A note on utility‐based futures hedging performance measure

This note considers the estimator for the utility‐based hedging performance. It shows that the estimator incurs a downward bias, regardless of whether the conventional mean‐variance expected utility function or the more general risk‐averse utility function is adopted. Consequently, the usefulness of the futures contract is under‐estimated. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark     

Pricing VIX futures: Evidence from integrated physical and risk‐neutral probability measures

This study derives closed‐form solutions to the fair value of VIX (volatility index) futures under alternate stochastic variance models with simultaneous jumps both in the asset price and variance processes. Model parameters are estimated using an integrated analysis of integrated volatility and VIX time series from April 21, 2004 to April 18, 2006. The stochastic volatility model with price jumps outperforms for the short‐dated futures, whereas additionally including a state‐dependent volatility jump can further reduce out‐of‐sample pricing errors for other futures maturities. Finally, adding volatility jumps enhances hedging performance except for the short‐dated futures on a daily‐rebalanced basis. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:1175–1217, 2007     

Regime‐dependent smile‐adjusted delta hedging

We introduce several regime‐dependent smile‐adjusted deltas and compare their efficiency with the smile‐adjusted deltas that are popular with option traders. Using years of daily option prices, out‐of‐sample hedging performance tests for options of all moneyness and maturities and daily, weekly, or fortnightly rebalancing show that even the simplest regime‐dependent smile‐adjustment consistently outperforms implied BSM delta hedging and local volatility and minimum variance smile‐adjustments. Markov‐switching deltas offer the best performance, with delta‐hedging errors often half the size of implied BSM hedging errors. During volatile markets risk reduction from regime‐dependent delta hedging is much greater than during tranquil periods.     

A note on steady-state price:Output relationships

Two sufficient conditions for non-perverse steady-state price: net output relationships are derived: (i) weak substitutability of each produced input, both with respect to other produced inputs and with respect to primary factor inputs, and (ii) constancy of the produced-input: output coefficients.     

A note on the relationship between the variability of the hedge ratio and hedging performance

This note provides an analysis to examine the conjecture about the monotonic relationship between hedge ratio variability and hedging performance. Specific conditions are characterized to sustain the conjecture. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark     

A note on the derivation of Black‐Scholes hedge ratios

An option hedge ratio is the sensitivity of an option price with respect to price changes in the underlying stock. It measures the number of shares of stocks to hedge an option position. This article presents a simple derivation of the hedge ratios under the Black‐Scholes option‐pricing framework. The proof is succinct and easy to follow. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:1119–1122, 2003     

Effective risk aversion in thin risk‐sharing markets

We consider thin incomplete financial markets, where traders with heterogeneous preferences and risk exposures have motive to behave strategically regarding the demand schedules they submit, thereby impacting prices and allocations. We argue that traders relatively more exposed to the market portfolio tend to behave in a more risk tolerant manner. Noncompetitive equilibrium prices and allocations result as an outcome of a game among traders. General sufficient conditions for existence and uniqueness of such equilibrium are provided, with extensive analysis of two‐trader transactions. Even though strategic behavior causes inefficient social allocations, traders with sufficiently high risk tolerance and/or high initial exposure to tradable securities obtain more utility gain in the noncompetitive equilibrium, when compared to the competitive one.     

A note on the performance of regime switching hedge strategy

We characterize conditions under which the regime switching (RS) hedge strategy will perform better than the ordinary least squares (OLS) hedge strategy. The result can be extended to the case where the GARCH effects prevail. Specifically, these conditions would allow the RS‐GARCH hedge strategy to dominate both OLS and GARCH hedge strategies. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark     

Cross‐group comparisons: A cautionary note

This article alerts researchers to the importance of factorial invariance in comparative studies. Cross‐group or cross‐national comparisons, without a clear understanding of factorial structures, can result in misleading conclusions regarding compared groups. The types and process of invariance test are discussed. Then, as an empirical illustration, American consumer ethnocentrism toward Japanese products is examined across gender and age. © 2002 Wiley Periodicals, Inc.     

