Capability building through innovation for unserved lower end mega markets

Although product innovation for unserved lower end mega markets in large developing countries has been recognized as an opportunity for improving the competitiveness of local firms, limited research has been conducted that explicitly explores how innovation capabilities can be built for these markets. This study investigates Tata Motors' Nano as an exploratory case of building innovation capabilities. This paper shows that the building of innovation capability could be achieved through creating a process that overcomes ‘the deficiency problem’ in generating radically cheap priced original products.The study's contribution to the literature is that it addresses issues of building local firms' innovation capabilities through creating original products for the unserved lower end market, in which advanced country firms have limited experience.Nano, as an unprecedented innovation in the automobile industry, reveals a path to building innovation capability that has not previously been observed. We show that detailed processes involved in generating an original product for the lower end market provide insights on the strategy in terms of target price setting, initiating innovation process overcoming ‘the deficiency problem’, and creation of complementary resources.     

‘Recession push’ and ‘prosperity pull’ entrepreneurship in a rural developing context

In this paper, the ‘recession push’ and the ‘prosperity pull’ hypotheses are used to analyse the effect of growing non-farm wage employment on entrepreneurship in a rural developing context. Data are collected in a rural household survey in 110 communes in central Vietnam which includes subjective owner assessments of reasons for starting non-farm businesses. This way it is possible to separately test the two hypotheses by distinguishing opportunity and necessity entrepreneurs. We use clustered probit regression analyses and control for possible endogeneity in order to predict participation in entrepreneurship. The results show that better access to non-farm wage employment increases the likelihood of becoming an opportunity entrepreneur but has no effect on necessity entrepreneurship. This, therefore, supports the ‘prosperity pull’ hypothesis but not the ‘recession push’ hypothesis. The growing non-farm economy is likely to accelerate the emergence of opportunity entrepreneurship in rural areas. However, necessity entrepreneurs are suffering from a lack of individual and household assets which pushes them into entrepreneurship regardless of non-farm job opportunities in the surrounding area.     

Arbitrage, linear programming and martingales¶in securities markets with bid-ask spreads

In a general, finite-dimensional securities market model with bid-ask spreads, we characterize absence of arbitrage opportunities both by linear programming and in terms of martingales. We first show that absence of arbitrage is equivalent to the existence of solutions to the linear programming problems that compute the minimum costs of super-replicating the feasible future cashflows. Via duality, we show that absence of arbitrage is also equivalent to the existence of underlying frictionless (UF) state-prices. We then show how to transform the UF state-prices into state-price densities, and use them to characterize absence of arbitrage opportunities in terms of existence of a securities market with zero bid-ask spreads whose price process lies inside the bid-ask spread. Finally, we argue that our results extend those of Naik (1995) and Jouini and Kallal (1995) to the case of intermediate dividend payments and positive bid-ask spreads on all assets.     

Price volatility and the political economy of resource-rich nations

This paper attempts to understand how price volatility affects the political transition of a resource-rich nation. Two states reflect price volatility: ‘high prices’ and ‘low prices’. We argue that whether or not political transition (i.e., a switch from one regime to another) will take place in a particular state depends critically on the kind of goods a country produces. If the main economic activity in a country is the extraction of “point-source” resources such as oil that demands capital-intensive production, the opportunity cost of switching the existing regime does not alter if the price of the resource changes but the benefit becomes more lucrative. Therefore, the incumbent group is most vulnerable during ‘high prices’. If the main economic activity of the nations is the production of “diffused resources” such as coffee that requires labor, prices do affect the opportunity cost. Nations concentrating in these commodities face acute political crisis during downturns.     

Pricing Political Rallies

Why are political rallies free to attend? Fundraising is a central campaign activity and a perennial correlate of political victory. We argue that politicians set a zero price for rallies in order to reap a non‐pecuniary benefit: political support. An ‘allocation by waiting’ scheme selects those attendees with a lower opportunity cost of time relative to a standard ‘allocation by price’ scheme. Transactions costs mitigate Coasean bargaining by removing the secondary market, thereby altering the composition of the average rally crowd. This mechanism allows politicians to facilitate exchange with ‘general interests’: citizens who do not engage in rent seeking due to collective action costs but still stand to gain from redistributive policies.     

