On <Emphasis Type="Italic">q</Emphasis>-optimal martingale measures in exponential Lévy models

We give a sufficient condition to identify the q-optimal signed and the q-optimal absolutely continuous martingale measures in exponential Lévy models. As a consequence, we find that in the one-dimensional case, the q-optimal equivalent martingale measures may exist only if the tails for upward jumps are extraordinarily light. Moreover, we derive the convergence of q-optimal signed, resp. absolutely continuous, martingale measures to the minimal entropy martingale measure as q approaches one. Finally, some implications for portfolio optimization are discussed. C.N. gratefully acknowledges financial support by UniCredit, Markets and Investment Banking. However, this paper does not reflect the opinion of UniCredit, Markets and Investment Banking, it is the personal view of the authors.     

Small-time ruin for a financial process modulated by a Harris recurrent Markov chain

We consider a nonstandard ruin problem where: (i) the increments of the process are heavy-tailed and Markov-dependent, modulated by a general Harris recurrent Markov chain; (ii) ruin occurs when a positive boundary is attained within a sufficiently small time. Our main result provides sharp asymptotics for the small-time probability of ruin, viz., P(sup? _{n≤δ u} S _n ≥u), where {S _n } denotes the discrete partial sums of the process and δ∈(0,1/μ), where μ is the mean drift. We apply our results to obtain risk estimates which quantify, e.g., repetitive operational risk losses or the extremal behavior for a GARCH(1,1) process.     

Beyond Risk Aversion: Why,How and What's Next?

Risk attitudes other than risk aversion (e.g. prudence and temperance) are becoming important both in theoretical and empirical work. While the literature has mainly focused its attention on the intensity of such risk attitudes (e.g. the concepts of absolute prudence and absolute temperance), I consider here an alternative approach related to the direction of these attitudes (i.e. the sign of the successive derivatives of the utility function).     

q-Optimal Martingale Measures for Discrete Time Models

We focus on a backward induction of the q-optimal martingale measure for discrete-time models, where 1  <  q  <  ∞. As for the bounded asset price process case, the same backward induction has been obtained by Grandits (Bernoulli, 5:225–247, 1999). To remove the boundedness, we shall discuss a sufficient condition under which there exists a signed martingale measure whose density is in the ${\mathcal {L}^q}$ -space, which topic is our second aim.     

From the Minimal Entropy Martingale Measures to the Optimal Strategies for the Exponential Utility Maximization: the Case of Geometric Lévy Processes

In this article, we will consider a multi-dimensional geometric L'evy process as a financial market model. We will first determine the minimal entropy martingale measure (MEMM); we will next derive the optimal strategy for the exponential utility maximization of terminal wealth concretely from the representation of the MEMM. JEL Classification: D46, D52, G12 AMS (2000) Subject Classification: 60G44, 60G51, 60G52,60H20, 60J75, 91B16, 91B28, 94A17     

On the properties of high-order non-monetary measures for risks

This paper investigates how welfare losses for facing high-order risk increases change when the risk environment of the decision maker is altered. To that aim, we define the nth-order utility premium as a measure of pain associated with facing the passage of one risk to a more severe one and we examine some of its properties. Changes in risk are expressed through the concept of stochastic dominance of order n. The paper investigates more particularly welfare changes of merging increases in risk, first ignoring background risks, then taking them into account. Merging increases in risk may be beneficial or not, depending on whether background risks are considered and how. The paper also provides conditions on individual preferences for superadditivity of the nth-order utility premium. The results confirm the importance and usefulness of two analytical concepts: mixed risk aversion and risk apportionment.     

Enhancement of value investing strategies based on financial statement variables: the German evidence

This paper examines the added-value of combining traditional valuation ratios with each other as well as with some financial statement variables in the German stock markets during the 2000–2015 period. The results show that combination pays off and, moreover, that the benefits of combination are greater in Germany than in most other developed stock markets. Particularly, we find strong evidence of the added-value of using Piotroski’s F-score as a supplementary selection criterion for value stocks as well as for low-accrual stocks. Our results show further that the F-score also boosts the efficacy of other valuation ratios besides the book-to-price ratio. In addition, the inclusion of F-score besides a relative value measure tends to increase the average market equity of portfolio firms. The decomposition of the full-sample-period performance into separate bull- and bear-period performance shows clearly that the better performance of F-score-boosted portfolios is mostly attributable to their outperformance during bearish periods, even though on average, they also generate higher bull-period returns than the comparable value portfolios formed without F-score. The use of F-score as a supplementary criterion also increases the proportion of stocks that earn above-market-average returns during the subsequent holding period. For the first time in the financial literature, we also document a strong relationship between high F-score stocks and momentum stocks.     

