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E-ISSN: 2047-0916

Volume 5 No. 1
March 2015

Editorial Board
Editorial Board
Editor in Chief
Prof. Dr. Jos Antnio Filipe, Instituto Universitrio de Lisboa (ISCTE-IUL),
Lisboa, Portugal
Managing Editor
Prof. Dr. Sofia Lopes Portela, Instituto Universitrio de Lisboa (ISCTE-IUL),
Lisboa, Portugal

Editorial Board Members

1. Prof. Dr. Manuel Alberto M. Ferreira, Instituto Universitrio de Lisboa
(ISCTE-IUL), Lisboa, Portugal
2. Prof. Dr. Rui Menezes, Instituto Universitrio de Lisboa (ISCTE-IUL), Lisboa,
3. Prof. Dr. Manuel Coelho, ISEG/UTL, Socius, Lisboa, Portugal
4. Prof. Dr. Isabel Pedro, IST/UTL, Lisboa, Portugal
5. Prof. Dr. A. Selvarasu, Annamalai University, India
6. Prof. Dr. Desislava Ivanova Yordanova, Sofia University St Kliment
Ohridski, Bulgaria
7. Prof. Dr. Antnio Caleiro, University of Evora, Portugal
8. Prof. Dr. Michael Grabinski, Neu-Ulm University, Germany
9. Prof. Dr. Jennifer Foo, Stetson University, USA
10. Prof. Dr. Rui Junqueira Lopes, University of Evora, Portugal
11. Prof. Bholanath Dutta, CMR Inst. of Tech, Blore, India
12. Prof. Dr. Henrik Egbert, Anhalt University of Applied Sciences, Germany
13. Prof. Dr. Javid A. Jafarov, National Academy of Sciences, Azerbaijan
14. Prof. Dr. Margarida Proena, University of Minho, Portugal
15. Prof. Dr. Maria Rosa Borges, ISEG-UTL, Portugal
16. Prof Dr. Marina Andrade, Instituto Universitrio de Lisboa (ISCTE-IUL),
17. Prof. Dr. Milan Terek, Ekonomicka Univerzita V Bratislava, Slovakia
18. Prof. Dr. Carlos Besteiro, Universidad de Oviedo, Spain
19. Prof. Dr. Dorota Witkowska, Warsaw Univ. of Life Sciences, Poland
20. Prof. Dr. Lucyna Kornecki, Embry-Riddle Aeronautical University, USA
21. Prof. Dr. Joaquim Ramos Silva, ISEG-UTL, Portugal

Abstracting / Indexing
International Journal of Latest Trends in Finance and Economic Sciences (IJLTFES) is
abstracted / indexed in the following international bodies and databases:

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Table of Contents

1. Space matters: Reconstructing a Localscale Okun's Law for Italy .............................. 833

Luca Salvati

2. A Note on NanoPhotovoltaic Panels Emergence in Energy Market ........................... 841

Jos Antnio Filipe, Jos Chavaglia Neto, Manuel Alberto M. Ferreira

3. Conclusion of a Probabilistic Model to Evaluate Motorcars Recycling and
Dismantling Process in a Scarce Oil Environment ........................................................... 846

Manuel Alberto M. Ferreira

4. Loan Products and Credit Scoring by Commercial Banks (India) ............................... 851

Rais Ahmad Itoo, A. Selvarasu, Jos Antnio Filipe

5. Efficiency in Stock Markets with DEA: Evidence from PSI20 .............................. 861

Nuno Ferreira, Adriano Mendona Souza

6. Chaos Theory in Politics A Book Review .......................................................................... 866

Manuel Alberto M. Ferreira

Int. J Latest Trends Fin. Eco. Sc.

Vol5 No. 1 March, 2015

Space matters: Reconstructing a Local-scale

Okun's Law for Italy
Luca Salvati#,1

Consiglio per la Ricerca in Agricoltura e l'analisi dell'economia agraria (CRA), Via della Navicella 2-4, I-00184
Rome, Italy

Abstract - The present study develops a local-scale

analysis of Okun's law for short-term changes in district
product and unemployment rate in 686 labour market
areas in Italy (2004-2005) based on a Geographical
Weighted Regression (GWR) model. The relationship
between changes in district product and unemployment
rate was poorly significant using both parametric and
non-parametric (a-spatial) techniques being more
intense when space is incorporated in the model. The
GWR results pointed out the spatial patterns
characterizing the Okun's law at the local scale. The
elasticity of district income to unemployment rate
showed important spatial variations being higher in
dynamic rural districts around metropolitan areas. The
highest model performance was found in specific areas
of both northern and southern Italy. However, the
classical Okun negative relationship between district
product and unemployment rate was mainly observed
in northern Italy while the reverse pattern was
identified primarily in southern Italian districts. While
providing a novel approach shedding light on the
spatially-varied income-employment dynamics, GWR
models allow evaluating the complex geography of
economic growth in Italy. The use of local-scale data
and spatial approaches may inform policies regulating
job markets on the base of their territorial specificity.
Keywords Economic growth, Unemployment, Travel to
work Areas, Geographically Weighted Regression, Italy.



Changes in the economic structure of countries

and regions are described using long-term spatiotemporal data checking for convergence/divergence
over time (Barro and Sala i Martin, 2004) or
analyzing territorial disparities through indicators
derived from district product, value added, disposal
income or unemployment rate (Giannini et al., 1995;
Terrasi, 1999; Proietti, 2005; Viesti et al., 2011). The
linkage among such indicators is also studied using
empirical relationships based on stylized facts, such
as the well known Phillips' curve and Okun's law
(Layard et al., 1991). Okun's law has implications

regarding macroeconomic policies, in particular as

regards the determination of the optimal or desirable
growth rate of real product (Palley, 1993; Moosa,
1997, 1999). Okun's law consists of an empirical
relationship that links changes in the unemployment
rate to changes in the growth rates of Gross Domestic
Product (GDP). This formulation is derived from a
study performed by Okun on the post-war economy
of the United States of America (Smith, 1975). The
rationale behind Okun's intuition stems from the
reflection that the maximum level of wealth of an
economic system is determined at full employment
(Paldman, 1987). Okun illustrated the existence of an
inverse relationship between unemployment and real
GDP growth above long-term trends, estimating that
the link between the two variables was quantified for
the United States with a ratio of 1 to 3 (Kaufman,
1988). The interest on this finding - in addition to
being guided by empirical robustness - is due to its
theoretical importance because the aggregate supply
curve can be determined by the combination of
Okun's law and Phillips' curve (Prachowny, 1993).
At the same time, Okun pointed out how some
structural changes on the labour market can affect the
validity of the estimated function identifying three
variables that influence the relationship between
changes in the unemployment rate and the real GDP:
(i) the degree of participation in the labour market,
(ii) the number of hours worked per employee and
(iii) labour productivity. Scholars have tried to test
the empirical validity of Okun's law in different
spatial contexts and time intervals, often highlighting
the role of some economic and social components.
Some authors (Gordon, 1984; Evans, 1989; Weber,
1995) analyzed the effect of external shocks on the
dynamic relationship between real GDP and
unemployment. Using the oil shock of the 1970s as a
break-even point in the time series analyzed, a loss of
intensity in the estimated Okun's coefficient in the

International Journal of Latest Trends in Finance & Economic Sciences
IJLTFES, EISSN: 20470916
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Vol5 No. 1 March, 2015

years after 1973 was noted (Harris and Silverstone,

2001). Further studies have suggested that the
progressive participation of women in the labour
market, the slowdown in productivity and wages, and
the process of economic restructuring are relevant
factors determining the loss of intensity of the
estimated Okun's coefficients (Brunner, 1997; Lee,
2000; Freeman, 2001).
More recent studies have focused on the
existence of asymmetry in Okun's relationship
(Attfield and Silverstone, 1998). Asymmetry may
reflect a different response of unemployment to
changes in the growth rate of GDP depending on the
economic phase (i.e. expansion or recession).
Asymmetry is seen also as a result of the (more or
less effective) regulative power of labour markets
(Virn, 2001). Rapid economic downturns can have
an effect more than proportional on the
unemployment rate, also due to the mismatch
between supply and demand in relation to sectoral
and local labour markets (Silvapulle et al., 2004).
Asymmetry in Okun's law would strengthen the
theory on the presence of asymmetry even in the
Phillips curve (Harris and Silverstone, 2001). A
precise assessment of asymmetry in Okun's law and
Phillips' curve may be useful to fine-tuned policy
measures for structural stabilization and may reduce
forecast errors (Balakrishnam and Michelacci, 2001).
Asymmetry can also reflect specific territorial
dynamics and regional disparities in local labour
markets that cannot be investigated using traditional
data at country or regional level. Based on these
premises, the local-scale assessment of Okun's law
may be meaningful when working in countries with
vastly different regional contexts due to the presence
of sub-national job markets characterized by
economic divides, lack in coordination and intrinsic
fragmentation. Italy, with the uneven gap between
wealthier northern regions and disadvantaged
southern regions, is a potentially interesting case to
evaluate the influence of the territorial component on
Okun's relationship (Virn, 2001).
The present study illustrates an original
approach verifying the short-term validity of Okun's
law in Italy at the local scale in 686 labour market
districts, taken as homogeneous spatial unit relevant
from the economic point of view. The objective of
this analysis is to focus on territorial dynamics
reducing simultaneously the effect of asymmetry.
District income is expressed through computation of
value added at various geographical levels. The

relevance of the used spatial unit can be assessed

based on the peculiarity of the administrative system
enforced in each country and the developmental
policies that are targeted to improve income levels.
Indicators at local district level are being
increasingly diffused according to the availability of
digital statistical data and ancillary information from
other official sources (Salvati and Sabbi, 2014).
These indicators usually provide a more detailed
picture of the geography of wealth and economic
development of a certain region or country that more
traditional regional estimates (Patacchini, 2008).
Investigating short-term spatial patterns of product
and unemployment in an economically-divided
country like Italy provides insight in the analysis of
local labour market regulation in the light of full
employment and territorial disparities reduction.



2.1. Study area

The whole Italy (301,330 km2) was considered as
the study area. A total of 686 Local Labor Market
Area (LLMA) districts, reflecting homogeneous areas
from the economic perspective at an enough detailed
geographical scale, were considered as the analysis
spatial unit (Salvati et al., 2011). LLMA districts
were defined by the Italian National Statistical
Institute (Istat) according to data collected in 2001
National Census of Population and Households (Istat,
2.2. Indicators
Data on district product and unemployment rate at
the LLMA level have been provided by Istat for the
years 2004 and 2005. Annual averages for these
indicators were based respectively on elaboration on
(i) the system of national/regional accounts and (ii)
microdata of the Labour Force Survey. A vector map
of LLMA districts provided by Istat (2006) was used
to prepare thematic maps illustrating the spatial
distribution of percent change in district product and
unemployment rate in Italy.
2.3. Data analysis
To explore the pair-wise relationship between
percent changes of district income and
unemployment rate on the district scale in Italy, both
parametric (Pearson moment) and non-parametric
(Spearman rank) correlation coefficients were carried
out testing for significance at p < 0.05. A linear aspatial model was used to estimate the Okun's
relationship based on the following equation:
yit = 0 + 1xit + it


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where yit is the product for the i-th district at time t,

xit is the value of the unemployment rate, while
indicates the difference-over-time operator (20042005 in the present case) and is a white noise
disturbance term. 0 estimates the intercept of the
model and captures the average growth rate of the
dependent variable. Elasticity between percent
change in district product and unemployment rate
was calculated at the district scale to illustrate the
spatial asymmetry in Okun's relationship in Italy.

district product expanding the most in rural districts

surrounding metropolitan areas in both central and
northern Italy. Also some marginal, disadvantaged
districts grew at a rate above the country average.
Short-term gains in employment rates were mainly
observed in rural, internal districts of central Italy
with a more scattered pattern in both northern and
southern Italy.

