The new ROE?

Lately I’ve been giving a lot of thought to topics of environmental systems and sustainability policy for consulting work and somehow this idea from Corporate Finance class with Professor Jacque resurfaced.  (For additional context, I was reading an interesting guide on “Decoupling Indicators” published by OECD, OECD_Decoupling.)

A useful technique for better understanding the underlying drivers of a firm’s past performance is to decompose Return on Equity (Income / Equity or “ROE”) into three components: Profit, Asset Utilization, and Leverage. The decomposition is insightful as the components reflect three basic functions in a firm: marketing, operations and finance, respectively.  As a formula, it looks like this:

Income / Equity = (Income / Sales) * (Sales / Assets) * (Assets / Equity)

Okay, so why the heck did this occur to me, besides that I might be a huge nerd and/or one of the few paying attention in lecture?  Well, what if we think of Net Exports as our flow variable (replacing Income) and Cumulative Environmental Impact as our stock (replacing Equity)?  Decomposing Net Exports / Cum Env Impact could involve some of the central elements of sustainability strategy, namely: (1) global markets, (2) productive people, (3) frugal behavior and (4) clean technology.  It could look something like this:

Net Exports / Cum Env Impact = (Net Exports / GDP) * (GDP / Population) * (Population / Consumption) * (Consumption / Cum Env Impact)

This could be one way of quantifying and decomposing a measure of Sustainable Environmental Economic Development (SEED?).  When I look at this formula (that I sketched on a napkin) my immediate reaction is that the best way to maximize the left-hand-side is to invest in knowledge-based, clean technology sectors in order to serve international markets, while promoting social responsibility and educating the next generation about the risks facing our planet and the opportunities for entrepreneurship.  That sounds about right, but maybe there’s a better formula out there(?)

A Network Analysis of the Global Financial System

The following was submitted to fulfill the requirements of coursework in finance with Professor Jacque at The Fletcher School at Tufts and coursework in networks and complexity with Professor Hidalgo at Harvard Kennedy School of Government.  The network visualizations were created using gephi, an open source graph viz platform that rocks my world.

ABSTRACT

What implications has the U.S. sub-prime mortgage crisis had for international financing?  Are banks more or less exposed to systemic risk in the global financial system now than before?  This paper explores recent developments in the web of cross-border bank exposures and, treating these exposures as a “directed network”, investigates the changing statistical measures of network topology.  These measures suggest a stark departure from historical patterns of globalization in banking.  Historically, trends toward higher connectivity and diversified exposure were continuous and unhampered by disturbances or crises between 1985 and 2006.  More recently, these trends have been substituted for an apparently steady state of constant connectivity, with lower levels of average exposure, lower bank appetites for risky lending to less developed countries, and greater concentration on lending between “culturally similar” countries.  Looking forward, key implications of this departure include lower levels of systemic risk, but also lower levels of efficiency in international financial markets.

Full text: 0420 – Exposures Network – Fabyanske – FINAL

PowerPoint: Bank Exposures Network Analysis