Leland's Approach to Option Pricing: The Evolution of a Discontinuity

A claim of Leland (1985) states that in the presence of transaction costs a call option on a stock S , described by geometric Brownian motion, can be perfectly hedged using Black–Scholes delta hedging with a modified volatility. Recently Kabanov and Safarian (1997) disproved this claim, giving an explicit (up to an integral) expression of the limiting hedging error, which appears to be strictly negative and depends on the path of the stock price only via the stock price at expiry S _T . We prove in this paper that the limiting hedging error, considered as a function of S _T , exhibits a removable discontinuity at the exercise price. Furthermore, we provide a quantitative result describing the evolution of the discontinuity: Hedging errors, plotted over the price at expiry, show a peak near the exercise price. We determine the rate at which that peak becomes narrower (producing the discontinuity in the limit) as the lengths of the revision intervals shrink.     

Optimal No‐Arbitrage Bounds on S&P 500 Index Options and the Volatility Smile

This article shows that the volatility smile is not necessarily inconsistent with the Black–Scholes analysis. Specifically, when transaction costs are present, the absence of arbitrage opportunities does not dictate that there exists a unique price for an option. Rather, there exists a range of prices within which the option's price may fall and still be consistent with the Black–Scholes arbitrage pricing argument. This article uses a linear program (LP) cast in a binomial framework to determine the smallest possible range of prices for Standard & Poor's 500 Index options that are consistent with no arbitrage in the presence of transaction costs. The LP method employs dynamic trading in the underlying and risk‐free assets as well as fixed positions in other options that trade on the same underlying security. One‐way transaction‐cost levels on the index, inclusive of the bid–ask spread, would have to be below six basis points for deviations from Black–Scholes pricing to present an arbitrage opportunity. Monte Carlo simulations are employed to assess the hedging error induced with a 12‐period binomial model to approximate a continuous‐time geometric Brownian motion. Once the risk caused by the hedging error is accounted for, transaction costs have to be well below three basis points for the arbitrage opportunity to be profitable two times out of five. This analysis indicates that market prices that deviate from those given by a constant‐volatility option model, such as the Black–Scholes model, can be consistent with the absence of arbitrage in the presence of transaction costs. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:1151–1179, 2001     

基于交易费用视角的中国体制转型绩效研究

交易费用的变动可作为衡量中国体制转型绩效的一个重要尺度。通过借鉴已有研究成果,构建MIMIC模型,测算中国自改革开放以来交易部门的交易费用和非市场交易费用及其变动趋势。结果显示,改革开放以来,中国的交易服务水平并未显著提高,且非市场交易费用居高不下。应将推动服务业发展作为产业结构优化升级的战略重点,加快建立法治政府和服务型政府,积极推进"十二五"期间的经济转型升级。     

APPROXIMATE HEDGING PROBLEM WITH TRANSACTION COSTS IN STOCHASTIC VOLATILITY MARKETS

This paper studies the problem of option replication in general stochastic volatility markets with transaction costs, using a new specification for the volatility adjustment in Leland's algorithm. We prove several limit theorems for the normalized replication error of Leland's strategy, as well as that of the strategy suggested by Lépinette. The asymptotic results obtained not only generalize the existing results, but also enable us to fix the underhedging property pointed out by Kabanov and Safarian. We also discuss possible methods to improve the convergence rate and to reduce the option price inclusive of transaction costs.     

Temporary Migration and Bilateral Trade Flows

Empirical evidence on migration and trade has established that permanent migration promotes trade. This finding has been interpreted as proof for the role of migrants in reducing trade‐related transaction costs such as contract enforcement costs or information costs. This paper contributes to improving our understanding of trade‐related transaction costs by analysing empirically whether temporary migrants, like permanent migrants, have an impact on bilateral trade flows. Temporary migrants can be expected to be less integrated in the host country than permanent migrants. At the same time, their knowledge of the home country can, on average, be expected to be more up‐to‐date. Our findings therefore give insights as to the relative importance of knowledge on the host and the home country for trade‐related transaction costs. Using a gravity approach in our empirical analysis, we find that temporary migration has a positive and significant effect on trade and that temporary migration tends to have a stronger and more significant effect on both imports and exports than permanent migration. Interestingly, the role of temporary migrants in reducing trade costs does not appear to be associated with their skills.     

