Monopoly pricing with dual-capacity constraints

This paper studies the price-setting behavior of a monopoly facing two capacity constraints: one on the number of its consumers, and the other on the amount of products it can sell. The characterization of the firm's optimal pricing and optimal customer mix as a function of its two capacities reveals a rich structure. In contrast to the results under one-dimensional capacity constraints with constant marginal cost of production, a firm may optimally respond to an exogenous reduction in one of its capacities by decreasing one of its prices. Moreover, neglecting the existence of the second capacity constraint can reverse some policy interventions' effects on consumer welfare. In particular, easing a regulatory restriction on one of the constraints may harm the average consumer.     

Asymmetric positive feedback trading and stock pricing in China

Defining asymmetry of feedback trading (AFC) as the difference between buying-winners and selling-losers intensities, the paper investigates if AFC impacts stock pricing. We show that buying stocks with low AFC and selling stocks with high AFC makes significant positive returns after controlling traditional pricing factors. The return mainly comes from the long leg and cannot be simply attributed to either mispricing, liquidity, or risk premium. Further study shows that the negative impact of AFC on future stock return is reinforced with an increase in past returns, maximum daily return, relative valuation level, asset growth rate, or operating profit rate. As AFC represents retail trading intensity, the results imply that the inactiveness of retail investors may make price relative underreaction to good news and thus lead to positive expected stock return.     

Rational asset pricing bubbles and debt constraints

Rational price bubble arises when the price of an asset exceeds the asset’s fundamental value, that is, the present value of future dividend payments. The important result of Santos and Woodford (1997) says that price bubbles cannot exist in equilibrium in the standard dynamic asset pricing model with rational agents facing borrowing constraints as long as assets are in strictly positive supply and the present value of total future resources is finite. This paper explores the possibility of asset price bubbles under endogenous debt constraints induced by limited enforcement of debt repayment. Equilibria with endogenous debt constraints are prone to have infinite present value of total resources. We show that asset price bubbles are likely to exist in such equilibria. Further, we demonstrate that there always exist equilibria with price bubbles on assets in zero supply.     

Insider trading: Regulation, securities markets, and welfare under risk aversion

I analyze in this article the impact of insider trading regulation (ITR) on a securities market and on social welfare, and argue that the imposition of ITR forces a reallocation of wealth and risk that decreases social welfare. Three reasons explain this result: First, ITR increases the volatility of securities prices; second, it worsens the risk sharing among investors; and, third, it diverts resources from the productive sector of the economy. Further, although I formally establish conditions under which ITR makes society better off, I argue that those conditions are not useful to justify the imposition of this regulation.     

Commodity money equilibrium in a convex trading post economy with transaction costs

Existence and efficiency of general equilibrium with commodity money is investigated in an economy where N   commodities are traded at N(N−1)/2$N(N-1)/2$ commodity-pairwise trading posts. Trade is a resource-using activity recovering transaction costs through the spread between bid (wholesale) and ask (retail) prices. Budget constraints, enforced at each trading post separately, imply demand for a carrier of value between trading posts. Existence of general equilibrium is established under conventional convexity and continuity conditions while structuring the price space to account for distinct bid and ask price ratios. Commodity money flows are identified as the difference between gross and net inter-post trades.     

The pricing of credit risk derivatives

This paper considers the pricing of derivatives that protect holders of corporate bonds from a reduction in their value because of a deterioration in their credit quality. These derivatives are structured as either puts on the bond price or calls on the bond spread (above the risk free rate) in the context of models developed by Merton (1974) and Black and Cox (1976). The pricing properties of these options are derived using both analytical and numerical methods.     

