American and European options in multi-factor jump-diffusion models,near expiry

We derive a general formula for the time decay θ for out-of-the-money European options on stocks and bonds at expiry, in terms of the density of jumps F(x,dy) and the payoff g ₊: −θ(x)=∫ g(x+y)₊ F(x,dy). Explicit formulas are derived for the standard put and call options, exchange options in stochastic volatility and local volatility models, and options on bonds in ATSMs. Using these formulas, we show that in the presence of jumps, the limit of the no-exercise region for the American option with the payoff (−g)₊ as time to expiry τ tends to 0 may be larger than in the pure Gaussian case. In particular, for many families of non-Gaussian processes used in empirical studies of financial markets, the early exercise boundary for the American put without dividends is separated from the strike price by a nonvanishing margin on the interval [0,T), where T is the maturity date.      

An Estimation of the Coastal Premium for Residential Housing Prices in San Diego County

The authors attempt to estimate the “coastal premium”—additional value conferred on a residence from being located near the coast—of single family homes in San Diego County, while controlling for other locational and structural characteristics. A previous investigation published in 2001 for south Orange County found that moving away from the coast by one mile was associated with a 42,000 lower housing price. Intrigued by this finding, we investigate whether (a) a similar coastal premium exists for all of San Diego County and (b) the premium varies by incremental distance from the coast (e.g., for 500-feet increments). Using data from 9,755 San Diego County home sales in 2006, results presented here suggest that for a median-priced home (42,000 lower housing price. Intrigued by this finding, we investigate whether (a) a similar coastal premium exists for all of San Diego County and (b) the premium varies by incremental distance from the coast (e.g., for 500-feet increments). Using data from 9,755 San Diego County home sales in 2006, results presented here suggest that for a median-priced home (540,000) at the mean distance from the coast (approximately 9 miles—and considerably farther than the Orange County estimate) a one-mile increase in distance from the coast would reduce the sale price by approximately $8,680. Specifying by specific distance increments, we find that the coastal premium is approximately 101.9% for houses within 500 feet of the coast (i.e., their value is 101.9% higher than similar homes located beyond six miles of the coast), falling to 62.8% for homes between 500 and 1,000 feet, declining to approximately 3.3% for homes located between five and six miles of the coast, disappearing entirely beyond around six miles. Since average comparisons of the sort initially considered in this analysis can be very misleading, researchers should consider the nonlinear incremental distance effects in model specifications.     

Classifying potential users of live chat services and chatbots

Live chat services and chatbot functionalities are experiencing significant growth within companies in the financial sector and growing consumer interest. But which consumers (segments) are more or less interested in these tools? Companies with an online presence would be well advised to profile potential users of these two important tools. This study seeks to classify potential users of live chat services and chatbots. A telephone interview questionnaire is administered to 342 panelists of a recognized Canadian research firm. A two-step cluster analysis is used to reveal natural groupings in the data set. Research conducted identifies four distinct segments, namely Women divided interest, Men partially interested, Age 35–44 partially interested and Older disinterested. This study brings to the fore information essential to the development of effective marketing strategies for reaching the different segments [e.g. develop and evidence an online end-to-end purchasing process for segment (1); provide good Web visibility for segment (2); ensure the presence of competitive offers and Web comparators for segment (3); and, pursue a more traditional approach for segment (4)]. This study represents the first ever classification of individuals based on their interest in emerging services (live chat services and chatbots).