Based on the existence of spatial dependence in

both variables, the Geographically Weighted
Regression (GWR) framework proposed by
Fotheringam et al. (2002) was used to identify the
effect of spatial asymmetry in local labour markets
incorporating the spatial structure of the distribution
of product and unemployment rates in the Okun's
law. The methodological framework underlying
GWR is similar to that of local linear regression
models, as it uses a kernel function to calculate
weights for the estimation of local weighted
regression models. Contrary to the standard
regression model, where the regression coefficients
are location invariant, the specification of a basic
GWR model for each location s = 1, , n, is:
yt(s) = b0(s) + b1xt(s) + t(s)


where yt(s) is change in district product at

location s, X(s) is change in unemployment rate at
location s, b1(s) is the column vector of regression
coefficients at location s, b0(s) is the column vector of
regression intercepts at location s and (s) is the
random error at location s. Hence, regression
parameters, estimated at each location by weighted
least squares, vary in space, implying that each
coefficient in the model is a function of s, a point
within the geographical space of the study area. As a
result, GWR gives rise to a distribution of local
estimated parameters, modeling socioeconomic
processes that are non-stationary in space (Salvati et
al., 2011). The weighting scheme is expressed as a
kernel function that places more weight on the
observations closer to the location s. In this study, we
adopted one of the most commonly used
specifications of the kernel function, which is the bisquare nearest neighbour function. The outputs of
GWR model were illustrated using maps (local R2, 1
coefficient, 0 intercept and regression residuals).


Results and discussion

The spatial distribution of short-term percent

change in district product and unemployment rate in
2004-2005 is illustrated in Figure 1. Maps indicated a
quite heterogeneous pattern for both variables with



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Vol5 No. 1 March, 2015

dealing with Okun's relationship (ranging between 0.2 and -0.3) and closer to values recorded for recent
decades (Lee, 2000; Freeman, 2001; Harris and
Silverstone, 2001).
District product (% change) = 0.033 - 0.028 * Unemployment rate (% change)
Pearson correlation: r = -0.107; Spearman correlation: rs = -0.104, p < 0.01


X: Unemployment rate
Mean = 0,021209
Std.Dv. = 0,153612
Max. = 0,620913
Min. = -0,390049
Y: District product
Mean = 0,032940
Std.Dv. = 0,040068
Max. = 0,166819
Min. = -0,174195


District product (% change)









1,0 0



Unemployment rate (% change)

Figure 1. Maps illustrating the spatial distribution of
(a) percent change in district product (b), percent
change in unemployment rate and (c) elasticity
between district product and unemployment rate.
The elasticity between percent growth in district
product and unemployment rate shows a
heterogeneous spatial pattern: highly positive
elasticity values (indicating unemployment increases
with product expansion) were scattered across Italy
especially in northern and central districts. Highly
negative elasticity values (indicating employment
increases with product expansion) were found in a
discontinuous pattern in rural areas in both central
and southern Italy with few cases observed also in
northern Italy. The spatially-varying elasticity score
indicates that the two variables are space-dependent.
Figure 2 illustrates descriptive statistics on the
relationship between percent changes in district
product and unemployment rate in Italy. Both
variables show a quasi-normal distribution and a
general trend toward a moderate, negative correlation
identified in both parametric field (r = 0.107, p <
0.01, df = 685) and non-parametric field (rs = 0.104, p
< 0.01, n = 686). Based on the linear model (1), the
estimated regression coefficient for percent change in
district product in Italy is -0.028 with 0.033 intercept.
The intercept coincides with the average growth rate
of district product; the regression coefficient is
relatively lower than the values observed in the
classical post-war studies (Smith, 1975; Gordon,
1984; Kaufman, 1988; Evans, 1989; Palley, 1993)

Figure 2. The relationship between district product

(% change) and unemployment rate (% change) in the
686 Italian district between 2004 and 2005.
The results of GWR applied to the local-scale
Okun's relationship in Italy are illustrated in Figure 3.
The adjusted R2 of the GWR was 0.213 for the whole
of Italy and local R2 represents a spatial
heterogeneous pattern with few districts concentrated in Piedmont, Lombardy, Friuli, Emilia
Romagna, Tuscany and Calabria regions - showing
local R2 above the country average (Figure 3a). In
these areas the relationship between district product
and unemployment rate is more intense as clearly
indicated by the local estimates of 1 regression
coefficient (Figure 3b). Local coefficients below -0.1
(approaching the classical values observed for Okun's
relationship in post-war developed economies) are
concentrated in Friuli, Lombardy, Emilia Romagna,
Tuscany and, in part, northern Sardinia and inland
districts of Campania where high R2 scores were also
observed. In these districts, Okun's relationship was
more intense and negative suggesting that local
labour markets are more sensitive to measures for
local development and unemployment reduction.
Apart from few exceptions, local labour markets in
these regions are characterized by medium-low
unemployment rate and medium-high participation
rate compared to the rest of Italy. Districts with
intense relationship between the two variables (high
local R2) and positive 1 coefficients (indicating an
inverse Okun's relationship) are concentrated in
southern Italy (districts in Calabria, south of
Campania and Apulia).

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Vol5 No. 1 March, 2015


Figure 3. Maps illustrating the outcomes of the
Geographically Weighted Regression model applied
to the relationship between local product and
unemployment rate in the 686 Italian districts (20042005): (a) local R2 (b), 1 coefficient, (c) 0 intercept,
(d) model's residuals.

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Vol5 No. 1 March, 2015

Positive coefficients confirm the spatial

asymmetry that may influence the overall relationship
at the national scale and are possibly due to
persistently high values of unemployment rate. The
spatial pattern of GWR local intercepts reproduces
substantially the expansion (or decline) in district
product being quite uncorrelated with local 1
coefficients. Finally, the spatial pattern of regression
residuals is typically scattered across the country with
no explicit spatial structure.



The present study provides insights in the localscale Okun's relationship between district income and
unemployment rate in Italy. Asymmetry and regional
disparities in income and labour market performances
were found as relevant factors influencing short-term
Okun's relationship in a divided country such as Italy
(King et al., 2001; Dunford and Greco, 2007; Viesti
et al., 2011). A moderate coefficient was observed for
the negative relationship between changes in district
product and unemployment rate. However, the
relationship became more intense and significant
when incorporating space in the regression model.
The different conditions of the labour market,
distinguishing between northern-central regions and
southern regions in terms of both participation and
unemployment rate may be considered a powerful
factor determining asymmetry in Okun's relationship.
The outcomes of GWR model reflect the spatial
variability observed in both the dependent and the
independent variables indicating a different intensity
in the relationship among district income and
unemployment rate. Higher negative coefficients,
closer to what Okun found for US economy (e.g.
Attfield and Silverstone, 1998), were observed
especially in northern and central Italy districts being
associated to a local R2 above the national average.
Positive and significant coefficients were also found
in some districts especially in southern Italy
indicating asymmetry and the structural mismatch
between supply and demand in local labour markets
reflected into high unemployment rates. In the
majority of Italian districts, the relationship between
the two studied variables showed moderate (or low)
negative coefficients and moderate (or low) local R2.
Together with the analysis of spatial elasticity
between district product and unemployment rate,
these outcomes clearly reveal the high fragmentation
of local labour markets in Italy at the base of

differential Okun's relationships between northerncentral and southern areas of the country. The
analysis underlines the different impact of policies
stimulating local development in districts exhibiting
distinct short-term responses to unemployment rate
based on product expansion or decline.
Policy implementation depend on the mutual
interactions among the drivers of economic
development acting differently at the various relevant
geographical scales (Layard et al., 1991). Indicators
made available on high-resolution spatial units and
spatial statistical techniques can be successfully
applied to the study of regional economic
performances and territorial disparities providing
insight for improved policies promoting local
development. Local labour market districts show
appreciable features that fill the need for data
integration, reliability and relevance to regional
issues. Our results definitely indicate that a stronger
integration between economic indicators is required
to achieve a more comprehensive, comparative
picture of local production structures and
performances affecting country-scale peculiar trends.

The author would like to thank Prof. Margherita
Carlucci for invaluable support during the study.

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A Note on Nano-Photovoltaic Panels

Emergence in Energy Market
Jos Antnio Filipe#1, Jos Chavaglia Neto#2, Manuel Alberto M. Ferreira#3

Instituto Universitrio de Lisboa (ISCTE-IUL), Portugal


Abstract - Nanotechnology may work as a powerful

weapon to be used for creating competitive advantages
in the energy market. Through the use of photovoltaic
nano-panels, which may reduce considerably
production costs and simultaneously meet socioenvironmental requirements demanded by law. It is a
way to produce clean energy in innovative terms.
Moreover, today the adoption of nanotechnology in
energy production can in turn make this kind of energy
quite interesting through time. Nanotechnology may be
environmental gains.
Keywords Nanotechnology, photovoltaic nano-panels,
solar energy, process.



In this new era of global competition,

technological innovations are a way for companies to
overcome the challenges that are met in this
competitive context, by applying innovative
processes to their production structures.
Presently, there is a permanent run to
technological innovations by companies in the market
aiming to get ahead in the competition struggle. This
has been happening especially in the last decade in
which product life cycle has decreased considerably.
Many developments in terms of innovations have
been seen in sectors such as, communications,
medicine, robotics, computing, energy or in many
other areas of society.
It is quite relevant to see the role that the
Internet has taken up, as well as the development of
mobile devices, new medical imaging, self-service
centers, banks, etc. The truth is that people have
become dependent on new technologies while
companies have become dependent on the process of
constant search for innovation. As some people do
better professionally than others, some companies
also do better in the competitive environment than
others. Notably, in both cases, both individuals and

companies that stand out have something in common:

the ability to innovate.
In this scenario, this paper aims to highlight one
very significant scientific advance in human history nanotechnology, which opens up unimaginable
possibilities in various fields of human reality and in
various fields of science. Today the influence of
nanotechnology can be seen in areas such as
medicine (implantation of nano-robots, for example),
agriculture (for pest control) or many others. The
possibilities are endless in these fields.
This work shows the use of nanotechnology in
industry, discussing how the use of nanopanels may
trigger very interesting gains in the industry, by
innovating in a topic that allows for long term gains
in several domains. The use of nanotechnology in
industrial production processes is evidenced in
particular in electric energy production by
photovoltaic panels. Emphasis is placed on the
competitive advantage associated with the use of
nanotechnology to solar energy production for
companies in this market segment.
The American firm Nanosolar, whose studies
are sponsored by major companies like Google or
IBM, or resulting from the allocation of benefits
offered by the Department of Energy, is leading the
race on energy production derived from
nanotechnology. It has identified this technology as
nano-photovoltaic panels.
The use of this product has showed a reduction
in firms total costs in relation to other types of solar
energy, and meets government requirements and the
importance of social use of energy when it is
obtained from clean sources.
Despite the high feasibility for the economy and
the environment, there are some considerations
regarding the ethical and moral limits on
nanotechnology that should be taken into account.