Transfer pricing under asymmetric information

This paper analyses optimal transfer prices in a firm organized in two divisions. The production costs of the divisions are their respective private information. The objective of headquarters is to determine the transfer pricing method that maximizes total profit less managers' compensation. Managers are interested in their current compensation and in the market evaluation of their experience. In this setting, the paper discusses why particular transfer pricing methods found in practice and literature may induce-inefficiencies, and it identifies conditions under which each method is preferable. Major results are: a market-based transfer price does not implement the first-best solution if there are benefits from internal trade; cost-based transfer,prices may achieve first-best, and they are preferable to negotiated transfer prices if communication is cost-less; dual transfer prices do not implement the first-best solution, as long as collusion cannot be discouraged.

‘There are two truisms in business. Transfer prices are wrong and charges for corporate overhead are too high.‘¹     

Variance trading and market price of variance risk

This paper develops a new approach for variance trading. We show that the discretely-sampled realized variance can be robustly replicated under very general conditions, including when the price can jump. The replication strategy specifies the exact timing for rebalancing in the underlying. The deviations from the optimal schedule can lead to surprisingly large hedging errors. In the empirical application, we synthesize the prices of the variance contract on S&P 500 index over the period from 01/1990 to 12/2009. We find that the market variance risk is priced, its risk premium is negative and economically very large. The variance risk premium cannot be explained by the known risk factors and option returns.     

Ramsey pricing in the presence of risk

This article examines Ramsey (second-best) pricing for a multi-product regulated monopolist when marginal costs fluctuate with a known probability function. When all marginal-cost risk is absorbed by consumers, the degrees of Pratt-Arrow absolute risk aversion and the marginal cost variances in the various markets have an affect on the appropriate Ramsey prices. An analogous result is obtained when investors absorb all of the cost risk. When the cost risk is optimally shared by consumers and investors, the deterministic Ramsey prices are obtained.     

Spatial competition under uniform delivered pricing

A Hotelling-type model of spatial competition is considered, in which two firms compete in uniform delivered prices. First, it is shown that there exists no uniform delivered price–location equilibrium when the product sold by the firms is perfectly homogeneous andwhen consumers buy from the firm quoting the lower delivered price. Second, when the product is heterogeneous and when preferences are identically, independently Weibull-distributed with standard deviation μ, we prove that there exists a single uniform delivered price–location equilibrium iff μ≧1/8 times the transportation rate times the size of the market. In equilibrium, firms are located at the center of the market and charge the same uniform delivered price, which equals their average transportation cost, plus a mark-up of 2μ. Finally, we discuss how our result extends to the case of n firms and proceed to a comparison of equilibria under uniform mill and delivered pricing.     

存款保险制度下银行道德风险计量范式——期权定价模型

存款保险制度作为金融安全网三大基本要素之一，在保护小额存款人、维持公众信心等方面发挥着举足轻重的作用。但是这一制度的实施，会诱发道德风险，给整个金融体系的安全带来负面影响。本文基于期权定价模型，提出在实行存款保险体制下的道德风险计量思路，从而为相关监管部门决策提供依据。     

The restricted convex risk measures in actuarial solvency

In this article, we propose a class of convex risk measures defined on appropriate wedges of a space of financial positions which denote the cumulative surplus variables created by undertaking risks by either an insurance or a reinsurance company. The form of the wedge which is the domain of such a risk measure expresses the form of the company, and it is a subspace in the case of reinsurance companies and a cone in the case of the insurance companies. The value of such a risk measure on an insurance position denotes the capital that the corresponding company has to receive or to keep in advance so that it will not be exposed to risk due to this position. We prove some dual representation and continuity results being similar to the unrestricted case. Finally, we contribute to a decision theory related to the choice of a numeraire asset when the space in which the positions lie in is reflexive.     

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.     

