Fast and accurate calculation of American option prices

We propose a very efficient numerical method to solve a nonlinear partial differential problem that is encountered in the pricing of American options. In particular, by using the front-fixing approach originally developed in Wu and Kwok (J Financ Eng 6:83–97, 1997) and Nielsen et al. (J Comput Finance 5:69–97, 2002) in conjunction with a suitable change of the time variable, a (nonlinear) partial differential problem is obtained which can be solved very efficiently by means of a finite difference scheme enhanced by repeated Richardson extrapolation. Numerical results are presented showing that the novel algorithm yields excellent results, and performs significantly better than a finite different method with Bermudan approximation.     

Retirement and Healthy Eating

This paper investigates the effect of retirement on healthy eating using data drawn from the Survey of Health, Ageing and Retirement in Europe (SHARE). We estimate the causal effect of retiring from work on daily fruit or vegetable consumption by exploiting policy changes in eligibility rules for early and statutory retirement. Our results show that changes in eating behaviour upon retirement are gender-specific: retirement induces men to reduce healthy eating; it has no effect on women. We further show that, for men, retirement increases the probability of becoming obese.     

Quasi‐Experimental Evidence on the Effects of Health Information on Preventive Behaviour in Europe

We investigate the effect of information on preventive decisions in a quasi‐experimental setting arising from the implementation of local breast cancer screening programmes in Europe. To identify the causal effect of invitation on preventive uptake, we link administrative public data on regional screening policies to individual data from the Survey of Health Ageing and Retirement in Europe (SHARE) and exploit regional variation in the availability of screening policies and in age eligibility criteria. We find home invitation increases mammography uptakes by around 24%. Significant effects are found when at least 50% of the population is reached by the invitation letter. The stock of health information and the ability to process the information received seem to play a significant role, as the effects of invitation are higher among low educated and lower among cognitively impaired women.     

The Impact of Oportunidades on Consumption,Savings and Transfers*

In this paper, we estimate the effect of the Mexican conditional cash transfer programme, Oportunidades, on transfers, savings and consumption for treated households. We find positive effects on consumption of non‐durable and durable goods, an increase in savings coupled with a drop in the number and values of loans, and a reduction of in‐kind transfers received by households in treatment areas. These results are consistent with the existing evidence that conditional cash transfer programmes have beneficial effects in both the short and medium term, but that they partly crowd out private transfers.     

Task assignment,incentives and technological factors

In this paper, we examine the allocation of tasks between a principal and an agent considering their incentives to provide effort, their different abilities in handling tasks, and transmission costs. We focus our attention on two tasks: the first may be handled by the principal or by the agent, whereas the second is necessarily carried out by the agent. Under a fully decentralised organisation, the agent performs both tasks, whereas, under partial delegation, the principal handles the first task and transfers the outcome to the agent who handles the second task. Assuming technological complementarities, from our analysis it emerges that, if there is imperfect observability of effort, full delegation is better at eliciting effort by the agent in the second task, whereas, in comparison with partial delegation, it lowers effort in the first task. Although with contractible effort, the choice between the two organisational forms depends only on transmission costs and on the relative ability of its members, when moral hazard problems are taken into account, the organisational choice is related to the relative importance played by the two tasks in production. If the agent's task is relatively important in production, full delegation, encouraging a higher level of effort in this task, may be optimal, even if technological factors favour partial delegation. Copyright © 2008 John Wiley & Sons, Ltd.     

Investment and liquidation in renegotiation-proof contracts with moral hazard

In a long-term contract with moral hazard, the liquidation of the firm can arise as the outcome of the optimal contract. However, if the future production capability or market opportunities remain unchanged, liquidation may not be free from renegotiation. Will the firm ever be liquidated if we allow for renegotiation? This paper shows that the firm can still be liquidated even though liquidation is not free from renegotiation in the long-term contract. In addition to liquidation, the renegotiation-proof contract generates important features of the investment behavior and dynamics of firms observed in the data.     

A numerical method to price exotic path-dependent options on an underlying described by the Heston stochastic volatility model

We consider the problem of pricing European exotic path-dependent derivatives on an underlying described by the Heston stochastic volatility model. Lipton has found a closed form integral representation of the joint transition probability density function of underlying price and variance in the Heston model. We give a convenient numerical approximation of this formula and we use the obtained approximated transition probability density function to price discrete path-dependent options as discounted expectations. The expected value of the payoff is calculated evaluating an integral with the Monte Carlo method using a variance reduction technique based on a suitable approximation of the transition probability density function of the Heston model. As a test case, we evaluate the price of a discrete arithmetic average Asian option, when the average over n = 12 prices is considered, that is when the integral to evaluate is a 2n = 24 dimensional integral. We show that the method proposed is computationally efficient and gives accurate results.     

Asymptotical behavior of finite and possible discontinuous economies

We consider a finite economy in which the data are depending on an exogenous parameter and the utilities satisfy a condition, previously introduced by the authors and called sequential pseudocontinuity, weaker than sequential lower semicontinuity and than sequential upper semicontinuity. We show that the economy has a nice asymptotical behavior, that is: for any sequence (x _n ) _n of exogenous parameters converging to x _o , any convergent subsequence of a sequence of approximate competitive equilibria of converges to an exact equilibrium of .      

Computing the survival probability in the Madan–Unal credit risk model: application to the CDS market

We obtain a quasi-analytical approximation of the survival probability in the credit risk model proposed in [Madan, D.B. and Unal, H., Pricing the risk of default. Rev. Deriv. Res., 1998, 2(2), 121–160]. Such a formula, which extensive numerical simulations reveal to be accurate and computationally fast, can also be employed for pricing credit default swaps (CDSs). Specifically, we derive a quasi-analytical approximate expression for CDS par spreads, and we use it to estimate the parameters of the model. The results obtained show a rather satisfactory agreement between theoretical and real market data.     

THE POSTAL SERVICE IN THE EUROPEAN UNION PUBLIC MONOPOLY OR COMPETITIVE MARKET?: A transaction cost approach

The paper discusses the relevant institutional and economic aspects of the postal service, and analyses both the arguments for abolishing the statutory monopoly and those for retaining it. The main thesis of the paper is that public and private postal services differ from each other in many aspects: transaction costs, the willingness of the customer to pay, market structure, and possibilities of substituting the service with other communication instruments. Therefore, a simple privatisation will not solve per se the efficiency problems of the service. furthermore, the European Commission, which published in 1992 a green paper on postal services, is considering the possibility of harmonising the quality of the service within the EU and gradually reducing the gap in national postal prices. This seems to be an effective device to force firms towards the greater efficiency required in a Continental market. In future, the competition will take place not so much between private firms (more interested in running the high-value segments), as between national public carriers, as shown by the phenomenon of remail.