An autoregressive jump process for common stock returns

This paper develops a new distribution theory for common stock returns. The model is composed of a calendar time diffusion process and a jump process where the magnitudes of the jumps may be autocorrelated. Empirical tests are performed on a month of transactions returns for twenty New York Stock Exchange securities. The data analysis supports the validity of the proposed theory.     

The purpose of capital for institutions with government-insured deposits

An earlier version of this article was presented at a conference sponsored by Arthur Andersen, Freddie Mac, and Salomon Brothers, Capitalizing for the 90s, held in Washington DC on March 21, 1991.     

Capital Structure and Financial Risk: Evidence from Foreign Debt Use in East Asia

Using a data set of East Asian nonfinancial companies, we examine a firm's choice between local, foreign, and synthetic local currency (hedged foreign currency) debt. We find evidence of unique as well as common factors that determine each debt type's use, indicating the importance of examining debt at a disaggregated level. We exploit the Asian financial crisis as a natural experiment to investigate the role of debt type in firm performance. Surprisingly, we find that the use of synthetic local currency debt is associated with the biggest drop in market value, possibly due to currency derivative market illiquidity during the crisis.     

Crisis at the summit

An unrecognized affliction is striking certain gifted performers at the top of their game. Its cause, paradoxically, is success itself. These stars, who thrive on conquering new challenges, can lose their bearings and question their purpose once a job has been mastered. A vague dissatisfaction gives way to confusion and then to inner turmoil. Left unattended, this summit syndrome can derail promising careers. The syndrome has three phases. In the approach phase, when most of the challenges of a current job have been met, sufferers tend to push harder in a vain attempt to recapture the adrenaline rush of the climb. Then, in the plateauing phase, when virtually all the challenges have been conquered, these individuals, who are incapable of coasting, bear down to try to produce ever more stellar results, but to less effect and greater dissatisfaction. This leads to the terminal descending phase, when performance slips noticeably. As their superstar status fades, they jump ship, accept demotions, or take lateral transfers. It's a terrible waste, for if the syndrome is recognized, steps can be taken before performance slips to dispel the confusion and set the stage for productive growth to the next assignment. There are four parts to this process: First, understand your "winning formula"--the characteristic way you approach a situation--and the vital part it plays in feeling stale or losing your edge. Second, reconnect with your core purpose in life. Third, recast your current, or future, job to better align your inner aspirations with the external requirements of your work. And fourth, create a developmental path by honing a handful of core leadership competencies. None of this is easy, but for talented individuals--and the organizations that rely on them--the vaccine of preventive awareness is far better than gambling on an after-the-fact cure once the crisis is full-blown.     

Managing global accounts

Global account management--which treats a multinational customer's operations as one integrated account, with coherent terms for pricing, product specifications, and service--has proliferated over the past decade. Yet according to the authors' research, only about a third of the suppliers that have offered GAM are pleased with the results. The unhappy majority may be suffering from confusion about when, how, and to whom to provide it. Yip, the director of research and innovation at Capgemini, and Bink, the head of marketing communications at Uxbridge College, have found that GAM can improve customer satisfaction by 20% or more and can raise both profits and revenues by at least 15% within just a few years of its introduction. They provide guidelines to help companies achieve similar results. The first steps are determining whether your products or services are appropriate for GAM, whether your customers want such a program, whether those customers are crucial to your strategy, and how GAM might affect your competitive advantage. If moving forward makes sense, the authors' exhibit, "A Scorecard for Selecting Global Accounts," can help you target the right customers. The final step is deciding which of three basic forms to offer: coordination GAM (in which national operations remain relatively strong), control GAM (in which the global operation and the national operations are fairly balanced), and separate GAM (in which a new business unit has total responsibility for global accounts). Given the difficulty and expense of providing multiple varieties, the vast majority of companies should initially customize just one---and they should be careful not to start with a choice that is too ambitious for either themselves or their customers to handle.     

