Arbitrage and price revelation with asymmetric information and incomplete markets

This paper deals with the issue of arbitrage with differential information and incomplete financial markets, with a focus on information that no-arbitrage asset prices can reveal. Time and uncertainty are represented by two periods and a finite set S of states of nature, one of which will prevail at the second period. Agents may operate limited financial transfers across periods and states via finitely many nominal assets. Each agent i has a private information about which state will prevail at the second period; this information is represented by a subset S_i of S. Agents receive no wrong information in the sense that the “true state” belongs to the “pooled information” set ∩_iS_i, hence assumed to be non-empty.Our analysis is two-fold. We first extend the classical symmetric information analysis to the asymmetric setting, via a concept of no-arbitrage price. Second, we study how such no-arbitrage prices convey information to agents in a decentralized way. The main difference between the symmetric and the asymmetric settings stems from the fact that a classical no-arbitrage asset price (common to every agent) always exists in the first case, but no longer in the asymmetric one, thus allowing arbitrage opportunities. This is the main reason why agents may need to refine their information up to an information structure which precludes arbitrage.     

Revisiting agency and transaction costs theory predictions on vertical financial ownership and contracting: electronic integration as an organizational form choice

This paper provides an organizational economics foundation to guide managers in matching the comparatively more efficient organizational mode with transactional characteristics such as: (1) the degree of (human capital) asset specificity involved in the transaction, (2) the degree of uncertainty surrounding the transaction, and (3) the number of trading partners (suppliers and buyers) in the vertical supply chain. The key role of technology, and more specifically the e‐business infrastructure and its effects on organizational mode choice, is highlighted. The main results from this analysis suggest that changes in information technology are changing the nature of transaction costs leading to more efficient management through an electronic integration solution thus favoring contracting and outsourcing than would have been technologically possible when Williamson's Markets and Hierarchies (Markets and Hierarchies: Analysis and Antitrust Implications. Free Press: New York, 1975) was published. It is emphasized that the transaction cost economics principles are durable but that the breathless advances in information technology, especially in the past decade, have comparatively favored lower transaction costs of markets over hierarchies. Copyright © 2006 John Wiley & Sons, Ltd.     

Tests of asset pricing with time‐varying factor loads

This paper proposes an empirical asset pricing test based on the homogeneity of the factor risk premia across risky assets. Factor loadings are considered to be dynamic and estimated from data at higher frequencies. The factor risk premia are obtained as estimates from time series regressions applied to each risky asset. We propose Swamy‐type tests robust to the presence of generated regressors and dependence between the pricing errors to assess the homogeneity of the factor risk premia and the zero intercept hypothesis. An application to US industry portfolios shows overwhelming evidence rejecting the capital asset pricing model, and the three and five factor models developed by Fama and French (Journal of Financial Economics, 1993, 33, 3–56; Journal of Financial Economics, 2015, 116, 1–22). In particular, we reject the null hypotheses of a zero intercept, homogeneous factor risk premia across risky assets, and the joint test involving both hypotheses.     

Endogenous participation risk in speculative markets

This paper analyses the dynamic implications of an asset-pricing model with incomplete participation due to entry costs. It is shown that heterogeneity in entry costs can lead to the existence of multiple stochastic sunspot equilibria, whereby the number of agents in the market and asset prices fluctuate endogeneously over time in the absence of fundamental uncertainty. Such asset-price fluctuations occur despite the uniqueness of the deterministic equilibrium, and thus bear no link to the usual notion of steady-state indeterminacy. In addition to excess volatility, the equilibria exhibit predictable and conditionally heteroskedastic returns.     

SURVEYING THE ECONOMICS OF PLURAL MODES OF ORGANIZATION

Why do firms concomitantly rely on more than one organizational arrangement to procure/distribute a given input/product? In this paper, we systematically review and discuss the extensive path undergone by the literature exploring this issue: the so‐called plural forms. We address two main questions: how to explain the coexistence (and often the prevalence) of plural forms in many types of businesses? Are plural forms stable or a transitory phenomenon? We describe the most prominent motivations identified in the economics and management literature that drive firms to adopt plural forms and show that their vast majority are related to the mitigation of various types of agency/transaction costs. We also demonstrate that most of the available pieces of empirical evidence suggest the stability of plural forms over time. We conclude by demonstrating the path that has been trailed by the most recent developments.     

