On the pricing of forward starting options in Heston’s model on stochastic volatility

We consider the problem of pricing European forward starting options in the presence of stochastic volatility. By performing a change of measure using the asset price at the time of strike determination as a numeraire, we derive a closed-form solution within Hestons stochastic volatility framework applying distribution properties of the volatility process. In this paper we develop a new and more suitable formula for pricing forward starting options. This formula allows to cover the smile effects observed in a Black-Scholes environment, in which the extreme exposure of forward starting options to volatility changes is ignored.Received: July 2004, Mathematics Subject Classification (2000): 91B28, 60G44, 60H30, 60E10JEL Classification: G13It is a pleasure to thank the anonymous referee for his valuable comments and suggestions on this paper. Furthermore, we would like to thank Holger Kraft, University of Kaiserslautern, and Alexander Giese, HypoVereinsbank AG Munich, for fruitful discussions and suggestions.     

Kolmogorov’s forward PIDE and forward transition rates in life insurance

We consider a doubly stochastic Markov chain, where the transition intensities are modelled as diffusion processes. Here we present a forward partial integro-differential equation (PIDE) for the transition probabilities. This is a generalisation of Kolmogorov’s forward differential equation. In this set-up, we define forward transition rates, generalising the concept of forward rates, e.g. the forward mortality rate. These models are applicable in e.g. life insurance mathematics, which is treated in the paper. The results presented follow from the general forward PIDE for stochastic processes, of which the Fokker–Planck differential equation and Kolmogorov’s forward differential equation are the two most known special cases. We end the paper by considering the semi-Markov case, which can also be considered a special case of a general forward partial integro-differential equation.     

The pricing and performance of IPOs in China’s poor counties

In the context of China’s drive to alleviate poverty, we focus on the initial public offering (IPO) firms located in China’s poor counties and investigate their IPO pricing and post-IPO performance. Contrary to the findings reported for the U.S., we find that the problem of information asymmetry between Chinese firms located in rural areas and their investors is so severe that these IPO firms are associated with significantly higher underpricing. This effect is more pronounced for firms located in rural areas with poor traffic systems. We do not find significant market performance differences between rural and urban firms after their IPOs, but the operating performance of rural firms improves in the short term. Our additional analyses indicate that rural IPO firms have significantly lower investor attention and higher agency costs than urban firms. Overall, we enrich the literature on IPO pricing and the economic effects of geographic location.     

A super-replication theorem in Kabanov’s model of transaction costs

We prove a general version of the super-replication theorem, which applies to Kabanov’s model of foreign exchange markets under proportional transaction costs. The market is described by a matrix-valued càdlàg bid-ask process evolving in continuous time. We propose a new definition of admissible portfolio processes as predictable (not necessarily right- or left- continuous) processes of finite variation related to the bid-ask process by economically meaningful relations. Under the assumption of existence of a strictly consistent price system (SCPS), we prove a closedness property for the set of attainable vector-valued contingent claims. We then obtain the super-replication theorem as a consequence of that property, thus generalizing to possibly discontinuous bid-ask processes analogous results obtained by Kabanov (Financ. Stoch. 3, 237–248, 1999), Kabanov and Last (Math. Financ. 12, 63–70, 2002) and Kabanov and Stricker (Advances in Finance and Stochastics: Essays in Honour of Dieter Sondermann, pp 125–136, 2002). Rásonyi’s counter-example (Lecture Notes in Mathematics 1832, 394–398, 2003) served as an important motivation for our approach.     

The interplay of salesperson’s job performance and satisfaction in the financial services industry

Research has not yet provided conclusive confirmation or disconfirmation of any model that discusses the relationship between job satisfaction (JS) and job performance (JP). This article reviews the relationship in the financial services industry setting and examines in line with the precedents (perceived organizational support, role ambiguity, role conflict (RC), work-family conflict (WFC), emotional exhaustion (EE)) and the consequences (organizational commitment). Findings suggest that, in the financial services industry, JP causes JS and has a positive effect on organizational commitment. This study also finds that WFC serves as an antecedent to RC, EE and JS. Most importantly, the finding that WFC is significantly related to RC is new and thus needs to be confirmed in different industry settings.     

Diversification benefits of risk portfolio models: a case of Taiwan’s stock market

How to construct effective investment strategies is a core issue for modern finance. In this paper, we investigate the benefits of various models by rebalancing portfolios using the daily stock return data in Taiwan. We further consider investment constraints in portfolios to ensure the feasibility of their applications. Using five performance criteria, we find the risk models, particularly the CVaR, yield higher ex ante and ex post performance than a naïve buy-and-hold portfolio. The two-stage regressions show that high return benefits are associated with a bear market while high reduction in risk is positively related to high volatility. Though VaR is regarded as a standard model applied in the real world, our findings suggest that CVaR can serve as a good alternative.     

