THE RANGE OF TRADED OPTION PRICES

Suppose we are given a set of prices of European call options over a finite range of strike prices and exercise times, written on a financial asset with deterministic dividends which is traded in a frictionless market with no interest rate volatility. We ask: when is there an arbitrage opportunity? We give conditions for the prices to be consistent with an arbitrage-free model (in which case the model can be realized on a finite probability space). We also give conditions for there to exist an arbitrage opportunity which can be locked in at time zero. There is also a third boundary case in which prices are recognizably misspecified, but the ability to take advantage of an arbitrage opportunity depends upon knowledge of the null sets of the model.     

THE EARLY EXERCISE PREMIUM FOR THE AMERICAN PUT UNDER DISCRETE DIVIDENDS

We derive an integral equation for the early exercise boundary of an American put option under Black–Scholes dynamics with discrete dividends at fixed times during the lifetime of the option. Our result is a generalization of the results obtained by Carr, Jarrow, and Myneni; Jacka; and Kim for the case without discrete dividends, and it requires a careful study of Snell envelopes for semimartingales with discontinuities.     

Recent SEC prosecution and insider trading on forthcoming merger announcements

While trading on nonpublic information is illegal, the enforcement of this law has been elusive, particularly in the area of trading in advance of merger announcements. We examine the impact of insider trading on daily stock price changes for firms identified by the SEC in the Antoniu-Newman insider trading case. Using residual analysis, the abnormal returns occuring prior to the announcement are calculated and compared with a sample of 188 typical merger candidates not identified in the Antoniu-Newman case to determine whether or not there was an unusually large market reaction prior to the forthcoming merger announcement on the subset of merger candidates involved in the court procedure.     

MONETARY POLICY RULES IN THE RUN‐UP TO THE EMU

We characterize central bank behavior in the euro area during the run‐up to the European Economic and Monetary Union (EMU) era by estimating Taylor rule‐type reaction functions at both the individual and aggregate level. We focus on whether national monetary policies during the run‐up to the EMU were responding to economic developments according to their own policy rules or to a broader, euro area‐wide, policy rule. To consider the last possibility we examine whether national monetary policies were responding to German interest rates. Finally, we compare the performance of the estimated with imposed policy rules.     

EXISTENCE OF THE STANDARD SYSTEM IN THE MULTIPLE‐PRODUCTION CASE: A SOLUTION TO THE MANARA PROBLEM

In this paper we show that the Manara problem in the case of Sraffa's generalized multiple‐production case arises due to the presence of superfluous processes of production. We argue that ‘goods’ should be defined from the perspective of the system and not the observer. We provide a mathematical procedure to remove superfluous processes from the construction of Sraffa's Standard system. Once this is done, the Manara problem disappears.     

UNDERSTANDING THE FINANCIAL CONSEQUENCES OF THE BULLWHIP EFFECT IN A MULTI‐ECHELON SUPPLY CHAIN

This article is concerned with how supply chain strategies can mitigate the Bullwhip Effect and inflated inventories from the perspective of the central firm (typically a manufacturer) in the supply chain. We first outline a base case scenario with a validated system dynamics simulation model, using supply chain characteristics as reported by a real firm, in this case a Mexican electronics supplier to U.S. automobile assemblers. We find, surprisingly, that a lower Bullwhip Effect Index (BE) does not always lead to lower costs in the supply chain studied. Furthermore, sensitivity analysis suggests some interesting, counterintuitive results. The implications of these findings are further developed as we test how lead time reduction can also reduce the Bullwhip Effect in the simulated setting.     

NOTE ON THE WELFARE EFFECT OF SECOND‐BEST POLICIES IN A NETWORK INDUSTRY: A MONOPOLY CASE

We show that the welfare effect of second‐best policies such as a subsidy/tax and quality regulation in the case of a monopoly in a network industry depends on the strength of network effects. That is, focusing on the case in which the network effect is smaller (larger) than the marginal cost of production for the small (large) network effect, it is demonstrated that in the case of a small (large) network effect, an output and a quality‐improving subsidy (tax) policy are socially optimal, and a government should commit to a minimum (maximum) quality standard.     

THE EIGENFUNCTION EXPANSION METHOD IN MULTI-FACTOR QUADRATIC TERM STRUCTURE MODELS

We propose the eigenfunction expansion method for pricing options in quadratic term structure models. The eigenvalues, eigenfunctions, and adjoint functions are calculated using elements of the representation theory of Lie algebras not only in the self-adjoint case, but in non-self-adjoint case as well; the eigenfunctions and adjoint functions are expressed in terms of Hermite polynomials. We demonstrate that the method is efficient for pricing caps, floors, and swaptions, if time to maturity is 1 year or more. We also consider subordination of the same class of models, and show that in the framework of the eigenfunction expansion approach, the subordinated models are (almost) as simple as pure Gaussian models. We study the dependence of Black implied volatilities and option prices on the type of non-Gaussian innovations.     

