Pricing vulnerable options in incomplete markets

This paper follows the framework of P. Klein (1996) to price vulnerable options when the market is incomplete. Vulnerable options, which are usually traded in the over‐the‐counter market, may not only face the risk of default but also the risk of illiquidity. Thus, pricing such options under the assumption of market completeness, as was done by H. Johnson and R. Stulz (1987) and P. Klein (1996), seems to be a mistake. Accordingly, the proposed model uses the methodology proposed by J. H. Cochrane and J. Saá‐Requejo (2000) to price vulnerable options under both deterministic and stochastic interest rates in an incomplete market. The model is found to perform well when the interest rate is stochastic. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:135–170, 2005     

Pricing strategies in markets with dynamic elasticities

This paper approaches strategic pricing over the product life cycle while considering the impact of dynamic price elasticities. Extending the work of Simon (1979), a general optimal control formulation is proposed which relies on functional forms which have empirical foundations and can be calibrated in a managerial context. In addition to typical skimming and penetration strategies, dynamic elasticities can lead to saw tooth strategies; optimal prices may, for example, decrease, then increase, then decrease over the life cycle. Several normative results, based on numerical simulations, are presented and compared to those found in the literature.Thanks are owed to Jehoshua Eliashberg, Lydia Price, Wilfried Vanhonacker, the editor and anonymous reviewers for their comments on earlier drafts of this research and to Katrina Maxwell for her excellent research support.     

Developing strategies for global markets: An evolutionary perspective

As the global landscape becomes populated by an increasingly diverse array of companies of different sizes, from different industries and of varied national origins, developing a strategy to compete effectively in global markets becomes ever more complex. How can companies of all kinds compete effectively in an increasingly diverse global landscape? The authors suggest that the appropriate response depends on a firm's level of involvement in international markets: whether a firm is just entering international markets, is aggressively expanding its international presence or is attempting to rationalize far-flung global operations. Focusing on three different industries, processed foods, automobiles and motor scooters, the authors identify appropriate strategies for leveraging competitive advantage at each phase of international involvement. They show how three paramount tasks, learning, building and leading, must evolve through each phase.     

Average skewness in global equity markets

This paper examines the predictive power of average skewness, defined as the average of monthly skewness values across stocks, documented by the prior literature for US market returns in an international setting. First, we confirm the validity of the results in the original study and show that the intertemporal relation between average skewness and aggregate returns becomes weaker in an alternative sample period. Second, when we repeat the analysis in 22 developed non-US markets, we find that average skewness has no robust predictive power for future market returns. The loss of forecasting power in the international sample does not depend on the method used to calculate average skewness or the regression specification and is supported by additional out-of-sample tests and subsample analysis.     

Convergence in global markets and consumer behaviour

Consumer behavioural scientists such as economists and marketing researchers are interested in the degree to which global convergence is occurring with respect to various consumer behaviour dimensions, particularly the extent that consumption patterns in products appear to evolve and become more similar across different parts of the world. With increasing internationalization and cultural cross‐fertilization, the traditional societies of the world are converging in many ways. The strategic marketing of flavoured alcoholic beverages is a particularly interesting example of this evolutionary process to convergence. Consumers in countries of different cultural originations are developing preferences for the same products and show increasing sign of converging around global product identity. This article presents the results of a study analysing the evolutionary process.     

Turnover and return in global stock markets

I study how growth affects liquidity of global stock exchanges and how liquidity determines cross-sectional returns on those stock exchange index portfolios. I measure portfolio liquidity by turnover ratio computed as value of shares traded over the market capitalization. I obtain data from FIBV, an association of global stock exchanges. In a multiple regression model for turnover ratio, I find age, size, type of exchange, competition for order flow, and growth rate to be significant determinants of portfolio liquidity; however, exchange- and time-specific effects are more appropriate for modeling portfolio liquidity. The time effects yield to three distinct regimes, while the exchange-specific effects are surrogates for the legal systems, English common law, and Civil laws of the countries. I estimate the parameters of a multiple regression model in a two-stage GLS framework in which index return is a function of turnover. The GLS method is preferable since a turnover ratio may have a non-stationary, random component. The significant determinants of index return are turnover and volatility, although some of the volatility effect may be a spillover from a January effect. Investors expect higher return from high turnover markets. However, the positive turnover expected return relation is true only in emerging markets; in developed markets expected return is a function of volatility. This result confirms existing empirical evidence that high turnover stock portfolios generate superior returns and further the sources and pricing of risk in emerging and developed markets are different.     

The global value chain under imperfect capital markets

This paper develops a model to study how suppliers' financial constraint interact with suppliers' position in a global value chain. I embed financial frictions into the property-rights model of the global value chain, as in Antràs and Chor (Econometrica, 2013, 81 , 2127), to derive the optimal allocation of ownership rights along the global value chain. The model predicts that multinational firms are more likely to integrate downstream intermediate input suppliers in countries with weak financial institutions when the production process is sequential complements. Using US intrafirm trade data for the years 2000–10, together with a triple-interaction term between "downstreamness" of an industry, demand elasticity of an industry and financial development of a country, I provide empirical evidence that supports the key prediction of the model.     