Risk Aversion,Downside Risk Aversion and Paying for Stochastic Improvements

This paper considers the relationship between risk preferences and the willingness to pay for stochastic improvements. We show that if the stochastic improvement satisfies a double-crossing condition, then a decision maker with utility v is willing to pay more than a decision maker with utility u, if v is both more risk averse and less downside risk averse than u. As the condition always holds in the case of self-protection, the result implies novel characterizations of individuals’ willingness to pay to reduce the probability of loss. By establishing a general result on the correspondence between an individual's willingness to pay, and his optimal purchase of stochastic improvement when there is a given relationship between stochastic improvements and the amount paid for them, we further show that all results on the willingness to pay can be applied directly to characterize the conditions under which a more risk averse individual will optimally choose to buy more stochastic improvement. Generalizations of existing results on optimal choice of self-protection can be obtained as corollaries.     

Minimal <Emphasis Type="Italic">q</Emphasis>-entropy martingale measures for exponential time-changed Lévy processes

We consider structure preserving measure transforms for time-changed Lévy processes. Within this class of transforms preserving the time-changed Lévy structure, we derive equivalent martingale measures minimizing relative q-entropy. They combine the corresponding transform for the Lévy process with an Esscher transform on the time change. Structure preservation is found to be an inherent property of minimal q-entropy martingale measures under continuous time changes, whereas it imposes an additional restriction for discontinuous time changes.     

No-arbitrage under a class of honest times

This paper quantifies the interplay between the no-arbitrage notion of no unbounded profit with bounded risk (NUPBR) and additional progressive information generated by a random time. This study complements the one of Aksamit et al. (Finance Stoch. 21:1103–1139, 2017) in which the authors have studied similar topics for the model stopped at the random time, while here we deal with the question of what happens after the random time. Given that the existing literature proves that NUPBR is always violated after honest times that avoid stopping times in a continuous filtration, we propose here a new class of honest times for which NUPBR can be preserved for some models. For these honest times, we obtain two principal results. The first result characterizes the pairs of initial market and honest time for which the resulting model preserves NUPBR, while the second result characterizes honest times that do not affect NUPBR of any quasi-left-continuous model (i.e., in which the asset price process has no predictable jump times). Furthermore, we construct explicitly local martingale deflators for a large class of models.     

From <Emphasis Type="Italic">The Geneva Papers on Risk and Insurance</Emphasis> to <Emphasis Type="Italic">The Geneva Risk and Insurance Review</Emphasis>

The Geneva Risk and Insurance Review celebrates in 2016 its 40^th year of existence. Yes. But it must be recalled that about half of these 40 years occurred under a different name—The Geneva Papers on Risk and Insurance. For a long time, the fate of the journal was very closely linked to the development of “The Geneva Association”.     

Land as Production Input and Collateral: Land Investment by Japanese Firms

Is the collateral role an empirically important determinant of investment in land? We study what has determined the land investment by Japanese firms since the 1990s, after the collapse of the asset-price bubble. With a large panel data set, we estimate nonlinear land-investment functions and calculate q for land assets. The estimates confirm the dual roles of land assets: production inputs and collateral. Firms sold land assets in response to the decline in their sales and the deterioration in financial conditions. Partial q for land assets was generally below one during the period.     

Modeling the inconsistency in intertemporal choice: the generalized Weibull discount function and its extension

The aim of this paper is to obtain the family of the so-called generalized Weibull discount functions, introduced by Takeuchi (Game Econ Behav 71:456–478, 2011), by deforming the q-exponential discount function by means of the Stevens’ “power” law. The obtained discount functions exhibit different degrees of inconsistency and so they can be classified according to the value of their characteristic deforming parameters. Moreover, we extend the construction of the generalized Weibull discount function starting from any discount function instead of the q-exponential discounting. In any case, the value of the parameter \(\theta \) of these new discount functions is extended from (0, 1] to the union of the intervals \((-\,\infty ,0) \cup (0,+\,\infty )\).     

The role of electronic word of mouth,conventional media,and subjective norms on the intention to purchase <Emphasis Type="Italic">Sharia</Emphasis> insurance services

The aim of this study was to investigate the effect of electronic word of mouth (eWOM) and conventional media on subjective norms and intention to purchase Sharia insurance in Indonesian Muslim society. The research data consisted of 458 Muslim clients who were members of an online community and also policy holders of Sharia insurance in the three largest cities in Indonesia: Jakarta, Semarang, and Surabaya. This study used purposive sampling and structural equation modeling. The research showed that eWOM and conventional media can affect subjective norms. Additionally, subjective norms have a significant effect on the intention to purchase among Sharia insurance customers. This study validated the importance of the variables of eWOM and conventional media in influencing subjective norms and intention to purchase. For Sharia insurance company management, this study can serve as a very useful reference in drafting and formulating campaign strategies. This study also justifies the integrated relationship between eWOM and conventional media with subjective norms and intention to purchase Sharia insurance.     

Impact of website characteristics on relationship quality: a comparison of banks financial cooperatives

This study seeks to investigate differences exhibited by bank customers and members of financial cooperatives respecting website characteristics (website design, convenience, information quality, ease of use and security/confidentiality) and their impact on online relationship quality (composed of trust, commitment and satisfaction). An online survey was conducted with 476 banking sector customers (banks and financial cooperatives), followed by a confirmatory factors analysis and multigroup analysis using EQS 6.2 software. Results evidence a significant difference in terms of website design and security/confidentiality. The impact of these variables on relationship quality proves significantly higher in the case of banks. This study submits that web strategies used by banks and financial cooperatives to develop online relationship quality may vary based on the type of organization.     