The context-specific conceptions of learning in case-based accounting assignments,students’ characteristics and performance

The present study contributes to accounting education literature by describing context-specific conceptions of learning related to case assignments, and by exploring the associations between the conceptions of learning, students’ characteristics and performance. The data analysed consist of 1320 learning diaries of 336 students, connected with students’ characteristics and course grades. The results are in line with earlier studies in that most students in accounting describe reproductive conceptions of learning. However, instead of only increasing knowledge, case assignments seem to emphasise the application of knowledge to real life. Furthermore, the conception of learning seems to be associated with performance in the course and the age of the student. Since no positive development of the conceptions of learning is visible during the course, using case assignments as such does not seem to solve the problem of reproductive conceptions. Therefore, how case assignments are used in teaching needs to be carefully considered.     

Constructing the Economy: The Role of Construction Sector in India’s Growth

On empirically examining the importance of construction sector in propelling economic growth rate in India, the study has found that in the presence of the dominant influence of capital stock, the impact of the construction sector gets blurred or neutralized. Once capital stock is dropped from the model, the construction sector emerges as a significant determinant of economic growth, while other financial variables such as interest rate and non-food bank credit including the financial liberalization dummy do not play significant roles in economic growth. However, from an investigation of the impact of the construction sector on economic growth through the channel of employment, it is seen that the construction sector might be impacting the growth rate through increasing employment and thereby increasing the aggregate output in the economy.     

Least squares,and a generalisation of the »Student»-Fisher theorem

Abstract

1. Following the methods employed by Steffensen ¹ a simple analytical proof of a generalisation of the »Student»-Fisher theorem is obtained. Geometrical proof of this generalisation has been given by Sterne.²     

CLA’s,PLA’s and a new method for pricing general passport options

This paper is primarily concerned with pricing a general passport option (GPO) within the standard Black–Scholes framework. We show that in all possible cases of the allowed trading strategy, the price can be decomposed into simple portfolios of standard European calls and puts and a contract we call a ‘PLA’ or a put on the log-asset price. For completeness, we also introduce the call on the log-asset price (or CLA) and explore their properties and applications. The decomposition of the GPO into its constituent parts is achieved with the help of the Method of Images to convert certain barrier option payoffs into equivalent European payoffs. This technique considerably simplifies the calculation and adds significant transparency to what is otherwise regarded as very complex problem. Curiously, a spin-off of the method to price the GPO suggests an alternative and simpler way to price lookback options.     

The impact of an independent inspectorate on penal governance,performance and accountability: Pressure points and conflict “in the pursuit of an ideal of perfection”

This paper examines the impact of an independent Inspectorate on the enactment, of and accountability for, penal reform in the Australian State of Western Australia. Intended to improve system wide custodial outcomes through the introduction of a privately managed operator acting as standard bearer and innovator, the reform agenda was predicated on an overhaul of governance, performance, systems and reporting practices in the sponsoring department and the state's public prison network. Insights from three credos of imprisonment, theorizations of ‘hierarchical’ and ‘intelligent’ governance and accountability, the interplay of values in changing practice, and the ways in which inspectors establish particular inspection regimes, frame analysis of reform implementation and the inspection regime in action over a ten year period. Using archival material, this research examines how the Inspectorate, in making things auditable, altered perceptions and organizational realities of a network of actors. It is contended that the governance and accountability tensions inherent in managerialism, exemplified in its reliance on ‘neutral’ accounting technologies to incentivise, manage and monitor custodial outcomes, privilege instrumental hierarchical governance and accountability regimes that ignore the rehabilitative aspects of imprisonment. Further, conflicting publicly espoused and privately held values play vital roles in moulding performance in a penal setting, and are fundamental to changing outcomes in networks. The Inspectorate's public values and intelligent accountability regime resonate with the Department's policy objectives and public values, but are shown to have been initially inconsistent with network actors’ hidden private values. The research concludes that the appointment of an independent Inspectorate has facilitated the accountability of those responsible for prison quality and positively influenced the treatment of prisoners. A secondary concern is investigating conflicting propositions about the relative governance, performance and accountability of privately and publicly operated prisons.     

Consequences of adopting an expanded auditor’s report in the United Kingdom

The United Kingdom has recently required an expanded auditor’s report for large public companies. We investigate whether this requirement is associated with an increase in the decision usefulness of the auditor’s report and whether it has indirect consequences on audit fees and quality. Our analyses cover four years surrounding the changes, including companies that transitioned to the new regime and companies that continued issuing the previous report’s format. We do not find evidence that the regulatory change significantly affected investors’ reaction to the release of auditors’ reports, audit fees, or audit quality. Furthermore, we do not find that variation in the expanded reports’ content has affected these outcomes. Although companies with long reports pay comparatively higher fees, the mere increase in disclosure does not affect audit fees or quality. Collectively, our evidence is consistent with the expanded auditor’s report providing little incremental information to investors.     