农户要素禀赋、交易费用与农户农地转出行为——基于江西省农户调查

在农地流转过程中,愈是具有从事非农要素禀赋的农户,转出农地的可能性愈大,转出的面积愈大。农地交易费用虽然对农户农地转出的可能性和流转面积有负向影响,但是它并没有构成农户农地转出行为的最主要影响因素。     

LIMIT THEOREMS FOR PARTIAL HEDGING UNDER TRANSACTION COSTS

We study shortfall risk minimization for American options with path‐dependent payoffs under proportional transaction costs in the Black–Scholes (BS) model. We show that for this case the shortfall risk is a limit of similar terms in an appropriate sequence of binomial models. We also prove that in the continuous time BS model, for a given initial capital, there exists a portfolio strategy which minimizes the shortfall risk. In the absence of transactions costs (complete markets) similar limit theorems were obtained by Dolinsky and Kifer for game options. In the presence of transaction costs the markets are no longer complete and additional machinery is required. Shortfall risk minimization for American options under transaction costs was not studied before.     

长期雇佣:一个人力资本理论的解释

新古典经济学认为,在劳动力市场上企业按照工人的边际劳动产品支付工资,随着产品市场需求的变动频繁地增减对劳动力的雇佣数量。然而,现代经济理论,特别是人力资本理论的发展,表明现实劳动力市场的运行并不符合新古典理论的假定条件,以长期雇佣为主要特征的内部劳动力市场有其客观的经济效率基础。     

契约选择与食品的安全供给:基于交易成本的视角

食品生产供应链中,各个阶段、各交易节点之间的契约模式选择在交易成本的约束下,最终会对食品的质量安全水平产生影响。本文以交易成本的三个维度为研究视角,从理论上分析了食品供应链上的交易主体在交易成本约束下的契约选择行为,进而考察其对食品安全供给的影响。研究表明:首先,专用性资产投资越多,交易契约越倾向于紧密型,有利于食品的安全供给;其次,不确定性(质量、价格等)程度越高,下游企业越倾向于生产契约形式,有利于食品的安全供给;第三,交易频率越高,交易双方对彼此的信任程度越高,企业越倾向于采取生产契约模式,有利于食品的安全供给。     

The Factor Content of Heterogeneous Firm Trade

The present paper studies the factor content of heterogenous firm trade in the presence of market imperfections and transaction costs. The conceptual framework builds on a relative factor endowment model, which we extend to account for firm heterogeneity and transaction costs. Using a large panel of firm‐level data for the EU, we are able to examine not only the aggregate factor content of trade but also to identify differences in the factor of trade between heterogenous firms. Our empirical results suggest that because of transaction costs and market imperfections, the factor content of agricultural trade is heavily distorted in the CEE transition economies. To increase the gains of trade and the employed factor rewards, the policy should first address the transaction costs and market imperfections.     

Jobs on the wire: In search of the perfect labor market

The Internet as the most recent development in communication technology might dramatically reduce transaction costs and thereby lead to the emergence of a nearly perfect market. This would have drastic implications for labor markets and the social security system. In the first part of the paper, the influence of the Internet on transaction costs is examined. It is shown that the Internet will not necessarily lead to a decrease of transaction costs. Therefore, it is not clear whether the Internet will promote a perfect labor market. Moreover, it is shown that an outsourcing to the Internet will only take place for certain jobs which can be easily standardised. The second part of the paper shows what an Internet‐based labor market may look like. To show this, the model of monopolistic competition is used. A result of these considerations is that an increased outsourcing to the Internet may lead to a kind of association of freelancers. This revised version was published online in June 2006 with corrections to the Cover Date.     

A NOTE ON THE EFFECTS OF TAXES ON OPTIMAL INVESTMENT

We integrate two approaches to portfolio management problems: that of Morton and Pliska (1995) for a portfolio with risky and riskless assets under transaction costs, and that of Cadenillas and Pliska (1999) for a portfolio with a risky asset under taxes and transaction costs. In particular, we show that the two surprising results of the latter paper, results shown for a taxable market consisting of only a single security, extend to a financial market with one risky asset and one bond: it can be optimal to realize not only losses but also gains, and sometimes the investor prefers a positive tax rate.     

Optimal consumption and investment under transaction costs*

In this paper, we consider the Merton problem in a market with a single risky asset and proportional transaction costs. We give a complete solution of the problem up to the solution of a first‐crossing problem for a first‐order differential equation. We find that the characteristics of the solution (e.g., well‐posedness) can be related to some simple properties of a univariate quadratic whose coefficients are functions of the parameters of the problem. Our solution to the problem via the value function includes expressions for the boundaries of the no‐transaction wedge. Using these expressions, we prove a precise condition for when leverage occurs. One new and unexpected result is that when the solution to the Merton problem (without transaction costs) involves a leveraged position, and when transaction costs are large, the location of the boundary at which sales of the risky asset occur is independent of the transaction cost on purchases.     

