Tag Archives: Life

Canadian Banking as a Dissertation Topic? A letter to my PhD mentor

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Dr. Fadul:

I’ve been giving a lot of thought lately to potential dissertation direction that could also be a good direction for future prospects.  I need to do this because I will need to have a very good plan to show the Social Sciences and Humanities Research Council of Canada selection committee when I apply to compete for limited and extremely competitive doctoral fellowships as well as plan a logical progression for the next few research papers.  Without these possible sources of funding, my completion of this degree is in jeopardy…

I’ve long tried to avoid doing anything related to the stock market and trading of any sort.  Even though most finance people seem to be lured by topics like options pricing or other market behaviours, I don’t really want to touch the markets, since I believe that people seem to believe that they are competent to gamble on it, without even being able to name three valuation models that can be applied to the stock they like, let alone how to calculate putative intrinsic values to know if a security is *actually* under- or over-priced, even if they choose to ignore the valuations.

That said, I came up with what I think will be a compelling direction and could hold good potential for the future.  About 10 years ago, when I was a financial analyst at CIBC–then still the second-largest Canadian bank–one of the projects I took on was to create a database to store and track metrics that pertained to Basel II, banking regulatory capital, such as Tier 1 capital ratio, net interest expense ratios, and other banking-specific metrics.  Recently, in 2008, we all became quite acutely aware of how important not only capitalization is, but what form of capital you hold in your capital structure, in a banking industry-specific way.  While capital structure in firms is much better understood, it is clear from the bank failures that we do not understand well the limitations and behaviours of liquid versus illiquid versus risk-impaired assets, particularly for a bank.  Canada has traditionally held that banks could not participate in all “four pillars” of banking, such as property & casual insurance, trust, mortgages, deposits, etc.  With banks constantly lobbying for deregulation and reduction of Tier 1 (most liquid) capital requirements, we have seen both how foreign banks have been hit hard by the credit crisis as well as how Canadian banks were consistently rated #1 during this period, not only for being conservative, but for managing to pull in huge profits whilst remaining relatively safe and insulated from the world credit crisis.  If a doctorate is designed to make you an “expert” in a specific field in your discipline, then I would like to study the Basel II accord and its policies, Tier 1 (and other) capital ratios and other banking-specific metrics, determine which ones are most important in what cases, which ones allow the banks to remain not only profitable but excel in various conditions, whilst maximizing safety without restricting performance.

This, I feel, has good prospects for the future in that the Canadian government itself would be interested to find out which aspect(s) of Basel II and various levels of regulatory capital were most responsible for the performance of Canadian banks during the credit crisis of 2008; Canadian banks would be interested to find out which aspect(s) had the most insurance against failure whilst maximizing performance so that the least restrictive regulations possible could be determined; US and foreign banks and governments would similarly be interested in learning this information to determine policy and finance strategy.  This would be good for consulting opportunities well into the future.

I think I have a uniquely competitive position to explore this also; there are relatively small numbers of Finance PhDs produced in Canada each year.  Even smaller number would be people interested in this field specifically, as I pointed out.

I would be needing to make application for these competitive doctoral fellowships in the coming weeks and months, so I thought I would start running this by you… I’ve collected quite a large number of references pertaining to Basel II, regulatory capital, and related topics…  Thoughts?

Mendeley is an awesome way for researchers to collaborate and even see what researchers working on related topics are reading (versus simply citing) and I will maintain my Mendeley reference and citation management software database continually updated with http://www.mendeley.com/research-papers/collections/2738071/Canadian-Banking/

How the handicapper became a jockey

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This is reposted from my original robincmba.blogspot.com post dated Thursday, April 7, 2005…  I wanted to consolidate blogs.

The other night, I had a rather intense dream. Intense emotions. Intense realism.

Intense fiction.

When one of my roommates first moved in to my current house and home last spring, he introduced me to the discipline of handicapping thoroughbred horse-races using the structured and tried and true methodology of the Controlling Factors: Speed, Class, Record, Weight, Interval between races, time, and odds. While he has returned to work two days per week, he spends every of the intervening days, for most of each day, betting the horses. Personally, I think it is a bit excessive, but it’s not my business, as long as he makes rent each month.

Since then, I’ve expanded my handicapping knowledge base, including formal studies of various methodologies–but still, I don’t have the money to play the races regularly–nor the desire to–but rather continued more formal studies because of my extensive background in forecasting, modeling, and statistical analyses.

But this is just background information for this odd, intense dream I had the other day.

The beginning of the dream started with my estranged wife spending pleasurable quality time together with me, just like we used to do. It was a refreshing change from the cold rudeness she affords me whenever I travel to her parents’ house, where she lives with my daughter.

