The Price of Options Illiquidity

The purpose of this paper is to examine the effect of illiquidity on the value of currency options. We use a unique dataset that allows us to explore this issue in special circumstances where options are issued by a central bank and are not traded prior to maturity. The value of these options is compared to similar options traded on the exchange. We find that the nontradable options are priced about 21 percent less than the exchange-traded options. This gap cannot be arbitraged away due to transactions costs and the risk that the exchange rate will change during the bidding process.     

"Flexible" Work Practices and Occupational Safety and Health: Exploring the Relationship Between Cumulative Trauma Disorders and Workplace Transformation

This article matches establishment-level data on workplace transformation (e.g., quality circles, work teams, and just-in-time production) with measures of cumulative trauma disorders at these same establishments to explore the relationship between "flexible" workplace practices and workplace health and safety. The results reveal a positive, statistically significant, and quantitatively sizable relationship between cumulative trauma disorders and the use of quality circles and just-in-time production.     

WHY SOCIETY NEEDS "IRRATIONAL EXUBERANCE"—AND WHAT THIS MEANS FOR VALUATIONS AND MONETARY POLICY

Despite all the talk of a New Economy and the revolutionary import of the Internet, this article suggests that there is nothing really new under the sun. When Christopher Columbus was building the ships for his expeditions to the East Indies, only the vaguest estimates could be made of their potential value. At this stage, nobody knew if Columbus would be able to manage the crossing, when the ships would return, and what cargo they would eventually carry. In this sense, Columbus's venture bears a striking resemblance to many of today's Internet stocks. This paper raises and attempts to answer a number of interesting questions. For example, how do risky ventures with very high fixed (startup) costs but very low expected variable costs raise the capital necessary to fund the fixed costs? What role should government (and, in particular, monetary) policy play in encouraging (or discouraging) funding for such ventures? And how does one establish the value of such ventures when there is little or no revenue and, in some cases, no clearly defined product? The answer to the first question is investor enthusiasm–or, in Alan Greenspan's terms, “irrational exuberance.” Irrational exuberance plays a very important economic role in giving entrepreneurs access to the cheap financing necessary to fund ventures with heavy startup costs. Indeed, “irrational exuberance” may be the best solution for financing large fixed costs, not only because it is a private (as opposed to a government‐financed) solution, but because it gives investors direct access to the risks and rewards of promising investment opportunities. Before the recent “democratization” of capital markets, such ventures would have been funded by large corporations if not government agencies. As for the third question, this paper suggests there is only one useful way to estimate the value of ventures without revenues or products. The author provides a back‐of‐the‐envelope, “Fermitype” valuation method that is based on the principle of “human capital arbitrage.” For those Internet startups that lure top executives away from established firms with large grants of stock options but relatively low salaries, there is a “breakeven level” for the future stock price that can be calculated using a fairly modest amount of information about the executive's past and current compensation plans. For outside investors, such movements of human capital provide what is perhaps the most reliable basis for estimating the value of the firm.     

Sterilization, Monetary Policy, and Global Financial Integration

This paper investigates the changing pattern and efficacy of sterilization within emerging market countries as they liberalize markets and integrate with the world economy. We estimate the marginal propensity to sterilize foreign asset accumulation associated with net balance of payments inflows, across countries, and over time. We find that the extent of sterilization of foreign reserve inflows has risen in recent years to varying degrees in Asia as well as in Latin America, consistent with greater concerns about the potential inflationary impact of reserve inflows. We also find that sterilization depends on the composition of balance of payments inflows.     

Can evolutionary algorithms describe learning processes?

Evolutionary algorithms have attracted more and more the attention of economists in recent years. Repeatedly it is claimed that they are an adequate tool to describe learning processes within a population of individuals. The present paper examines this claim. To this end, a learning model is set up that contains the three elements of variation, elimination, and imitation that are claimed to correspond with the processes of mutation, selection, and replication of biological evolution. Subsequently, this model is compared with a formulation of evolutionary algorithms. The comparison reveals that although both processes have a similar structure there are crucial differences between the two dynamics.     

User,Use & Utility Research

Business and Information Systems Engineering (BISE) is at a turning point. Planning, designing, developing and operating IT used to be a management task of a few elites in public ad-ministrations and corporations. But the continuous digitization of nearly all areas of life changes the IT landscape fundamentally. Success in this new era requires putting the human perspective – the digital user – at the very heart of the new digitized service-led economy. BISE faces not just a temporary trend but a complex socio-technical phenomenon with far-reaching implications. The challenges are manifold and have major consequences for all stakeholders, both in information systems and management research as well as in practice. Corporate processes have to be re-designed from the ground up, starting with the user’s perspective, thus putting usage experience and utility of the individual center stage. The digital service economy leads to highly personalized application systems while organizational functions are being fragmented. Entirely new ways of interacting with information systems, in particular beyond desktop IT, are being invented and established. These fundamental challenges require novel approaches with regards to innovation and development methods as well as adequate concepts for enterprise or service system architectures. Gigantic amounts of data are being generated at an accelerating rate by an increasing number of devices – data that need to be managed. In order to tackle these extraordinary challenges we introduce ‘user, use & utility’ as a new field of BISE that focuses primarily on the digital user, his or her usage behavior and the utility associated with system usage in the digitized service-led economy. The research objectives encompass the development of theories, methods and tools for systematic requirement elicitation, systems design, and business development for successful Business and Information Systems Engineering in a digitized economy – information systems that digital users enjoy using. This challenge calls for leveraging insights from various scientific disciplines such as Design, Engineering, Computer Science, Psychology and Sociology. BISE can provide an integrated perspective, thereby assuming a pivotal role within the digitized service led economy.