THE GENERAL STRUCTURE OF OPTIMAL INVESTMENT AND CONSUMPTION WITH SMALL TRANSACTION COSTS

We investigate the general structure of optimal investment and consumption with small proportional transaction costs. For a safe asset and a risky asset with general continuous dynamics, traded with random and time‐varying but small transaction costs, we derive simple formal asymptotics for the optimal policy and welfare. These reveal the roles of the investors' preferences as well as the market and cost dynamics, and also lead to a fully dynamic model for the implied trading volume. In frictionless models that can be solved in closed form, explicit formulas for the leading‐order corrections due to small transaction costs are obtained.     

Customs-related Transaction Costs,Firm Size and International Trade Intensity

customs are generally perceived as a time-consuming impediment to international trade. However, few studies have empirically examined the determinants and the impact of this type of government-imposed transaction costs. This paper analyses the role of firm size as a determinant of customs-related transaction costs, as well as the effect of firm size on the relationship between these costs and the international trade intensity of firms. The results of this study indicate that customs-related transaction costs repress international trade activities of firms, even at low levels of these costs. The paper identifies transaction-related economies of scale, simplified customs procedures and advanced information and communication technology as main determinants of customs-related transaction costs. It is shown that when these factors are taken into account, firm size has no effect on customs-related transaction costs. Policy implications are considered for firm strategy and public policy.     

Improving Software Flexibility for Business Process Changes

In times of continuous change, companies need to adjust their business processes to gain sustainable competitive advantage. Resulting changes in the company’s IT currently require the involvement of developers from departments that are mostly not aligned with the business. These changes often result in high transaction and labor costs. The article presents a platform-based method to adjust business processes with the aim of increasing both efficiency and flexibility compared to current approaches. The core of our work is an evaluation against traditional component-based software development using a sound simulation model. Three real-world scenarios of business process change show that – despite a slight increase in transaction costs – our suggested method decreases labor costs while increasing operational flexibility.     

基于交易费用理论的大部制改革分析

政府组织成员的遂利本性决定了政府交易行为的存在,政府部门交易的实质是同类公共事务管理权和管理责任的跨部门转移。现行大部制改革尽管降低了部门交易的协调、信息和控制成本,但同时也引起了部门内部管理成本的上涨,当大部门的规模扩张至边际交易费用与边际管理成本相等时,静态均衡就实现了。简单的部门合并并非是治愈政府运转失调、效率低下的良方,只有明确交易主体的职责权限、减少交易频率和交易的不确定性,才能从根本上降低政府交易费用,建立有效的政治市场。     

The Transaction Cost Economics of Market‐based Exchange: The Impact of Reputation and External Verification Agencies

In this analysis, we empirically investigate market‐based transaction costs. We measure market‐based transaction costs indirectly by examining variations in market prices when selling Morgan Silver Dollars on eBay. We find that the reputation of both the seller and the coin‐rating agency employed significantly influences the price premium obtained. Moreover, we find that the use of a coin‐rating agency with a poor reputation proved more damaging than the use of no coin‐rating agency. Thus, we find support for the suggestion that the reputation of sellers and third‐party verification agencies have a significant influence on perceived market‐based transaction costs.     

Some Transaction Cost Effects of Authoritarian Management

This paper studies the transaction cost economizing effects of authoritarian management in organizations and systems subject to higher transaction costs originating from various sources. We analyze the nature, mechanisms, and transaction cost aspects of the authoritarian management style. We argue that the higher the transaction costs of internal organization, the more autocratic the manager is likely to be. We discuss the features of authoritarian managers, illustrating some of our key hypotheses with the example of Henry Ford and his running of the Ford Motor Company. In the context of non-market economies, we relate authoritarian leadership to economic centralism in high transaction cost systems such as East European societies with significant transactional or organizational opportunism, as well as other sources of market failure.     

从交易成本经济学看第三方物流的信用风险问题

我国第三方物流发展缓慢,其中最主要的障碍是第三方物流服务的交易成本过高,导致物流需求的不旺。分析信用风险对我国第三方物流交易成本的影响,企业缺乏信用意识、国家缺乏信用管理、社会信用环境较差和信用违规行为缺乏惩治机制等等,是信用缺失对第三方物流交易成本影响的关键。应从完善政府信用监督管理体系、推动和完善信用中介机构的发展和加强中介机构的监督作用及企业内部信用管理等方面发展我国第三方物流。