Recent Trends in Financial Engineering

The following sections are included:

• Preface
• About the Editors
• Acknowledgments
• Contents

In recent years, the study of innovation systems has received significant attention. Within this framework, the European Innovation Scoreboard (EIS) was introduced in 2000 in order to provide indicators for monitoring the EU’s progress in high-tech innovation as well as its relation to the progress of its major global competitors. In this study, we employ an alternative evaluation methodology based on the “Benefit of the Doubt” (BoD) variant of data envelopment analysis (DEA). In contrast to the unweighted construction in composite indicators in the EIS, the BoD weighting model takes into account the importance each dimension has for each country, offering significantly different results and, in some cases, favoring some of the lower-EIS performance groups. The question is whether the observed divergences are simply a matter of choice of a mathematical formula or if they serve political and financial expediencies. Also, the role innovation could play in the global scene in the future is one more suggestion for further research.

This chapter aims to better understand how a young company can use its funding trajectory as the basis for its development trajectory. Financial players provide capital and also meet other business needs, such as the need for knowledge, legitimacy, credibility, and visibility at local, national, and international levels. These needs evolve over time, and each financial partner’s interactions with the company help create a specific trajectory (Bessière et al., 2020) that will allow the company to develop.

This study uses decision tree and random forest regressions to improve the accuracy of an approximation of credit default swap (CDS) spreads called the Equity-to-Credit (E2C) formula based on a time span including the COVID-19 pandemic period. Certain sections are dedicated to explaining deeper important concepts in machine learning. Random forest regressions run with the E2C and selected additional financial data results in an accuracy in CDS approximations of 82% out-of-sample. The transparency property of these algorithms confirms that, for CDS spreads’ forecasting, the most used feature is the E2C formula and to a lower extent companies’ debt rating and size.

Europe was the first continent to create concomitantly a large-scale carbon market to reduce the level of carbon emissions and to create a green bond market to finance the transition to low-carbon economies. In this chapter, we study the respective roles of these instruments, their price trajectories, their interaction, and their potential complementarities over a six-year period (2014–2019). We enrich the literature on environmental markets in several respects. First, we report significant short-run and long-run persistence of shocks to the conditional correlation between the European carbon and the European green bond markets. Second, we detect bidirectional shock transmission effects between those markets but no significant spillover effects. Taken together, these results suggest that a green bond issued in Europe may be used to hedge against the carbon price risk.

Emerged around 2010, social impact bonds (SIBs) are a multi-stakeholders’ mechanism where private investors fund a social service experiment and are paid back by a public body if pre-defined social outcomes are achieved. This chapter presents a synthesis of the knowledge produced about SIBs by both academics and experts by the following: first, presenting the emergence of the SIB model in the UK and its diffusion; second, highlighting the different features of the SIB model according to rationales, goals, and risks; third, focusing on the different approaches and financial arrangements characterizing the SIB application around the world, before ending the chapter with a case study presentation focusing on the SIB development in France.

The purpose of this study is to examine whether Greek companies that apply Environmental, Social, and Governance (ESG) criteria in their activities show better financial performance than companies that do not apply such criteria. The analysis considers 10 financial indicators for a sample of 56 Greek companies. With the application of the multi-criteria UTADIS method, the differences between the two groups of companies are examined. The results show that companies that apply ESG criteria seem to show a better financial performance in certain financial ratios, while the other indicators show indifference between the two categories of companies.

Shareholder activism, the use of ownership rights to exert influence on investee companies, is not new but is an evolving phenomenon that has made its way into mainstream investment approaches as a powerful means of inciting change in companies. In this chapter, we review not only the past and present of shareholder activism, going back to its origins and mapping the development of both financially and socially motivated activism, but also go further to identify future trends and challenges. Drawing on interviews with international experts from key organizations in the activism universe, we tease out the newest issues, actors, and tactics to give a forward-looking account of where shareholder activism will go next. We identify four new trends, the beneficiary revolution, refining collaboration, a holistic approach, and technological innovation, which stand out as significant shapers of the future direction of shareholder activism. Our analysis of these empirical trends combined with recent research and practical examples indicate some key challenges on the horizon that demand further attention in both research and practice. These challenges are the diversity of demand, democratization, temporality, and increasing polarization between leaders and laggards. These findings have implications not only from a practical investment or management perspective but also for future research in terms of identifying and analyzing potentially unintended consequences of the new trends.

The sharing economy may be an opportunity to respond to real societal needs through the mutualization of resources and to encourage new communities through the democratization of power. Mutualization and democratization do not guarantee the ethical nature of this movement. Our research question is under what conditions the sharing economy can present the ethical dimensions highlighted by sharing-related literature. To answer that question, we explore the theoretical and empirical context of crowdfunding (CF) and focus on the comparative analysis of five reward- and equity-based CF platforms. This study emphasizes the conditions needed for ethical CF and, more generally, for an ethical sharing economy: the possibility to give gratuitously; the pursuit of a societal purpose; cooperation within and between groups of actors; long-term stability of spaces and times dedicated to cooperation; virtual and possibly physical arenas of cooperation; and people dedicated to cooperation.

Impact can be qualified as a “hembig” concept, that is, an important concept that is intellectually problematic and vague. As it has gained considerable traction in practice, both in finance and accounting, we explore the interrelationships between the measure of impact and its effects on the allocation of capitals in practice. After reviewing its conceptual meaning and current standards, frameworks, and practices, we propose a multi-dimensional framework to analyze impact accounts. We conclude by acknowledging the limits of impact measurement devices and key takeaways from practice.

The following section is included:

• Index