When NGOs go global: Competition on international markets for development donations

Why are many large non-governmental organizations (NGOs) becoming multinational entities? What are the welfare implications of this integration of markets for development donations? To answer these questions, we build a simple two-country model with horizontally differentiated NGOs competing in fundraising. We find that NGOs become multinational if the economies of scale in fundraising are sufficiently large. In that case, national NGOs in the smaller country disappear, while some national NGOs remain in the larger country only if country sizes are sufficiently different. Social welfare is higher in the regime with multinationals than under autarky.     

When NGOs go global: Competition on international markets for development donations

Why are many large non-governmental organizations (NGOs) becoming multinational entities? What are the welfare implications of this integration of markets for development donations? To answer these questions, we build a simple two-country model with horizontally differentiated NGOs competing in fundraising. We find that NGOs become multinational if the economies of scale in fundraising are sufficiently large. In that case, national NGOs in the smaller country disappear, while some national NGOs remain in the larger country only if country sizes are sufficiently different. Social welfare is higher in the regime with multinationals than under autarky.     

Taking a global view on brand post popularity: Six social media brand post practices for global markets

Brand post popularity positively relates to consumers’ purchase intentions, actual sales, and stock prices. Research suggests that social media posts should be vivid, practical, interesting, personalized, and interactive. However, cross-cultural research also suggests that practices might not be equally effective across different regional markets. While vividness and practicality could be consistently important across cultures, characteristics of interest, personalization, and interactivity might need to be adapted to the cultural conditions of specific target markets. We consider how individualism/collectivism, long-term orientation, uncertainty avoidance, power distance, and high-context/low-context cultures could influence brand post effectiveness. We provide suggestions for how to manage social media brand post popularity from a cross-cultural perspective to inform both domestic and global social media marketing campaigns. Suggested practices include: (1) making brand posts engaging; (2) targeting the ‘I’ in individualistic cultures and the ‘we’ in collectivist cultures; (3) focusing on consumers’ identity in less long-term oriented cultures and on functional information in more long-term oriented cultures; (4) ensuring that posts help reduce uncertainty; (5) planning for one-way communication in higher power distance countries and two-way communication in lower power distance countries; and (6) making messages less direct in higher-context cultures and more direct in lower-context cultures.     

Financial connectedness of BRICS and global sovereign bond markets

The paper examines the financial connectedness via return and volatility spillovers between Brazil, Russia, India, China and South Africa (BRICS) and three global bond market indices represented by the United States of America (USA), European Monetary Union (EMU) and Japan for the period 01 January 1997 to 27 July 2016 (weekly data). We find that Russia followed by South Africa is the net transmitter of shocks within BRICS, implying that the risk arising from these markets may have an adverse impact on others in BRICS. However, China and India exhibit weak connectedness, suggesting that these markets may be useful for hedging and diversification opportunities in BRICS. The networks of pairwise spillover results further confirm this. Among global indices, China appears as highly interconnected with the USA. USA is the strongest transmitter of shocks to BRICS bond indices. The panel data results further confirm the significant determinants of net directional spillover. Thus, we can conclude that BRICS is a heterogeneous asset class even in the case of the bond market. India and China are the markets to look for better risk management strategies.     

The future of private-label markets: A global convergence approach

Private-label (PL) shares are characterized by considerable heterogeneity across both countries and categories, not only in their current level, but also in the rate at which they are growing. This creates ambiguity about their remaining growth potential. To offer insights into the likely long-run PL shares, we take a forward-looking perspective by means of a convergence model. We apply the model to two unique datasets that together span more than 50 countries, both emerging and developed, across more than70 CPG categories. We find evidence of partial PL convergence: even though PL shares will become more similar, part of the currently observed heterogeneity will persist. The future evolution in two key marketing instruments, new-product introductions by both NB manufacturers and retailers and the NB-PL price gap, is found to play a substantial role in shaping the global PL landscape of the future. This impact is not uniform, however, but depends on the category, and varies with the retail, economic and cultural context. In addition, the long-run impact of both marketing drivers differs from what is currently observed, suggesting that managers should not adhere too strongly to earlier practices when planning for the future.     

Evaluating the performance of global emerging markets equity exchange-traded funds

We examine the performance of passively managed exchange-traded funds (ETFs) that provide exposure to global emerging markets equities. We find that the tracking errors of these funds are substantially higher than previously reported levels for developed markets ETFs. ETFs that use statistical index replication techniques turn out to be especially prone to high tracking errors, and particularly so during periods of high cross-sectional dispersion in stock returns. At the same time, we find no convincing evidence that these funds earn higher returns than ETFs that rely on full-replication techniques.     

