Local volatility dynamic models

This paper is concerned with the characterization of arbitrage-free dynamic stochastic models for the equity markets when Itô stochastic differential equations are used to model the dynamics of a set of basic instruments including, but not limited to, the underliers. We study these market models in the framework of the HJM philosophy originally articulated for Treasury bond markets. The main thrust of the paper is to characterize absence of arbitrage by a drift condition and a spot consistency condition for the coefficients of the local volatility dynamics.     

The IASB and FASB convergence process and the need for ‘concept-based’ accounting teaching

The increasing globalization of the U.S. economy drives interest in international accounting standards. In this respect, the convergence process between the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) targets the completion of several major projects by 2011. The importance of the projects under consideration as well as the lack of conclusive theoretical solutions around them suggests that the target of a “common set” of accounting standards will be replaced in the short-medium term by a de facto situation of a “slightly different set” of accounting standards. In this paper, we draw on best available practices to make a specific proposal for the introduction of IFRS into the curriculum of institutions of higher learning in the U.S. Our proposal is driven by the idea that accounting education should move from teaching ever temporary rules to emphasize the economic and strategic underpinnings of accounting transactions.     

Accounting and international relations: Britain,Spain and the Asiento treaty

The boundaries between accounting and law are contingent on time–space intersections. Here, these margins are explored in the realm of international relations by focusing on the Asiento, an 18th century treaty granting Britain the monopoly to trade slaves with the Spanish American colonies. Although a relatively minor concern of treaty-makers, noncompliance with provisions of the Asiento by the South Sea Company placed accounting centre stage in conflicts between Britain and Spain. In combination with geo-strategic and domestic political circumstances, reporting failures exacerbated the commercial dispute between the two nations which culminated in war in 1739. The accounting provisions of the Asiento are examined by drawing on managerialist and realist theories of treaty compliance. It is shown that British noncompliance with accounting obligations under the treaty was driven by realist self-interest and the maximisation of material gain. Given that such motivations dominated behaviour attempts to manage noncompliance through the routine processes and structures of international politics proved unsuccessful. Managerial devices such as diplomatic exchanges over treaty ambiguity and securing greater informational transparency merely provided further opportunities for the pursuit of self-interest. It is suggested that divergent perceptions of the role of accounting in international relations stem from the unique political, legal, social and cultural configurations of nation states. The study highlights the limitations of accounting as an instrument of treaty verification. Its effectiveness in that capacity is diminished where there is no shared understanding of the significance, purpose, content and interpretation of accounting information.     

Structural change and cumulative causation: A Kaldorian approach

This paper presents a multisectoral model based on Kaldor's approach to explain the importance of structural change and cumulative causation. Divergence in countries' growth rates in Kaldorian models are explained either by different degrees of increasing returns among sectors on the supply side or by different income elasticities of exports and imports on the demand-side, but it is not explained by both factors together. In this vein, a multisector growth model that combines different sectoral income elasticities and different sectoral increasing returns is built to explain how structural changes toward high-tech industries can trigger a process of cumulative causation and ensure higher growth rates in the long run.     

How social capital and knowledge affect innovation

This research analyzes the effects of interorganizational links on radical innovation using a comprehensive framework that integrates three research streams: social capital, the knowledge-based view and innovation. Incorporating data from 143 companies of innovative manufacturing and service industries, our results show that while knowledge complexity per se exerts a clear influence on radical innovation, the effect of knowledge tacitness appears only in combination with social capital. Similarly, the mere existence of strong cooperation agreements (relational social capital) does not guarantee more radical innovations, only when combining high levels of social capital with tacit knowledge does this antecedent produce more radical innovation.     

Large games with countable characteristics

We consider anonymous games with an atomless probability space of players in which players’ characteristics are countable. Our main result shows that the set of equilibrium distributions coincides with the set of distributions induced by equilibrium strategies together with the function assigning characteristics to players. This result implies the existence of Nash equilibria in continuous large games with countable characteristics.     

Ex-post stability of Bayes-Nash equilibria of large games

We present a result on approximate ex-post stability of Bayes-Nash equilibria in semi-anonymous Bayesian games with a large finite number of players. The result allows players? action and type spaces to be general compact metric spaces, thus extending a result by Kalai (2004).     

Bank failures caused by Large withdrawals: An explanation based purely on liquidity

In a version of the Diamond and Dybvig [Diamond, D., Dybvig, P., 1983. Bank runs, deposit insurance, and liquidity. Journal of Political Economy 91, 401–419.] model with aggregate uncertainty, we show that there exists an equilibrium with the following properties: all consumers deposit at the bank, all patient consumers wait for the last period to withdraw, and the bank fails with strictly positive probability. Furthermore, we show that the probability of a bank failure remains bounded away from zero as the number of consumers increases.This equilibrium explains bank failures driven by extreme withdrawals solely on liquidity since they happen because both banks and depositors are illiquid. Furthermore, it does not require much of the elements typically emphasized, including: consumers well informed about the true state of nature, a non-zero consumption after a crisis, consumers’ panic and sunspots. We therefore think that aggregate risk in Diamond-Dybvig-like environments can be an important element to explain bank crises.     

On the global acceptance of IAS/IFRS accounting standards: The logic and implications of the principles-based system

The widespread acceptance of International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) makes it timely to examine their technical determinants as well as their implications for the accounting profession and the process of accounting harmonization. In this respect, we suggest that the principles-based approach to the standards and its inner flexibility enables the application of IAS/IFRS to countries with diverse accounting traditions and varying institutional conditions. Furthermore, the principles-based approach involves major changes in the expertise held by accountants and, hence, in their educational background, training programs, and in the organizational and business models of accounting firms. Finally, we submit that the standards set by the IAS/IFRS constitute a step forward in the process of accounting harmonization, although there is still far to go in the comparability of accounting measures across countries and regions.     

OPTIMAL MULTIPLE STOPPING AND VALUATION OF SWING OPTIONS

The connection between optimal stopping of random systems and the theory of the Snell envelop is well understood, and its application to the pricing of American contingent claims is well known. Motivated by the pricing of swing contracts (whose recall components can be viewed as contingent claims with multiple exercises of American type) we investigate the mathematical generalization of these results to the case of possible multiple stopping. We prove existence of the multiple exercise policies in a fairly general set-up. We then concentrate on the Black–Scholes model for which we give a constructive solution in the perpetual case, and an approximation procedure in the finite horizon case. The last two sections of the paper are devoted to numerical results. We illustrate the theoretical results of the perpetual case, and in the finite horizon case, we introduce numerical approximation algorithms based on ideas of the Malliavin calculus.