International Journal of Latest Trends in Finance & Economic Sciences
IJLTFES, EISSN: 20470916
Copyright ExcelingTech, Pub, UK (

Int. J Latest Trends Fin. Eco. Sc.


The Emergence of Nanotechnology

Nanotechnology was Richard P. Feynman, although
he had not used this term in his speech to the
American Physical Society on December 29, 1959,
where he made the first comments on the subject.
However, the word nanotechnology was first used
by Professor Norio Taniguchi (1974) to define the
fabrication of a scale of 1 nm. Nanotechnology is the
potential ability to create things from the smallest
element, using the techniques and tools that are being
developed today to place every atom and molecule in
place. The use of nanometer implies the existence of
a system of molecular engineering, which will likely
generate the revolution of the factory-manufacturing
model, as it is known.
Nanotechnology will offer, in addition to higher
quality products at a lower cost, a range of
possibilities to generate new means of production and
new types of resources and factors. This is a
manufacturing system that could produce more
manufacturing systems (plants that produce other
plants) in a quick, cheap and clean way. The means
of production may be reproduced exponentially. So in
just a few weeks, power would pass from a few to
several billion nanofactories. Thus represents a kind
powerful, but also with many potential risks, besides
the existing and well-recognized benefits (see
Euroresidentes, 2011, p. 01).
In Brazil, the Ministry of Science and
Technologys budget for the next four years is R680
million. Overall it is estimated that only developed
countries are to allocate a sum of around USD 5.5
billion. An important example of successful
application of nanotechnology is Empresa Brasileira
de Agropecuria (Embrapa). It has been working
with nanotechnology in various research centers and
has already released some products. One of the most
notable is perhaps the electronic tongue, a device
that combines chemical sensors with nanometer-thick
with a computer program that detects flavors and
aromas and serves to control quality and certification
of wines, juices, coffees and other products ( see
DIEESE, 2008, p. 03).
There is an interesting reconfiguration of the
industrial model, directly related to the use of
nanotechnology in the various branches of economic
activities. This study gives an outline for the
manufacture of electric power, which generically

Vol5 No. 1 March, 2015

McKibben considered itself as a country's economy

(see McKibben, 2009, p. 24).
Nanotechnology is therefore contributing for the
transformation of traditional models, independently
of the way goods and services are produced or of the
way production is conducted and made.


Nano-photovoltaic panels as an

Nowadays solar panels are a way to produce

energy. There is a well-known level of efficiency and
expectations that are got with the traditional panels,
which may be compared with new forms of
producing energy when using other kind of nontraditional panels.
Considering that, some notes about innovation
and new forms of obtaining efficient processes get
required. Actually, companies need to be dynamic in
the development of innovations and thus creating
competitive advantages through its production
processes so they can create economic value, and
consequently generate their viability based on the
market in which they operate. For McDonough III
(2009, p. 04) in the current buoyant economy,
organizations must continually reinvent what they are
and what they do [...]. This means that they need to
constantly maintain market differentiation, through
deliberate strategies in order to obtain competitive
advantages that provide monopoly profits, even if
temporary in this environment that requires from
companies a high degree of competitiveness.
The competition is part of a dynamic and
evolutionary operation of the capitalist economy. The
evolution of this economy is seen as over time based
on an uninterrupted process of introduction and
diffusion of innovations in a broad sense, i.e. any
changes in the economic space in which these
companies operate, whether changes in products,
processes, sources of raw materials, forms of
productive organization, or in their own markets,
including in terms of geography (see Schumpeter,
Brazilian version, 1982, p. 65).
According to McAfee and Brynjolfsson (2008,
p. 78) the result is that an innovator with a better
way of doing things can grow at unprecedented
speeds and dominate the industry.
In contrast, at the same time, which seeks a high
level of competitiveness, it is understood that there is
a need for companies to retain the existing common
resources for their optimization in the future because

Int. J Latest Trends Fin. Eco. Sc.

it is not possible no longer count on such a supply of

natural resources to meet the continuing huge
demand, given the level of production that humanity
has achieved over the last century.
To Nogami and Passos (1999, p. 03), the harsh
reality of scarcity arises the necessity of choice. Since
it is not possible to produce everything that people
want, mechanisms must be created to somehow show
the societies the path to decide what goods to produce
and which needs are met.
The appropriated concepts which are consistent
with the possibility of economic efficiency and
technological means demand a study that requires an
integrated analysis of the proceedings related to the
production combination of forces and the structure of
supply inside the production unit in order to get
efficient processes. All the means or methods of
production indicate some of these combinations.
Production methods vary in the way how such
combinations occur, or by objects or by the combined
ratio of their quantities. Every concrete act of
production incorporates some combination thereof. It
could also be considered as a combination enterprise
itself, and even the production conditions of the
whole economic system (see on this subject
Schumpeter, 1982, p. 16).
The possibility of economic and technological
efficiency reflects a producing combination of forces
and inputs to reach an interesting production level for
the company. All the means or methods of production
indicate different sorts of combinations. Production
methods vary in the way by which such combinations
occur, or by objects or by the combined ratio of their
quantities. Every concrete act of production
incorporates a kind of combination. A company can
itself be considered a combination by itself, and even
the production conditions of the whole economic
system (see Schumpeter, 1982, p. 16).
Thus, it can be said that any company when
producing goods and services through the use of
clean energy (in particular, the use of photovoltaic
panels produced by nanopanels) generates
competitive advantage by breaking the closed circle
of the economy. This is made by creating a new
mechanism of generation of market value, since it is a
new way to produce through a new combination of
available resources.
The photovoltaics manufacture with this new
technology, the nanopanels, are in fact a great
innovation in the production of clean electric energy.

Vol5 No. 1 March, 2015

As can be seen in the table below, the production of

electric energy with nanopanels is enormously
cheaper than with the photovoltaic silicon panels; and
reach a price comparable with the one of the
traditional power energy, being yet higher. So, the
nano photovoltaic panels begin to be competitive
with the traditional electricity production means. This
considerable power can also be interpreted as the
ability to break paradigms in the energy industry,
taking the form of a powerful competitive weapon of
production units. Given this framework, electric
energy production through photovoltaic nanopanels
becomes evidently interesting for the production
units, whether public or private.











The Utilization of Nanopanels in

the Industry

Considering Chavaglia and Filipes recent

researches for solar panels in Brazilian market, some
results are presented in terms of the nanopanels
technology and some specific examples for Brazil are
In order to describe the way how a nanopanel is
got, it can be said that first it is necessary to produce
the semiconductors nanoparticles (about 20mn in
size, equivalent to 200 atoms in diameter). Then,
aluminum sheets are placed in press, similar to those
used in graphic paper. These aluminum sheets may
be very dynamic in their use, because of their length
and their width. This makes the product much more
adaptable to formats required for the product. Then a
thin layer of semiconducting ink is painted on the
aluminum substrate. After that, another press put
layers of cadmium sulfide and sulfur, and zinc oxide
(CdS and ZnO). The layer of zinc oxide is nonreflective to ensure that sunlight is able to reach the
semiconductor layer. Finally, the sheet is defined in
sheets of solar cells. Unlike other methods of panels
manufacture that are usually used, which typically
requires a special location for manufacturing, nano-

Int. J Latest Trends Fin. Eco. Sc.

panels can be produced outdoors (Chavaglia et al,

This technology is very interesting, reaching
good results either in terms of costs when compared
with other solar panels and has also improved
significantly when compared with the performance of
public energy. These costs have coming to be
considerably reduced.
In Brazil a strong trend of increasing costs to the
production of hydroelectric power is observed. The
comparison of the hydroelectric energy produced in
Brazil and other countries like Canada, for example,
shows the importance of the development of
alternative energies. In Brazil, the behavior of the
total cost of producing energy used to be well above
inflation in this country for a long period. Recently,
Brazil took the advantage of using photovoltaic
energy through the use of nano-panels. It may be
noted in fact that this is one of the reasons that
qualify the use of photovoltaic energy as a generator
of competitive advantage in the market. The company
which owns such technology may experience a
reduction on its variable costs, when compared with
solar photovoltaic panels (silicon). Nano-panels
permit also to perceive a competitive advantage in
environmental conservation terms, if compared with
the energy provided by public network (see
Chavaglia et al, 2012).
Therefore nanotechnology is contributing for the
transformation of traditional models. This
transformation may be in the way goods and services
are produced, or in the way the production is
conducted and made.


Final Remarks

The possibilities open to mankind through

nanotechnology are enormous. It encompasses the
way people connect with each other and with the
natural resources for the production of goods and
First, it is prudent to recognize that there are
dangers when using nanotechnology. These dangers
may get materialized under the prism of problems
arising from human nature itself, as corruption and
bad faith, or the overexploitation of resources.
However, the advantages arising from the use of
nanotechnology may mean breaking with paradigms
in what concerns to the attendance of the
consumption needs of humanity. These advantages
may be visible in particular in terms of reducing costs

Vol5 No. 1 March, 2015

and increasing the quality of both the products and

the production method, and can be seen in the case of
electrical energy production based on nanophotovoltaic panels.
Therefore it is necessary to be precautious when
using nanotechnology. It is important to stress that
the benefits can be got not only for the production
units as well as for society in a whole. Its use allows
mankind to gain additional levels of wealth and
quality of life. Anyway, the balance between costs
and benefits must be taken into consideration in the
analysis of all the relevant elements.
The experience shows that nano-photovoltaic
panels may bring interesting results for economies
and bring a new form of producing energy with
considerable advantages in the long term.

[1] Bensaude-Vincent, B. (2010). Opening the Field
of Nanoethics: Editorial Introduction to the
Special Issue on Bionanoethics, II. HYLE
International Journal for Philosophy of
Chemistry, Vol. 16, No. 1, 1-2.
[2] Cavalcanti, A. (2009). Nanorobot Invention and
Linux: The Open Technology Factor. An Open
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[3] Chavaglia, J., Filipe, J. A., Ferreira, M. A. M. &
Coelho, M. (2012), Nanotechnology and
Processes: Nano-Photovoltaic panels as an
innovation in energy market, International
Journal of Latest Trends in Finance and
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[4] Euroresidentes
Nanotecnologia: O que Nanotecnologia.
Assessed in 26 de January 2011. Available in
[5] Ferreira, M. A. M., Filipe, J. A. & Chavaglia, J.
(2014), Nanotechnology and Processes: The
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Trans Tech Publications Inc. (TTP).
[6] Filipe, J. A., Ferreira, M. A. M., Coelho, M. &
Chavaglia, J. N.. Nanotechnology: Overpassing
the limits of the human being. An ethical
discussion applied to medical applications, in
Silva, N. and Costa, G. J. M. (Ed.), Ethical
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and Future Applications in Telemedicine,

Hershey, USA: IGI Global. Forthcoming.
[7] Freitas, R. A. (2005). What is nanomedicine?.
Nanomedicine: Nanotechnology, Biology and
Medicine Vol.1, Issue 1, 2-9.
[8] Jacobstein, N. (2006). Foresight Guidelines for
Responsible Nanotechnology Development.
[9] Kubik, T., Bogunia-Kubik, K. & Sugisaka, M.
(2005). Nanotechnology on Duty in Medical
Biotechnology, 6, 17-33.
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Diferena competitiva. Havard Business
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Berdrow, I. (2009). Integrando a inovao e o
conhecimento na estratgia. Revista Portuguesa
e Brasileira de Gesto.
[12] Mckibben, B., Rogers, J. & Nijhuis, M. (2009).
National Geographic.