Benchmark priors for Bayesian model averaging

In contrast to a posterior analysis given a particular sampling model, posterior model probabilities in the context of model uncertainty are typically rather sensitive to the specification of the prior. In particular, ‘diffuse’ priors on model-specific parameters can lead to quite unexpected consequences. Here we focus on the practically relevant situation where we need to entertain a (large) number of sampling models and we have (or wish to use) little or no subjective prior information. We aim at providing an ‘automatic’ or ‘benchmark’ prior structure that can be used in such cases. We focus on the normal linear regression model with uncertainty in the choice of regressors. We propose a partly non-informative prior structure related to a natural conjugate g-prior specification, where the amount of subjective information requested from the user is limited to the choice of a single scalar hyperparameter g_0j. The consequences of different choices for g_0j are examined. We investigate theoretical properties, such as consistency of the implied Bayesian procedure. Links with classical information criteria are provided. More importantly, we examine the finite sample implications of several choices of g_0j in a simulation study. The use of the MC³ algorithm of Madigan and York (Int. Stat. Rev. 63 (1995) 215), combined with efficient coding in Fortran, makes it feasible to conduct large simulations. In addition to posterior criteria, we shall also compare the predictive performance of different priors. A classic example concerning the economics of crime will also be provided and contrasted with results in the literature. The main findings of the paper will lead us to propose a ‘benchmark’ prior specification in a linear regression context with model uncertainty.     

Exploiting tail shape biases to discriminate between stable and student t alternatives

The nonnormal stable laws and Student t distributions are used to model the unconditional distribution of financial asset returns, as both models display heavy tails. The relevance of the two models is subject to debate because empirical estimates of the tail shape conditional on either model give conflicting signals. This stems from opposing bias terms. We exploit the biases to discriminate between the two distributions. A sign estimator for the second‐order scale parameter strengthens our results. Tail estimates based on asset return data match the bias induced by finite‐variance unconditional Student t data and the generalized autoregressive conditional heteroscedasticity process.     

Fluctuating uncertainty and flexibility value

A simple model of recurrent fluctuating uncertainty with two types of investment assets, commitment and flexible, where fluctuating uncertainty is defined as changes between high and low confidence regimes, is constructed. By assuming risk neutrality, I find analytically a formula for flexibility value that is defined as the difference between the expected return to the commitment asset and the expected return to the flexible asset. This flexibility value is positive in the low confidence regime because of a positive attribute of the flexibility asset that is the option to utilize new information later. The relation between flexibility value and other parameters of the model is also considered. Flexibility value increases as the information an individual obtains in the high confidence regime increases or the discounting factor of the individual increases. Finally, flexibility value can increase even if, ceteris paribus, the return to the commitment asset increases.     

STRATEGIC ASSET ALLOCATION FOR LONG‐TERM INVESTORS: PARAMETER UNCERTAINTY AND PRIOR INFORMATION

We study the effect of parameter uncertainty on the long‐run risk for three asset classes: stocks, bills and bonds. Using a Bayesian vector autoregression with an uninformative prior we find that parameter uncertainty raises the annualized long‐run volatilities of all three asset classes proportionally with the same factor relative to volatilities that are conditional on maximum likelihood parameter estimates. As a result, the horizon effect in optimal asset allocations is much weaker compared to models in which only equity returns are subject to parameter uncertainty. Results are sensitive to alternative informative priors, but generally the term structure of risk for stocks and bonds is relatively flat for investment horizons up to 15 years. Copyright © 2013 John Wiley & Sons, Ltd.     

A numerical study of tournament structure and seeding policy for the soccer World Cup Finals

Tournament outcome uncertainty depends on: the design of the tournament; and the relative strengths of the competitors – the competitive balance. A tournament design comprises the arrangement of the individual matches, which we call the tournament structure, the seeding policy and the progression rules. In this paper, we investigate the effect of seeding policy for various tournament structures, while taking account of competitive balance. Our methodology uses tournament outcome uncertainty to consider the effect of seeding policy and other design changes. The tournament outcome uncertainty is measured using the tournament outcome characteristic which is the probability P_q,R that a team in the top 100q pre‐tournament rank percentile progresses forward from round R, for all q and R. We use Monte Carlo simulation to calculate the values of this metric. We find that, in general, seeding favours stronger competitors, but that the degree of favouritism varies with the type of seeding. Reseeding after each round favours the strong to the greatest extent. The ideas in the paper are illustrated using the soccer World Cup Finals tournament.     