They say time heals all. But surely this is a sign that the intervening year and a half since our separation has had barely any effect at all–that I still wish that a snap of the finger could bring us back to our happy days–that we could once again be a happy family. In my dream we spent happy times, as we did for so much of the almost five years we were together, exploring the natural world together–thinking about the science behind what we take for granted–thinking about such things as why ice floats, for example. We take for granted that ice floats. But because we take it for granted, we don’t think about it. And because we don’t think about it, we really don’t understand what is going on that makes ice float. In fact, ice won’t always float. We take it for granted that ice floats in liquid water, but never stop to think that the very physics that makes ice float in water could make ice sink in some other liquids, or that in the microgravity of freefall, such as a spaceship in orbit–that’s right, there is a strong gravitational pull on spaceships; the only reason astronauts seem to be weightless (not massless, which would mean they didn’t exist) is because, they–and their spacecraft–are in fact very strongly being affected by the earth’s gravity. They are weightless because they are in a very controlled freefall in a special condition where they fall towards the earth (quite fast, too–the speed at which they orbit) and they fall at just the right angle that their freefall is just at a rate that matches the curvature of the earth. That’s right–spaceships and astronauts are actually in freefall, because of the earth’s gravity (and their very fast orbital speed is evidence of how strong this gravity is), but in a special freefall where they fall towards the earth, and just match the curvature of the earth, so the freefall can continue ad nauseam. If the spaceship moved faster than the pull of gravity made them fall, the spaceship would leave orbit–and not be weightless. If the spaceship moved slower than the pull of gravity, it would not keep up with the curvature of the earth and would fall towards the earth until it crashed–and experience negative gee’s. The whole reason I expounded on the explanation of spaceships and the illusion that there is no gravity in space is to explain further that ice does not float in space, but not because there is no gravity–rather because the spaceship is in freefall matching the pull of gravity, thus making it seem like there is no gravity, when in fact, there is a lot of gravity in space. Because it the pull of gravity is matched by the spaceship’s freefall, ice in water would not float–the pull of gravity on the water and the ice is matched and made to seem absent because the ship that the glass of icewater is in is in freefall.

So why does ice float on earth, when we obviously know that gravity is present?

It is because water behaves strangely around its freezing point. Due to hydrogen bonding and the fact that a water molecule is polar (that is, because of an unpaired set of electrons on the oxygen-rich side of the molecule, and the relative lack of any charge on the hydrogen side, the water molecule is overall neutral electrically, but exerts a slight negative charge effect on the oxygen side and a slight positive charge effect on the hydrogen side). Because water is polar, it experiences hydrogen bonding–that is, an attraction between the unbalanced concentration of negative charge on the oxygen side and the unbalanced lack of negative charge (relative positivity) on the hydrogen side. This attraction occurs between water molecules and is, in fact, what causes water to be liquid at room temperature and pressure instead of a gas; without the cohesion caused by this polarity keeping molecules attracted to each other, at room temperature, water would not have any attraction between molecules, and a substance as light as water would cease to have any cohesive forces within it, freeing the molecules to act as a gas.

So, what does this have to do with ice floating? (Or, more circumlocutionally, what does this have to do with my intense dream?) It is this polarity that causes something strange to happen to the intermolecular interactions of water around its freezing point (perhaps another day, I’ll explain that the Celsius temperature scale does not mean that the freezing point of water is “cold” or “hot”–or that 0°C lacks any temperature and, say, -40°C (which coincides with -40°F, incidentally). The Celsius scale was simply defined as 0°C being the temperature at which water turned from liquid to sold (or vice versa) at standard pressure, and 100°C was the point at which water turned from liquid to gas (or vice versa). But as I said, I’ll write more at length on this in a future post….

As I just mentioned, the polarity causes something “strange” to happen around freezing temperature. First, I must make something else we take for granted–and therefore don’t really understand–perfectly clear; I must define what, precisely, a “liquid” and a “solid” are. A liquid, as I alluded earlier, is a state of matter characterised by intermolecular attraction strong enough to cause the molecules of a substance to maintain contact with each other (without molecules having a strong enough attraction to maintain contact with each other, the substance ceases to “stay together” and becomes a gas). But this intermolecular attraction is not strong enough to form a structure (i.e. the intermolecular forces are not strong enough to maintain each molecule of the substance a fixed position relative to each other–a solid). What is the force opposing intermolecular forces, determining what state a substance will be? It is temperature, something else we take for granted. Temperature, technically defined by the Kinetic Molecular Theory, is simply defined as the amount of kinetic energy (energy of motion) the substance’s molecules have. The faster the molecules move, the hotter a substance is. The slower a substance’s molecules move, the colder the temperature. Therefore, although it is “temperature” that determines what state a substance will be–solid, liquid, or gas–a more meaningful explanation is that whether a substance will be a solid, liquid, or gas, is determined by the balance between the intermolecular attraction and the motion of the molecules (temperature) which acts opposing the intermolecular attraction. A solid is thus the point at which intermolecular attractive forces are stronger than the motion of the molecules. And since we do not change the intermolecular forces of a substance, the only variable is the temperature–or the motion of the molecules. A liquid is a substance within the range of temperature/molecular motion where intermolecular attraction is able to maintain a cohesion between the substance’s molecules (i.e. intermolecular attraction is strong enough to prevent the substance from being a gas, but not strong enough to maintain fixed relative positions of the molecules–a solid), but not strong enough to make it a solid. When the molecular motion is high enough to overcome the intermolecular attraction, the substance ceases to maintain cohesion between molecules and the molecules have enough energy to roam freely–be a gas.

So what happens that is “strange” with water around it’s freezing temperature? What is “strange” is that liquid water–water with enough intermolecular attraction to maintain cohesiveness of the substance to itself but enough molecular motion/temperature to prevent its molecules from settling into fixed relative positions/structure–has a certain average distance between its molecules. I don’t know what it is numerically, but it naturally has a certain average distance between the molecules. Because of its polarity, when the temperature is low enough/molecular motion is slow enough/defined in the Celsius scale as 0°C, the water molecules are moving slowly enough that they do not have enough energy to move out of a fixed orientation/structure. But just before water “freezes” or “settles into a fixed position of molecules relative to each other,” the polarity of the water molecules cause them to orient themselves in a hexagonal 3-dimensional structure. At temperatures/motions around freezing temperature, there is enough molecular motion energy to keep the hexagonal structure having an average distance between molecules that is farther apart than the average distance between liquid water molecules.