     

Book Reviews

Book reviewed in this article: Share Markets and Portfolio Theory: Readings and Australian Evidence. Edited by RAY BALL, PHILIP BROWN, FRANK J. FINN, and R. R. OFFICER. The Economics of Taxation. Edited by HENRY AARON and MICHAEL BOSKIN. Foreign Exchange Management in U.S. Multinationals. By RITA M. RODRIGUEZ. Investment Strategies for Doctors. By DAVID A. UMSTEAD Investment Strategies for Doctors. By DAVID A. UMSTEAD Introduction to Financial Management. By IQBAL MATHUR Principles of Corporate Finance. By RICHARD BREALEY and STEWART MYERS Finance and Accounting for Nonfinancial Managers. By WILLIAM C. DROMS     

On distributions of functions of samples from a normally distributed infinite population

Abstract

7. The joint distribution of the moments a ₁₁, a ₂₂,…, a_nn and a ₁₂, …, a _1n may be deduced explicitly in the case, in which the variates χ₁, …, χ _n in (1) are mutually uncorrelated. In this case we have for the population values of the moments: α_μv = 0 for μ ═ v and, consequently, A_μv = 0 for μ ═ v, so that according to (6) λ_μv = 0 for μ ═ v; the distribution (5) of the moments α_μv is then      

The influence of the CEO's value perception towards auditing on audit demand in private firms

Audit demand is generally considered to be a direct reflection of the level of agency conflicts. This study examines the CEO's value perception towards auditing as additional driver for both auditor reputation demand (appointing a Big 4 auditor or not) and audit effort demand in private firms. Examining the CEO's value perception in a multidimensional way, the regression results indicate that the CEO's functional value perception towards auditing positively affects the demand for audit effort, while the CEO's social value perception towards auditing negatively affects the demand for audit effort but positively affects the demand for auditor reputation.     

BOOK REVIEWS

Book reviewed in this article: Richard Dobbins & Stephen F. Witt, Practical Financial Management Z. Hribar, A Guide to Company Law 3rd ed. Stanley Chapman, The Rise of Merchant Banking Keith Cuthbertson & Peter Gripaios, The Macroeconomy — A Guide for Business Barry Edwards, Understanding Maths and Statistics in Business Dan A. Simunic & Michael T. Stein, Product Differentiation in Auditing: Auditor Choice in the Market for Unseasoned New Issues     

BOOK REVIEWS

Book reviewed in this article: Aggregate Theory and Policy Economics on a New Frontier. By E. Ray Canterbery . Financial Policies in Transition: A Critique of Selected Issues, 1967. Edited by Thomas O. Depperschmidt . Forecasting and Recognizing Business Cycle Turning Points. By Rendigs Fels and C. Elton Hinshaw . The Demand for Money. By William J. Frazer , Jr . Public Policies and Private Investments. By John F. Helliwell . Macroeconomic Readings. Edited by John Lindauer . Monetary Policy in the United States. By Thomas Mayer . Prices: Issues in Theory, Practice, and Public Policy. Edited by Almarin Phillips and Oliver E. Williamson . Business Finance and Investments Accounting for Extraordinary Gains and Losses. By Leopold A. Bernstein . Investment and the Return to Equity Capital in the South African Gold Mining Industry, 1887–1965: An International Comparison. By S. Herbert Frankel . Dividend Policy and Enterprise Evaluation. By James E. Walter . Theory of Business Finance—Advanced Readings. Edited by J. Fred Weston and Donald H. Woods . Financial Institutions. By Raymond W. Goldsmith . Capital Markets and Institutions. By Herbert E. Dougall . Nine Leading Stock Exchanges. By Wilford J. and Sylvia C. Eiteman . The Regulation of Deposit Interest Rates. By Charles F. Haywood and Charles M. Linke . The Theory and Practice of Nonpar Banking. By Paul F. Jessup . The Impact of Computers on Banking. By James A. O'Brien . Prospects for the Savings and Loan Industry to 1975. By Edward E. Williams , Jr . International Finance Foreign Exchange Crises. By Paul Einzig . Imports of Manufactures from Less Developed Countries. By Hal B. Lary . An Econometric Model of Canada Under Fluctuating Exchange Rates. By Lawrence H. Officer . Public Finance The Demand and Supply of Public Goods. By James Buchanan . Financing Latin American Housing. By Sean M. Elliott . Federal Programs for the Development of Human Resources, A Compendium of Papers (2 volumes). Joint Economic Committee , Congress of the United States . Financial Institutions and Markets Costs in Commercial Banking: A Quantitative Analysis of Bank Behavior and Its Relation to Bank Regulation. By Frederick W. Bell and Neil B. Murphy .     