Insuring against the shortfall risk associated with real options

We would like to insure against the risk that a geometric Brownian motion, correlated with the price process of a certain traded asset, is in a set E at time T. In this paper it is shown that the best action one can take to insure against this risk is to buy a binary option on the traded asset. We give explicit formulas in the case that E is an infinite interval. The setting of all our investigations is the Black-Scholes model. Mathematics Subject Classification (2000): 91B28, 60J65, 62P05, 91B30, 62F03 Journal of Economic Literature Classification: G31     

Asset specificity,capital intensity and capital structure: An empirical test

Capital investment and capital financing decisions interact. To resolve current controversies in investment-leverage-growth relationships requires an integrated industrial organization/financial economics empirical model of profit margins, capital investment intensity, leverage and risk. Using cumulative future losses in discontinued operations to measure the asset specificity of the firm's investments, empiricai results support a complementary (positive) relationship between debt and investment, the debt financing of verifiable contemporaneous growth, equity financing of future growth and the debt financing of specific assets. This evidence rejects the transactions cost theory of capital structure in Fortune 500 firms.     

Culture, Economic Development, and Quality of Life: A Speculative Comment on the Case of Kerala, India

Abstract . Kerala State, India, had a per capita income of abott $290 for 1985, about the same as other Indian states. But Kerala has a Physical Quality of Life Index of 79 (compared to 43 for India). Saudi Arabia has a per capita income of $8,850 for 1985 but a PQLI of 28. How come? Of course, per capita income does not measure income distribution and India is a plural democracy while Saudi Arabia is an authoritarian monarchy. But the critical factor may well be culture.     

Using the Past to Construct Territorial Identities in Regional Planning: The Case of Mälardalen,Sweden

This study examines how the past is used in the construction of regional identity narratives in policy discourses and documents. Despite assumptions that regional identity is based on shared culture, some authors argue that new forms of regional identity have emerged as the consequence of regions’ involvement in wider networks. Identity has been pursued as an asset to regional attractiveness and economic growth and, as such, is shaped by regional development strategies concerning particular social groups. Socially shared representations of the past through history, cultural heritage and collective memory play an important role in this process, since the past is a powerful resource that may be used to construct images of places, legitimizing claims on territories. Document analysis and interviews with planners are used to analyse strategies for regional development in five counties located in the Mälardalen region, Sweden. This study shows that regional strategies are guided by narratives framing regions from an exclusive outside perspective, leaving internal qualities unnoticed. The past is used to structure these narratives and construct identities that serve economic growth rather than the integration of the plural heritages of the region.     

Long-run risk and hidden growth persistence

An extensive literature has analyzed the implications of hidden shifts in the dividend growth rate. However, corresponding research on learning about growth persistence is completely lacking. Hidden persistence is a novel way to introduce long-run risk into standard business-cycle models of asset prices because it tightly intertwines the cyclical and long-run frequencies. Hidden persistence magnifies endogenous changes in the forecast variance of the long-run dividend growth rate despite homoscedastic consumption innovations. Not only does changing forecast variance make discrimination between protracted spells of anemic growth and brief business recessions difficult, it also endogenously induces additional variation in asset price discounts due to the preference for early uncertainty resolution.     

Strategic HRM and organisational learning in the Chinese private sector during second-pioneering

This study examines the relationship between strategic human resource management (HRM) and organisational learning in Chinese private firms during the second-pioneering stage, which involves a process of transition from ‘opportunism’ to ‘capability building’. It specifically examines how this relationship is influenced by environmental uncertainty and guanxi dependence. Using data from a face-to-face survey of 107 Chinese private firms, the findings show that strategic HRM has a positive effect on all four dimensions of organisational learning: knowledge acquisition, knowledge distribution, knowledge interpretation and organisational memory. In addition, task environmental uncertainty positively moderates the relationship between strategic HRM and organisational learning. However, the moderating effects of institutional environmental uncertainty and guanxi dependence on this relationship are not significant. These results highlight the importance of strategic HRM for organisational learning in uncertain task environments to promote organisational transition.     