Why does this make solid water (ice) float in liquid water? It is because of this differential in distance between water molecules as a solid and as a liquid. (It should be noted that at slower molecular motions than around the freezing point, the molecules do not have enough molecular motion energy to keep the perfect hexagonal structure and the intermolecular forces win over the motion of temperature, causing the intermolecular attractive forces to draw water molecules closer together. This causes solid water to become more dense. At some theoretical point, the intermolecular attraction is strong enough to pull the water molecules closer together than liquid water’s molecules, making ice sink.

But around the freezing point of water, when the hexagonal solid structure maintains a distance between molecules farther apart than liquid molecules, the concentration of mass is less in the solid structure than the concentration of mass of the liquid.

This is where I must point out that you should realize that it is not really ice that floats. It’s really the more concentrated mass of the liquid water that is trying to fall as close to the earth as possible. Because it has more concentrated mass than the solid water (ice), it pushes the solid water out of the way. It could be sideways, upwards, diagonal–it doesn’t care; the liquid water only cares about being as low as possible. So if it pushed the ice sideways, it would not gain any advantage in being lower. The only way to make as much liquid water sink as far down as possible is to push everything less dense than it upwards. This means, of course, that if you had a balloon filled with carbon dioxide and a balloon filled with helium as well as ice chunks in a swimming pool, the water would push the helium balloon and the ice upwards. But the carbon dioxide-filled balloon has more concentrated mass than liquid water (i.e. is more dense), so it pushes everything out of the way to get to the lowest position. This means pushing water, helium balloon, and ice out of the way to be lowest.

Now, I think you will never look at a glass of icewater the same way again.

And now, I can get back to my dream.

It was the enjoyment of exploring such simple physical properties for the sake of understanding that my wife and I shared. And in my dream, we blissfully discussed such properties.

After my dream took a sharp change in story, it went from the blissful to the exotic.

Enter my father, my sister, one of my friends, Brad, his dream-generated brother, my father, my father’s girlfriend, and my other roommate, Alex. Somehow now there was an understanding that we would all participate in a thoroughbred race–not bet on it–we would be jockeys. What began to drive me crazy was that each person, in turn, caused a delay for some reason or other, to the point that Brad decided that he no longer had time to race his horse. Then his brother dropped out. Then my father’s girlfriend, and then him. My sister stuck with me the longest (but strangely caused the first delay for taking a bath). Then I blew up at my father. Probably repressed emotions from waking hours, I lashed out at him for not understanding my situation. I lashed out at him for never even trying to understand my difficult emotional, financial, and life situation. He was lying down on a couch at the time, and completely out of character when he drew the blanket up to cover his crying face. Of course, in real life, I know his obstinance would result in the confrontation ending with his storming away, even more righteous than before, even less understanding than before.

At this point, the craziness of the idea that we would jockey horses yielded to the insanity of my intensely resentful, painful emotions. The fact that because the numbers worked out such that I and my friend would be jockeying two horses–just as insane as the idea that we would race a horse in the first place–was even overpowered by my anger of being delayed by everyone close to me, one by one; was even overpowered by my resentful feelings of being betrayed by everyone close to me when they decided not to race, after causing all the delay; was even overpowered by my disappointment that my parents had become increasingly less supportive and understanding as time has gone on–was even overpowered by my losing my wife and daughter a second time.

When I first set out to write this exposition, I thought it would help to verbalize all this pain.

But now, over an hour after I wrote the first words, the emotional pain has become so intense–the tears accurately prophesied in my dream now a reality–I realize that time has done nothing to heal anything.

Rather, time has caused my emotional wounds to fester and ripen–and rot.

If not time, what–if anything–will save me?

Who’s afraid of Vitamin E?

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I feel that there is a problem some people have fully understanding the ingredients listing on their food products.  Recent regulation requiring nutrition information to be displayed prominently and ingredients lists to be accurate combined with truth-in-advertising laws have gone a long way in mitigating fear of foods; yet, a comprehensive ingredients list is a double-edged sword.  Like fire in the hands of a child who does not know how to use it safely can be mean agonizing death; in the hands of a master chef, it can bring a scrumptious zest to lif .

For one thing, yes, there are some additives that are designed to extend the shelf-life–last time you made bread with only flour, water, and yeast, how long did it last (incidentally, check the ingredients in your “enriched flour”; it should list many of what people identify as “chemicals” but really are only the chemical names for common vitamins; such is the case with the pyridoxine and calcium pantothenate highlighted in red in the original post).

Some other “chemicals” are actually chemical names for common baking ingredients. Calcium carbonate, a component of mollusc shells and a common antacid, is simply chalk. All the -glycerides are simply different forms of fatty acid esters. Many times people will see something like “ammonium bicarbonate” and associate it with “ammonia,” which is not technically false because the ammonium ion really is the same functional group, but acting as an ionic compound with bicarbonate, it simply acts, as sodium bicarbonate does, as baking soda.

I do not disagree that unnecessary additives are often included, but without many stabilizers and antioxidants (many of which sound scarier than they really are–for example, our common vitamin E, is more commonly known by its chemical name of tocopherol, and so d-alpha-tocopheryl acetate is simply vitamin E bonded to an acetate (the same ion that makes vinegar acetic aid) moiety. In fact, the IUPAC systematic name for vitamin E would become 2,7,8-trimethyl-2-(4,8,12-trimethyltridecyl)-3,4-dihydrochromen-6-ol. It might look scary, but how many of us are scared of vitamin E?

People should not substitute ignorance of chemistry or biology for fear.

