Spanning and completeness with options

The role of ordinary options in facilitating the completionof securities markets is examined in the context of a modelof contigent claims sufficiently general to accommodate thecontinuous distributions of asset pricing theory and optionpricing theory. In this context, it is shown that call optionswritten on a single security approximately span all contingentclaims written on this security and that call options writtenon portfolios of call options on individual primitive securitiesapproximately span all contingent claims that can be writtenon these primitive securities. In the case of simple options,explicit formulas are given for the approximating options andportfolios of options. These results are applied to the pricingof contingent claims by arbitrage and to irrelevance propositionsin corporate finance.     

Relationship marketing and airline loyalty schemes

This article examines the emerging concept of relationship marketing in an accessible way through an explanation of airline loyalty schemes. It provides evidence that success from relationship marketing schemes is not easily achieved. This is because of the proliferation of loyalty schemes and the build up of rewards to be redeemed which has affected levels of profitability and effectiveness.     

A SIBLINGS ANALYSIS OF THE EFFECTS OF ALCOHOL CONSUMPTION ONSET ON EDUCATIONAL ATTAINMENT

This article examines the relationship between youthful drinking and educational attainment using data on same-sex siblings pairs from the 1979–90 panels of the National Longitudinal Survey of Youth. We consider different estimators that can be constructed using siblings data, including estimators that adopt key restrictions of the standard regression, family fixed effect, and instrumental variable approaches. We also consider the properties of these estimators under more general conditions and show that under very plausible assumptions the effect of drinking on schooling can be bounded. The study finds that estimates of the schooling consequences of youthful drinking are very sensitive to specification issues. The research concludes that the actual effects of youthful drinking on education are likely to be small.     

Optimal design of securities under asymmetric information

A firm must decide what security to sell to raise external capitalto finance a profitable investment opportunity. There is exante asymmetry of information regarding the probability distributionof cashflow generated by the investment. In this setting, wederive necessary and sufficient conditions for a security tobe optimal (uniquely optimal), that is, for pooling at thissecurity to be an (the unique) equilibrium outcome. Using theseconditions we show that the debt contract is (uniquely) optimalif and only if cash flows are ordered by (strict) conditionalstochastic dominance. Finally, we derive an equivalence relationshipbetween optimal security designs and designs that minimize mispricing.