Financial markets with volatility uncertainty

We investigate financial markets under model risk caused by uncertain volatilities. To this end, we consider a financial market that features volatility uncertainty. We use the notion of G-expectation and its corresponding G-Brownian motion recently introduced by Peng (2007) to ensure a mathematically consistent framework. Our financial market consists of a riskless asset and a risky stock with price process modeled by geometric G-Brownian motion. We adapt the notion of arbitrage to this more complex situation, and consider stock price dynamics which exclude arbitrage opportunities. Volatility uncertainty results in an incomplete market. We establish the interval of no-arbitrage prices for general European contingent claims, and deduce explicit results in the Markovian case.     

Opportunity Discovery, Problem Solving and a Theory of the Entrepreneurial Firm

abstract When should an entrepreneur employ a market to help discover and exploit opportunities, and when should the entrepreneur create a firm to do so? If a firm is created, how should it be organized? In this paper we argue that opportunities equate to valuable problem‐solution pairings, and that opportunity discovery relates to deliberate search or recognition over this solution space. As problem complexity increases, experiential (or ‘directional’) search via trial‐and‐error provides fewer benefits, and cognitive (or ‘heuristic’) search via theorizing becomes more useful. Cognitive search, however, requires knowledge sharing, when knowledge is distributed among specialists, that is plagued by a knowledge appropriation hazard and a strategic knowledge accumulation hazard. Markets, authority‐based hierarchy, and consensus‐based hierarchy then have differential effects on the efficiency of opportunity discovery given the complexity of the associated problem. Those entrepreneurs with exceptional capabilities of opportunity recognition can efficiently adopt authority‐based governance over a wider range of complexity. We thus combine the two major modes of opportunity discovery – search and recognition – onto one framework that can explain different entrepreneurial organizational forms, resulting in an entrepreneurial theory of the firm.     

Arbitrage and price revelation with asymmetric information and incomplete markets

This paper deals with the issue of arbitrage with differential information and incomplete financial markets, with a focus on information that no-arbitrage asset prices can reveal. Time and uncertainty are represented by two periods and a finite set S of states of nature, one of which will prevail at the second period. Agents may operate limited financial transfers across periods and states via finitely many nominal assets. Each agent i has a private information about which state will prevail at the second period; this information is represented by a subset S_i of S. Agents receive no wrong information in the sense that the “true state” belongs to the “pooled information” set ∩_iS_i, hence assumed to be non-empty.Our analysis is two-fold. We first extend the classical symmetric information analysis to the asymmetric setting, via a concept of no-arbitrage price. Second, we study how such no-arbitrage prices convey information to agents in a decentralized way. The main difference between the symmetric and the asymmetric settings stems from the fact that a classical no-arbitrage asset price (common to every agent) always exists in the first case, but no longer in the asymmetric one, thus allowing arbitrage opportunities. This is the main reason why agents may need to refine their information up to an information structure which precludes arbitrage.     

Arbitrage in stationary markets

We analyse questions of arbitrage in financial markets in which asset prices change in time as stationary stochastic processes. The main focus of the paper is on a model where the price vectors are independent and identically distributed. In the framework of this model, we find conditions that are necessary and sufficient for the absence of arbitrage opportunities. We discuss the relations between the results obtained and the phenomenon of “volatility-induced growth” in stationary markets. Financial support by the Swiss National Center of Competence in Research “Financial Valuation and Risk Management” (NCCR FINRISK) is gratefully acknowledged.     

Applications of the Likelihood Theory in Finance: Modelling and Pricing

This paper discusses the connection between mathematical finance and statistical modelling which turns out to be more than a formal mathematical correspondence. We like to figure out how common results and notions in statistics and their meaning can be translated to the world of mathematical finance and vice versa. A lot of similarities can be expressed in terms of LeCam’s theory for statistical experiments which is the theory of the behaviour of likelihood processes. For positive prices the arbitrage free financial assets fit into statistical experiments. It is shown that they are given by filtered likelihood ratio processes. From the statistical point of view, martingale measures, completeness, and pricing formulas are revisited. The pricing formulas for various options are connected with the power functions of tests. For instance the Black–Scholes price of a European option is related to Neyman–Pearson tests and it has an interpretation as Bayes risk. Under contiguity the convergence of financial experiments and option prices are obtained. In particular, the approximation of Itô type price processes by discrete models and the convergence of associated option prices is studied. The result relies on the central limit theorem for statistical experiments, which is well known in statistics in connection with local asymptotic normal (LAN) families. As application certain continuous time option prices can be approximated by related discrete time pricing formulas.     