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[13] Mnyusiwalla, A., Daar A. S. & Singer P.

A.(2003) Mind the gap: science and ethics in
nanotechnology. Nanotechnology 14, R9R13.
[14] Moghimi, S. M., Hunter, A. C. & Murray, J. C.
(2005). Nanomedicine: current status and future
prospects. The FASEB Journal.19, 311-330.
[15] Nogami, O. & Passos, C. R. (1999). Princpios
de economia. So Paulo: Pioneira.
[16] Roco, M. C. (2003). Nanotechnology:
convergence with modern biology and
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14, 337346.
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desenvolvimento econmico. So Paulo: Abril
[18] Srivastava, D. & Atluri, S. A. (2002).
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[19] Yan, H., Zhang, X., Shen, Z. & Seeman, N. C.
(2002). A robust DNA mechanical device
controlled by hybridization topology. Nature
415, 62-65

Int. J Latest Trends Fin. Eco. Sc.

Vol5 No. 1 March, 2015

Conclusion of a Probabilistic Model to Evaluate

Motorcars Recycling and Dismantling Process
in a Scarce Oil Environment
Manuel Alberto M. Ferreira
Lisbon University Institute ISCTE-IUL, BRU-IUL, Portugal
Abstract - The M|G| queue system, at which customers
arrive according to a Poisson process at rate , is
considered in this study. Using this tool it is built a
model to analyse a situation in which motorcars arrive
at the system when getting idle, in a scarce conventional
energy ambience, and leave it as soon as they are
recycled or dismantled. Both situations are modelled
with the same purpose. The model allows concluding
that when the rhythm of dismantling and recycling of
motorcars is greater than the rate at which they become
idle, the system has a tendency to get balanced.
Keywords Motorcars, recycling, dismantling, infinite
servers queues, hazard rate function.



The humanity has come to the beginning of a new

stage of development. Things have begun to change
about environmental and ecological attitudes and
about criteria and conditions for business, see for
instance Hardin (1968), Filipe, Coelho and Ferreira
(2006), Ferreira, Filipe and Chavaglia (2014). Now
companies and governments seem to be concerned
about the environmental changes; on this subject see
Kunstler (2006). Very important changes in the way
of living and in the balances of the planet are coming
up fast, see Hardin (1968). Conventional sources of
energy are exploited at a very fast rate and they will
be exhausted in a near future, maybe within just a
few decades.
The world steps far to a new era of energy. Many of
the non-renewable resources are over-exploited and
conventional sources of energy such as oil, gas and
coal, that have been determinant as fuels civilization
in the last centuries, will collapse soon. Possibly
firstly oil, then gas and lastly coal. New opportunities
for business are becoming visible and began to be
experienced all over the world associated to the new

sources of energy.
General problems of environment have emerged
from the bad use of this kind of resources; see again
Filipe, Coelho and Ferreira (2006). Demand for
inputs by industry companies has seriously increased
for more than the two last centuries to satisfy all the
demand that has resulted either from the strong
increasing of human global population or from the
increasing level of life for an important part of the
world population. All the wastes people have made
for many decades must be overcome and it should be
know how to convert old equipment in useful
devices, when it is possible, see Ferreira, Filipe,
Coelho (2008), Ferreira et al (2008). Many kinds of
new problems will occur and it is important to know
how quickly general changes may happen, while
today societies develop new sources of energy in
order to create a new economy and a reorganized
The aim of this paper is to show that motorcars
which work on the basis of oil may have an
alternative use when this conventional source of
energy collapses; or simply they may become
dismantled. In the model to be presented, through the
use of infinite servers queues, it is considered that too
many motorcars will become idle if conventional
energy misses or even when conventional energy
becomes replaced by a renewable one. Motorcars
dismantle or recycling will become very usual
because there will not be a way to get them functional
with conventional oil, since the moment it gets
It will be stated that it is essentially relevant the
cadence at which the recycling and dismantling
actions are performed, being important in this
analysis the service hazard rate function, see Ross

International Journal of Latest Trends in Finance & Economic Sciences
IJLTFES, EISSN: 20470916
Copyright ExcelingTech, Pub, UK (

Int. J Latest Trends Fin. Eco. Sc.

Vol5 No. 1 March, 2015

In this paper it is retrieved the work presented in
Ferreira, Filipe, Coelho (2008), Ferreira et al (2011),
Ferreira et al (2008). It is completed in the part of the
model rising and enlarged in the economic analysis.


The Model

In the M G queue, see Takcs (1962), Ferreira

(1995), customers arrive according to a Poisson
process at rate and each one receives a service
which length is a positive random variable with
distribution function

The MG queue has neither losses nor waiting.

Note that there is no queue in the usual sense of the
In what concerns this study, the costumers are the
motor cars that become idle. The arrivals rate is the
rate at which the motor cars become idle. The service
time for each one is the time that goes from the
instant they get idle till the instant they become either
recycled or dismantled.
Call N t the number of occupied servers (or the
number of customers being served) at instant t , in a
p0n t P N t n N 0 0 , n 0,1,2,..., is given


n 0,1,2,...
So, the transient distribution, when the system is
initially empty, is Poisson with mean 0t 1 G v dv .
The stationary distribution is the limit distribution:


e , n 0,1,2,...


This queue system, as any other, has a sequence of

busy periods and idle periods. A busy period begins
when a customer arrives at the system finding it
empty. Be p1'n P N t n N 0 1' , n 0,1,2,...,

It is easy to check that

lim p1'n t


e , n 0,1,2,...


Calling the service time hazard rate function h(t),

according to


g t
1 G t


where g . is the probability density function

associated to G . . The service time hazard rate
function is the rate at which the services end. For the
situation under study in this paper, is the rate at
which the motorcars become either recycled or
Proposition 1:
If G t 1 , t 0 continuous and differentiable and

ht , t 0


p1'0 t is non- decreasing.

It is enough to note, according to (5),

t 1 G v dv
1 G v dv

p 0 n t

or goes on being served, with probability 1 G t ;

-The other servers, that were unoccupied at the time
origin, either go on unoccupied or occupied with
1,2,... customers, being the probabilities p0n t ,
n 0,1,2,.... Both subsystems, the one of the initial
customer and the one of the servers initially
unoccupied, are independent. So

G . and mean value . There

are infinite servers, that is: when a customer arrives

it always finds an available server. The service of a
customer is independent from the other customers
services and from the arrivals process. An important
parameter is the traffic intensity, called .

lim p 0 n t

number of customers from 0 to 1. That is: a busy

period begins. At t 0 possibly, see Ferreira (1995):
-The customer that arrived at the initial instant either
abandoned the queue system with probability G t ,

meaning N 0 1' that the time origin is an instant at

which a customer arrives at the system, jumping the

If the rate at which the services end is
greater or equal than the customers
arrivals rate, p1'0 t is non- decreasing.

For the M|M| system, exponential service


and (6) is equivalent


Equation (6) evidences that if either the recycling

or the dismantling rate is greater or equal than the

Int. J Latest Trends Fin. Eco. Sc.

Vol5 No. 1 March, 2015

rate at which the motorcars become idle, the

In the former section it was seen how important was

probability that the system is empty at instant t,

the role of h(t) and

meaning it that there is no idle motorcars, does not

of motorcars recycling and dismantling is managed.

decrease with t. So the system has a tendency to

To perform an economic analysis, based on the

become balanced as far as time goes on.

model presented behind, consider additionally p as

Denoting 1' , t and

the distributions

given by (3) and (1) mean values, respectively,




the probability, or percentage, of the motorcars

arrivals designed to the recycling being consequently

1',t np1'n t nGt p00t np0n1t1Gt

to monitor the way the system




dismantling. Call
the hazard rate

function, the mean cost and the mean benefit,

and for
respectively for recycling when

dismantling when


Gt0,t 1Gt j 1p0 j t 0,t 1Gt,

So the total cost per unit of time for motor cars


recycling and dismantling is:


1' , t 1 G t 1 G v dv


Proposition 2:
If G t 1 , t 0 continuous and differentiable and

ht , t 0


1' , t is non- decreasing.

It is enough to note, according to (5),
that 1' , t 1 G t ht .
-If the rate at which the services end is lesser or
equal than the customers arrivals rate, 1' , t is nondecreasing.
-For the M|M| system (9) is equivalent to

and the benefit per unit of time resulting from

recycling and dismantling
From an economic point of view, quite extreme, it
for any t. So results that it is
must be
interesting recycling if

are both exponential, with


, respectively, (13) becomes


Equation (9) evidences that if either the recycling

or the dismantling rate is lesser or equal than the rate
at which the motorcars become idle, the mean
number of motor cars in the system does not decrease
with time. This means that the system has a
propensity to become unbalanced as far as time goes


It is interesting dismantling if

Note that for exponential service times, in both

criteria considered, the condition 1 guarantees
the system balance.



Cost-Benefit Analysis

Int. J Latest Trends Fin. Eco. Sc.

Vol5 No. 1 March, 2015

are both exponential, with


, respectively, (15) becomes

Kelly (1979). In this kind of problem this is pacific,

in general, due to the huge quantity of motorcars
which owners certainly will look for these services. It
is essential to estimate and h(t) to get conclusive
particular results about the system after the available
data. A correct estimate of will depend also on the
arrivals process to be Poisson in real. And certainly


In a more global approach, more realistic and not

so extreme, consider a period of time with length T.
Then it must be

. It is not

so simple to deal analytically with this expression as

in the former situation. But, considering that
are both constant in


with values

, respectively, it is obtained

Recycling is interesting if

Dismantling is interesting if


From Cost-Benefit analysis performed, standing in

this model, it is concluded that there are minimum
benefits above which, from an economic point of
view, both dismantling and recycling are interesting.
And the most interesting is the one for which this
minimum benefit is the least. That is: in a broader
perspective it is more efficient the activity that
corresponds to a lower level for the minimum
interesting benefit.


are both exponential,


the way is to decide for a mean estimate for a

given period of time since it easy to admit that the
arrivals rate will depend on time. Also it is correct to
admit that with very large populations, such as the
ones dealt in these situations, the estimation of h(t) is
in general technically complicated. Then the best to
do is to estimate directly h(t) instead of estimating
first the service time distribution followed by the
consequent computation of h(t).For exponential
service times all this is particularly easy since in this
does not depend on t.





and (18)

The model here presented contributes for a better

understanding of this kind of problems. It may be
applied, with eventual modifications, to study for
example some other social economic and financial
problems such as unemployment (Ferreira et al,
2011), health Ferreira (2014a,b), pensions funds
Ferreira, Andrade and Filipe, 2012) or investment
projects (Ferreira et al, 2011). An interesting
application to repair systems, concerning technical
and economic features, is considered in Ferreira
(2003), Ferreira (2013), Ferreira, Andrade and
Filipe(2009), Ferreira et al (2009), Ferreira et al

[1] Kelly, F. P. (1979) Reversibility and Stochastic
Networks. John Wiley & Sons, New York.