Book Reviews

Book reviewed in this article: Money, The Financial System, and Monetary Policy. By THOMAS F. CARGILL. Policy Making for Social Security. By MARTHA DERTHICK. Financial Theory and Corporate Policy. By THOMAS E. COPELAND and J. FRED WESTON. Impending Changes for Securities Markets: What Role for the Exchanges? Edited by ERNEST BLOCH and ROBERT A. SCHWARTZ. G Money in International Exchange. By RONALD I. McKINNON. CORPORATE FINANCE Essentials of Finance. By JONES, RAY G., JR. and DUDLEY, DEAN. The Theory of Financial Decisions, 2nd Edition. By C.W. Haley and L.D. Schall. A New Look at Portfolio Management. By DAVID M. AHLERS INVESTMENTS Investments. By WILLIAM F. SHARPE. MISCELLANEOUS The Golden Constant: The English and American Experience, 1560–1976. By ROY W. JASTRAM Research in Experimental Economics. Vol. 1., editor: VERNON L. SMITH REAL ESTATE Real Estate Appraisal and Investment. By SANDERS A. KAHN and FREDERICK E. CASE     

The most influential journals in academic accounting

In this article we summarize the findings of articles that have ranked academic accounting journals, as well as articles that provide other bases for considering journal quality. Results indicate that five journals—Accounting, Organizations and Society, Contemporary Accounting Research, Journal of Accounting and Economics, Journal of Accounting Research, and The Accounting Review—rank consistently as the top journals in the field. However, these five journals differ substantially as to the numbers of articles they publish overall as well as the proportions of articles that are related to the various specialty areas of accounting. Further, the relative proportions of articles by area do not correspond to the numbers of individuals working in the specialty areas. Financial accounting articles appear in disproportionately high numbers for all journals except Accounting, Organizations and Society, whereas management accounting articles appear in disproportionately low numbers for all journals except Accounting, Organizations and Society. In all journals, systems and tax articles also appear to be disproportionately low vis-à-vis the numbers of individuals working in these areas. Auditing receives fairly even exposure across journals and vis-à-vis individuals in the area, except in the Journal of Accounting and Economics.     

Corporate Groups in Australia: State of Play

While a number of studies and reports (for example, CASAC 2000 ; Clarke and Dean 2007 ; Ramsay and Stapledon 1998; 2001 ) have identified the importance of corporate groups on the commercial landscape, both in Australia and internationally, little is known about the nature, incidence, composition or rationale for commercial enterprises to adopt specific types of group structures. Understanding the differences in the accounting for each separate company within a group and the process of consolidated group enterprise data used in most empirical works is a prius for researchers undertaking large‐scale empirical work. It underpins the ability to generalise about findings based on samples of publicly listed companies, arguably randomly selected from the population of listed corporate groups. This paper reports findings of an extensive empirical study using 2007 data in order to illuminate the current situation in relation to the nature, incidence and composition of corporate groups in Australia. It adopts a similar structure to that used by Ramsay and Stapledon (1998; 2001) . The current data will allow tests of stability regarding the way corporate groups are structured.     

A Logical,Simple Method for Solving the Problem of Properly Indexing Social Security Benefits

Abstract

The problem of allocating responsibility for risk among members of a portfolio arises in a variety of financial and risk-management contexts. Examples are particularly prominent in the insurance sector, where actuaries have long sought methods for distributing capital (net worth) across a number of distinct exposure units or accounts according to their relative contributions to the total “risk” of an insurer’s portfolio. Although substantial work has been done on this problem, no satisfactory solution has yet been presented for the case of inhomogeneous loss distributions— that is, losses X ～ F _{X| λ} such that F _X|tλ (X) ≠ F _{tX| λ} (X) for some t > 0. The purpose of this article is to show that the value-assignment method of nonatomic cooperative games proposed in 1974 by Aumann and Shapley may be used to solve risk-allocation problems involving losses of this type. This technique is illustrated by providing analytical solutions for a useful class of multivariatenormal loss distributions.     