Arrogance of Science, and Rubiks Cubes

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I have found that modern scientists have a certain arrogance that was not as evident in the past–a sense that “science has arrived,” and “we didn’t know better back then, but we got it right, now.” And it is this feeling that science cannot do wrong now, I believe, more than anything else, that is dangerous. The other day, I heard on CBC radio (Canadian Broadcasting Corporation is Canada’s public broadcaster, and might be compared to NPR, but it also comprises three radio streams and does broadcast content from alternative, contemporary, and classical music to talk radio) the other day that some scientists had begun to think that the greenhouse gases were out of control and that a viable solution would be to build an orbiting solar shield to counter global warming. That is precisely the kind of thinking that I find is absolutely irresponsible that happens across the pure, applied, and social sciences. We see it in medicine when a researcher makes the leap from “low blood levels of X result in Y,” to a drug that raises X and causes all sorts of complications with Z, W, and the other due to complex interactions that were difficult to anticipate given the rigid framework of quantitative methods. We see it in economics when we build increasingly accurate econometric models that are great for explaining what is causing economic crises and then try to operate these models in reverse to fix economies.

Some of the most famous and pivotal scientific developments of our time were once developed by Catholic priests and monks. Some of the most compelling mathematical and engineering developments have been made by devout Muslims in the earlier years of Islam. Yet now, the divide between science and religion has never been greater; indeed, the father of modern genetics can be considered a Catholic priest, Gregor Mendel, who studied heritability in pea plants. Having completed my own degree largely in molecular genetics (although I also extensively studied evolutionary and population genetics) before I had converted to Catholicism, people look at me in amazement and wonder how I can responsibly call myself a Catholic, knowing what I do as a scientist. Still more are shocked that I converted from no religion to Catholicism after completing my degree.

Before beginning my MBA in 2000, I was faced during my GMAT exam with a question pertaining to government funding of the arts, as part of my Analytical Writing Assessment. I cannot, of course, go further into detail about the question since I signed an agreement not to disclose test questions, but at the time I still held the belief that arts, such as literature and visual arts, should be maintained as hobbies, while artists supports their own–and society’s–needs through being a regular employed contriburing member of society. I now see the value of government funding of the arts. I now see the value of what could not be achieved without this freedom. I extend the same belief to science. With increasing funding coming from industry–with its associated expectations to do science that satisfies an intermediate- to short-term business goal–it is vital that the government maintain adequate funding–especially to the pure sciences–such that research without directly obvious commercial application or that runs afoul of current industry wisdom will still be carried out. University research must not be allowed to become an extension of a pharmaceutical R&D lab.

It is interesting how I arrived at that belief through inductive reasoning. I have recently become a huge fan of the Rubiks Cube, and subsequently, all of its larger cousins available commercially, ranging from the 2x2x2 Rubiks Cube to the 7x7x7 V-Cube 7. I have made many discoveries in pure inductive reasoning through it. I often found that traditional logic puzzles have a weakness where any critical thinker can “outsmart” the questions by thinking of exceptions and “what ifs.” Indeed, that might be the *responsibility* of a critical thinker. But reduced to coloured cubelets moving around, the Rubiks-type cube puzzles present to me a pure opportunity to study reasoning, much like Chess is to strategy.

I realize that there exist many algorithms to solve the cube, some of which involve no problem-solving or strategic skills whatsoever, and while I do not find much value in using these mindlessly following steps to solve the cubes, I do now encourage all beginning cubers to learn the simplest beginner methods–which reduce solving the basic 3x3x3 cube to six basic steps, recognizing a simple situation, and repeating a series of repeated moves–in order to be able to solve the cube well enough without thinking that the cuber can begin to focus on watching the behaviours of the cubelets. When I begin teaching someone to DJ or play the piano, for example, it is impossible to learn things like phrasing or articulating motifs while still trying to learn the technical skills; thus, beginners to musical instruments must focus on technique before interpretation. Likewise with cubing, a beginner set of algorithsms helps be able to solve the cube and focus entirely on studying the cubelet movements without being distracted by also thinking how to solve the cube.

But once someone is able to solve the cube in under roughly two minutes, I advise abandoning the beginner method for more intuitive ones. My favourite of these, the Jessica Fridrich method, eschews the initial first- and second-layer algorithms for a set of intiutive steps that complete the first two layers simultaneously.

When one progresses to the 4x4x4 cube (and higher order cubes), they will recognize immediately that the most common general solutions for them are to reduce the cube into a 3x3x3 and solve as usual–all centre cubelets are filled in and move as a single centre, and all edge cubelets between corners are paired and move as a single edge piece. There are issues that can arise in a 5×5 that could not exist in a 4×4 (a 5×5 has a 3×3 centre, whereas a 4×4 has only a 2×2 centre–in order to fill in 5×5 centres, it is necessary to fill in a 2×3 on one face, and a 1×3 on a separate face; then displace a 1×3 line of the 2×3, rotate the face, and return the displaced 1×3 in the empty 1×3 slot). This strategy had to be deveoped because the 4×4 only had two 1×2 slots for centres, whereas the 5×5 has three 1×3 slots.

When generalizing, therefore, is the pattern to fill in centres layer-by-layer, or to fill in two separate halves of a centre and join them? That is also not evident yet because the 5×5 does not have enough layers to abstract that information.

Moving onto the 6x6x6 cube (which has a 4×4 centre), it is readily apparent that the way to fill in centres is buiding two separate 2×4 segments and merging them because once a 3×4 block is created, attempts to displace and replace a1×4 block will disrupt the portion of the block between the middle of the cube and the second layer. Moving onto the 7×7, new challenges to the approach that worked so well for the 4×4, 5×5, and 6×6 come into view that could not exist because of the fewer layers in previous cubes.

