 
public pension funds elsewhere, the Canadians 
prefer to run their portfolios internally and invest directly. They put more of their money into 
buy-outs, infrastructure and property, believing 
that these produce higher returns than publicly 
traded stocks and bonds. They are in some ways 
like depoliticized sovereign-wealth funds — a new 
brand of financial institution. Running assets internally costs a tenth of what it would if they were 
outsourced. Canadian pension funds have ensured 
their pay is competitive with Bay Street, Toronto’s 
version of Wall Street.
A mixture of social and financial returns is central to a burgeoning asset class known as “impact 
investing”. In simple terms, finance lacks an “off” 
button. Most stock market bulls build their case 

on the trailing price-earnings ratio for the S&P 
500, which stands at 16.
The capital market that is commonly thought 
to be the most developed in the world is in a 
mess. An average of 165 companies with less 
than $50m in inflation-adjusted annual sales 
went public in America each year between 1980 
and 2000. In 2001–2011 the average fell by more 
than 80%.
Qualitative and quantitative changes have 
marked 2011 in other segments of the financial 
market. The insurance industry paid out some 
$110 billion for natural disasters last year. Their 
economic costs were $378 billion last year, breaking 
the previous record of $262 billion in 2005 (in constant 2011 dollars). Whether the economic toll of 
disasters is rising faster than global GDP is unclear, 
since a wealthier world naturally has more wealth 
at risk. Development by its nature also aggravates 
risks.
The mountain of over-the-counter (OTC) derivatives products, whose notional amounts outstanding, reckoned at around $700 trillion in June 
2011, easily dwarf the $83 trillion of derivatives on 
exchanges. The notional amount of outstanding 
over-the-counter (OTC) derivatives declined to 
$648 trillion at the end of last year, after reaching 
a high of $707 trillion in June 2011.
Interest-rate contracts, which make up the 
majority of OTC derivatives traded, decreased by 
9% to $504 trillion; credit-default swaps dropped 
by 12%; and other derivatives, including commodities and equity-linked contracts, fell by 
9%—despite Australia and Spain reporting to the 
Bank for International Settlements for the first 
time in December 2011. However, gross market 
values, which measure the cost of replacing all 
existing contracts, increased by 40%, to $27.3 
trillion, the biggest increase since the second 
half of 2008.
For less calamitous changes in the weather, 
derivatives are a better option. According to the 
Weather Risk Management Association, an industry body, the value of trades in the year to March 
2011 totalled $11.8 billion, nearly 20% up on the 
previous year, though far below the peak reached 
before the financial crisis took the steam out of 
the business. In 2005–06 the value of contracts 
had hit $45 billion.
Weather derivatives had an inauspicious start: 
the first trade was done by Enron in 1997.

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Mining and oil companies account for some 
30% of the value of London’s stockmarket, about 
twice the global weighting.
But just as the client base is shifting eastward, so 
is incorporation. A new big trend is the rise of the 
“mid-shore” financial centre, which incorporates elements of onshore and offshore. Two big examples 
are Hong Kong and Singapore. Both have offshore 
traits (low tax, secrecy) but also have strong legal 
systems and plenty of double-taxation treaties. 
This has helped Singapore, in particular, gain business that has fled the Channel Islands and other 
European jurisdictions.
The average year-on-year growth rate for crossborder bank credit to non-banks during the 2000–
07 period was a sizzling 15.2%, compared with 6.7% 
for total bank credit. Since then cross-border credit 
has fizzled and looks likely to fall further.
European lenders were in the vanguard during 
the era of internationalization, and around a third 
of their assets are outside their home markets. 
In March 2012 the Reserve Bank of Australia revealed that the departure of European lenders, in 
particular French banks, had left an A$34 billion 
($35 billion) funding gap in the syndicated-loan 
market for local companies. A big lesson of the 
crisis is that banks which are global in life are 
national in death. Bankruptcies of Lehman Brothers and MF Global showed regulators how assets 
could easily get trapped in foreign jurisdictions, 
leaving a bigger bill for taxpayers back home. Now 
a third revolution is under way. Manufacturing 
is going digital. Offshore production is increasingly moving back to rich countries not because 
Chinese wages are rising, but because companies 
now want to be closer to their customers so that 
they can respond more quickly to changes in 
demand. And they cling to a romantic belief that 
manufacturing is superior to services, let alone 
finance.
Financial industry was at birth of a very interesting sector of the world economy known as offshore 
business incorporation.
Up to 2m companies are set up in America each 
year. Britain creates some 300,000. These are the 
total numbers. At the same time around 250,000 
are set up in offshore locations.
The British Virgin Islands (BVI) alone registered 
59,000 new firms in 2010. It had 457,000 active 
companies as of last September — more than 16 
companies for every one of its 28,000 people.

