Volatility options: Hedging effectiveness,pricing, and model error

Motivated by the growing literature on volatility options and their imminent introduction in major exchanges, this article addresses two issues. First, the question of whether volatility options are superior to standard options in terms of hedging volatility risk is examined. Second, the comparative pricing and hedging performance of various volatility option pricing models in the presence of model error is investigated. Monte Carlo simulations within a stochastic volatility setup are employed to address these questions. Alternative dynamic hedging schemes are compared, and various option‐pricing models are considered. It is found that volatility options are not better hedging instruments than plain‐vanilla options. Furthermore, the most naïve volatility option‐pricing model can be reliably used for pricing and hedging purposes. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:1–31, 2006     

A new test for deficit sustainability and its application to US data

In this paper, we define deficit sustainability by requiring formally that both the discounted debt vanish asymptotically and the undiscounted debt be bounded. Thus, a new necessary condition and a new testing procedure emerge. We propose a new test statistic and prove that its limiting distribution is standard normal, N(0, 1). Its finite- sample distribution differs from N(0, 1), however, mainly because it has fat tails, so we derive empirical critical values using simulations. Using the new test and United States (US) quarterly data, the conclusions of three earlier papers that fail to reject the sustainability of the US budget or current-account deficit are reversed.     

FORECASTING INFLATION USING DYNAMIC MODEL AVERAGING*

We forecast quarterly US inflation based on the generalized Phillips curve using econometric methods that incorporate dynamic model averaging. These methods not only allow for coefficients to change over time, but also allow for the entire forecasting model to change over time. We find that dynamic model averaging leads to substantial forecasting improvements over simple benchmark regressions and more sophisticated approaches such as those using time varying coefficient models. We also provide evidence on which sets of predictors are relevant for forecasting in each period.     

The Abrams curve of government size and unemployment: evidence from panel data

This study investigates the long run relationship between government size and unemployment rate, the Abrams curve, using ten European countries over the period 1961–1999. To this end, panel cointegration analysis and estimation techniques appropriate for heterogeneous panels are made use of. The results support the idea that there is an Abrams curve, and the relation between government size and the unemployment rate is positive.     

Escapism FDI from developed economies: The role of regulatory context and corporate taxation

In this paper, we extend the conceptualisation of escapism Foreign Direct Investment (FDI) holding for emerging economies to developed economies that face specific institutional failures, such as weak or incomplete regulations, along with high taxation. We combine this literature with the recent development of Dunning’s eclectic paradigm, which includes institutional aspects regarding location factors. We argue that in developed economies with problematic regulations and high taxation, sound institutions and lower tax rates abroad are extremely significant for domestic firms’ internationalisation. A central result regards the moderating effect of host regulatory quality on taxation, which highlights the crucial role of institutions for firms originating in developed economies that lack sound institutions. Additionally, the results challenge the available theorising and evidence on the moderating role of institutions in the prior experience of a firm at a location. We instead provide evidence that once firms establish a subsidiary abroad, they acquire substantial knowledge about the host institutional environment, which translates into an Ot advantage, providing an additional motive for further expansion. This work uses a unique database of the total population of Greek MNEs – released for the first time – for an extended time period, 2001–2010. The results could be generalised to similar developed economies facing analogous regulatory failures and high taxation, such as the southern European Union countries, as well as even for northern European Union countries, such as Germany, according to Bundesbank’s report.     

Economies of scale,cost minimization and productivity in telecom markets under economic crisis: evidence from Greece

Telecommunications has entered a new age of development with advanced technology and increased competition with established players. The main focus of telecom operators is to maintain and increase their market shares by creating a loyal customer base and technology advancements. However, it remains difficult for telecom operators to evaluate their performance and competence within a fast-changing environment, especially since the telecom business is complex and involves unknown trade-offs. The current study proposes a series of methods in order to evaluate the performance of telecommunication companies, using as a case study the Hellenic Telecommunications Organization (OTE). OTE’s importance lies on its role as one of the leading companies in Greece affecting the economy. On the methodological side, this paper applies the linear regression analysis to measure and evaluate the performance of OTE. The results show that during the period 2005-2015 there are events which affect the operation of OTE and create conditions for cost optimization which are of great importance and they determine the future evolution of the organization. The results of this study are expected to be utilized as guidelines for the telecom operators as well as for regulators and decision makers in general.     

Techno-economic evaluation of 3G and beyond mobile business alternatives

Three business case scenarios in the context of emerging mobile access network technologies and business players have been studied and the economical results are presented. The aim is to cover some of the most interesting business alternatives in providing the new 3G and beyond services including cases where the operator may have an existing second-generation cellular network or not, and a license for the 3G UMTS network or not. The scenarios have been analyzed in different Western European country groups that are not exactly representative of any defined country, but rather share typical demographic characteristics. Investments and operational expenditures are identified and the results show how diverse business models and technologies lead to different revenue, cost, and profitability profiles. The business case scenarios include incumbent’s 3G evolution with UMTS compared to an alternative 3G technology deployment with mobile WiMAX, new entrant’s UMTS deployment business case, and a greenfield CDMA450 deployment business case.     

Stochastic Optimization: a Review

We review three leading stochastic optimization methods—simulated annealing, genetic algorithms, and tabu search. In each case we analyze the method, give the exact algorithm, detail advantages and disadvantages, and summarize the literature on optimal values of the inputs. As a motivating example we describe the solution—using Bayesian decision theory, via maximization of expected utility—of a variable selection problem in generalized linear models, which arises in the cost-effective construction of a patient sickness-at-admission scale as part of an effort to measure quality of hospital care.     

Acquisitions,Overconfident Managers and Self‐attribution Bias

We examine whether acquisitions by overconfident managers generate superior abnormal returns and whether managerial overconfidence stems from self‐attribution. Self‐attribution bias suggests that overconfidence plays a greater role in higher order acquisition deals predicting lower wealth effects for higher order acquisition deals. Using two alternative measures of overconfidence (1) high order acquisition deals and (2) insider dealings we find evidence supporting the view that average stock returns are related to managerial overconfidence. Overconfident bidders realise lower announcement returns than rational bidders and exhibit poor long‐term performance. Second, we find that managerial overconfidence stems from self‐attribution bias. Specifically, we find that high‐order acquisitions (five or more deals within a three‐year period) are associated with lower wealth effects than low‐order acquisitions (first deals). That is, managers tend to credit the initial success to their own ability and therefore become overconfident and engage in more deals. In our analysis we control for endogeneity of the decision to engage in high‐order acquisitions and find evidence that does not support the self‐selection of excessive acquisitive firms. Our analysis is robust to the influence of merger waves, industry shocks, and macroeconomic conditions.