Real options under a double exponential jump-diffusion model with regime switching and partial information

We consider the irreversible investment in a project which generates a cash flow following a double exponential jump-diffusion process and its expected return is governed by a continuous-time two-state Markov chain. If the expected return is observable, we present explicit expressions for the pricing and timing of the option to invest. With partial information, i.e. if the expected return is unobservable, we provide an explicit project value and an integral-differential equation for the pricing and timing of the option. We provide a method to measure the information value, i.e. the difference between the option values under the two different cases. We present numerical solutions by finite difference methods. By numerical analysis, we find that: (i) the higher the jump intensity, the later the option to invest is exercised, but its effect on the option value is ambiguous; (ii) the option value increases with the belief in a boom economy; (iii) if investors are more uncertain about the economic environment, information is more valuable; (iv) the more likely the transition from boom to recession, the lower the value of the option; (v) the bigger the dispersion of the expected return, the higher the information value; (vi) a higher cash flow volatility induces a lower information value.     

On the valuation of reverse mortgage insurance

This article presents a closed-form formula for calculating the loan-to-value (LTV) ratio in an adjusted-rate reverse mortgage (RM) with a lump sum payment. Previous literatures consider the pricing of RM in a constant interest rate assumption and price it on fixed-rate loans. This paper successfully considers the dynamic of interest rate and the adjustable-rate RM simultaneously. This paper also considers the housing price shock into the valuation model. Assuming that house prices follow a jump diffusion process with a stochastic interest rate and that the loan interest rate is adjusted instantaneously according to the short rate, we demonstrate that the LTV ratio is independent of the term structure of interest rates. This argument holds even when housing prices follow a general process: an exponential Lévy process. In addition, the HECM (Home Equity Conversion Mortgage) program may be not sustainable, especially for a higher level of housing price volatility. Finally, when the loan interest rate is adjusted periodically according to the LIBOR rate, our finding reveals that the LTV ratio is insensitive to the parameters characterizing the CIR model.     

The double entry structural constraint on the econometric estimation of accounting variables

ABSTRACT

This paper develops a structural system for estimating accounting variables, within which the deterministic relationships inherent in financial statement articulation are clearly defined in the econometric model. The key proposition of the paper lies in the treatment of the financial statements as a matrix of codetermined information constrained by double entry, where the expected value of each of the individual items that comprise the financial statements will be mirrored elsewhere in the system with a different sign. Given that the change in net operating assets shares the same variation as the change in net financial claims, it is shown, by formally identifying the articulation, that empirical application will yield increased precision and improved efficiency by comparison to the more traditional methods that fail to specify the structural double entry property.