But all other strategies and algorithms remain the same as lower-order cubes.

It is that elegance, beauty, and simplicity, the complexity, that I have come to appreciate from cubing. And the process of abstracting generalizations that apply to all (n-layer) cubes that I learned by developing strategies for solving (n-1)-, (n-2)-, and (n-3)-layer cubes, for example.

The same inductive reasoning do we strive for in qualitative research designs.

Islamic Finance: Engineering Shariah-compliant debt instruments

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Gunn (2008) provided the inspiration for further study into Islamic financing by point out the relative paucity of studies pertaining to Islamic finance.  Gunn (2008) point out that to an extent more so than western religions, Islam demands that its law be integrated into every aspect of a Muslim’s life—spiritual, commercial, professional, legal.  While the majority of firms being traded in the international financial markets comprise capital structures that have integrated interest-bearing debt, Islamic law forbids Muslims from receiving or paying interest; thus, it is extremely difficult for a devout Muslim to operate within modern financial markets.  Gunn (2008) examined the capital structures of both Islamic-compliant and –noncompliant firms in developing countries to determine if Islamic religion had any impact on capital structures of firms operating within traditionally Islamic countries.  There is opportunity to extend the work of Gunn (2008) by examining debt instruments that are used by Islamic financial institutions, offered to Islamic investors, and Islamic mortgages—not traditional components of many of the capital structures she examined.

While Chiu, Newberger, and Paulson (2005) pointed out that no precise numbers exist for the number of Muslims (which I define as an adherent, to any degree, of Islam) nor for the degrees of compliance they have for Islamic law, that Islam is the fastest-growing religion in America (Dar & Presley, 1999), I think, makes it compelling enough a reason to re-explore its impact on fundamental financial theories developed in its absence, such as Portfolio Theory (Markowitz, 1952).  Markowitz (1952) assumes, for example, rational behaviour by investors in quantifying risk. Rational behaviours constrained by Islamic law might be considered nonrational behaviour otherwise.   One gap in the literature identified Chiu, Newberger, and Paulson (2005) was estimating demand for Islamic financing in the US.  Abdul-Rahman & Tug (1999) had made an estimate of market demand for Lariba (Islamic-compliant) mortgages in the US by beginning with an estimate of 1.5 million Muslim households in the US, 50% of which can afford to buy and maintain a home.  They then assumed that 20% of these households live according to Islamic law in general, only 5% to 10% of which they considered “Lariba-Puritan,” or compliant enough to be attracted to Lariba financing.  The final demand of Islamic mortgages they estimated at between 7,500 to 15,000 households for a primary market size of just over $750 million.  While they acknowledge this number to be a “drop in the bucket” compared to total mortgages, they acknowledge that if awareness could be raised such that the legal climate could be changed, the market could be much larger.  Further, it is likely that debt instruments made available to Islamic firms in a commercial setting would represent a market much larger than the limited mortgage estimate Abdul-Rahman & Tug (1999) estimated.

Gunn (2008) found that there was no significant relationship between whether investors were Muslim or not and debt-equity ratios. Yet, it is not clear whether the debt was provided by a Muslim or foreign investor. One possible applied research project would be to determine whether alternative instruments that would fit within North American (SEC, Ontario Securities Commission, etc.) regulations as well as Islamic law would open up additional investment opportunities for Muslims or Muslim-operated firms. It is also possible to investigate whether amending regulation would increase compliance amongst semi-compliant Muslims. While it is possible that Islamic law could be reinterpreted in conjunction with regulatory amendments, one characteristic of Islam is that “what is not expressly forbidden, is allowed,” and thus I believe there is less room to reinterpret Islamic law regarding debt than there is in amending regulation to be more cognizant of religious factors.

Hassoune (2002) measured Islamic bank performance, measured by their Return on Equity (ROE), and found that the profit- and loss-sharing principle behind Islamic financial law makes profitability less volatile over business cycles.  They also found that market imperfections, such as large amounts of non-remunerated deposits, considerably decrease their cost of funding relative to their traditional counterparts.  They conceded, however, that in terms of liquidity—a very topical concern—Islamic financial institutions could be at a disadvantage.

Obaidullah (2001) examined overall market efficiency, not only financial institution performance, and found that Islamic ethics led to a general enhancement of market efficiency, rather than the decrease in efficiency found by Hassoune (2002).  He attributes his finding, admittedly at odds with other studies, to “mistaken notions of efficiency” (Obaidullah,  2002).  Hassoune (2002), however, employed a sound quantitative analysis using defensible metrics and calculations, while Obaidullah relied primarily on a dialectical presentation.  Perhaps an investigation of the points illustrated by Obaidullah (2001) using a quantitative survey approach would yield some insights that would help reconcile Obaidullah (2001) with Hassoune (2002).

Problem Statement

There is a problem amongst Islamic firms competing in Western markets. Despite provisions in the Charter of Rights and Freedoms of Canada that prevents discrimination based on religious bases, systemic factors cause investors to discriminate against Shariah-compliant firms. Islamic law forbids paying or receiving interest on loans. Interest-bearing debt has traditionally comprised an important portion of a firm’s strategic capital structure. The problem has negatively impacted Muslim investors and business-owners because potential investors routinely consider metrics such as debt-equity ratio in their investment decisions. In her doctoral dissertation, Gunn (2008), ascertained that firms in Islamic countries have traditionally compromised by incorporating debt instruments in their capital structures at the cost of being fully Shariah-compliant. In order to In order to try to mitigate the systemic discrimination against Shariah-compliant firms, it is necessary to know more about the performance of compliant versus noncompliant firms. A study that tests whether Western Islamic Shariah-compliant financing instruments are equal in financial performance to traditional debt instruments, and whether informed investors are as accepting of these instruments as traditional debt instruments will provide future direction about whether a solution to systemic discrimination against Islamic businesses could best be remedied by financial engineering or changes to the regulatory environment.