Equilibrium in incomplete markets: II : Generic existence in stochastic economies

We model multiperiod securities markets with differential information. A price system that admits no free lunches is related to martingales when agents have rational expectations. We introduce the concept of resolution time, and show that a better informed agent and a less informed agent must agree on the resolution times of commonly marketed events if they have rational expectations and if there are no free lunches. It then follows that if all elementary events are marketed for a less informed agent then any price system that admits no free lunches to a better informed agent must eliminate any private information asymmetry between the two. We provide an example of a dynamically fully revealing price system that is arbitrage free and yields elementarily complete markets.     

IPO定价与公司内含价值——基于常山药业的案例研究

如何对IPO公司准确定价是学术界和实务界广泛争议的热点话题。IPO定价准确性的评价依赖于对公司内含价值的判断，选择不同的标准确定公司的内含价值会得出IP0定价过高或过低的不同结论。本文应用可比公司法对常山药业的内含价值进行估计，使用四种可比公司乘数计算的结果表明公司实际发行价格高于公司内含价值，这意味着公司的发行价格存在一定程度的高估现象。与同期证券分析师对常山药业发行价格预测的平均估价水平相比，结果发现多数证券分析师由于过度乐观而高估公司内含价值。本文研究结果表明可比公司法具有计算简单、可操作性强等特点，不仅有助于一级市场中不同投资者对IP0公司的内含价值做出合理的估计，而且可以为二级市场交易中小投资者形成正确的投资决策提供依据，减少超额投资损失。     

Heterogeneous expectations in the gold market: Specification and estimation

The increase in the price of gold between 2002 and 2011 appears to be a candidate for a potential asset price ‘bubble’, suggesting that chartists (feedback traders) were highly active in the gold market during this period. Hence, this paper develops and tests empirically several models incorporating heterogeneous expectations of agents, specifically fundamentalists and chartists, for the gold market. The empirical results show that both agent types are important in explaining historical gold prices but that the 10-year bull run of gold in the early 2000s is consistent with the presence of agents extrapolating long-term trends. Technically this paper is a further step toward providing an empirical foundation for certain assumptions used in the heterogeneous agents literature. For example, the empirical results presented in this paper compare the economical and statistical significance of numerous switching variable specifications that are generally only introduced ad hoc.     

Price functionals with bid–ask spreads: an axiomatic approach

In Jouini and Kallal [Jouini, E., Kallal, H., 1995. Martinagles and arbitrage in securities markets with transaction costs. Journal of Economic Theory 66 (1) 178-197], the authors characterized the absence of arbitrage opportunities for contingent claims with cash delivery in the presence of bid–ask spreads. Other authors obtained similar results for a more general definition of the contingent claims but assuming some specific price processes and transaction costs rather than bid–ask spreads in general (see for instance, Cvitanic and Karatzas [Cvitanic, J., Karatzas, I., 1996. Hedging and portfolio optimization under transaction costs: a martinangle approach. Mathematical Finance 6, 133-166]). The main difference consists of the fact that the bid–ask ratio is constant in this last reference. This assumption does not permit to encompass situations where the prices are determined by the buying and selling limit orders or by a (resp. competitive) specialist (resp. market-makers). We derive in this paper some implications from the no-arbitrage assumption on the price functionals that generalizes all the previous results in a very general setting. Indeed, under some minimal assumptions on the price functional, we prove that the prices of the contingent claims are necessarily in some minimal interval. This result opens the way to many empirical analyses.     

Liquidity skewness premium

Risk-averse investors may dislike decrease of liquidity rather than increase of liquidity, and thus there can be asymmetric preference in variation of liquidity. In addition, investors are likely to avoid extreme illiquidity. This paper examines whether the skewness of an individual firm’s liquidity capturing asymmetric distribution of liquidity and extreme illiquidity is priced in the US stock market. Using the skewness of the daily price impact, we find that it is positively priced, and this positive relation is significant up to eight months after controlling for other effects. Moreover, we find our results remain significant with the skewness of alternative liquidity measures, i.e., dollar-volume, and turnover.     

