Pricing Defaultable Bonds Using a Lévy Jump‐Diffusion Model

This paper uses a reduced‐form approach to derive a closed‐form pricing formula for defaultable bonds. The authors specify the default hazard rate as an affine function of multiple variables which follow the Lévy jump‐diffusion processes. Because such specification allows greater flexibility in the generation of a valid probability of default, their pricing model should be more accurate than the valuation models in traditional studies, which ignore the jump effects. This paper also proposes a new method for estimating the parameters in a Lévy Jump‐diffusion process. The real data from the Taiwanese bond market are used to illustrate how their model can be applied in practical situations. The authors compare the pricing results for the influential variables with no jump effects, with jump magnitudes following the normal distribution, and with jump magnitudes following the gamma distribution. The results reveal that the predictive ability is the best for the model with the jump components. The valuation model shown in this paper should help portfolio managers more accurately price defaultable bonds and more effectively hedge their portfolio holdings.     

Dynamic analysis of stock return volatility in an integrated international capital market

This paper examines the dynamic behavior of the stock return volatility for Canada, Japan, Germany, and the United Kingdom. The evidence indicates that international stock return volatility is mainly influenced by the U.S. stock return volatility and the exchange rate volatility, supporting the international capital market integration hypothesis. There seems to be some correlation between stock return volatility and macroeconomic volatility, but the effect is relatively weaker. In addition to the economic fundamentals, the noise component is found to be time varying, confirming the AR(MA)CH specifications in the stock return models.     

A comparative analysis of perception of dividends by financial managers

This paper is a report about the perception of dividends by Chief financial officers (CFOs). The research encompasses five countries, on three continents, and covers three types of economies. Our cross-sectional study is concerned with both inter- and intra-societal differences that may or may not exist regarding the perception of dividends by those who are in charge of making such decisions in the firm. Using a survey instrument, we find that both similarities and dissimilarities exist inter- and intra-culturally. Perhaps the most important conclusion we reach is that dividend research must take a different track than it has been following so far.     

Relevance of the disposition effect on the options market: New evidence

A moneyness‐based propensity to sell (MPS) measure, at the aggregate level, determines the propensity of option holders to exercise their winning relative to losing positions. Using data on individual stock and S&P 500 Index options, we find that the MPS measure has significant predictive power over the cross section of delta‐hedged option returns. We test the disposition effect in the options market based on a long–short strategy that exploits price distortions induced by the disposition bias. More pronounced evidence of the disposition bias is found for individual at‐the‐money call options than put options where the significance of abnormal returns remains robust across different subsamples even after we control for the portfolio option greeks and market‐based risk factors. The profitability of the long–short strategy is related to limit‐to‐arbitrage proxies suggesting that behavioral explanations help explain the positive relation between the MPS measure and delta‐hedged option returns.     

The Valuation Model for a Risky Asset When Its Risky Factors Follow Gamma Distributions

This paper constructed a pricing model for the asset with multi‐risks by specifying the risky factors (i.e., interest rate and termination hazard rates) to follow gamma distributions. The model not only avoids the possibility of the termination hazard rate taking an irrational (i.e., negative) value, but it also makes it easier to derive a valuation formula for a risky asset. Our model can also effortless apply because the parameters of the gamma distribution can easily be estimated from market data. An example using Taiwanese bond data illustrates how the model can be utilized for practical applications. To facilitate understanding of how accurately the different models price risky bonds, we compare their out‐of‐sample pricing errors for different hazard rate specifications assuming normal and gamma distributions. The results show that our pricing formula is realistic and accurate in its applications. Therefore, it should help market participants to accurately price risky assets and to effectively manage complicated portfolios.     

Premium setting and bank behavior in a voluntary deposit insurance scheme

This study analyzes the effect of premium rates on banks’ incentives to join a deposit insurance scheme and their incentives to invest in risky projects under a voluntary deposit insurance scheme. We find that in order to maximize social welfare, the insurance agency must either set the premium rate to be low so as to attract all banks to join the insurance scheme, or not to have the deposit insurance at all. However, the low premium rate in the voluntary scheme does not balance the budget of the deposit insurance. We also show that in the compulsory deposit insurance scheme, however, it is possible to impose an optimal premium rate that can balance the insurance agency’s budget and achieve the highest social welfare. The results also present the dominance of the compulsory scheme over the voluntary scheme in terms of maximizing social welfare and balancing the budget.

