The appraisal of ordinary shares by Saudi investors

This paper reports on a questionnaire survey about share valuation practices among investors and their intermediaries in Saudi Arabia. The findings suggest that fundamental analysis is used most by investor respondents where a P/E multiple is applied to an earnings forecast to generate a prediction of future price. However, technical analysis is also used to a much greater extent than in developed markets. Finally, the results indicate that quarterly and annual reports as well as newspapers are widely consulted by investors when forming their expectations about share valuations.     

An analysis of option pricing under systematic consumption risk using GARCH

An issue in the pricing of contingent claims is whether to account for consumption risk. This is relevant for contingent claims on stock indices, such as the FTSE 100 share price index, as investor’s desire for smooth consumption is often used to explain risk premiums on stock market portfolios, but is not used to explain risk premiums on contingent claims themselves. This paper addresses this fundamental question by allowing for consumption in an economy to be correlated with returns. Daily data on the FTSE 100 share price index are used to compare three option pricing models: the Black–Scholes option pricing model, a GARCH (1, 1) model priced under a risk-neutral framework, and a GARCH (1, 1) model priced under systematic consumption risk. The findings are that accounting for systematic consumption risk only provides improved accuracy for in-the-money call options. When the correlation between consumption and returns increases, the model that accounts for consumption risk will produce lower call option prices than observed prices for in-the-money call options. These results combined imply that the potential consumption-related premium in the market for contingent claims is constant in the case of FTSE 100 index options.     

European Sugar Policy Reform and Agricultural Innovation

In July 2006, the European Union's (EU) Common Market Organization (CMO) for sugar underwent the first radical reform since its establishment in 1968. In this article, we study the incentives for adoption of new technologies before and after the policy reform. We build a stochastic partial equilibrium model and use it to analyze the effect of the policy reform on the adoption incentives of genetically modified herbicide tolerant sugar beet. Our findings show that the adoption incentives of high‐cost sugar beet farmers are significantly reduced under the new CMO. Medium‐cost producers, in contrast, have greater incentives to adopt new technologies, while low‐cost producers are largely left unaffected. The reduced adoption incentives of high‐cost farmers lead to lower flexibility and competitiveness of these farmers and therefore coincides with the goals of the reform to crowd out high‐cost producers and increase competitiveness of the European sugar market. En juillet 2006, l'Organisation commune du marché (OCM) du sucre a subi sa première réforme radicale depuis sa mise en place par l'UE en 1968. Dans la présente étude, nous avons examiné les incitatifs offerts pour l'adoption de nouvelles technologies, avant et après la réforme. Nous avons élaboré un modèle stochastique d'équilibre partiel et l'avons utilisé pour analyser les répercussions de la réforme sur les incitatifs offerts pour l'adoption de variétés de betteraves sucrières génétiquement modifiées résistantes aux herbicides. Selon nos résultats, les incitatifs offerts aux producteurs de betterave sucrière ayant des coûts marginaux élevés ont significativement diminué depuis la réforme de l'OCM du sucre. Par contre, les incitatifs offerts aux producteurs ayant des coûts marginaux moyens se sont accrus, tandis que ceux offerts aux producteurs ayant de faibles coûts marginaux n'ont pas changé. La diminution des incitatifs offerts aux producteurs ayant des coûts marginaux élevés entraîne une diminution de la souplesse et de la capacité concurrentielle de ces producteurs et, par conséquent, coïncide avec les objectifs de la réforme qui visent àévincer les producteurs ayant des coûts marginaux élevés et à accroître la capacité concurrentielle du marché européen du sucre.     

Replacement Investment: Optimal Economic Life Under Uncertainty

Replacement investment is essentially a regenerative optimal stopping problem; that is, the key decision concerns when to terminate the life of existing plant – and hence when to start over again. This paper examines this optimisation problem within a continuous time framework and studies the qualitative and quantitative impact of uncertainty on the timing of new investment (and the criteria that should be used for terminating the life of existing plant).     

Unemployment compensation and episodes of nonemployment

This paper examines the influence of unemployment insurance (UI) on the length of nonemployment spells experienced by young workers. The analysis introduces a flexible duration model to estimate the effects of the weekly benefit amount and weeks of eligibility on the amount of time spent between jobs by men, distinguishing between the experiences of UI and non-UI recipients. The empirical findings suggest three conclusions: (1) UI recipients experience longer spells of nonemployment than their non-UI recipient counterparts, at least up to the point of exhaustion of UI benefits; (2) the level of the weekly benefit amount does not significantly affect the length of nonemployment spells; and (3) increasing the number of weeks of eligibility offered by a UI program leads to longer episodes of nonemployment.     

The Distribution of Multifamily Mortgage Originations: What We Know and Why We Care

Three policy-relevant questions about multifamily mortgage originations (MFOs) are addressed. First, what is the annual volume of MFOs? This analysis highlights differences and problems among three publicly available multifamily lending surveys; the 1993 volume is estimated at $30 billion. Second, what is the size distribution of multifamily mortgages? Using kernel density estimation, variation in this distribution among central cities and suburbs, underserved areas, and lender type is examined. Third, what are the primary determinants of the variation in multifamily lending? A relatively simple regression model is estimated to shed light on the variables most highly correlated with multifamily lending. Tract income relative to MSA median income and minority concentrations are shown to be highly correlated with lending volume, but the largest source of variation is the number of multifamily rental units in the tract.     

INITIAL PUBLIC OFFERINGS: GOING BY THE BOOK

In the U.S., and increasingly in other countries as well, IPO securities are marketed to investors in a process known as "book-building"—one that amounts to polling institutional investors to establish a demand schedule for the issue and then allotting stock to individual investors according to the strength of their professed interest. Although book-building methods require use of discriminatory tactics that have attracted strong criticism from investors and regulators, this article defends such practices by demonstrating that book-building is more efficient than alternative methods. It effectively allows issuers to increase the net proceeds of their offerings by making better use of information about market demand conditions.
In the process of explaining the efficiency of the book-building method, this article also offers a plausible explanation for a phenomenon that has long puzzled economists: the systematic underpricing of IPOs. The key to the success of a book-building effort lies in the use of a strategic pricing and allocation policy designed to offset the investor's incentive to understate his or her interest in an IPO. By committing to favor investors who provide strong indications of interest with relatively large allocations of underpriced shares, the investment bank can limit the distortion of investor's incentives in bidding and so increase the level of proceeds the issuing firm can expect to generate from its IPO.     

Endogenous communication among lenders and entrepreneurial incentives

If banks have an informational monopoly about their clients,borrowers may curtail their effort level for fear of being exploitedvia high interest rates in the future. Banks can correct thisincentive problem by committing to share private informationwith other lenders. The fiercer competition triggered by informationsharing lowers future interest rates and future profits of banks.But, provided banks retain an initial informational advantage,their current profits are raised by the borrowers' higher effort.This trade-off determines the banks' willingness to share information.Their decision affects credit market competition, interest rates,volume of lending, and social welfare.