DISCRETE TIME HEDGING OF THE AMERICAN OPTION

In a complete financial market we consider the discrete time hedging of the American option with a convex payoff. It is well known that for the perfect hedging the writer of the option must trade continuously in time, which is impossible in practice. In reality, the writer hedges only at some discrete time instants. The perfect hedging requires the knowledge of the partial derivative of the value function of the American option in the underlying asset, the explicit form of which is unknown in most cases of practical importance. Several approximation methods have been developed for the calculation of the value function of the American option. We claim in this paper that having at hand any uniform approximation of the American option value function at equidistant discrete rebalancing times it is possible to construct a discrete time hedging portfolio, the value process of which uniformly approximates the value process of the continuous time perfect delta‐hedging portfolio. We are able to estimate the corresponding discrete time hedging error that leads to a complete justification of our hedging method for nonincreasing convex payoff functions including the important case of the American put. This method is essentially based on a new type square integral estimate for the derivative of an arbitrary convex function recently found by Shashiashvili.     

Business under adverse home country institutions: The case of international sanctions against Myanmar

We expand the institutional perspective of international business by exploring the range of institutions outside the host country that influence international business. We use a critical case, Myanmar, to explore the dynamics of institutional constraints and the reaction of business to such constraints. Our in-depth case analysis focuses on four industries for the period 1996–2011. On this basis, we develop the concept of ‘low profile strategy’ and propose a conceptual framework of home country pressures influencing multinational enterprises’ international operation, and the variation of their impact across industries and firms. This framework provides a foundation for future work on the extra-territorial effects of institutions in international business.     

WAGE FLEXIBILITY AND THE STABILITY ARGUMENTS OF THE NEOCLASSICAL SYNTHESIS

This note fills a lacuna in the neoclassical synthesis and completes its dynamic disequilibrium processes by including adjustments of the money wage rate in response to excess demand on the labour market. A Walrasian and a Keynesian variant are distinguished. While in the first case local asymptotic stability is always ensured, the equilibrium is unstable in the Keynesian case if money wages are too flexible relative to the adjustment speeds on the product and money markets.     

LABOR VALUES AND THE IMPUTATION OF LABOR CONTENTS*

In a recent article (Econometrica 1983), Peter Flaschel presented an empirical procedure for the calculation of labor values in joint production. This procedure was based on a disaggregation of production processes. The concept of «market value» (average value) was then used to determine values on the basis of the single technology which resulted from the disaggregation. In the first part, the formalism of market value is directly applied to the case of joint production, and the conditions for the existence of positive solutions are discussed. We demonstrate that these conditions are quite general, and are not related to conditions concerning the existence of any equilibrium. In this analysis, we substitute the concept of « nonreductivity » for the traditional notion of productivity of the technology. The second part of the article considers the problems involved in procedures of disaggregation. In the third part we discuss the main results obtained, stressing the importance of the difference between values and prices.     

The impact of a captive insurance company's formation on a firm's value after the carnation case

One of the primary reasons previously cited for forming a captive insurance company is tax advantages based on premium deductibility. The IRS ruling in the Carnation Company case was the first time that investors experienced a decisive legal action signaling the possibility that premiums paid to captives might not be tax deductible to the parent company. The purpose of this paper is to determine if the investor's perceived lack of tax deductibility of premiums, based upon the Carnation case, has an impact upon the parent firm's value at time of captive formation. The results indicate that the market placed a high value on the ability of the parent company to deduct for tax purposes the insurance premium paid to its captive. Before the Carnation case there was a positive reaction by the market to captive formation whereas after the Carnation case, there was a negative reaction.     

OPTIMAL MULTIPLE STOPPING AND VALUATION OF SWING OPTIONS

The connection between optimal stopping of random systems and the theory of the Snell envelop is well understood, and its application to the pricing of American contingent claims is well known. Motivated by the pricing of swing contracts (whose recall components can be viewed as contingent claims with multiple exercises of American type) we investigate the mathematical generalization of these results to the case of possible multiple stopping. We prove existence of the multiple exercise policies in a fairly general set-up. We then concentrate on the Black–Scholes model for which we give a constructive solution in the perpetual case, and an approximation procedure in the finite horizon case. The last two sections of the paper are devoted to numerical results. We illustrate the theoretical results of the perpetual case, and in the finite horizon case, we introduce numerical approximation algorithms based on ideas of the Malliavin calculus.     