To apply this model, and get useful conclusions, it is

important to check if customers arrivals occur
according to a Poisson process, see for instance

[2] Hardin, G. (1968). The Tragedy of the

Commons. Science, 162, 124-148.
[3] Filipe, J. A., Coelho, M., Ferreira, M. A. M.
(2006). O Drama dos Recursos Comuns-

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Procura de Solues para os Ecossistemas em

Perigo. Edies Slabo, Lisboa.
[4] Kunstler, J. H. (2006). O Fim do Petrleo- O
Grande Desafio do Sculo XXI. Editorial
Bizncio, Lisboa.
[5] Takcs, L. (1962). An Introduction to Queueing
Theory. Oxford University Press, New York.
[6] Ferreira, M. A. M. (1995). Comportamento
Transeunte e Perodo de Ocupao de Sistemas
de Filas de Espera sem Espera. PhD Thesis
discussed in ISCTE, Lisboa.
[7] Ferreira, M. A. M. (2003). A two echelons
repair system modelled through infinite servers
queues. Proceedings of the 21st International
Economics 2003, 75-80.
[8] Ferreira, M. A. M. (2013). Modelling and
differential costs evaluation of a two echelons
repair system through infinite servers nodes
queuing networks. Applied Mathematical
[9] Ferreira, M. A. M. (2014a). The pandemic
period length modelled through queue systems.
Proceedings of the International Conference
Quantitative Methods in Economics (Multiple
Criteria Decision Making XVII), 43-47. Virt,
[10] Ferreira, M. A. M. (2014b). M G queue
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(2012). Studying pensions funds through an
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[15] Ferreira, M. A. M., Filipe, J. A., Coelho, M..
(2014). Performance and differential costs
analysis in a two echelons repair system with
infinite servers queues. Advanced Materials
[16] Ferreira, M. A. M., Andrade, M., Filipe, J. A.,
Selvarasu, A. (2009). The management of a two
echelons repair system using queuing networks
with infinite servers queues. Annamalai
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1, 32-37.
[17] Ferreira, M. A. M., Andrade, M., Filipe, J. A.,
Coelho, M. (2011). Statistical queuing theory
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Andrade M. (2008). An infinite servers model
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[19] S. Ross (1983). Stochastic Processes. John
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Vol5 No. 1 March, 2015

Loan Products and Credit Scoring by

Commercial Banks (India)
Rais Ahmad Itoo #1, A. Selvarasu #2, Jos Antnio Filipe*3

Department of Business Administration, Annamalai University, India

Instituto Universitrio de Lisboa (ISCTE-IUL), Portugal

Abstract - This study describes the loan products offered

by commercial banks and credit scoring techniques
used for classifying risks and granting credit to
applicants in India. Loan products offered by
commercial banks are from several kinds, since housing
loans, personal loans, business loans until education
loans or vehicle loans, among many other types. All loan
products are categorized either as secured or unsecured
loans. Credit scoring techniques used for both secured
and unsecured loans are broadly divided into two
categories: Advanced Statistical Methods and
Traditional Statistical Methods. Some methodologies
are presented to discuss Indian situation and
understand the different kind on retail loans offered by
banks and the different credit scoring methods for
personal finance used by commercial banks in India.
Keywords Retail banks, Secured and Unsecured Loans,
Credit Scoring Techniques.



1.1 Initial Considerations

The human History allows well to understand
the risks of lending money. Borrowing and lending
have long history related to human behavior (Thomas
et al., 2002). A credit risk component may be
associated with lending transactions, in order to
reduce credit risk. Credit scoring methods may be
used to assess the credit worthiness of borrower. The
information filled in the personal finance application
form is used to develop a numerical score for each
applicant (Lewis, 1992; Hand and Jacks, 1998;
Thomas et al., 2002) and these scores may be used to
discriminate on bad and good loans (Durand, 1941).
Credit scores are broadly classified into two
categories based on the method used to obtain scores,
i.e. deductive or judgmental credit scoring and
empirical or statistical credit scoring (Muller, 1997;
Liu, 2001; Caire, 2004).
1.2 Retail Banking In India
Any national economy has to have a good
banking system. It is very important for sustaining
International Journal of Latest Trends in Finance & Economic Sciences
IJLTFES, EISSN: 20470916
Copyright ExcelingTech, Pub, UK (

the economic development. Indian economy is

among the fastest growing economies; and probably
the main reason behind this was the financial and
banking sector reforms that have taken place after
1991. Banking sector has faced many circumstances
where growth has taken place but others with more
difficult situations. This kind of ups and downs were
verified several times in the post independence era.
Retail banking has always been important in India,
coming back to the times when banks were
nationalized with the objective of reaching the
The growth in retail banking has been quite
prominent retail in the recent years. Retail banking
has been supported by growth in banking technology
and automation of the banking process.
Technological development has played the main role
for the rapid growth and spread of retail banking.
This banking segment has vast opportunity as well as
challenges in a growing economy as it is the case of
Indian economy. The company A.T. Kearney, a
global management consulting firm, has identified
India as the second most attractive retail destination
out of 30 emergent markets.
The major relevant policy issues to retail
banking may be pointed as financial capability,
consumer protection, regulation and responsible
Retail banking is an interesting innovation in the
21st century in India and has experienced a fast
growth. As retail banking is a banking service that
has increased primarily towards individual customer,
it focuses mainly on buyer markets. Retail banking
uses to apply mass-market strategy being the target
the individual customer. The individual customer
uses local branches of larger commercial banks. The
main services offered by retail banks are saving and
checking accounts, mortgages, personal loans, debit
cards, credit cards, among others. Moreover, it deals
also with various customers banking needs. Retail
banking provides several kind of features related to

Int. J Latest Trends Fin. Eco. Sc.

Vol5 No. 1 March, 2015

multiple products, channels and customer groups. In

India most of the banks are providing retail banking

in accumulating NPAs in banking sector and may

accentuate the indebtedness of households in the
medium term.

The considerable recent retail banking growth in

India is expected to continue in the future. There are
some consistent reasons for this growth since
technological factors, private and foreign banks
introduced in India, the increased competition, the
significant innovation in banking products and
services, the economic growth, the interest rates
deregulation, the consumerism, changes in life style
of working/middle class, the focus on productivity
and profitability, the driving towards low NPAs, the
changing consumer demographics.

1.3 Credit Scoring

Retail banking sector in the banking industry is

continuously undergoing innovations, product
reengineering, adjustments and alignments. As
mentioned above, Indian retail banking segment is
developing considerably and includes nowadays
many services. Besides credit cards, debit and ATM,
housing loans, personal loans, consumption loans,
education loans, vehicle loans, it includes also for
example insurance services, online services, among
many other services.
For the purposes of this study, a restriction of
analysis is made being the study focused basically on
loan products.
Retail lending is the exhortation in India. Most
banks have the retail segment on around 20% of their
total lending portfolio, being this segment growing at
an unnatural rate of 30 to 35% per annum. Retail
lending has been the key profit driver in the banking
sector in recent times. Retail banking used to be
synonymous of savings account and fixed deposits
with cheque based/deposit slip based transactions.
Retail loans were usually restricted to housing loans.
This situation has changed considerably in the last
decade in India.
RBI's report on Trend and Progress of India
(2003-04) has shown that the retail lending ranges
between Rs.1 20000 to Rs. 100 Lakh2, which are
generally for the duration of 5-7 years with housing
loans granted for 15 years. It reveals some new trends
in growth of credit. There is upsurge in retail credit as
against corporate advances, which may reveal itself

1 USD= 59.310 Indian Rupees (27th October 2014).


lakh or lac is a unit in the Indian numbering system

equal to one hundred thousand (100,000; scientific
notation: 105). In the Indian convention of digit grouping, it
is written as 1,00,000. For example, in India 150,000
rupees becomes 1.5 lakh rupees.

Credit evaluation is one of the most crucial

processes in banks credit management decisions. This
process includes collecting, analyzing and classifying
different credit elements and variables to assess the
credit decisions. The quality of bank loans is the key
determinant of competition, survival and profitability.
One of the most important kits, to classify bank
customers, as a part of the credit evaluation process
to reduce the current and the expected risk of a
customer being bad credit, is credit scoring. Hand &
Jacka (1998) stated that the process of modeling
creditworthiness by financial institutions is referred
to as credit scoring. It is also useful to provide
further definitions of credit scoring.
Anderson (2007) suggested that to define credit
scoring, the term should be broken down into two
components, credit and scoring. Firstly, simply the
word credit means buy now, pay later. It is derived
from the Latin word credo, which means I
believe or I trust in. Secondly, the word scoring
refers to the use of a numerical tool to rank order
cases according to some real or perceived quality in
order to discriminate between them, and ensure
objective and consistent decisions. Therefore, scores
might be presented as numbers to represent a single
quality, or grades which may be presented as
letters or labels to represent one or more qualities
(Anderson, 2007). Consequently, credit scoring can
be simply defined as the use of statistical models to
transform relevant data into numerical measures that
guide credit decisions. It is the industrialization of
trust; a logical future development of the subjective
credit ratings (Beynon, 2005) first provided by
nineteenth century credit bureau, that has been driven
by a need for objectives, fast and consistent
decisions, and made possible by advances in
technology (Anderson, 2007). Furthermore, credit
scoring is the use of statistical models to determine
the likelihood that a prospective borrower will default
on a loan. Credit scoring models are widely used to
evaluate business, real estate, and consumer loans
(Gup & Kolari, 2005). Also, credit scoring is the set
of decision models and their underlying techniques
that aid lenders in the granting of consumer credit.
These techniques decide who will get credit, how
much credit they should get and what operational
strategies will enhance the profitability of the
borrowers to the lenders (Thomas et al., 2002).

Int. J Latest Trends Fin. Eco. Sc.

Credit scoring models (Lewis, 1992; Bailey,

2001; Mays, 2001; Malhotra & Malhotra, 2003;
Thomas et al., 2004; Chuang & Lin, 2009; Sustersic
et al, 2009) are some of the most successful
applications of research modeling in finance and
banking, as reflected in the number of scoring
analysts in the industry, which is continually
increasing. However, credit scoring has been
important in allowing the phenomenal growth in
consumer credit over the last five decades. Without
credit scoring techniques, as an accurate and
automatically operated risk assessment tool, lenders
of consumer credit could not have expanded their
loan effectively (Thomas et al, 2002).