Product-market strategy and underwriting performance in the United Kingdom’s property–casualty insurance market

Drawing on a framework from the organizational economics literature, we utilize a panel data design to examine empirically the effect of motor insurance and liability insurance business on the overall underwriting performance of insurers operating in the United Kingdom’s (UK) property–casualty insurance market. We find that participation in liability insurance contributes positively to underwriting performance, whereas motor insurance is associated with inferior underwriting performance. Additionally, we find that higher reinsurance ratio is associated with better underwriting performance, but reduced profit margins. Our results show that higher leverage too is associated with better underwriting performance. We conclude that our results could have potentially important commercial and/or policy implications.     

Measurement and prediction of systemic risk in China’s banking industry

This research uses a hybrid systemic risk indicator (rSYR) to measure the systemic financial risk of China’s banking industry from 2009 to 2019 and combines rSYR with sSYR (new standardized rSYR) to more accurately determine systemic important banks. We also forecast systemic risk in the next period, finding that large-scale banks (such as ICBC, Bank of China, Agricultural Bank of China, and China Merchants Bank) have high systemic importance. After eliminating the impact of scale, we then pay attention to the possibility of systemic risk brought by some smaller banks (such as Huaxia Bank and Everbright Bank). Through the prediction of systemic risk in the next six months, we also find out that the possibility of systemic risk caused by possible capital shortage brought by Agricultural Bank of China, Ping An Bank, Bank of China and Everbright Bank is more obvious, which is worth paying greater attention.     

The perceiver’s social role and a risk’s causal structure as determinants of environmental risk evaluation

We present a dual-process risk perception model that integrates cognitive and emotional as well as consequentialist and deontological components by distinguishing between two modes of evaluative processing: (a) a consequentialist evaluation that focuses on potential consequences and (b) a deontological evaluation that focuses on moral values. Each of these two modes is assumed to trigger specific cognitive evaluations, specific emotions, and specific behavioral tendencies concerning a perceived risk. We conducted an experiment (N = 270) that tested whether the relative dominance of the two evaluative modes would depend on the causal structure of the environmental risk being evaluated and on the social role of the evaluator. Three types of causal structure were varied by providing scenario information: (a) anthropogenic risks that endanger only nature, (b) naturally caused risks with potential harmful consequences for humans, and (c) anthropogenic risks that may harm humans. Participants evaluated each scenario from the perspective of one of three social roles: mayor, expecting parent, and environmental activist. For each scenario, participants specified their focus and evaluated the event’s morality and perceived risk, the intensity of specific emotions, and their preferences for prospective behaviors. Results showed that the consequentialist evaluation was generally stronger than the deontological evaluation and was less affected by the experimental manipulations. The deontological evaluation was substantially affected by the risk’s causal structure. It was stronger for anthropogenic than for natural causation; risks caused by humans were associated with greater perceived moral blameworthiness, more intense morality-based emotions (e.g. outrage), and a stronger tendency to perform agent-related behaviors (e.g. aggression) than naturally occurring risks. The effect of the social role was less pronounced than that of the causal structure. Furthermore, the effect of an evaluative focus on behavior was fully mediated by emotions for deontological evaluations and partially mediated for consequentialist evaluations. The implications for environmental risk perception and communication are discussed.     

Public’s perceived overcrowding risk and their adoption of precautionary actions: a study of holiday travel in China

The importance of travel risk has been recognized, but only a limited number of studies have been conducted on this risk and the precautionary actions the public may take to manage it during holidays. This study applied the protective action decision model and the protection motivation theory to examine the public’s intent to take precautionary actions during holiday times to handle the risk of overcrowding in China. Our survey showed that efficacy-related attributes of precautionary actions were positively correlated, whereas resource-related attributes were negatively correlated, with the intention to take precautionary measures. Risk perception also significantly influenced the adoption intention, but the amount of variance in the intention to adopt precautionary actions that was motivated by risk perception was lower than that related to efficacy-related attributes. In addition, we found that risk perception mediated the influence of past overcrowding experiences on people’s intention to adopt precautionary measures. Travel frequency, length of time spent away for the holiday, and the number of underage family members involved were significantly correlated with the intention to adopt precautionary actions. Finally, this paper discussed suggestions and implications for travelers, tourist departments, and related stakeholders.     