Cointegration Testing in Panels with Common Factors*

Panel unit‐root and no‐cointegration tests that rely on cross‐sectional independence of the panel unit experience severe size distortions when this assumption is violated, as has, for example, been shown by Banerjee, Marcellino and Osbat [Econometrics Journal (2004), Vol. 7, pp. 322–340; Empirical Economics (2005), Vol. 30, pp. 77–91] via Monte Carlo simulations. Several studies have recently addressed this issue for panel unit‐root tests using a common factor structure to model the cross‐sectional dependence, but not much work has been done yet for panel no‐cointegration tests. This paper proposes a model for panel no‐cointegration using an unobserved common factor structure, following the study by Bai and Ng [Econometrica (2004), Vol. 72, pp. 1127–1177] for panel unit roots. We distinguish two important cases: (i) the case when the non‐stationarity in the data is driven by a reduced number of common stochastic trends, and (ii) the case where we have common and idiosyncratic stochastic trends present in the data. We discuss the homogeneity restrictions on the cointegrating vectors resulting from the presence of common factor cointegration. Furthermore, we study the asymptotic behaviour of some existing residual‐based panel no‐cointegration tests, as suggested by Kao [Journal of Econometrics (1999), Vol. 90, pp. 1–44] and Pedroni [Econometric Theory (2004a), Vol. 20, pp. 597–625]. Under the data‐generating processes (DGP) used, the test statistics are no longer asymptotically normal, and convergence occurs at rate T rather than as for independent panels. We then examine the possibilities of testing for various forms of no‐cointegration by extracting the common factors and individual components from the observed data directly and then testing for no‐cointegration using residual‐based panel tests applied to the defactored data.     

A dynamic CAPM with supply effect: Theory and empirical results

Breeden [Breeden, D. T. (1979). An intertemporal asset pricing model with stochastic consumption and investment opportunities. Journal of Financial Economics 7, 265–196] and Grinols [Grinols, E. L. (1984). Production and risk leveling in the intertemporal capital asset pricing model. The Journal of Finance 39, 5, 1571–1595] and Cox et al. [Cox, J. C., Ingersoll, J. E., Jr., & Ross, S. A. (1985). An intertemporal general equilibrium model of asset prices. Econometrica 53, 363–384] have described the importance of supply side for the capital asset pricing. Black [Black, S. W. (1976). Rational response to shocks in a dynamic model of capital asset pricing. American Economic Review 66, 767–779] derives a dynamic, multiperiod CAPM, integrating endogenous demand and supply. However, Black's theoretically elegant model has never been empirically tested for its implications in dynamic asset pricing. We first theoretically extend Black's CAPM. Then we use price, dividend per share and earnings per share to test the existence of supply effect with U.S. equity data. We find the supply effect is important in U.S. domestic stock markets. This finding holds as we break the companies listed in the S&P 500 into ten portfolios by different level of payout ratio. It also holds consistently if we use individual stock data.     

影响建设项目合同不完备性的因素分析

从交易成本理论角度分析建设项目合同设计和选择逐渐成为项目研究中的重要课题。合同不完备性作为交易成本理论的关键合同分析维度,与交易属性密切相关。建设项目合同不完备性选择同样受到资产专用性、不确定性、复杂性和项目工期等交易属性的显著影响。本文在交易成本理论治理逻辑下,构建了一个简化的建设项目合同不完备性分析框架,并在此基础上探讨了影响建设项目合同不完备性选择的因素及其影响作用。     

Jointness of growth determinants

This paper introduces a new measure of dependence or jointness among explanatory variables. Jointness is based on the joint posterior distribution of variables over the model space, thereby taking model uncertainty into account. By looking beyond marginal measures of variable importance, jointness reveals generally unknown forms of dependence. Positive jointness implies that regressors are complements, representing distinct but mutually reinforcing effects. Negative jointness implies that explanatory variables are substitutes and capture similar underlying effects. In a cross‐country dataset we show that jointness among 67 determinants of growth is important, affecting inference and informing economic policy. Copyright © 2009 John Wiley & Sons, Ltd.