2 Literature Review
There are many studies developing this subject.
Some studies are particularly interesting in order to
frame the analysis and to create some references for
the developments that are intended to develop in this
study. Some modelling cases follow around studies
on this area.
Hand and Crowde (2005), for example, used
latent-variable technique for measuring underlying
aspects of credit customer behavior. The latentvariable model separates the observed variables into
primary characteristics (x) and behavioral
characteristics (y). Then the study summarizes them
into overall measure of credit consumer scores.
Samreen et al. (2013) summarized the
development of a credit scoring model known as
Credit Scoring Model for Corporations (CSMC),
which could be used to evaluate the creditworthiness
of corporate borrowers before granting loan. Type I
and type II errors of proposed model (CSMC) have
more accuracy rate with no errors as compared to LR
and DA.
Li and Zhong (2012) introduced ensemble
learning model for credit scoring. This model points
out moving from static credit scoring to dynamic
behavioral scoring and maximizing revenue by
decreasing Type I and Type II errors. The challenges
faced in building credit scoring models are halfbaked applicants information, missing values and
inaccurate information.
Hussein and Pointon (2011) reviewed 214
articles/books of credit scoring applications. The
important and key determinants of credit scoring
models have been investigated. The matrix (ACC rate
criterion) measures the proportion of correctly
classified cases. ACC rate is a significant criterion in

Vol5 No. 1 March, 2015

evaluating the classification capacity of proposed

scoring model. ROC curves also known as Lorentz
curves is a two dimensional graph that represents the
proposition of sensitivity (1-type II error) on y-axis
and specificity (1-type I error) on x-axis. The
maximum distance between ROC and diagonal is
equal to constant times K-S statistics.
Bellotti and Crook (2009) developed a credit
score model with inclusion of time varying macrovariables like interest rate and unemployment rate
using Survival Analysis. Survival Analysis is
competitive in comparison to LR as a credit scoring
method for prediction. The inclusion of macrovariables gave a statistically significant improvement
in predictive performance.
Kessy (2011) examined the link between the
loan processing and monitoring in banks, and asset
growth and empowerment of individual customers.
Findings revealed that better allocation and utilization
of financial institutions economic capital not only
facilitates outreach to more under banked and
unbanked productive poor people but also
empowering them by stimulating investments and
increasing productivity in a cost-effective way for
poverty reduction.
Azam et al. (2012) evaluated the significance of
loan applicant socioeconomic attributes on personal
loan decision in banks using descriptive statistics and
logistic regression. The model identified that out of
six independent variables only three variables
(region, residence status and year with the current
organization) have significant impact on personal
loan decision.
Matthew and Sarah (2013) investigated credit
risk and default among Ghanaian banks. It was
suggested that banks should tighten their credit
assessment tool, i.e. CAMPARI (Character, Ability,
Model, Purpose, Amount, Repayment and Insurance)
model. It was recommended that the Central Bank
should facilitate the establishment of a vibrant creditreferencing bureau in order to provide the credit
history for banks customers.
Koh et al. (2006) illustrated the use of data
mining techniques to construct credit scoring models.
The construction of this model has five steps:
defining the objective, selecting variables, selecting
sample and collecting data, selecting modelling tools
and constructing models, validating and assessing
Nancy et al. (2013) studied the Credit Risk
Assessment Model of SBI Bank. SBI loan norms are

Int. J Latest Trends Fin. Eco. Sc.

flexible and differ from case to case. Loans applicant

information will be checked from RBI willful
defaulters lists.

3 Types of Retail Loans

Retail banks offer different types of loan to the
individual customer to meet their diverse needs. The
different types of loans offered by a retail banks to an
individual customer may be home loans, loans
against property, education loans, personal loans,
business loans, gold loans, credit card loans, or yet
even others.
Description of some loan types offered by retail
banks is given below:
1. Home Loan - available for purchasing
new/old dwelling unit, construction of a house,
purchasing a plot of land for construction of a house.
Banks have also designed housing loans facilities for
NRI/PIO. Customer opt for Flexi Rate plan to hedge
the interest rate risk by breaking a loan into two
separate accounts, free property insurance and
personal accident insurance. Borrower does not pay
pre-payment/foreclosure charges for a part as well as
full prepayment (when repaid from own sources by
the borrower).
2. Education is the most important investment
one may make in life. Higher studies and
specialization in certain fields call for additional
financial support from time to time. Whether
customers are planning school education for their
children (nursery to standard XII) pursuing a
graduate or post-graduate degree, the bank gives
Education Loans, to fulfill customers ambitions and
3. In nowadays fast paced world, a vehicle is a
common necessity. Yet there are some expenses and
plans in life that take priority, the dream of owning a
car is now also important. Whether as a comfortable
and dependable means of transport or as a status
symbol in society, it is believed that anyone deserves
today to have a vehicle. There are benefits for this
kind of loans. Available up to `15 Lakhs for any car
model (inclusive of gas-kit), loans can be availed for
new and second-hand vehicles (not more than 3 years
old). Repayment period of a loan is as long as 7
years. For those individuals who prefer to travel more
conservatively or to get to their destinations faster, a
two-wheeler is as much a boon as it is to a car owner.
With newer models coming out each year, the options
available to the customer are both attractive as well as
convenient. All resident Indians, salaried people,

Vol5 No. 1 March, 2015

professionals, self-employed, businessmen

farmers can apply for this kind of loan.


4. Banks give loans to professional people like

doctors or engineers, for example. These loans are
designed specially to cater to the financial needs of
the professional. A loan can be availed as a
demand/term loan or overdraft as per customers
preference. The loan is available for purchasing
office equipments viz. computers, fax, airconditioners, furniture, etc.
5. Also,
expansion/renovation/modernization of existing
premises. Traders loan facilities enable individuals,
proprietorships, bodies such as partnership firms and
co-operative societies to avail of working capital or
undertake development of shop by way of
6. Dealers in gold/silver jewellary may get
benefit of a loan. The loan is provided against the
security of tangible collateral securities in the form of
mortgage of land (not agricultural land) and building.
There is wedding in the family. May be a person likes
to surprise the spouse with a priceless gift. People
simply may like to pamper their family with an
extended vacation. These are situations for which a
person may need a helping hand.
A bank offers personal loans to meet personal
requirements. A bank helps a customer to take care of
all kind of expenses at a short notice. A loan may be
availed to meet expenses related to marriage, a travel,
the honeymoon, a holiday or medical expenditures or
yet for any other personal use. It is also available to
pensioners/defense pensioners. A loan is also
available for Earnest Money Deposits for buyers of
home/flat/plot. A bank gives loans to a customer as
an innovative combination of a loan and over draft
facility with flexible repayment options against the
immovable property security of the customer.
Benefits of this loan are an ideal use of idle property generating additional income from idle property,
customer withdraw money as per their needs and save
on interest costs, deposit surplus money/regular
income/salary and save interest, flexibility to
withdraw money deposited earlier. Banks also
provide either as overdraft or demand loans as per the
customers need.

4 Credit Scoring



Int. J Latest Trends Fin. Eco. Sc.

4.1 Credit Scoring Methodology

Credit scoring was primarily dedicated to
assessing individuals who were granted loans, both
existing and new customers. Credit analysts, based on
pre-determined scores, reviewed customers credit
history and creditworthiness to minimize the
probability of delinquency and default.
Basically, credit scoring is a method which can
be used to classify or quantify the risk factors
relevant for a borrower's ability and willingness to
repay the loan. Credit scoring allows lenders to
predict likely loan outcomes based on the use of
statistical techniques, which allow objective
predictions as to whether a loan will produce a good
or bad outcome. Credit scoring can be used on a
standalone basis or as a part of the credit evaluation
process. When used on a standalone basis, credit
scoring assists in classifying applicants into
accept/reject groups or good/bad credits; when used
as part of the credit evaluation process, credit scoring
can help to measure the credit risk of the applicants
(Thomas et al, 2002; Bhatia, 2006).
Durand (1941) was the first to recognise that one
could use the same techniques to discriminate
between good and bad loans. Credit scoring is
essentially a way of recognizing the different groups
in a population when one cannot see the
characteristic that separates the groups (Thomas,
2000). Commercially, the credit scoring was first
developed in the 1950s by Bill Fair and Earl Isaac,
but has only come into increasing use in the last two
decades (Thomas, 2000). The main aim of the credit
scoring model is to build a single aggregate risk
indicator for a set of risk factors from analysis of data
representative of the lender's own previous lending
experience (Thomas, 2000; Bhatia, 2006).
As per the information collected from the
bankers, the credit scoring for personal loans is done
in line with the RBI guidelines. Almost all banks are
following BASEL II and III guidelines. As per the
experience of bankers, credit scoring process includes
collecting, analyzing and classifying different credit
elements and variables to assess the credit decisions.
The quality of bank loans is the key determinant of
competition, survival and profitability. It is one of the
most important kits, to classify a banks customers, as
a part of the credit evaluation process to reduce the
current and the expected risk of a customer as being a
bad credit. The objective of credit scoring models is
to assign loan customers to either good credit or bad
credit or predict the bad creditors. Therefore, scoring
problems are related to the classification analysis.

Vol5 No. 1 March, 2015

Probably the earliest use of statistical scoring to

distinguish between good and bad applicants was
made by Durand. Bankers will assign some weight
age to the loan application form filled by borrower.
Every bank has its own credit score cut points, which
will cluster the customer into different risk groups.
A wide range of statistical techniques are used in
building scoring models. Most of these models are
statistical, being some of them non-linear; models are
applicable to build an efficient and effective credit
scoring system that is effectively used for predictive
purposes. Techniques, such as weight of evidence
measure, regression analysis, discriminant analysis,
programming, Coxs proportional hazard model,
support vector machines, decision trees, neural
networks, k-nearest-neighbour, genetic algorithms
and genetic programming, are all widely used
techniques in building credit scoring models by credit
analysts, bankers, lenders and computer software
developers and providers.
4.2 Advanced statistical methods vs. traditional
statistical methods
Advanced statistical techniques, such neural
networks and genetic programming, provide an
alternative to conventional statistical techniques, such
as discriminant analysis, Probit analysis and logistic
regression. The point of using sophisticated
techniques, such as neural nets, is their capability of
modeling extremely complex functions, and, of
course, this stands in contrast to traditional linear
techniques, such as linear regression and linear
discriminant analysis. Probabilistic neural nets
usually trains presented cases faster than multi-layer
feed-forward nets, and classifies them in the same
way or better than multi-layer feed-forward nets,
even through multi-layer feed-forward nets have been
shown to be excellent classifiers (Palisade, 2005;
Irwin, et al., 1995). However, a range of sophisticated
algorithms for neural nets training - making them an
attractive alternative to the more conventional
techniques - has become available (Masters, 1995;
Palisade, 2005). Also, genetic programming is one of
the most successful alternatives to traditional
techniques recently used in this field. Genetic
programming is utilized to automatically determine
the sufficient discriminant functions and the
applicable features simultaneously. Dissimilar neural
networks may only suit large datasets, but genetic
programming can positively perform well even with
small data-sets (Nath et al, 1997). Different credit

Int. J Latest Trends Fin. Eco. Sc.

scoring tools and techniques used by banks are

discussed in existing literature.
4.3 Credit Scoring Tools and Techniques in the
Follows some references which are important
where this topic is developed by pursuing some
different scoring tools and techniques:

Logistic Regression: Orgler (1971), Lucas

1992, Henley, 1995; Arminger et al.,1997, Desai et
al.,1997, Hand and Henley, 1997; Hand and Jacka,
1998, West 2000, Baesens et al., 2003, Abdou et

Discriminant Analysis: Durand (1941),

Altman (1968), Boyle et al. (1992), Henley (1995),
Desai et al. (1997), Hand and Henley (1997);
Caouette et al. (1998); West (2000), Baesens et al.
(2003), Malhotra and Malhotra (2003), Sarlija et al.
(2004); Abdou and Pointon (2009).

Probit Analysis: Grablowsky and Talley

(1981), Guillen and Artis (1992), Pindyck and
Rubinfeld (1997), Maddala (2001).
DT or CART or recursive partitioning:
Baesens et al. (2003), Stefanowski and Wilk (2001),
Fritz and Hosemann (2000), Hand and Jacka (1998),
Henley and Hand (1996) and Coffman (1986),
Paleologo et al. (2010), Breiman et al. (1984);
Arminger et al. (1997), Breiman et al. (1984),
Rosenberg and Gleit (1994).
Neural Network: Bishop (1995); Masters
(1995); Arminger et al. (1997), Stefanowski and Wilk
(2001), Lee et al. (2002), Malhotra and Malhotra
(2003), Kim and Sohn (2004), Zekic Susac et al.
(2004), Lee and Chen (2005), Yim and Mitchell
(2005), Blochlinger and Leippold (2006), Seow and
Thomas (2006), Trinkle and Baldwin (2007).
Genetic Programming: Koza (1994); Teller
and Veloso (2000), Xia et al. (2000), McKee and
Lensberg (2002), Nunez Letamendia (2002), Chen
and Huang (2003), Zhang and Bhattacharyya (2004),
Ong et al. (2005), Lensberg et al. (2006), Huang et al.
(2006), Huang et al. (2007), Etemadi et al. (2009).