Firms may use them during mergers, to park assets during complicated transactions, or to fend off 
lawsuits in countries with predatory governments 
or corrupt courts. They can usefully protect trade 
secrets or safeguard directors from kidnappers or 
busybodies. Takeovers are usually lucrative for 
shareholders of the target firm: in America between 1990 and 2008, they have received a median 
premium of 35%.
They offer flexibility for entrepreneurs needing to move quickly. Many companies started out 
as a shell. Delaware’s Division of Corporations 
registered 133,297 new corporate vehicles 2011.
Offshore formation agents seethe at this: they 
have tightened their standards under pressure from 
big countries that do not practice what they preach 
and (worse still) are now stealing their business.
Great financial influence on the world economy 
is contributed by remittances to poor countries. 
Since 1996 remittances to poor countries have been 
worth more than all overseas-development aid, and 
for most of the past decade more than private debt 
and portfolio equity inflows. In 2011 remittances 
to poor countries totaled $372 billion, according 
to the World Bank (total remittances, including to 
the rich world, came to $501 billion). That is not far 
off the total amount of foreign direct investment 
that flowed to poor countries. Given that cash is 
ferried home stuffed into socks as well as by wire 
transfer, the real total could be 50% higher.
Remittances are not just big, but growing — they 
have nearly quadrupled since the turn of the millennium — and resilient. In 2009, when economies 
around the world crashed, remittances to poor 
countries fell by a modest 5%, and by 2010 had 
bounced back to record levels. By contrast, foreign direct investment in poor countries fell by a 
third during the crisis, and portfolio inflows fell 
by more than half. In 1970 46% of recorded remittances were reckoned to originate in America. By 
2010 America’s share was just 17%. One big new 
player is the Gulf, which has sucked in migrant 
workers since the oil boom. Saudi Arabia is now 
the world’s biggest sender of remittances after 
America, posting $27 billion in 2010, mostly to the 
families of South Asians and Africans who toil on 
its building sites and clean its homes. More than 
half of all remittances to South Asia come from 
the Gulf; worldwide, the region sends almost as 
many remittances to poor countries as Western 
Europe does.

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Expensive oil has made Russia a big destination 
for immigrants, too. In 2000 it was only the 17thbiggest remitter in the world — indeed, it was a 
net receiver. But by 2010 it was the fourth-largest 
sender, dispatching nearly $19 billion, mostly to 
Central Asia. Remittances from Russia are worth 
more than a fifth of Tajikistan’s economy. Stricter 
border controls keep migrants in as well as out, and 
the remittances flowing.
Despite world economic turmoil, global inflows 
of foreign direct investment (FDI) rose by 17% in 
2011 to $1.5 trillion (SUNS, 2012).
Most buy-out firms now prefer the fluffy title of 
“alternative asset manager”. There are 827 buy-out 
firms globally(Pensionprism, 2012). Private-equity 
buy-outs tend to increase productivity — by around 
2%, on average (Lee, 2012).
Dynamic changes occur to hedge funds. Running a hedge fund today is three times as much 
work for a third of the fun, says one. But many are 
motivated by economics. Hedge funds typically 
get paid a 2% management fee on assets to cover 
expenses and a 20% performance fee on the returns 
they achieve for investors. Most funds do not earn 
performance fees unless they outperform their peak 
level or “high-water mark”. At the end of 2011, 67% 
of hedge funds were below their high-water marks 
and 13% have not earned a performance fee since 
2007 or earlier. 18% of hedge funds are more than 
20% below their high-water marks (Durden, 2012).
Last year alone, Bridgewater Pure Alpha fund 
earned its investors $13.8 billion, taking its total gains since it opened in 1975 to $35.8 billion, 
more than any other hedge fund ever, including the 
previous record-holder, George Soros’s Quantum 
Endowment Fund.
Around a third of all hedge funds own Apple’s 
shares, including big names like SAC Capital and 
Greenlight. Some have made very big bets. Citadel’s $5.1 billion stake in Apple (as of December 
31st 2011) accounted for around 12% of its equity 
portfolio. Many hedge funds that have done well 
in the past year owe much to this single position.
Apple is larger than the American retail sector 
combined. It accounts for 4.5% of the S&P 500 and 
1.1% of the global equity market.

CHINA DWINDLING AND 
EXPANDING ROLE
China foreign-exchange reserves fell in the fourth 
quarter 2011 for the first time since the height of 

the Asian financial crisis in 1998. The drop was 
small, from $3.2 trillion to $3.18 trillion, but also 
a little mysterious. China still exports more than 
it imports, and attracts more foreign direct investment than it undertakes. These two sources 
of foreign exchange must, then, have been offset 
by an unidentified drain. Last year about $185 
billion might have passed from mainland China 
through the VIP rooms of Macau’s casinos.
Each iPad sold in America adds $275, the total 
production cost, to America’s trade deficit with 
China, yet the value of the actual work performed 
in China accounts for only $10. China’s small contribution to total costs suggests that a Yuan appreciation would have little impact on its exports. 
A 20% rise in the Yuan would add less than 1% to 
the import price of an iPad.
But is China’s currency still undervalued by the 
Senate’s own definition? There are three IMF’s 
methods to identify offending exchange rates. Referring to one IMF calculation the Yuan was undervalued by 23%. That estimate, made in September 
2011, was based on the exchange rate required 
to bring the country’s notorious current-account 
surplus into line with the “norm” for a country 
like China. The IMF has not said officially what 
that norm should be, but one study suggests it is 
about 2.9% of GDP.
The corollary of a cheap currency is a large 
current-account surplus. It is therefore notable 
that China’s surplus narrowed to only 2.5% in the 
fourth quarter of 2011. It was the smallest surplus 
(relative to the size of China’s economy) since 2002. 
Even in absolute terms, the $201 billion surplus 
was the smallest since 2005.
China’s labour force is not, however, growing 
as quickly as it was. From 1991 to 2000, it swelled 
by 8.7m a year.
So China is not about to hollow out. But if it is 
to keep growing fast, it must become more innovative. At present Chinese innovation is a mixed 
bag. China was once a dazzling innovator: think 
of printing, paper, gunpowder and the compass.
China can seem invincible. In 2010 it overtook 
America in terms of manufactured output, energy 
use and car sales. Shanghai reported fertility of just 
0.6 in 2010—probably the lowest level anywhere 
in the world. In 1980 China’s median (the age at 
which half the population is younger, half older) 
was 22. That is characteristic of a young developing country. It is now 34.5, more like a rich country