European quanto option pricing in presence of liquidity risk

In this paper, we study the pricing problems of the European quanto options in which the underlying foreign asset is in imperfectly liquid markets. First, we assume that the dynamics of the underlying foreign asset price are affected by market liquidity and propose a liquidity-adjusted quanto model. This allows for the effects of market liquidity on European quanto option pricing. And then we derive the analytical pricing formulas for four different types of European quanto options. Finally, we empirically investigate the pricing performance of our proposed model with a European quanto construction involving the SSE 50 ETF, as the underlying asset, and the CNY/HKD exchange rate. Empirical results demonstrate that the pricing accuracy of the proposed model is markedly superior to that of the Black-Scholes quanto model. In other words, allowing for liquidity risk in the framework of European quanto option pricing can make markedly improvements in fitting the real market data. Particularly, the improvement rate is high for medium-term and out-of-the-money options. Moreover, these results are robust for different liquidity measures.     

Approximate arbitrage-free option pricing under the SABR model

The stochastic-alpha-beta-rho (SABR) model introduced by Hagan et al. (2002) provides a popular vehicle to model the implied volatilities in the interest rate and foreign exchange markets. To exclude arbitrage opportunities, we need to specify an absorbing boundary at zero for this model, which the existing analytical approaches to pricing derivatives under the SABR model typically ignore. This paper develops closed-form approximations to the prices of vanilla options to incorporate the effect of such a boundary condition. Different from the traditional normal distribution-based approximations, our method stems from an expansion around a one-dimensional Bessel process. Extensive numerical experiments demonstrate its accuracy and efficiency. Furthermore, the explicit expression yielded from our method is appealing from the practical perspective because it can lead to fast calibration, pricing, and hedging.     

On pricing lookback options under the CEV process

Abstract We consider the problem of pricing European lookback options when the underlying asset price is driven by a constant elasticity of variance (CEV) process. The evaluation model is based on the binomial approximation developed by Nelson and Ramaswamy (1990) and we show how to apply it in the case of such options. We develop simple pricing algorithms that compute accurate estimates of the option prices.     

Multi-sample simple step-stress experiment under time constraints

In the context of accelerated life testing, a step-stress model allows for testing under different conditions at various intermediate stages of the experiment. The goal is to develop inference for the mean lifetime at each stress level. The maximum likelihood estimates (MLEs) exist only when some (at least one) failures are observed at each stress level. This limitation can be tackled by a multi-sample step-stress model, which imposes a weaker condition for the existence of the MLEs, i.e. at each stress level, some failures (at least one) must be observed in at least one of the samples. The step-stress experiment with multiple samples at the same stress levels was introduced by Kateri et al. ( Journal of Statistical Planning and Inference, 139 , 2009a ). In this article, we focus on the likelihood inference under such a multi-sample set-up for the case of a simple step-stress experiment under exponentially distributed lifetimes when time constraints are in place in the experimentation.     

Supplier incentives and resource constraints under uncertainty

Procurement in environments of cost uncertainty and asymmetric information require special arrangements such as the linear incentive contract. Usually the buyer is motivated to make investments that can relieve temporary supplier resource constraints during the procurement. Special problems arise, however, due to interactions between investments in suppliers and the risk-incentive trade-off achieved by the incentive contract. A cost signaling model is proposed to overcome these problems, where a supplier offers an equity share in the profit from the incentive contract to the buyer in return for a priori investment. The equity share signals the supplier's private cost information, and forms the basis for the buyer's investment decision. Under equilibrium the buyer can expect to recover the entire amount provided to the supplier through his or her share of the profit.     

Optimal highway design and user welfare under value pricing

This paper investigates the optimal design of highways operated under a form of congestion pricing called value pricing. Value pricing involves dividing a highway into free and priced lanes so that in equilibrium the highway effectively operates at two levels of service, with those users placing a higher value on travel time savings selecting the faster, priced route. A tractable analytical framework is developed which allows analysis of equilibrium and welfare on value priced highways when users vary in their value of time. The model is used to characterize optimal toll and capacity policies, as well as investigate the fiscal implications of value pricing. The analysis concludes with results on how welfare changes induced by value pricing are distributed over the population of users when the government finances any funding shortfall through a non-discriminatory taxing mechanism. A realistic numeric example is used to illustrate how the model can be applied to evaluation of actual and proposed value pricing implementations.