5 Methodology
5.1 Statement of the Problem
Considering the exposed above, it can be said
that the main income for retail banking is the interest
generated for the loans and advances. If this interest
or loans are not paid regularly it becomes a big
problem for the bank. When a borrower fails to meet

Vol5 No. 1 March, 2015

the legal obligations (or conditions) of a loan, he is

said to have defaulted on his/her loan. These defaults
increase the level of non-performing assets. In order
to decrease the level of non-performing assets, the
bank has to develop loan application screening
methods, which distinguishes applicants as bad and
good applicants, considering the credit scoring
methods. Almost all banks have credit scoring
methods, but still they have non-performing assets.
This study is carried out to know the credit scoring
methods used by banks and list loan products offered
to customers.
5.2 Objectives
The main objectives of the present study are the
following ones:
1. To know different types of retail loans
offered by banks.
2. To know the different credit scoring
methods for personal finance available and used by
commercial banks.

6 Current Credit Scoring Procedure

The different types of loans offered by Indian
banks are home loans, auto loans, personal loans,
business loans, loans against property, gold loans and
credit cards loans. The process of loans sanctioning
involves personal loans product promotions,
customers contacting the bank, filling up the
application form. Physical evidences for the support
of a loan process are application forms, agreement,
loan balance statement, and acknowledgement of
The interface (people) responsible for carrying
the whole loan process is a bank branch, a bank loan
executive, a bank manager, a credit scoring
executive, a CIBIL and a credit manager. Customer
requirements are: availability for different loan
products, low interest rates, low EMI, maximum
repayment time periods, diminishing rates of
interests, easy documentation, higher LTV and the
credit scoring. Once banks receive the filled
application form of applicant for personal finance, it
undergoes through various stages. The application
form will be sent to the credit risk department where
credit scores are calculated.
There are two types of credit scoring done by
banks in India i.e. internal and external scoring. The
ranges as well as groups vary from bank to bank,
while as the external CIBIL scores are the same for
all banks. The CIBIL scores vary from 300 to 900 or
NA (Not applicable) or NH (No History), 300 being

Int. J Latest Trends Fin. Eco. Sc.

the lowest and 900 the highest. Banks prefer

applicants with a score higher than 700. The external
scoring is carried out to check the applicants banking
with other banks and other financial institutions. The
components of the CIBIL credit score and credit
report are payment history (35%), Amount Owed
(30%), Length of Credit History (15%), New Credit
(10%) and types of Credit used (10%) for scoring the
applicant. CIBIL has all the transaction details of all
borrowers. Normally the whole process will take
place within 10 working days.
The commonly assessed customer details are:
bank history, income, banking (Annual Quarterly
Balance AQB), stability, etc. The whole processing
fee will be paid by banks. The internal credit scoring
will be done within the bank, while as for the external
scoring bank has to pay towards CIBIL. Bank will
not charge the processing fee to the applicant. The
credit score can be improved considering the
following principles:

Always pay your dues on time.

2. Always keep your credit balance low on

your credit card.

Maintain a healthy mix of credit

4. Monitor your and your guarantor accounts

balance frequently.
There are 4 main factors which mainly affect the

payment history,


high utilization of credit limit,

Vol5 No. 1 March, 2015

7 Final Notes
In a new or emerging market, the operational,
technical, business and cultural issues should be
considered with the implementation of the credit
scoring models for retail loan products. The
operational issues relate to the use of the model and it
is imperative that the staff and the management of the
bank understand the purpose of the model.
Application scoring models should be used for
making credit decisions on new applications and
behavioral models for retail loan products to
supervise existing borrowers for limiting the
expansion or for marketing new products. The
technical issues relate to the development of proper
infrastructure, maintenance of historical data and
software needed to build a credit scoring model for
retail loan products within the bank. The business
issues relate to whether the soundness and safety of
banks could be achieved through the adoption of
quantitative credit decision models, which would
send a positive impact in the banking sector. The
cultural issues relate to making credit irrespective of
race, colour, sex, religion, marital status, age or
ethnic origin. Further, models have to be validated so
as to ensure that the model performance is compatible
in meeting the business as well as regulatory
Thus, the above issues have to be considered
while developing and implementing credit scoring
models for retail loan products.

3. higher percentage of credit cards or personal

finance and

many new accounts opened recently.

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credit scoring: The case of Egyptian public
sector banks. Expert Systems with Applications
36 (9): 11402-11417.
[2] Abdou, H., Pointon, J. (2009). Credit scoring
and decision-making in Egyptian public sector
banks. International Journal of Managerial
Finance 5 (4): 391-406.
[3] Altman, E. I. (1968). Financial Ratios,
Discriminant Analysis and the Prediction of
Corporate Bankruptcy. The Journal of Finance
XXIII (4): 589-609.
[4] Anderson, R. (2007). The Credit Scoring
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Vol5 No. 1 March, 2015

Efficiency in Stock Markets with DEA: Evidence

from PSI20
Nuno Ferreira#1, Adriano Mendona Souza*2
# Department

of Quantitative Methods, IBS-ISCTE Business School, ISCTE

Avenida das Foras Armadas, Lisboa, Portugal

Department of Statistics, Federal University of Santa Maria

Roraima Avenue, 100, Santa Maria, RS state, Brazil

Abstract - After the US subprime crisis, the first signs of

a sovereign debt crisis spread among European
financial players. The regulation of the markets by
European Commission and European Central Bank
created limitation to obtained great amount of liquidity
in commercial banking sector. In this context, the
successful survival of some European banks became in a
dangerous situation. The present study try to explore
the crisis occurred in one of the largest private
Portuguese banks through the analysis of the efficiency
levels of twenty largest enterprises of the PSI20 since
1993. The input variables chosen were market value
and return in a Data Envelopment Analysis model.
Consistent with earlier studies, the results show
substantial revenue inefficiencies among the Portuguese
Keywords Stock Markets Indices; Interest Rates; Banking
sector; EU Sovereign Debt Crisis; Efficiency.



Financial researchers had dedicated a large effort

to discover the factors that explain differences in the
enterprises financial performance during several
years. Around the world stock markets have fallen,
large financial institutions have collapsed or been
bought out, and governments in even the wealthiest
nations have had to come up with rescue packages to
bail out their financial systems. In this context, all
agents focus their attention on productivity and
efficiency gains since both are central to the growth
of firms in any industry. For this matter, inefficiency
can be due to structural problems or market
imperfections or even other factors, resulting in firms
producing below their maximum attainable output.
Efforts to measure how efficiently a firm (a
Decision Maker Unit, known as DMU in literature)
produces outputs with its inputs have led to the
development of a number of efficiency concepts,
including scale efficiency, scope efficiency,

economic efficiency, and technical efficiency.

Whereas technical efficiency requires only input and
output data, economic efficiency also requires price
data. The simplest way to differentiate productive and
technical efficiency is to think of productive
efficiency in terms of cost minimization by adjusting
the mix of inputs, whereas technical efficiency is
output maximization from a given mix of inputs.
In literature, a large number of papers is based on
an essentially nonparametric, programming approach
to analysis of observed outcomes. In fact, the Data
Envelopment Analysis (DEA) is by far the most used
methodology to measure efficiency. Traditional DEA
models compare the relative efficiency of each DMU
(for instances: individual firms or, individual
industries in the sector). Leontief-type input-output
models characterize the different sectors dependence,
each sector comprising several industries. In this
context, it seems natural to explore the DEA
efficiency models in so different economy sectors
such as agriculture, manufacturing, transportation,
and trade. Despite DEA efficiency models mostly
emphasize technical efficiency (TE), and allocative
efficiency (AE) concepts, alternative approaches are
also covered with this methodology.
The purpose of DEA is to construct an
envelopment production frontier. This frontier maps
out the greatest output (least input) for a given level
of input (output) based on observed outputs and
inputs of the DMUs. In this context, all observed
points lie on or below this frontier. Thus, the
production frontier or the best practices frontier is
constructed with the DMUs that lie on it (highest
efficiency). The efficiencies of the remaining DMUs
that lie below it measured by the distance relative to
this frontier.
PSI20 (acronym of Portuguese Stock Index) is the
main index of Euronext Lisbon. Eligible companies

International Journal of Latest Trends in Finance & Economic Sciences
IJLTFES, EISSN: 20470916
Copyright ExcelingTech, Pub, UK (

Int. J Latest Trends Fin. Eco. Sc.

are required to fulfill the velocity threshold and

minimum free float (corresponding to the value of
100 million). The base value of the PSI-20 date back
to December 31, 1992 and was 3000 points.
The Portuguese stock index includes 7 categories
of companies, namely: Banks, Industry, Media,
Energy, Food & Allied Products, Construction and
Communications (5, 3, 1, 4, 4, 1 and 2 companies,
respectively) [see Table 1].
Table 1. List of the studied Companies from PSI20 Index

Food and Allied Products



Altri SGPS
Mota Engil SGPS
Jernimo Martins
Sonae Indstria SGPS
Sonae SGPS
Portugal Telecom SGPS
Zon Optimus
EDP Renovveis
EDP Energias de Portugal
Banco Comercial Portugus (BCP)
Banco Esprito Santo (BES)
Banco Portugus de Investimento (BPI)
Esprito Santo Financial Group

Among the literature focused on the Portuguese

stock market, we selected the following papers as
relevant research on the topic under study.
Nascimento (2007) analyzed the Portuguese market
during 19972007. In this study the author concluded
that 42% of the 26 selected stocks, which had a
random walk in prices, held a significant part of the
(weak) efficiency where the market players did not
enjoy supernormal profits. Nevertheless, the author
hinted at the possibility of the lack of efficiency due
to the existence of information asymmetries, since
58% of the remaining assets of the sample allowed
supernormal profits to be possible. Duque and
Madeira (2004) presented empirical evidence on the
existence of abnormal returns of asset prices in the
Portuguese Stock Index (PSI) for the period 1996
2001. The authors evidenced that the Portuguese
stock market has a weak efficiency.
If we extend to international stock markets the
proliferation of papers increase substantially. In this
context, a large number of papers highlight the DEA
importance. The acceptance of this methodology in
financial markets is reaching more popularity in
recent years. By using DEA to generate a financial
efficiency frontier, each enterprise achieves an
overall financial efficiency score comparable to that
of its peer enterprises. One great advantage of DEA

Vol5 No. 1 March, 2015

was based on the evidence that DEA gives analysts

an opportunity. This opportunity relies in the facility
of calculating an overall efficiency score based on
financial data, to examine different aspects of
financial conditions and financial performance
simultaneously rather than sequentially. In this
context, Chen (2008) by using the size effect through
DEA tried to model for stock selection to form
portfolios and compare them against the benchmark
market portfolio. Lopes et al. (2008) applying the
same DEA model to the Brazilian stock market. But
the focus of the analysis relied on into risk measures
like variance and beta as inputs and quarterly returns
as the output. Singh et al. (2009), used DEA to form
efficient portfolio in their comparative analysis.
Wang et al. (2010) formulated a model of stock
classification to facilitate investors making
investment decisions related to equity stock selection
by two dimensions. These were performance shift
and stock price evaluation (Malmquist productivity
index based on DEA and Range adjusted Measure
(DEA-RAM)). More recently Lim and Zhu (2014)
proposed a way of using DEA cross-efficiency
evaluation in portfolio selection. They presented an
application to Korean stock market.
In the present study the revenue efficiency levels
of twenty largest enterprises of the PSI20 since 1993
are analysed in order to better understand how
efficiency or the lack of it, contribute to the crisis
occurred in one of the largest private Portuguese
banks (Banco Esprito Santo).