Purpose Statement

Gunn (2008) established that firms in Islamic countries Islamic law notwithstanding, traditionally still incorporate interest-bearing debt into their capital structures; in order to be Shariah-compliant, however, a corporation should not include these instruments.

I therefore propose a summative comparative analysis of matched firms that are fully Shariah-compliant with those firms in Islamic countries that do incorporate debt financing into their capital structures to establish appropriate metrics applicable in their respective economies and whether compliance with Shariah law has a detrimental impact on capital structure. One way I see the research problem in this case is as the case of vegetarianism: “Is adherence to a vegetarian diet [given a typical diet of a given culture] detrimental to an individual’s health?” While nobody would claim that it is not possible to obtain necessary nutrients from a completely vegetarian diet, it is likely that without special dietary considerations, individuals would be lacking in certain amino acids and nutrients not commonly produced by most plants. I would like to investigate whether adherence to Shariah law places companies at a competitive disadvantage relative to their less-compliant counterparts.  The results of this study could lead to future research questions such as whether novel financing instruments that incorporate the notions of shared risk and proportional reward but are not strictly equity-based could be structured to finance firms in Islamic countries in a Shariah-compliant manner.  The purpose of the summative study will be to compare the financial performance of matched Shariah-compliant and noncompliant firms in Islamic countries.

Research Questions

One of the wise pieces of sage advice given during the recent Walden Dallas doctoral residency was that a single doctoral level project should not attempt to both establish a set of metrics as well as use them in application. That said, the initial research questions should include “Are Shariah-compliant financial debt instruments equal in performance to traditional debt instruments?” “Are Islamic investors as likely to incorporate Shariah-compliant debt instruments that do not perform as well as noncompliant ones but are Shariah-compliant into their firms’ capital structures?”  The first research question would be best translated to a hypothesis for a two-tailed type of statistical test; the null hypothesis would be that extant Shariah-compliant debt instruments are equal in performance to traditional interest-bearing instruments; the alternate hypothesis would be that they are not equal in performance.  The second question could be assessed by a survey design using a stratified sample of different segments of investors, asking the likelihood of the various investors, using a Likert scale, of choosing Shariah-compliant instruments and investments given the choice.  The third question would also best be served using a survey design assessing the likelihood of senior and financial managers of firms, also using Likert scales, whether they would choose Shariah-compliant investments and debt instruments given the choice, either as they currently exist, or if new instruments were engineered or the legislative climate changed.

References

Abdul-Rahman, Y. K., & Tug, A. S. (1999).  Towards a Lariba (Islamic) mortgage financing in the United States providing an alternative to traditional mortgages.  International Journal of Islamic Financial Services.  1(2): 1-6. Retrieved from http://www.iiibf.org/journals/journal1/art3.pdf

Chiu, S., Newberger, R., & Paulson, A. (2005). Islamic Finance in the United States. Society. September/October, 2005. 64-8.

Gunn, T. A. (2008). A comparative analysis of the Islamic religion on corporate capital structures of firms in emerging countries. (Doctoral dissertation). Retrieved from http://proquest.umi.com.ezp.waldenulibrary.org/pqdweb?RQT=302&COPT=REJTPUcyODcrNTRjYiszYjBmJklOVD0wJlZFUj0y&clientId=70192&cfc=1 UMI Number: 3305577

Hassoune, A. (2002).  Profitability of Islamic banks.  International Journal of Islamic Financial Services.  4(2): 1-13.  Retrieved from http://www.iiibf.org/journals/journal14/vol4no2art2.pdf

Obaidullah, M. (2001).  Ethics and efficiency in Islamic stock markets.  International Journal of Islamic Financial Services. 3(2): 1-10. Retrieved from http://www.iiibf.org/journals/journal10/obaidvol3no2.pdf

Theories: A little knowledge is a dangerous thing

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I think in the pure sciences the more we know, as I wrote before, the more we think we are infallible. But time still continues to prove us wrong, and what we had taken as gospel, continues to evolve. The theory of the atom, as proposed by democritus, was challenged when Rutherford proposed his “raisin bun” model of the atom, with positive and negative charges spread out over its volume randomly. The Geiger-Marsden experiment showed that the atom must have a very small positive nucleus with most of its volume being empty space, as shown by directing alpha particles at a gold foil, and observing that a small number of particles were reflected directly back at the source, with a vast majority of alpha particles passing straight through the foil. Bohr later refined his model to show electrons orbiting a nucleus. And now we have come to understand that even this Bohr model is not a true representation of reality–we now understand that electrons do not exist as true “particles” orbiting a nucleus, but rather as probability clouds around the nucleus, even with “nodes” of zero probability, and probabilities above zero on either side of the node–the electron must somehow spontaneously cease existing on one side of the nucleus and reappear on the otherside, passing through an area with zero probability. I am sure that in a few more decades, we will further not only refine, but refute some ideas that we have taken for granted as truth.

It does really seem, therefore, that it is really impossible to prove that a given theory absolutely *is* reality; it is possible to disprove that a theory is true in a given case (and therefore not true for all cases), but that only leaves an infinite set of other possibilities with varying degrees of probabilities.