Timing is everything: A meta-analysis of the relationships between organizational performance and innovation

The relationship between innovation and firm performance has been uncertain. In previous empirical tests of both causal directions of the organizational performance and innovation relationship, the temporal sequence of research designs has often been flawed. We meta-analytically test both temporal sequences of this relationship using 158 effect sizes from 55 empirical studies. We find that many empirical studies hypothesized one temporal sequence (e.g. innovation and future performance), but used data based on the opposite temporal sequence (e.g. past performance and innovation). Correcting the studies based on the actual temporal sequence used reveals that while the relationship between innovation and future performance is positive (based on economic rent-seeking), the relationship between past performance and innovation is less clear, especially when the study's framing is taken into account. Focusing on temporal sequencing suggests new research avenues on the organizational performance and innovation relationship.     

A note on endogenous competition mode with managerial‐unionized firms

We analyse the endogenous choice of the competition mode (price vs. quantity) in a duopoly model with managerial delegation and unionized labor markets. Depending on the unions' relative bargaining power and the degree of product differentiation, the set of possible outcomes proves to be very rich, including alternatively a unique quantity or price equilibrium as well as multiple asymmetric‐type equilibria.     

Funding development infrastructure without leverage: A risk‐sharing alternative using innovative sukuk structures

Muslim countries of the developing world suffer indebtedness resulting mostly from funding development infrastructure. Faced with a dire need for development infrastructure but with inadequate resources to fund them domestically, these governments often resort to foreign borrowing. As neither foreign banks nor international debt markets would allow for the debt to be in home currency, the funding is invariably denominated in foreign currency. For the borrowing country, in addition to currency exposure such borrowing increases the country's leverage and economic vulnerability. As these countries typically have a narrow economic base with heavy reliance on commodity exports, they are susceptible to the vagaries of commodity price fluctuation. Leverage increases the amplitude of the economy's fluctuation, resulting if not in outright crisis, then, at least in financial distress and depreciating home currency. As a result, when the foreign currency funded project comes on stream, it is burdened with huge accumulated debt which in many cases makes the project unmanageable without further government help through subsidy of operating costs. This further stresses already stretched government budgets and perpetuates indebtedness. This cycle of borrowing, leverage and vulnerability can be broken by innovative use of sukuk. The problem with debt financing is that the servicing requirements are independent of the underlying project's risk or cash flows. This paper presents two sukuk structures based on the risk sharing principles of Islamic finance. Sukuk that have returns linked to the nation's gross domestic product growth if the funded project is non‐revenue generating and linked to earnings of the project if it is revenue generating can avoid the problems above. The pay‐off profile, estimated cost of funds and returns to investors of these sukuk are discussed. When designed in small denomination, such sukuk can enhance financial inclusion, help build domestic capital markets and enable the financing of development without stressing government budgets.     

Back to the sixties: A note on multi‐primary‐factor linear models with homogeneous capital

This paper extends Bruno's ( 1967 ) one capital good two‐sector growth model with discrete technology by allowing for multiple primary factors of production. While the existence of an optimal steady state is established for any positive rate of discount, an example in which three “modified golden rules” exist shows that the optimal steady state is not necessarily unique. The extended model provides a simple exemplification of the more general principle that the presence of multiple primary factors of production in homogeneous capital models can definitively result in the same complications that arise when there is joint production.     

Option prices and risk‐neutral densities for currency cross rates

The theoretical relationship between the risk‐neutral density (RND) of the euro/ pound cross rate and the bivariate RND of the dollar/euro and the dollar/pound rates is derived; the required bivariate RND is defined by the dollar‐rate marginal RNDs and a copula function. The cross‐rate RND can be used by banks, international businesses, and central bankers to assess market expectations, to measure risks, and to value options, without relying on over‐the‐counter markets, which may be either non‐existent or illiquid. Empirical comparisons are made between cross‐rate RNDs estimated from several data sets. Five one‐parameter copula functions are evaluated and it is found that the Gaussian copula is the only one‐parameter copula function that is ranked highly in all of the comparisons we have made. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:324–360, 2010     

Inconsistency and over‐determination in neo‐Kaleckian growth models: A note

This short note argues that the canonical neo‐Kaleckian growth model does not yield a balanced growth path due to the absence of an inbuilt mechanism by which desired and actual rates of capital accumulation are equalized. Introducing non‐generating capacity autonomous demand does not solve such inconsistency. Contrary to what Lavoie ( 2016 ) claims, we show that the latter is also unable to bring capacity utilization to its normal level. In light of recent contributions (e.g., Nikiforos, 2013, 2016 ), we suggest that making normal capacity utilization an endogenous variable is an alternative better suited to deal with the issue.