Approaching rainfall-based weather derivatives pricing and operational challenges

Review of Derivatives Research - This article approaches some of the current rainfall derivatives pricing and operational challenges through an empirical application to Comunidad Valenciana, Spain....     

Neuerscheinungen versicherungswissenschaftlicher Bücher

Ohne Zusammenfassung Ausgew?hlt von Dr. Andrea Uber, Berlin     

A Holy Alliance: Collusion in the Renaissance Europe Alum Market

On June 11, 1470, representatives of Pope Paul II and Ferdinand, King of Naples concluded a cartel agreement to restrict competition in the sale of alum. The agreement was one element of a broader plan to monopolize the sale of alum throughout Christendom. We discuss the background of the cartel agreement and analyze its terms (which include arrangements to facilitate detection of and reduce the profitability of defection) and the constraints that limited, but did not eliminate, Rome’s ability to extract economic profit from the European alum market.     

Randomised Mixture Models for Pricing Kernels

Numerous kinds of uncertainties may affect an economy, e.g. economic, political, and environmental ones. We model the aggregate impact by the uncertainties on an economy and its associated financial market by randomised mixtures of Lévy processes. We assume that market participants observe the randomised mixtures only through best estimates based on noisy market information. The concept of incomplete information introduces an element of stochastic filtering theory in constructing what we term “filtered Esscher martingales”. We make use of this family of martingales to develop pricing kernel models. Examples of bond price models are examined, and we show that the choice of the random mixture has a significant effect on the model dynamics and the types of movements observed in the associated yield curves. Parameter sensitivity is analysed and option price processes are derived. We extend the class of pricing kernel models by considering a weighted heat kernel approach, and develop models driven by mixtures of Markov processes.     

The effects of analyst forecasts and earnings trends on perceptions of management forecast credibility

We examine whether analyst forecasts influence investors’ perceptions of the credibility of a good news management earnings forecast. We hypothesize that the effect of analyst forecasts will depend on whether the analyst forecast confirms management’s forecast and the extent to which management’s forecast is consistent with the prior earnings trend. Findings indicate that the positive effect of a confirming analyst forecast is greater when the management forecast is trend inconsistent than when it is trend consistent. The negative effect of a disconfirming analyst forecast does not differ based on management forecast trend consistency.     

A Range-Based Finite Difference Approach to Valuing Options in Markov Switching Regimes*

Recognizing the inflexibility inherent in standard capital budgeting analysis, recent research has provided new insights using a real options framework. This paper uses the explicit finite difference approach to value real options. However, instead of assuming a constant return and volatility term, we assume that these variables are sensitive to changes in the economic environment. Accordingly, we adapt our approach to incorporate a Markov switching feature. Further, we recognize that some of the modeling assumptions can be violated in a practical application. Therefore, we recommend using range based estimates of the real option value, as opposed to a point estimate.     

Orchestrating corporate social responsibility in the multinational enterprise

Research Summary: Multinational enterprises (MNEs) invest significant resources in corporate social responsibility (CSR), but their attempts to build a global “social brand” may clash with the execution of operational strategies at a subsidiary level. Using a game-theoretic model, this research addresses the complex interplay of different contingencies that shape the coordination and control challenges facing MNEs when they implement global CSR strategies, including brand spillovers, the risk of public scandals caused by irresponsible behavior, the size of the MNE network, as well as the roles played by nongovernmental organizations and altruistic managers. Challenging the view of CSR as insurance against lapses of responsible conduct, our model shows that investment in social brands helps avoid irresponsible practices across the MNE network, thereby inducing subsidiaries to “walk the talk.” Managerial Summary: Global social brands are increasingly valuable to multinational enterprises (MNEs), which makes the control and coordination of responsible behavior across their network of foreign subsidiaries a relevant managerial challenge. Indeed, lapses of responsible conduct at the subsidiary level often generate reputational damage at the multinational level. This research explores several mechanisms that help MNEs manage this coordination and control challenge. First, it shows under what conditions MNEs can leverage their investments in social brands to induce responsible practices across their global network. Second, it illustrates how MNEs can exploit collaborations with nongovernmental organizations to reduce the costs of coordinating and controlling their subsidiaries. Finally, it identifies conditions under which MNEs benefit from hiring altruistic managers to run their subsidiaries.     

Insider employee stock option trading and stock prices

The question of which factors determine corporate bonds pricing is investigated by analysing the spreads of eurobonds issued by major G-10 companies during the 1991–2001 period. Three main results emerge from the analysis. First, bond ratings appear as the most important determinant of yield spreads, with investors’ reliance on rating agencies judgments increasing over time. Second, the primary market efficiency and the expected secondary market liquidity are not relevant explanatory factors of spreads cross-sectional variability. Finally, rating agencies adopt a different, ‘through the cycle’, evaluation criteria of default risk with respect to the forward looking one adopted by bond investors.     

Supervisors as information producers: Do stress tests reduce bank opaqueness?

Supervisory stress tests assess the impact of an adverse macroeconomic scenario on the profitability and capitalisation of a large number of banks. The results of such stress test exercises have recently been disclosed to the public in an attempt to restore confidence and to curb bank opaqueness by helping investors distinguish between sound and fragile institutions. In an unprecedented effort for transparency, the 2011 European Union stress test lead to the release of some 3400 data points for each of the 90 participating banks. This makes it an ideal setting to investigate a number of hypotheses on the information role of the stress tests.     

Do banks price discriminate spatially? Evidence from small business lending in local credit markets

In this paper we explore the effects of bank–borrower physical proximity on price and non-price aspects of small business lending in local credit markets. Along the price dimension, our analysis reveals that interest rates increase with bank–borrower distance and decrease with the distance between borrower and other competing banks. Along the quantity dimension, we observe that more distant borrowers are more likely to experience binding credit limits. We also show that the quantity effects of bank–borrower distance are concentrated among less transparent firms. Our findings are consistent with pricing based on marginal costs that reflect information-based factors, and are in contrast to the established paradigm, where banks adopt spatial discriminatory pricing rules when lending to small-sized enterprises.