Methodology of DEA

The panel data defined to undertake the analysis

considered the individual companys return as the
output variable and the market return and the market
value as inputs. The DEA output-oriented approach
to estimate the revenue efficiency (RE) of each stock
return follows (Fre et al. (1985) :

1, ,

1, ,



1, ,


1, ,

Int. J Latest Trends Fin. Eco. Sc.

This model considers n DMUs, defined by j

(j=1,,n), which use the inputs xij (x1j,,xmj), to
obtain the outputs yrj (y1j,,ysj). In the formulation
(1), prj0 is the value of output r for the DMU j0 under
assessment. yr0 is a variable that, at optimal solution,
gives the output r to be produced by DMU j0 to
maximize revenue, subject to the technological
restrictions imposed by the existing production
possibility. The RE of each DMU j0 is given by as the
ratio of current revenue observed at DMU j0 to the
maximum revenue estimated by the optimal solution
to model (2):

The DEA model (1) and the revenue efficiency

model (2), were estimated using the DEAP software
(Coelli, 1996).



The Tables 2 to 4 present the DEA scores by

economical sector, year and enterprises. The results
achieved with DEA consider the more efficient, the
sectors of Media, Communications and Energy.
Table 2. DEA revenue efficiency scores by economical
sectors (between 1993 and 2013)
Food and Allied Products


The results are along with the common sense since

this sector usually has the greatest impact in an
established crisis period. It would be expected that
the Industry would be also more penalized,
nonetheless this sectors enterprises represented in
PSI20 has an important percentage of the business
directed to the export sector. This would be an
important key to avoid a stronger impact. Media,
Communications and Energy, are also affected by the
crisis due the economic contraction of the business
cycle. The analysis by year does not bring any

Vol5 No. 1 March, 2015

additional enlighten to the discussion, as the lowest

score corresponds to the first year of the index
Table 3. DEA revenue efficiency scores by year


Nonetheless, from Table 3, three important periods

of economic tension are well identified. The Asian
financial crisis in 1996-97; the Iraq and Afghanistan
invasion in 2001; the Subprime crisis in the US
housing sector and the Troika in 2011. Since the
intervention of Troika, the PSI20 has fallen.
This slowdown can be explained by other
additional factors: i) slowdown of economies the
European Union (EU) and the United States of
America (USA), due to deleveraging of economy and
the sovereign debt crisis Euro zone; ii) lower rates of
growth in emerging economies, affected by the
reduction in consumption the most advanced
economies and policies of rising interest rates to
contain inflation, iii) events extraordinary, as the
tsunami in Japan (who led the country into recession
in 2011) and the instability in the Middle East (with
an impact on the price of commodities), but whose
effects are should blurring in 2012. Notwithstanding,
the year 2013 was the most difficult for the euro area
since the financial crisis 2008.

Int. J Latest Trends Fin. Eco. Sc.

Vol5 No. 1 March, 2015

Table 4. DEA revenue efficiency scores by enterprises


Food and Allied Products



Altri SGPS
Mota Engil SGPS
Jernimo Martins
Sonae Indstria SGPS
Sonae SGPS
Portugal Telecom SGPS
Zon Optimus
EDP Renovveis
EDP Energias de Portugal
Banco Comercial Portugus (BCP)
Banco Esprito Santo (BES)
Banco Portugus de Investimento (BPI)
Esprito Santo Financial Group

Table 4 presents the efficiency levels by enterprise

and the percentage of times that each one was used as
benchmark to the remaining.
The analysis by enterprise denotes that the energy
sector and communications, are the more used
enterprises as benchmarks. The exception goes to
Jeronimo Martins (Food and Allied products)
considered as efficient by both methodologies.
Although achieving a good score (0.91) Altri
SGPS didnt was used as benchmark and the Esprito
Santo Financial Group already revealed an
efficiencys low score (0.67, the second lowest
following Banif (0.53)).
From an individual point of view, the more
efficient companies are: Altri SGPS, Jernimo
Martins, Portugal Telecom SGPS, EDP Energias de
Portugal, GALP Energia SGPS, Banco Comercial
Portugus, Banco Esprito Santo and Banco
Portugus de Investimento. From those, only
Jernimo Martins, EDP Energias de Portugal and
GALP Energia SGPS were used as benchmark more
than 10%. The company Zon Optimus also was used
as benchmark (19%) although being below 85% of
The lower efficient are namely: Mota Engil SGPS,
BANIF and Esprito Santo Financial Group. The
result of the last one, is quite curious considering the
outcome of the BES crisis. Indeed, at the end of
2013, BES was the most penalized with the
deterioration of credit quality due to its large
concentration on corporate loans segment with a ratio
of 11.6%.


Technical Efficiency

As benchmark (%)

Concluding Remarks

The results of DEA model formulated in the paper

evidenced in terms of the more efficient sectors, the
Media, Communications and Energy. The analysis by
enterprise confirms this assumption since the best
companies and the more used as benchmarks are
from these sectors.
The mean technical efficiency of PSI20 market
during the period 1993 to 2013 given by the DEA
model was 0.82. This implied that 82% of the
potential yield was being realized by the companies
in the market. This score also indicated that there was
a scope to increase the output further by 18% without
increasing the levels of inputs.
Finally the evolution through years were stable if
we eliminated 1993, the year of PSI20 creation and
the years of extreme events in terms of economic and
financial crisis and wars.
Our paper results showed comparable technical
efficiencies between BES and BANIF. This fact
imply that this bank is in the queue to ask for
financial assistance. In fact on 21 January of 2013,
the European Commission announced that it has
temporarily approved, a recapitalization totaling 1.1
billion by Portuguese government to BANIF to meet
regulatory capital ratios.

Int. J Latest Trends Fin. Eco. Sc.

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Vol5 No. 1 March, 2015

Chaos Theory in Politics - A Book Review

Manuel Alberto M. Ferreira
Lisbon University Institute ISCTE-IUL, BRU-IUL, Portugal

Abstract The objective of this work is the book Chaos

Theory in Politics, 978-94-017-8690-4, from Springer
Series Understanding Complex Systems review:
Banerjee, Santo, Sule Ercetin,
Sefika, Tekin, Ali, Editors of
this book present its three
main achievements as:
phenomena such as the Arab
Spring and how complexity
relates political forecasting
using principles of chaos
2. Provides mathematical models as applied to political
and economical concerns.
3. Incorporates applications of fractals in political
It is composed of four parts:
Part I
Politics, Uncertainty and Peace Intelligence.
Part II
Politics, Complex Systems, Basin of Attractions.
Part III
Leadership, Political Science, Chaos and
National Security
Part IV
Sex Complexity and Politics in Literature.
The authors are: Part I: Politics, Uncertainty and Peace
Intelligence. - Organized and Disorganized Chaos a
New Dynamics in Peace Intelligence; . . Eretin et al.
- Uncertainty and Fuzzy Decisions; I. zkan, I. B.
Trken. - Understanding Arab Spring with Chaos
Theory: Uprising or Revolution; .N. Akaln, C.A.
Blcek. - Part II: Politics, Complex Systems, Basin of
Attractions; Economic Decision Making: Application of
the Theory of Complex Systems; R. Kitt. - Basins of
Attraction for Generative Justice; R. Eglash, C. Garvey.
- Chaos in World Politics: A Reflection; M. A. Martins
Ferreira et al. - Large Spatial and Temporal Separation
of Cause and Effect in Policy Making Dealing with
Non-Linear Effects; J. McCaskill. - Part III:
Leadership, Political Science, Chaos and National

Security. - Chaos and Political Science: How Floods and

Butter have proved to be relevant to move tables closer;
J. P. Plaza i Font. - Working towards the Fuhrer: A
Chaotic View; U. Cakar. - New Communitarianism
Movements and Complex Utopia; K. Gediz Akdeniz. Counter-Intelligence as a Chaotic Phenomenon and its
Importance in National Security; G. Kulolu et al. Part IV: Sex Complexity and Politics in Literature. Sex Complexity and Politics in Black Dogs; I. McEwan
et al.
The keywords and the related subjects presented below,
also supplied by the Editors, complete the
understanding about the subjects approached in this
book and also on the research methodologies employed.
The whole book is written in very correct, even stylist,
and accessible English. It is rigorous and impartial. The
contributors have a great expertise on this field.
Keywords - Chaos and Political Science; Chaos in the Arab
World; Deterministic Chaos Theory and Social Change;
Fractal Theory and Politics ; Modelling the Arab Spring;
Non-linear Analysis in Political Science; Nonlinearity in
Political Economy ; Political Forecasting.
Related subjects - Complexity; Political Science; Social
Policy / Labor / Population Economics.


The review

The purpose of this book is to investigate global

politics and political implications of social science
and management, making use of the tools supplied by
complexity and chaos theories. Complexity and chaos
appear often tied in many research fields, in particular
in the study of very complex phenomena there
Developed basically inside mathematics,
complexity and chaos theory were first applied to
study phenomena in the scope of the applied and
natural sciences. But soon it became intuitive its
possible application to the humanities and social
In fact their mathematical models, intuitive
reasoning and metaphors as the the butterfly effect
and the drop of honey effect , the first with more
adequacy to the applied and natural sciences and the

International Journal of Latest Trends in Finance & Economic Sciences
IJLTFES, EISSN: 20470916
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second to the humanities and social sciences, gave

rise to the hope of fruitful applications in this last
This is patent in this work, where these analysis
technics are applied to investigate global politics and
political implications of social science.

Vol5 No. 1 March, 2015

The text has very great quality. The innovative

approach of these phenomena makes its reading
essential for social scientists and students and also for
the general public.


Overall review

In this sense the book is methodological because

it exemplifies in a very interesting way the use of
such technics. And, complementarily, the conclusions
and results obtained, much of them quite surprising,
show the success of these research methodologies
application in this investigation field.

This is a methodological and original book,

scientifically rigorous, fundamental and valuable.
Very well written by highly reputed contributors it is
an essential reading for social scientists and students,
and also very interesting to the general public.

This book is original in the use of deterministic

chaos and nonlinear analysis that have not been a
focal point in this area of research.


Through this book, political, social, economic

and media phenomena are studied since very old
times till nowadays. This fact enriches very much this
work because it gives the historic perspective
essential to catch the essence of this kind of

[1] Banerjee, Santo, Sule Ercetin, Sefika, Tekin,

Ali, (Eds.). Chaos Theory in Politics.
Understanding Complex Systems, 2014, X, 201
p. 13 illus., 7 illus. in color. ISBN: 978-94-0178690-4. DOI: 10. 1007/978-94-017-8691-1.

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