The impact of sovereign wealth funds on global financial markets

If sovereign wealth funds act similarly to private investors and thus allocate foreign assets according to market capitalisation rather than liquidity considerations, official portfolios reduce their “bias” towards the major reserve currencies — the US dollar and the euro. As a result, more capital flows “downhill“ from rich to less wealthy economies. In this scenario, the euro area and the United States would be subject to net capital outflows while Japan and the emerging markets would attract net capital inflows. The potential implications of a rebalancing of international capital flows for stock prices, interest rates and exchange rates remain uncertain, however. The authors wish to thank Marcel Fratzscher for excellents comments. The views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank.     

Investigating customer value in global business markets: Commentary essay

This commentary reflects on Blocker's cross-cultural investigation of relationship value in business markets, published in this issue, and identifies several research avenues. From a theoretical point of view, researchers should develop and test hypotheses grounded in both conceptual frameworks and extant literature to expand knowledge of how national cultures-as well as other country-specific variables-affect customer value perceptions in business markets. From a methodological point of view, ongoing research should establish cross-cultural measurement equivalence on the basis of procedures specifically designed to support formative customer value models. Finally, this commentary highlights several key insights related to models of customer value in international business markets.     

State institutions, risk, and lending in global capital markets

This paper examines one component of the expansion of global capitalism, the lending of capital across national borders and the affect of national political institutions and arrangements upon that lending. Global capital markets expanded rapidly during the latter part of the twentieth century, prompting discussions about the role of mobile capital. This contribution makes three key points to the understanding of globalization, its impacts, its causes, and its relationship to the nation-state, business and development. First, globalization is an uneven, bifurcated, phenomenon. Only a select group access these global capital markets, while many watch from the sidelines. Second, national political arrangements help us understand systematic disparities in access to global capital. National and local public policies, national political institutions, and other local activities prove instrumental in affecting access to global capital. Democracy and regulatory stability matter as they provide information to international investors about the risk to investments from local arenas. Third, the data presents a methodological obstacle in understanding how politics affects access to global capital. The structure of the data’s distribution can hide real relationships and pervert substantive interpretations if not managed. Without addressing the statistical concerns presented by the data the results would at worst be little more than garbage in, garbage out, and at best misleading.     

Pricing practices and firms' market power in international cellular markets, an empirical study

Previous studies on international marketing have typically asked the question: “how is the demand characterized across countries?” Such analysis is then used to provide guidelines for firms to enter new markets and/or to allocate marketing resources across countries. To provide such normative guidelines, however, one also needs to analyze the supply-side of the problem, i.e., ask: “what is the likely market power that firms will be able to command in different countries?” Building on the New Empirical Industrial Organization (NEIO) framework, recent research in marketing provides marketers with a variety of models to explore competitive interactions among firms in the context of a single market. The goal of this paper is to extend this literature to a multimarket/multinational context to help international marketers assess the likely market power they face when entering new countries. We illustrate the proposed method on the mobile telecommunications industry, using price and quantity data from 10 countries around the world, estimating firms' market power as a function of a number of country characteristics.The results indicate that, while the simple presence of competition diminishes firms' market power, it does not lead to perfect competition. Interestingly, a higher number of competitors in a country does not seem to have significant incremental effect on market power. In contrast, the country's commitment to a severe antitrust policy has a significant negative effect, while the monopolist's lead-time before competition is allowed has a significant positive effect on market power. These findings, together with a change in price elasticities as a result of competition, suggest that market power in different countries may originate from two sources: (i) collusive pricing among cellular operators and (ii) consumers' switching costs across service providers. For international marketers, the findings imply that the attractiveness of wealthier countries (with usually faster diffusion rates and larger market potential) may be mitigated by higher levels of competition (as a result of developed antitrust regulation and more consumer exposure to competitive marketing practices). From a policy point of view, it suggests that (in contrast to the conventional wisdom) simple deregulation may not be enough to reduce prices to competitive levels. In addition, a severe antitrust policy is crucial to achieve this goal.     

Real-time price discovery in global stock, bond and foreign exchange markets

Using a unique high-frequency futures dataset, we characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. We find that news produces conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. Equity markets, moreover, react differently to news depending on the stage of the business cycle, which explains the low correlation between stock and bond returns when averaged over the cycle. Hence our results qualify earlier work suggesting that bond markets react most strongly to macroeconomic news; in particular, when conditioning on the state of the economy, the equity and foreign exchange markets appear equally responsive. Finally, we also document important contemporaneous links across all markets and countries, even after controlling for the effects of macroeconomic news.     

Real-time price discovery in global stock,bond and foreign exchange markets

Using a unique high-frequency futures dataset, we characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. We find that news produces conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. Equity markets, moreover, react differently to news depending on the stage of the business cycle, which explains the low correlation between stock and bond returns when averaged over the cycle. Hence our results qualify earlier work suggesting that bond markets react most strongly to macroeconomic news; in particular, when conditioning on the state of the economy, the equity and foreign exchange markets appear equally responsive. Finally, we also document important contemporaneous links across all markets and countries, even after controlling for the effects of macroeconomic news.