On optimal portfolio diversification with respect to extreme risks

Extreme losses of portfolios with heavy-tailed components are studied in the framework of multivariate regular variation. Asymptotic distributions of extreme portfolio losses are characterized by a functional γ _ξ =γ _ξ (α,Ψ) of the tail index α, the spectral measure Ψ, and the vector ξ of portfolio weights. Existence, uniqueness, and location of the optimal portfolio are analysed and applied to the minimization of risk measures. It is shown that diversification effects are positive for α>1 and negative for α<1. Strong consistency and asymptotic normality are established for a semiparametric estimator of the mapping ξ ↦ γ _ξ . Strong consistency is also established for the estimated optimal portfolio.     

What is the Economic Cost of the Investment Home Bias?

Overinvesting domestically is well known as an investment home bias (IHB). We define an economic home bias (EHB), whereby the IHB measures the investment weights and the EHB measures the economic cost induced by the IHB. We may have a large IHB and a negligible EHB. With the increase in the average correlation between foreign markets from 0.4 for the decade ending in 1988 to about 0.9 for more recent decades, the U.S. EHB is becoming negligible despite the domestic investment of 77.5%. Since 2009, the correlations have decreased, indicating that the HB puzzle is emerging once again.     

Design principles for long‐lived Internet agents

Prior research on intelligent Internet agents has failed to address the needs of long‐lived data‐collecting agents, focusing instead on short‐lived transaction agents. Transaction agents typically run for a few seconds and retrieve information for a single transaction. With the staggering growth of electronic commerce, researchers and practitioners will want to design long‐lived data‐collecting agents that intelligently search for, retrieve, interpret, categorize, and store vast amounts of related information each time that they run. Such agents can run over the course of days rather than seconds and can be used by practitioners for decision support applications or by researchers as part of an empirical research methodology. This paper proposes a framework for agent sophistication, and emphasizes a number of design concepts for long‐lived Internet agents, including intelligence, validation, concurrency, recovery, monitoring, and interactivity. These concepts are used in the development of an illustrative tool called Electronic Data Retrieval LexicaL Agent (eDRILL), an object‐oriented data‐collecting agent. eDRILL is designed using the Unified Modeling Language (UML) and is written in Java. It gathers research data from an online auction. © 2000 John Wiley & Sons, Ltd.     

The numerical calculation of U(w,t), the probability of non-ruin in an interval (0, t)

Summary

A formula for U(w, t), the distribution function of the waiting time of a potential customer who joins a queue with a single server at epoch t after service commences without a queue was derived for dam theory by Gani & Prabhu (1959) and for queues by Bene? (1960). Here we use it to calculate numerically the probability of non-ruin in risk theory with an assumption that X(t), the accumulated claims during the interval (0, t), is a stochastic process with independent increments occurring at the event points of a stationary process. The difficulties encountered are described in some detail and suggestions made for the attainment of three-decimal accuracy in U(w, t).     

Variance of the CTE Estimator

Abstract

The Conditional Tail Expectation (CTE), also called Expected Shortfall or Tail-VaR, is a robust, convenient, practical, and coherent measure for quantifying financial risk exposure. The CTE is quickly becoming the preferred measure for statutory balance sheet valuation whenever real-world stochastic methods are used to set liability provisions. We look at some statistical properties of the methods that are commonly used to estimate the CTE and develop a simple formula for the variance of the CTE estimator that is valid in the large sample limit. We also show that the formula works well for finite sample sizes. Formula results are compared with sample values from realworld Monte Carlo simulations for some common loss distributions, including equity-linked annuities with investment guarantees, whole life insurance and operational risks. We develop the CTE variance formula in the general case using a system of biased weights and explore importance sampling, a form of variance reduction, as a way to improve the quality of the estimators for a given sample size. The paper closes with a discussion of practical applications.     

