Intraday Empirical Analysis and Modeling of Diversified World Stock Indices

This paper proposes an approach to the intraday analysis of diversified world stock accumulation indices. The growth optimal portfolio (GOP) is used as reference unit or benchmark in a continuous financial market model. Diversified portfolios, covering the world stock market, are constructed and shown to approximate the GOP, providing the basis for a range of financial applications. The normalized GOP is modeled as a time transformed square root process of dimension four. Its dynamics are empirically verified for several world stock indices. Furthermore, the evolution of the transformed time is modeled as the integral over a rapidly evolving mean-reverting market activity process with deterministic volatility. The empirical findings suggest a rather simple and robust model for a world stock index that reflects the historical evolution, by using only a few readily observable parameters. Mathematics Subject Classification: (1991) primary 90A12, secondary 60G30,62P20 JEL Classification: G10, G13     

Viewing Tax Policy Through Party‐Colored Glasses: What German Politicians Believe

Abstract. The process of globalization has an important impact on national tax policies. Most of the literature does not focus directly on the political decision‐making process and assumes that the desired tax policy is responding to objective underlying tradeoffs. Based on an original survey of members of the German national parliament (Bundestag) in 2006/07, we document a strong ideological bias among policy‐makers with respect to the perceived mobility of international tax bases (real capital and paper profits). Ideology also influences, directly and indirectly, the perceived national autonomy in tax setting and preferences for a European Union minimum tax for companies. There seems little consensus as to what the efficiency costs of capital taxation in open economies are, even though our survey falls in a period of extensive debate about, and actual adoption of, a company tax reform bill in Germany.     

Interest rates,distribution and capital accumulation – A post-Kaleckian perspective on the US and Germany

We analyse the effects of interest rate variations on the rates of capacity utilisation, capital accumulation and profit in a simple post-Kaleckian distribution and growth model. This model gives rise to different potential accumulation regimes depending on the values of the parameters in the investment, saving and distribution function. Estimating these core behavioural equations for the US and Germany in the period 1960–2007, we find significant and robust effects of interest payments with the expected sign in each of the equations. Our estimation results imply, both for the US and for Germany, that the effects of changes in the real long-term rate of interest on the equilibrium rates of capacity utilisation, capital accumulation and profits, are characterised by the ‘normal regime’: rising long-term real rates of interest cause falling rates of capacity utilisation, capital accumulation and profits, as well as redistribution at the expense of labour income and hence an increasing profit share in both countries.     

THE NUMÉRAIRE PROPERTY AND LONG‐TERM GROWTH OPTIMALITY FOR DRAWDOWN‐CONSTRAINED INVESTMENTS

We consider the portfolio choice problem for a long‐run investor in a general continuous semimartingale model. We combine the decision criterion of pathwise growth optimality with a flexible specification of attitude toward risk, encoded by a linear drawdown constraint imposed on admissible wealth processes. We define the constrained numéraire property through the notion of expected relative return and prove that drawdown‐constrained numéraire portfolio exists and is unique, but may depend on the investment horizon. However, when sampled at the times of its maximum and asymptotically as the time‐horizon becomes distant, the drawdown‐constrained numéraire portfolio is given explicitly through a model‐independent transformation of the unconstrained numéraire portfolio. The asymptotically growth‐optimal strategy is obtained as limit of numéraire strategies on finite horizons.     

A Benchmark Approach to Filtering in Finance

The paper proposes the use of the growth optimal portfolio for pricing and hedging in incomplete markets when there are unobserved factors that have to be filtered. The proposed filtering framework is applicable also in cases when there does not exist an equivalent risk neutral martingale measure. The reduction of the variance of derivative prices for increasing degrees of available information is measured. 1991 Mathematics Subject Classification: primary 90A09; secondary 60G99; 62P20 JEL Classification: G10, G13     

Understanding the Implied Volatility Surface for Options on a Diversified Index

This paper describes a two-factor model for a diversified index that attempts to explain both the leverage effect and the implied volatility skews that are characteristic of index options. Our formulation is based on an analysis of the growth optimal portfolio and a corresponding random market activity time where the discounted growth optimal portfolio is expressed as a time transformed squared Bessel process of dimension four. It turns out that for this index model an equivalent risk neutral martingale measure does not exist because the corresponding Radon-Nikodym derivative process is a strict local martingale. However, a consistent pricing and hedging framework is established by using the benchmark approach. The proposed model, which includes a random initial condition for market activity, generates implied volatility surfaces for European call and put options that are typically observed in real markets. The paper also examines the price differences of binary options for the proposed model and their Black-Scholes counterparts. Mathematics Subject Classification: primary 90A12; secondary 60G30; 62P20 JEL Classification: G10, G13     

A Comparison of Two Quadratic Approaches to Hedging in Incomplete Markets

This paper provides comparative theoretical and numerical results on risks, values, and hedging strategies for local risk-minimization versus mean-variance hedging in a class of stochastic volatility models. We explain the theory for both hedging approaches in a general framework, specialize to a Markovian situation, and analyze in detail variants of the well-known Heston (1993) and Stein and Stein (1991) stochastic volatility models. Numerical results are obtained mainly by PDE and simulation methods. In addition, we take special care to check that all of our examples do satisfy the conditions required by the general theory.