WORKFORCE AGEING AND THE SUBSTITUTION OF LABOUR: THE ROLE OF SUPPLY AND DEMAND OF LABOUR IN AUSTRIA

We study the sensitivity of projected economic productivity (output per worker) with respect to alternative projections of labour supply and alternative assumptions on the substitutability of workers at different ages. We show that in a pure labour economy assuming imperfect substitution of workers at different ages implies an increase in relative productivity during the next two decades. For a decreasing or hump‐shaped age‐specific productivity profile a negative tradeoff between an increasing labour force at older ages and aggregate productivity results. A decline in productivity can be attenuated by adjusting labour force participation rates to levels currently observed in Nordic countries.     

ON THE CONSISTENCY OF THE LUCAS PRICING FORMULA

In order to find the real market value of an asset in an exchange economy, one would typically apply the Lucas formula, developed in a discrete time framework. This theory has also been extended to continuous time models, in which case the same pricing formula has been universally applied.
While the discrete time theory is rather transparent, there has been some confusion regarding the continuous time analogue. In particular, the continuous time pricing formula must contain a certain type of a square covariance term that does not readily follow from the discrete time formulation. As a result, this term has sometimes been missing in situations where it should have been included.
In this paper, we reformulate the discrete time theory in such a way that this covariance term does not come as a mystery in the continuous time version.
In most real life situations dividends are paid out in lump sums, not in rates. This leads to a discontinuous model, and adding a continuous time framework, it appears that our framework is a most natural one in finance.
Finally, the Gordon growth formula is extended from its deterministic origin, to the present model of uncertainty, and it is indicated how this can be used to to possibly shed some light on the volatility puzzle.     

EXCHANGE RATE PASS-THROUGH IN THE AUTOMOBILE INDUSTRY

This article examines empirically the exchange rate pass-through of car manufacturers on the Swedish market. It first analyzes the changes in prices by supplying countries during the period 1976 - 1996. In a second stage, the relationship between price-level adjusted exchange rates and quality-adjusted prices is investigated. Although there exist significant differences across countries, the evidence shows that actual price adjustments are associated with stabilization of local currency prices. The policy implication of the results is that the use of an exchange rate policy in the case of external imbalances should therefore be reconsidered within the broader context of how market structure and conduct influence the optimal pricing of traded goods.     

THE LATENT CHOICE. WHEN IT IS WORTH POSTPONING THE DECISION

We discuss choices among irreversible projects under uncertainty. This kind of problem was first posed studying natural resource utilization (Weisbrod, Arrow-Fisher), but our analysis may be applied to a wide class of phenomena. In an uncertain world, an economic agent, instead of committing himself to an irreversible decision, could prefer to postpone his choice waiting for better information. In this paper, we discuss the projects characteristics and the information qualities that make postponing the preferred choice. We use a Markov process with a three-period horizon, because it allows us to treat analitically the way in which information arrives over time.     

INDUSTRY COMPETITIVENESS—THE ROLE OF REGIONAL DISTANCE-SENSITIVE INPUT SHARING (THE ISRAELI-ARAB CASE)

This study offers a method to estimate how the availability of distance-sensitive inputs affects industrial performance of neighboring countries. It shows that replacing either distant foreign input suppliers or inefficient local ones with neighboring suppliers could enhance the competitiveness of specific industries within a country. Whereas the suggested method could be generalized for any type of regional trade liberalization, we focus on the case of removing trade barriers between former non-trading neighboring countries. More specifically, the case of regional distance-sensitive input sharing between Israel and three of its Arab neighbors (Egypt, Jordan, and Syria) is demonstrated.     

Reframing the Business Case for Diversity: A Values and Virtues Perspective

We provide an ethical evaluation of the debate on managing diversity within teams and organizations between equality and business case scholars. Our core assertion is that equality and business case perspectives on diversity from an ethical reading appear stuck as they are based on two different moral perspectives that are difficult to reconcile with each other. More specifically, we point out how the arguments of equality scholars correspond with moral reasoning grounded in deontology, whereas the foundations of the business case perspective are crafted by utilitarian arguments. We show that the problems associated with each diversity perspective correspond with the traditional concerns with the two moral perspectives. To resolve this stalemate position, we argue that the equality versus business case debate needs to be approached from a third, less well-known moral perspective (i.e. virtue ethics). We posit that a focus on virtues can enhance equality by reducing prejudice and illustrate this by applying it to the HRM domains of recruitment and selection and of performance management. Subsequently, we argue that values are key to aligning virtues with each other and with corporate strategy, delineate our values and virtues perspective on diversity, and argue why and how it can enhance organizational performance.