Morals versus Ethics

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The following is a post exerpted from a compulsory weekly course discussion in my PhD (Finance) program at www.waldenu.edu in the Winter 2009/2010 quarter regarding Ethics.  The full discourse can be found archived at http://robincheung.info/rsch8100/week2/discussion1/

In 2000 when I began my MBA studies, McMaster University had no formal ethics course in the curriculum. Just before the Andersen and Enron debacles, McMaster’s business school began to integrate a weekend minicourse on ethics. Part of that course differentiated ethical and moral issues–the main difference being that ethics are codified; thus, it is entirely possible that Dr. Frederick may not have done anything wrong ethically, but has wronged Sandra morally.

I think that whether Dr. Frederick has done anything wrong would depend on whether Sandra was given an active role in determining her plan of study, whether her consent to the plan involving the company-funded research was truly informed, and whether she had any viable alternatives. As her mentor, it should be his responsibility to point out the possible consequences of her accepting this path; just as his research is expected to be unbiased, so too should be his guidance. Were he to have recommended that she accept this course or misled her to believe this was the optimal path for her as a new graduate student, I believe he would have been wrong to do so. In either case, I believe he has not acted in her best interests and therefore has done her wrong morally.

Since Sandra is a new graduate student, Dr. Frederick’s responsibilities include both acting as a positive role model as well as guiding Sandra’s decision-making. On Being a Scientist (2009) states that “researchers, particularly students, have to make difficult decisions about how to divide their time between research and other responsibilities, how to serve their scientific disciplines.” This includes dividing their time between furthering knowledge in their field and serving the profit-seeking interests of a sponsor who will not freely share the researcher’s work with society as a whole. It is therefore Dr. Frederick’s role to outline Sandra’s role as a researcher and graduate student since she is in the process of forming an understanding of her role as a researcher.

In terms of potential conflicts, the data available to Sandra may be influenced by the sponsor; the sponsor may modulate funding or facilitate biased sampling based on Sandra’s sample selection while always maintaining an appearance of supporting her research. Sandra is under pressure of funding cuts to interpret the data in favourable ways to her sponsor. The sponsor might even refuse to allow Sandra to publish her findings on the grounds that her intellectual capital is proprietary, although the case as presented implies that she has not signed a confidentiality agreement.

Committee on Science, Engineering, and Public Policy. (2009). On Being a Scientist: A guide to responsible conduct in research. 3rd ed. Washington DC: National Academies Press. Retrieved fromhttp://www.nap.edu/catalog/12192.html
Date Modified: 16 Dec 09    3:48 PM MST
    Cheryl Winsten-Bartlett 17 Dec 09    5:02 PM MST
  Samantha, very interesting point about distinguishing between morals and ethics. I agree, as a faculty person is important to guide students and give them the benefit of your experience – we aren’t born knowing how to plan an academic or research career and we rely on our faculty to lead us appropriately. As a student in this scenario, she has a right to be working on something of educational value.
    Robin Cheung 17 Dec 09    6:54 PM MST
  (Just wanted to point out you were responding in Robin’s thread, not Samantha’s.)
(I am Robin.)

When I think about it more, I think the crux of what the course tried to convey regarding the distinction between ethics and morals is that morals, whether codified or not, are personal beliefs, whereas ethics are those morals that are standardized and applied uniformly; thus, an example would be a code of ethics that lawyers must adhere to which may at times override a lawyer’s morals in order to ensure justice is preserved.
Date Modified: 17 Dec 09    7:30 PM MST
          Everton King 18 Dec 09  10:13 PM MST
  Robin:

I share your views. This is a case of responsible conduct between the researcher and the graduate student. Since, the scenario is not detailed it is hard to conclusively classify the ethical and moral responsibility of Sandra or Dr. Frederick to each other. However, it is obvious that something is wrong since both parties are not in a win-win situation. And, there are a lot of potential conflicts between Sandra and the ‘sponsor’.

Everton.
          Raymond Obinozie 19 Dec 09    4:30 AM MST
  Everton,
Just to add my cents, Who should worry most about this potential conflict: Sandra, Dr. Frederick or the sponsor of the project. Just wondering.
Respond  
          Robin Cheung 19 Dec 09    6:19 AM MST
  I should think all stakeholders have an interest in the situation. And sane stakeholders will naturally be concerned more with what carries more consequence for their own situations.
          Anthony Samaye 19 Dec 09  11:32 PM MST
  Raymond,

Good question. I will pick Sandra as one who should worry most about this dilemma, given what was at stake in terms of final dissertation.
          Raymond Obinozie 20 Dec 09    4:24 AM MST
  Anthony,
I will rather think that the funding institution have much to worry. My reason being that since Sandra is already having a feeling of misgiving towards Dr. Frederick and the research project, chances are she could screw things up. Allthesame, all of them have stakes in the project, and therefore have much to lose. Thanks Anthony and happy holidays.
          Everton King 20 Dec 09    2:02 PM MST
  Raymond,

All parties are accountable players in this scenario if the potential conflict becomes a real one. However, Dr. Frederick’s employer (University?) should worry most. If he is self-employed then he should worry most. The responsibility rises to the top of the command chain or to the person most capable of changing the outcome.

Everton
          Daniel Benjamin 18 Dec 09  10:20 PM MST
  Robin,

Thanks for a great post – nice job!

I concur with you that Dr. Frederick abandoned his roles as advisor and mentor. He did not fully disclose the purpose, the sources,the expectations, the impact on the student, and the risk assessment.

The threat of funding cuts can be a strong motivator for suppressing or manipulating data to show the funding source in a positive light.

Dan Benjamin
         Samantha Kanta 19 Dec 09  12:56 AM MST
  G’Day Robin

It is always a pleasure to read your posts this quarter as it was this past Autumn.