Optimal Reinsurance Under the Risk-Adjusted Value of an Insurer’s Liability and an Economic Reinsurance Premium Principle

In this article, an optimal reinsurance problem is formulated from the perspective of an insurer, with the objective of minimizing the risk-adjusted value of its liability where the valuation is carried out by a cost-of-capital approach and the capital at risk is calculated by either the value-at-risk (VaR) or conditional value-at-risk (CVaR). In our reinsurance arrangement, we also assume that both insurer and reinsurer are obligated to pay more for a larger realization of loss as a way of reducing ex post moral hazard. A key contribution of this article is to expand the research on optimal reinsurance by deriving explicit optimal reinsurance solutions under an economic premium principle. It is a rather general class of premium principles that includes many weighted premium principles as special cases. The advantage of adopting such a premium principle is that the resulting reinsurance premium depends not only on the risk ceded but also on a market economic factor that reflects the market environment or the risk the reinsurer is facing. This feature appears to be more consistent with the reinsurance market. We show that the optimal reinsurance policies are piecewise linear under both VaR and CVaR risk measures. While the structures of optimal reinsurance solutions are the same for both risk measures, we also formally show that there are some significant differences, particularly on the managing tail risk. Because of the integration of the market factor (via the reinsurance pricing) into the optimal reinsurance model, some new insights on the optimal reinsurance design could be gleaned, which would otherwise be impossible for many of the existing models. For example, the market factor has a nontrivial effect on the optimal reinsurance, which is greatly influenced by the changes of the joint distribution of the market factor and the loss. Finally, under an additional assumption that the market factor and the loss have a copula with quadratic sections, we demonstrate that the optimal reinsurance policies admit relatively simple forms to foster the applicability of our theoretical results, and a numerical example is presented to further highlight our results.     

The importance of service quality in British Muslim’s choice of an Islamic or non-Islamic bank account

Using an extended SERVQUAL model, this study identifies and compares the importance of service quality to Muslim consumers with an Islamic or non-Islamic bank account in a non-Muslim country, Britain. Eight group discussions and a survey of 300 Muslims were conducted. Five dimensions of service quality were identified, i.e. responsiveness, credibility, Islamic tangibles, accessibility and reputation. These differ in structure and content from the original SERVQUAL developed in a western context and the subsequent CARTER model constructed in a Muslim country. In addition, significant differences were found in the importance of items between Islamic bank account and non-Islamic bank account holders. This study is one of the first to identify and compare the importance of service quality between Islamic and non-Islamic bank account holders in a western non-Muslim country. The results advance our understanding of the impact of culture on SERVQUAL. The study provides insight into Muslims’ bank choice and helps bank managers of both Islamic and non-Islamic banks to focus their attention on the service quality dimensions that matter most to Muslim customers.     

Market Sentiments,Winner’s Curse and Bidding Outcome in Land Auctions

This paper empirically tests auction theory by examining how the stock market evaluates the outcome of open-bid English auctions of rights to develop residential real estate projects in Hong Kong. To do so, we deconstruct the complexity surrounding actual auction events, and empirically isolate the influence of conflicting auction theory predictions using data from expert opinion around auction events, actual auction event and outcome data, and stock market data. The empirical findings include (1) with increasing uncertainty bidders reduce bids, thus confirming predictions following the winner’s curse thesis; (2) joint bidding does not lead to increased bids based on pooled (“better”) information, but instead leads to reduced competition; while increased competition leads to increased prices at auction, as expected; (3) the market interprets auction outcomes as information events which function to signal developers’ expectations about future market prospects; but if the winning bid is considered too high, this interpretation is revised to that of the winner’s curse; (4) with joint bidding and winning, the market’s response to joint winners is better explained by concern for winner’s curse (despite supposed better informed bids) than the acquisition of a below cost development project following reduced competition at auction; and (5) the market interprets increased competition at auction as indicator of the future direction of property price movements in the secondary market—the more intense the competition, the more positive the future prospect of the property market are seen to be.     

Abatement Efforts,Technological Progress,and Pollution Control in China’s Industrial Sector

This article examines the roles of abatement efforts and the technological progress in the pollution control of China’s industrial sector. Based on StoNED model, as a measurement of the technological progress, the total factor productivity (TFP) of China’s industry is estimated by using panel input?output data of the industrial sector at provincial level, and then, the impact of abatement efforts and TFP on the emissions of SO2 and COD in China’s industry is investigated. The results show that (i) there is too much statistical noise in input?output data of China’s industry, and it could lead to an underestimate of TFP if all deviations from the production frontier are attributed to inefficiency; (ii) improving TFP has greater impact on the reduction of the industrial SO2 and COD than increasing abatement efforts does, although improving TFP does not exert statistically significant effect on COD emission.