Shadow prices,fractional Brownian motion,and portfolio optimisation under transaction costs

The present paper accomplishes a major step towards a reconciliation of two conflicting approaches in mathematical finance: on the one hand, the mainstream approach based on the notion of no arbitrage (Black, Merton & Scholes), and on the other hand, the consideration of non-semimartingale price processes, the archetype of which being fractional Brownian motion (Mandelbrot). Imposing (arbitrarily small) proportional transaction costs and considering logarithmic utility optimisers, we are able to show the existence of a semimartingale, frictionless shadow price process for an exponential fractional Brownian financial market.     

Valuation of asset and volatility derivatives using decoupled time-changed Lévy processes

In this paper we propose a general derivative pricing framework that employs decoupled time-changed (DTC) Lévy processes to model the underlying assets of contingent claims. A DTC Lévy process is a generalized time-changed Lévy process whose continuous and pure jump parts are allowed to follow separate random time scalings; we devise the martingale structure for a DTC Lévy-driven asset and revisit many popular models which fall under this framework. Postulating different time changes for the underlying Lévy decomposition allows the introduction of asset price models consistent with the assumption of a correlated pair of continuous and jump market activity rates; we study one illustrative DTC model of this kind based on the so-called Wishart process. The theory we develop is applied to the problem of pricing not only claims that depend on the price or the volatility of an underlying asset, but also more sophisticated derivatives whose payoffs rely on the joint performance of these two financial variables, such as the target volatility option. We solve the pricing problem through a Fourier-inversion method. Numerical analyses validating our techniques are provided. In particular, we present some evidence that correlating the activity rates could be beneficial for modeling the volatility skew dynamics.     

Strong Increases in Downside Risk Aversion

A ranking of risk preferences is of economic interest insofar as it leads to unambiguous comparative statics predictions, and for this to be the case, the ranking must be a strict partial ordering. The ranking by greater risk aversion meets this demand at the second order, and yields a variety of well-known predictions concerning the effect of greater risk aversion on demands for insurance and risky assets, among many other applications. There has been less success at the third order, where ranking preferences by aversion to downside risk has not produced a strict partial ordering. The problem is that account has not been taken of the fact that an increase in downside risk aversion must induce changes in risk aversion as well. We propose a definition of stronger downside risk aversion that does yield a strict partial ordering by requiring a nested increase in both second- and third-order risk aversion, so that v is more strongly downside risk averse than u if v is more risk averse and more downside risk averse than u. We demonstrate that v being more strongly downside risk averse than u is characterized by v never liking any change in the probability distribution for y that induces a third-order stochastic dominance deterioration in the distribution for u(y). We apply the definition to obtain intuitive comparative statics predictions in the precautionary saving problem, and relate the definition to alternatives proposed in the literature.     

Towards a better understanding of mobile banking: the impact of customer experience on trust and commitment

In the current context of ubiquitous connectedness through portable mobile devices and services, it is important to comprehend more fully the nature of consumer/bank interactions and relationships. At the same time, firms in the service sector are trying to provide customers with impactful positive experiences. This article examines the impact of mobile banking experience on trust and commitment based on the customer experience dimensions defined by Schmitt and expanded to include the negative aspect of the affective dimension. A total of 396 panellists of a recognized Canadian research firm responded to a self-administered online questionnaire. Findings demonstrate that the cognitive and negative affective dimensions of mobile experience impact trust, whereas the positive affective/sensory dimension influences commitment. The behavioural and social dimensions do not have significant impacts. This study enriches the theoretical corpus of knowledge in customer experience, relationship marketing and m-banking literature, lending practical implications for mobile services managers. Financial institutions, for example, should offer sensory mobile applications designed to appeal to the eye or to the touch (positive affective/sensory dimension), provide tools and information intended to arouse user curiosity and provoke reflection (cognitive dimension), while avoiding negative experiences which can lead to damaging feelings/emotions such as disappointment and anger (negative affective dimension).     

Stochastic orders in dynamic reinsurance markets

We consider a dynamic reinsurance market, where the traded risk process is driven by a compound Poisson process and where claim amounts are unbounded. These markets are known to be incomplete, and there are typically infinitely many martingale measures. In this case, no-arbitrage pricing theory can typically only provide wide bounds on prices of reinsurance claims. Optimal martingale measures such as the minimal martingale measure and the minimal entropy martingale measure are determined, and some comparison results for prices under different martingale measures are provided. This leads to a simple stochastic ordering result for the optimal martingale measures. Moreover, these optimal martingale measures are compared with other martingale measures that have been suggested in the literature on dynamic reinsurance markets.Received: March 2004, Mathematics Subject Classification (2000): 62P05, 60J75, 60G44JEL Classification: G10