‘I Like How You Think’: Similarity as an Interaction Bias in the Investor–Entrepreneur Dyad

Investigating the factors that influence venture capital decision‐making has a long tradition in the management and entrepreneurship literatures. However, few studies have considered the factors that might bias an investment decision in a way that is idiosyncratic to a given investor–entrepreneur dyad. We do so in this study. Specifically, we build from the literature on the ‘similarity effect’ to investigate the extent to which decision‐making process similarity (shared between the investor and the entrepreneur) might bias or otherwise impact the investor's evaluation of a new venture investment opportunity. Our findings suggest venture capitalists evaluate more favourably opportunities represented by entrepreneurs who ‘think’ in ways similar to their own. Moreover, in the presence of decision‐making process similarity, the impacts of other factors that inform the investment decision actually change in counter‐intuitive ways.     

International pharmaceutical supply prices: Definitions — problems — policy implications

In cases where the buyer and the seller of goods and services are companies belonging to the same group the prices charged for goods and services are called ‘international delivery prices’ or ‘international transfer prices’. The peculiarities of research-based companies are such that attempts to ascertain in practice what constitutes an ‘appropriate’ international delivery price are beset by a number of problems. Any scheme that is devised to solve the problems of international transfer prices should feature general ‘rules’ on how the various countries ought to share in central costs. As international transfer prices are a prerequisite for an efficient world economy based on the division of labour an agreement should be reached on the design and content of suitable delivery price systems for a research-intensive industry.     

Asset price and wealth dynamics in a financial market with heterogeneous agents

This paper considers a discrete-time model of a financial market with one risky asset and one risk-free asset, where the asset price and wealth dynamics are determined by the interaction of two groups of agents, fundamentalists and chartists. In each period each group allocates its wealth between the risky asset and the safe asset according to myopic expected utility maximization, but the two groups have heterogeneous beliefs about the price change over the next period: the chartists are trend extrapolators, while the fundamentalists expect that the price will return to the fundamental. We assume that investors’ optimal demand for the risky asset depends on wealth, as a result of CRRA utility. A market maker is assumed to adjust the market price at the end of each trading period, based on excess demand and on changes of the underlying reference price. The model results in a nonlinear discrete-time dynamical system, with growing price and wealth processes, but it is reduced to a stationary system in terms of asset returns and wealth shares of the two groups. It is shown that the long-run market dynamics are highly dependent on the parameters which characterize agents’ behaviour as well as on the initial condition. Moreover, for wide ranges of the parameters a (locally) stable fundamental steady state coexists with a stable ‘non-fundamental’ steady state, or with a stable closed orbit, where only chartists survive in the long run: such cases require the numerical and graphical investigation of the basins of attraction. Other dynamic scenarios include periodic orbits and more complex attractors, where in general both types of agents survive in the long run, with time-varying wealth fractions.     

Informational externalities of initial public offerings: Does venture capital backing matter?

We examine the role of venture capital backing on informational externalities generated by IPO firms. Theoretical models predict that going public firms generate positive externalities creating a spillover effect for other firms to go public. In this paper, we posit that venture backed IPOs convey positive information about industry and this information is transferred to rival firms. We also hypothesize that intra-industry information transfer varies with rivals’ characteristics and IPO price revisions generate additional information that affects rivals’ valuation. The results show that rivals have positive valuation effects in response to venture backed IPOs and no significant reaction in response to non-venture backed IPOs. We find evidence that the effect on rival firms is stronger if they operate in less concentrated industries and have high growth opportunities. The larger the IPO proceeds, the higher the magnitude of rivals ‘valuation effects. Positive (negative) information revealed in the form of upward (downward) price revisions significantly impacts rivals’ reaction in response to venture backed IPOs.     

Arbitrage concepts under trading restrictions in discrete-time financial markets

In a discrete-time setting, we study arbitrage concepts in the presence of convex trading constraints. We show that solvability of portfolio optimization problems is equivalent to absence of arbitrage of the first kind, a condition weaker than classical absence of arbitrage opportunities. We center our analysis on this characterization of market viability and derive versions of the fundamental theorems of asset pricing based on portfolio optimization arguments. By considering specifically a discrete-time setup, we simplify existing results and proofs that rely on semimartingale theory, thus allowing for a clear understanding of the foundational economic concepts involved. We exemplify these concepts, as well as some unexpected situations, in the context of one-period factor models with arbitrage opportunities under borrowing constraints.