Is it real? Can we win? Is it worth doing? Managing risk and reward in an innovation portfolio

Minor innovations make up most of a company's development portfolio, on average, but they never generate the growth companies seek. The solution, says Day--the Geoffrey T. Boisi Professor of Marketing and a codirector of the Mack Center for Technological Innovation at Wharton--is for companies to undertake a systematic, disciplined review of their innovation portfolios and increase the number of major innovations at an acceptable level of risk. Two tools can help them do this. The first, called the risk matrix, graphically reveals the distribution of risk across a company's entire innovation portfolio. The matrix allows companies to estimate each project's probability of success or failure, based on how big a stretch it is for the firm to undertake. The less familiar the product or technology and the intended market, the higher the risk. The second tool, dubbed the R-W-W (real-win-worth it) screen, allows companies to evaluate the risks and potential of individual projects by answering six fundamental questions about each one: Is the market real? Explores customers' needs, their willingness to buy, and the size of the potential market. Is the product real? Looks at the feasibility of producing the innovation. Can the product be competitive? and Can our company be competitive? Investigate how well suited the company's resources and management are to compete in the marketplace with the product. Will the product be profitable at an acceptable risk? Explores the financial analysis needed to assess an innovation's commercial viability. Last, Does launching the product make strategic sense? examines the project's fit with company strategy and whether management supports it.     

The influence of culture on accountants' application of financial reporting rules

The objective of this study is to examine the influence of national culture on accountants' application of accounting rules. Based on a refinement of Gray's (1988 ) framework, this study hypothesizes Greek accountants will be more likely (less likely) to recognize contingent liabilities (assets) than U.S. accountants (H1). It also hypothesizes that Greek accountants will be less likely to disclose the existence of both contingent assets and liabilities than U.S. accountants (H2). The results do not support H1. No significant differences are found between Greek and U.S. accountants' recognition decisions involving both contingent assets and liabilities. However, supplemental analyses show that U.S. accountants consistently exhibited more conservatism than Greek accountants. In line with expectations, Greek accountants are less likely to disclose information (i.e., were more secretive) than U.S. accountants, providing strong support for H2. Implications for both research and practice also are discussed.     

FORECASTING VOLATILITY FOR PORTFOLIO SELECTION

The volatility of an asset is a primary input to the portfolio selection problem. Information about volatility is available from two sources, namely the share market and the option market. This paper examines the forecasting performance, over a three month investment horizon, of time series forecasts (from the share market) and option based implied volatilities. Three time series models, including GARCH, are used and twenty four implied volatility estimation models are employed. Using a data set of twelve UK companies, it is demonstrated that implied volatilities produce better individual forecasts than time series. However, more remarkably, forecasts combining implied volatilies and time series estimates significantly outperform both component forecasts.     

Financial Modeling in a Fast Mean-Reverting Stochastic Volatility Environment

We present a derivative pricing and estimation methodology for a class of stochastic volatility models that exploits the observed 'bursty' or persistent nature of stock price volatility. Empirical analysis of high-frequency S&P 500 index data confirms that volatility reverts slowly to its mean in comparison to the tick-by- tick fluctuations of the index value, but it is fast mean- reverting when looked at over the time scale of a derivative contract (many months). This motivates an asymptotic analysis of the partial differential equation satisfied by derivative prices, utilizing the distinction between these time scales. The analysis yields pricing and implied volatility formulas, and the latter provides a simple procedure to 'fit the skew' from European index option prices. The theory identifies the important group parameters that are needed for the derivative pricing and hedging problem for European-style securities, namely the average volatility and the slope and intercept of the implied volatility line, plotted as a function of the log- moneyness-to-maturity-ratio. The results considerably simplify the estimation procedure. The remaining parameters, including the growth rate of the underlying, the correlation between asset price and volatility shocks, the rate of mean-reversion of the volatility and the market price of volatility risk are not needed for the asymptotic pricing formulas for European derivatives, and we derive the formula for a knock-out barrier option as an example. The extension to American and path-dependent contingent claims is the subject of future work. This revised version was published online in August 2006 with corrections to the Cover Date.