On fairness of systemic risk measures

Finance and Stochastics - In our previous paper “A unified approach to systemic risk measures via acceptance sets” (Mathematical Finance, 2018), we have introduced a general class of...     

What if subordinates took care of managers’ mental health at work?

Managers’ mental health is increasingly a subject of concern. However, organizational interventions to reduce stress and promote mental health do not target managers, but rather employees. Numerous studies report a link between supervisory behaviors and subordinates’ mental health at work, and suggest that developing managers’ behavior is a promising avenue in enhancing subordinates’ mental health at work. Nonetheless, the literature has neglected the role and behaviors of subordinates in the prevention of their managers’ mental health problems. This article presents the results of a qualitative research study that inventories 38 specific work practices (observable behaviors) of subordinates, grouped into 12 competencies. Managers and subordinates identified these work practices as affecting work environmental stressors and promoting managers’ mental health at work. The results also point to a major gap between the specific working practices cited by managers and those cited by subordinates, who generally report practices in a passive way. The theoretical and practical repercussions and implications for organizational intervention and human resource management are discussed.     

Cross-sectional dependence robust block bootstrap panel unit root tests

In this paper we consider the issue of unit root testing in cross-sectionally dependent panels. We consider panels that may be characterized by various forms of cross-sectional dependence including (but not exclusive to) the popular common factor framework. We consider block bootstrap versions of the group-mean (Im et al., 2003) and the pooled (Levin et al., 2002) unit root coefficient DF tests for panel data, originally proposed for a setting of no cross-sectional dependence beyond a common time effect. The tests, suited for testing for unit roots in the observed data, can be easily implemented as no specification or estimation of the dependence structure is required. Asymptotic properties of the tests are derived for T going to infinity and N finite. Asymptotic validity of the bootstrap tests is established in very general settings, including the presence of common factors and cointegration across units. Properties under the alternative hypothesis are also considered. In a Monte Carlo simulation, the bootstrap tests are found to have rejection frequencies that are much closer to nominal size than the rejection frequencies for the corresponding asymptotic tests. The power properties of the bootstrap tests appear to be similar to those of the asymptotic tests.     

Lockout/tagout and operational risks in the production control of manufacturing systems with passive redundancy

This paper addresses problems associated with production control and occupational safety in a manufacturing system prone to failure involving two machines working in passive redundancy. Machines turning out one part experience two modes of failure and repair: firstly, where failure occurs when a machine remains in fair condition; and, secondly, where such failure results in outright breakdown. Accordingly, we examine both modes of failure for their impact on a flexible manufacturing system (FMS) with respect to production control in terms of costs associated with lockout/tagout procedures and corrective maintenance. This study seeks to identify optimal costs related to backlogs, inventories and maintenance over an infinite planning horizon, along with levels of occupational risk where production control includes efficient planning of lockouts/tagouts. Our study offers numerical methods which may be employed to achieve optimal conditions in setting control policies. A numerical example and sensitivity analysis support this approach.     

Strategic Manipulation in Voting Games When Lotteries and Ties Are Permitted

A Gibbard-Satterthwaite type theorem is established for random decision rules and rules that permit ties. The rules use full information on how individuals rank lotteries and sets of outcomes. The theorem allows restrictions on the domain of rankings. Journal of Economic Literature Classification Numbers: D7, C7.     

Investment in information acquisition

This paper presents a simple model in which a community must decide on the amount of real investment and investment in information so as to maximise the expected utility of consumption over two periods. It is shown that under conditions involving the product of the elasticity of the marginal utility of consumption and the elasticity of the production function that optimal real investment is either a monotone function of the information or is independent of it. In the former case information is of value and it is optimal to invest a positive amount in information acquisition. In the latter case information has no value and society devotes no resources to information acquisition.     

An Empirical Model of Advertising Dynamics

This paper develops a model of dynamic advertising competition, and applies it to the problem of optimal advertising scheduling through time. In many industries we observe advertising “pulsing”, whereby firms systematically switch advertising on and off at a high-frequency. Hence, we observe periods of zero and non-zero advertising, as opposed to a steady level of positive advertising. Previous research has rationalized pulsing through two features of the sale response function: an S-shaped response to advertising, and long-run effects of current advertising on demand. Despite considerable evidence for advertising carry-over, existing evidence for non-convexities in the shape of the sales-response to advertising has been limited and, often, mixed. We show how both features can be included in a discrete choice based demand system and estimated using a simple partial maximum likelihood estimator. The demand estimates are then taken to the supply side, where we simulate the outcome of a dynamic game using the Markov perfect equilibrium (MPE) concept. Our objective is not to test for the specific game generating observed advertising levels. Rather, we wish to verify whether the use of pulsing (on and off) can be justified as an equilibrium advertising practice. We solve for the equilibrium using numerical dynamic programming methods. The flexibility provided by the numerical solution method allows us to improve on the existing literature, which typically considers only two competitors, and places strong restrictions on the demand models for which the supply side policies can be obtained. We estimate the demand model using data from the Frozen Entree product category. We find evidence for a threshold effect, which is qualitatively similar to the aforementioned S-shaped advertising response. We also show that the threshold is robust to functional form assumptions for the marginal impact of advertising on demand. Our estimates, which are obtained without imposing any supply side restrictions, imply that firms should indeed pulse in equilibrium. Predicted advertising in the MPE is higher, on average, than observed advertising. On average, the optimal advertising policies yield a moderate profit improvement over the profits under observed advertising.JEL Classification: L11, L66, M30 M37 R12     

Multiple-Object Auctions with Budget Constrained Bidders

A seller with two objects faces a group of bidders who are subject to budget constraints. The objects have common values to all bidders but need not be identical, and may be either complements or substitutes. In a simple complete information setting we show: (1) if the objects are sold by means of a sequence of open ascending auctions, then it is always optimal to sell the more valuable object first; (2) the sequential auction yields more revenue than the simultaneous ascending auction used recently by the FCC if the discrepancy in the values is large, or if there are significant complementarities; (3) a hybrid simultaneous-sequential form is revenue superior to the sequential auction; and (4) budget constraints arise endogenously.     

Option pricing under a stressed-beta model

Empirical studies have concluded that stochastic volatility is an important component of option prices. We introduce a regime-switching mechanism into a continuous-time Capital Asset Pricing Model which naturally induces stochastic volatility in the asset price. Under this Stressed-Beta model, the mechanism is relatively simple: the slope coefficient—which measures asset returns relative to market returns—switches between two values, depending on the market being above or below a given level. After specifying the model, we use it to price European options on the asset. Interestingly, these option prices are given explicitly as integrals with respect to known densities. We find that the model is able to produce a volatility skew, which is a prominent feature in option markets. This opens the possibility of forward-looking calibration of the slope coefficients, using option data, as illustrated in the paper.