Forecasting the volatility of S&P depositary receipts using GARCH-type models under intraday range-based and return-based proxy measures

We employ four various GARCH-type models, incorporating the skewed generalized t (SGT) errors into those returns innovations exhibiting fat-tails, leptokurtosis and skewness to forecast both volatility and value-at-risk (VaR) for Standard & Poor's Depositary Receipts (SPDRs) from 2002 to 2008. Empirical results indicate that the asymmetric EGARCH model is the most preferable according to purely statistical loss functions. However, the mean mixed error criterion suggests that the EGARCH model facilitates option buyers for improving their trading position performance, while option sellers tend to favor the IGARCH/EGARCH model at shorter/longer trading horizon. For VaR calculations, although these GARCH-type models are likely to over-predict SPDRs' volatility, they are, nevertheless, capable of providing adequate VaR forecasts. Thus, a GARCH genre of model with SGT errors remains a useful technique for measuring and managing potential losses on SPDRs under a turbulent market scenario.     

Cost structure and technological change of local public transport: the Kaohsiung City Bus case

This study has developed a translog cost function for the Kaohsiung City Bus (KCB) to analyse its cost structure and economic characteristics, based on monthly data over the time period from January 1996 to December 2000. The empirical results reveal that economies of density in the provision of bus services in Kaohsiung do prevail. The estimated marginal cost, which is less than the average cost but greater than the current bus fare, indicates that the subsidy is necessary. Due to the existence of returns to density (RTD), the KCB could obtain cost-saving benefits by extending its output scale. The KCB production technology is also not neutral. The effects of technological change on the KCB costs suggest that over the period 1996–2000 technological progress did lead to cost saving; the pure productivity growth rate increased from 0.45% in 1998 to 3% in 2000.     

Marketing timeshare in Singapore: An analysis of potential customers and present owners

Timeshare has gained recognition and acceptance in many Asian countries in recent years, but is relatively slow in gaining momentum in Singapore. Timesharing is a type of real estate ownership, which may include hotels, resorts, holiday villas, apartments and more, whereby ownership is split among individuals on the basis of time. This paper presents a study on the attitude of potential consumers on timeshare, and to investigate the current satisfaction level of timeshare owners in Singapore. Two questionnaires were designed to survey the attitude of potential consumers and the timeshare owners. The findings showed that potential consumers’ perception of timeshare is generally negative in Singapore. The main reasons for this negative perception include undesirable sales tactics used in the industry and negative media coverage which tainted the image of the industry. Developers should provide facilities at the resorts to help timeshare owners achieve their desire for rest and relaxation, amongst other reasons.     

Obtaining collaboration benefits: the role of collaboration-specific investment and absorptive capacity in China

This study examines the role of collaboration-specific investment and absorptive capacity on the attainment of interorganizational collaboration benefits. Grounded in the extended resource-based view, and using survey data from Chinese executives, we study the driver for, and test the impacts of, collaboration-specific investment and organizational learning on collaboration performance. Our findings indicate that resource similarity between the collaborative partners affects the level of collaboration-specific investment and learning, and demonstrate an approach that firms can use to obtain both abnormal common and private benefits from participation in an interorganizational collaboration. Specifically, the findings suggest that collaboration-specific investment has a direct effect on the enhancement of absorptive capacity and attainment of common and private collaboration benefits. Furthermore, due to the direct effect of absorptive capacity on attainment of collaboration benefits, commitment of collaboration-specific investment has an indirect effect on the attainment of common and private collaboration benefits. This study is the first to apply both the competence-capability framework and extended resource-based view to study interorganizational collaboration. In fact, this study aims to determine mechanisms for a collaboration-participating firm to obtain more benefit, whether common or private. Our findings provide support for the importance of learning capability as a factor in the acquisition of collaboration benefits.