After I read your analysis of the scenario and your response to my initial posting, I see how I was amiss in my assessment of Sandra’s predicament in that Dr. Frederick had a moral obligation to support her as new researcher and PhD candidate under direct supervision. There is not only a “moral duty” (Cheung, 2009) for Frederick to support, and to some degree protect, Sandra from compromising her studies, but a professional code of practice.

I reflected on your comment on the moral-ethical continuum and pose this concept: Morals are belief system of an individual, shaped by societal context, whereas ethics are beliefs about what is acceptable for the society as a whole, not the individual. This distinction was made in the work of De George (as cited in Fischer, 2004, p.397): “…ethics presupposes the existence of morality, as well as the existence of moral people who judge right from wrong and generally act in accordance with norms they accept and to which they and the rest of society hold others.” Scenario 1 shows how the individual beliefs of Dr Frederick are shaped by the context of corporate sponsorship, yet simultaneously at direct odds with the agreed upon practices made explicit by the University.

Again Robin, a pleasure to engage with your thinking. I was comforted by the fact that “favourable” was spelt according to the Commonwealth’s code of practice ;)

References

Cheung, R. (2009, December 17). In 2000 when I began my MBA studies [Online forum comment]. Retrieved from http://sylvan.live.ecollege.com/ec/thd/thd.learn?CourseID=3818508&UnitNumber=2&COID=257&Mode=&TopicGroupID=16815092&ThreadViewMode=&ThreadSortBy=&AdvOpts=&47=6016409&TopicID=0&RSOID=16815092&PageYOffset=1782#

Fischer, J. (2004). Social responsibility and ethics: Clarifying the concepts. Journal of Business Ethics, 52(4), 391-400. doi: 10.1007/s10551-004-2545-y
Date Modified: 19 Dec 09    1:00 AM MST
      Send Email to Author    Robin Cheung 19 Dec 09    6:15 AM MST
  Samantha,

Thank you for taking the time to read and think about my post. It might also be comforting to know that we are now one and the same person apparently :)

There is one thing in particular that you have just remindfed me about, from the APA Workshop with Jeff Zuckerman in the October 2008 residency in St. Charles, IL (held at a nice little resort, too: www.pheasantrun.com and it looks like there will be another there in the quaint little town that made me feel comfortable being in the US, which I actually didn’t feel so much when I had the opportunity to accompany some academic advisors to Chicago proper for some Chicago Deep Dish Pizza).

I recall Dr. Zuckerman stating that APA stipulated specifically American spellings, which is a very big challenge for me to remember–and worse, American spellings make me feel rather uncomfortable. Without getting into the debate about how I also feel uncomfortable about how we must clear American customs agents *before* even leaving our sovereign soil at Canadian airports, I will just say, it also is not necesarily British spelling that makes me feel better either; there are words with uniquely Canadian spellings that I prefer, such as “yogourt.” This spelling is based neither on the British “yoghurt” nor the the American “yogurt,” but I believe has a French-Canadian etymology.

Although I tend to use the pocket edition of the APA manual as as reference since it is easier to locate specific sections and much less unwieldy (more wieldy?), on page 96 of the Publication Manual of the American Psychological Association: “Spelling should conform to standard American English as exemplified in Merriam-Webster’s Collegiate Dictionary (2005), the standard spelling reference for APA journals and books.”

The other major difficulty I have adapting to APA is the lack of hyphenation (which is also inconsistent); my father still writes “to-day,” although for me it is more compound words that I feel require hyphenation, especially terms such as pre- and post-operative, for example.

That said, last term Dr. Bush did mention he would accept nonAmerican spellings, but in practice whenever I missed any (since I do not use the American dictionary in Word by default) I did lose some APA points for `spelling errors.“ It will continue to be a challenge, since to me, “color” not only looks wrong, but makes me want to pronounce it as “cull-ore.”

Use of Theory: Falsified models still valuable (Exerpted from Research Design and Theory RSCH 8100 Course)

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The following exerpt is from a weekly discussion on Use of Theory in my PhD program compulsory RSCH 8100 Research Design course at Walden University for Winter 2009/2010 quarter.  The full discussion archive can be found at http://robincheung.info/rsch8100/week3/discussion/

         Robin Cheung

26 Dec 09    8:29 PM MST
  Kristina,

When I reflected upon that post, I remembered a situation in Grade 11 where our chemistry teacher, Mr. Wade, was introducing the Quantum model of the atom, where electrons are not discrete particles circulating about the nucleus, such as in the Bohr atom. I then pointed out that even though such shifts in paradigms do invalidate some aspects of a previous model, they still retain certain didactic value.

While we understand the models are not sufficient past a certain point, they are still valuable for understanding the basics of how systems work. In physics, for example, while we know that Newtonian classical mechanics do not apply at the subatomic scale or at high velocities and altitudes due to relativistic effects, it is impractical to take into account relativistic effects, for example, of time and length dilation, when considering moving cars, since the relativistic effects are negligible at those scales.

Similarly, in terms of understanding chemical bonding, reactions, and behaviours of substances in various states, earlier models such as the Rutherford raisin bun model or the Bohr atom are sufficient to understand atomic and molecular behaviours without the complexities of quantum mechanics.

In the future we likely will encounter new information that supercedes our current quantum model–perhaps from the Large Hadron Collider experiments–but regardless, it has held for a certain body of knowledge for a number of decades, and the value it holds for understanding behaviours of subatomic particles and chemical reactions will ensure that long after the quantum model is superceded, students far into the future will still be learning it.