Portfolio performance and accounting measures of earnings: an alternative look at usefulness

Measures of economic performance, such as accounting earnings, working capital and cash flows, have been evaluated in tests of relative explanatory power of regressions of market returns on earnings, working capital and cash flows. We employ a different test. Using Basu’s (J Finance 663–682, 1977) investment trading strategy, we measure portfolio returns based on these three accounting measures of earnings. The objective is to ascertain whether investment performance also supports the findings of the explanatory power studies that accounting earnings is the premier measure of performance. The evidence does not support this conclusion. Our findings are at variance with prior conclusions that accounting earnings is more useful than cash flow. The Basu trading strategy is effective for all three measures. Excess market returns are observed for all three measures, even when controlled for risk and for low priced stocks. But accounting earnings portfolios do not dominate working capital or cash flow portfolios. In fact, the raw returns to cash flow portfolios are marginally (statistically) larger than accounting earnings portfolios. Economically, a dollar invested in a portfolio using accounting earnings to select the stock would have an accumulated value of 22.73 while the same dollar investment using cash flow instead of accounting earnings would accumulate a value of22.73 while the same dollar investment using cash flow instead of accounting earnings would accumulate a value of 33.94 over the same 16 years starting with the second quarter of 1988 and concluding at the end of the first quarter of 2004. Thus, our results have implications for the studies of explanatory power of different measures of earnings and their comparison in the US and other markets.     

Is integration I(d) applicable to observed economics and finance time series?

The method of cointegration in regression analysis is based on an assumption of stationary increments. Stationary increments with fixed time lag are called ‘integration I(d)’. A class of regression models where cointegration works was identified by Granger and yields the ergodic behavior required for equilibrium expectations in standard economics. Detrended finance market returns are martingales, and martingales do not satisfy regression equations. We ask if there exist detrended processes beyond standard regression models that satisfy integration I(d). We show that stationary increment martingales are confined to the Wiener process, and observe that martingales describing finance data admit neither the integration I(d) nor the ergodicity required for long time equilibrium relationships. In particular, the martingales derived from finance data do not admit the time (or ‘space’) translational invariance required for increment stationarity. Our analysis explains the lack of equilibrium observed earlier between FX rates and relative price levels.     

BOOK REVIEWS

Book reviewed in this article: Household Capital Formation and Financing, 1897–1962. By F. Thomas Juster . Money and Conquest: Allied Occupation Currencies in World War II. By Vladimir Petrov . Prosperity and Unemployment. Edited by Robert A. Gordon and Margaret S. Gordon . Toward Full Employment in Our Free Enterprise Society. By Morris A. Copeland . Regional Accounts for Policy Decisions. Edited by Werner Z. Hirsch . The Tenement Landlord. By George Sternlieb . Foundations for Financial Management: A Book of Readings. Edited by James Van Horne . A Theory of Financial Analysis. By Eugene M. Lerner and Willard T. Carleton . The Scope and Methodology of Finance. By J. Feed Weston . Working Capital Management. By William Beranek . Valuation: Concepts and Practice. By Erich Helfert . The Term Structure of Interest Rates: Expectations and Behavior Patterns. By Burton Gordon Malkiel . Liquidity Preferences of Commercial Banks. By George R. Morrison . Monetary Theory and Policy. Edited by Richard S. Thorn . Analytical Methods in Banking. Edited by Kalman J. Cohen and Frederick S. Hammer . The Commercial Paper Market. By Nevins D. Baxter . Insider Trading and the Stock Market. By Henry G. Manne . Money, Banking, and Credit in Eastern Europe. By George Garvy . Forward Exchange, Speculation, and the International Flow of Capital. By Herbert G. Grubel . International Finance for Multinational Business. By Lee C. Nehrt . Intergovernmental Fiscal Relations in the United States. By George F. Break . Effects of Corporation Income Tax. Edited by Marian Krzyzaniak . A General Theory of Tax Structure Change During Economic Development. By Harley H. Hinrichs .