Static hedging and model risk for barrier options

The article investigates how sensitive different dynamic and static hedge strategies for barrier options are to model risk. It is found that using plain‐vanilla options to hedge offers considerable improvements over usual Δ hedges. Further, it is shown that the hedge portfolios involving options are relatively more sensitive to model risk, but that the degree of misspecification sensitivity is robust across commonly used models. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:449–463, 2006     

Granger-causality in multiple time series

The concept of Granger-causality is formulated for a finite-dimensional multiple time series. Special attention is given to causality patterns in autoregressive series, and it is shown how these patterns can be tested under quite general assumptions using a χ² statistic. The power of the test is discussed, and it is shown that the χ² statistic results from a Lagrange multiplier test in the Gaussian case. The causality test is tried both on artificial data and some economic time series. Finally we consider the problem of constrained estimation in models with a known causality structure.     

Pluralism in the mass media: Can management participation help?

Concentration and lack of plurality of media control is significant and appears to be increasing. The potential danger to a democracy of a lack of plurality of media control is serious. There are opportunities for greater plurality and freedom of expression through professional employee decision making partcipation. There are practical precedents for professional employee management participation in the media. Therefore, professional media employee management participation deserves to be seriously considered. Limitations of the principle are also considered.Richard P. Nielsen is Associate Professor at the School of Management, Boston College, Chestnut Hill, Mass. Professor Nielsen publishes frequently in the areas of philosophical and social issues in management as well as strategy and consensus building.The author would like to thank Professor William Torbert of Boston College for his helpful criticism of this article.     

Ownership and Cost‐Sharing Contracts

We discuss the relative merits of public and private ownership in an incomplete contract framework developed by Hart, Shleifer and Vishney (HSV). We add two new elements to their model. First, the government may offer cost‐sharing contracts when procuring the good. Second, the owner of a private firm may divert resources that increase their own profit/utility but increase total costs. The cost sharing contract allows the government to reduce the private firm's incentives to dump quality in order to save on costs. However, this also leads to resource diversion, which increases total costs. We derive the preferred mode of ownership when the government optimally chooses the power of the cost sharing scheme. We find that the presence of quality‐reducing cost reductions only favours government ownership if the scope for resource diversion is substantial. A discussion of when resource diversion is likely to be important is also provided.     

Inflation adjustment in the open economy: an I(2) analysis of UK prices

This paper estimates a cointegrated vector autoregressive (VAR) model for UK data on consumer prices, unit labour costs, import prices and real consumption growth. The estimated VAR indicates that the nominal variables are characterised by I(2) trends, and that a linear combination of these processes cointegrate to I(1). This supports an analysis in which I(1) and I(2) restrictions are imposed. A key finding is that an increase in real import prices reduces productivity adjusted real wages, such that the change in domestic inflation is moderated. This may explain why the depreciation of sterling in 1992 left inflation unchanged.

Differentiable von Neumann-Morgenstern utility

Summary. Differentiability is a convenient property of von Neumann-Morgenstern utility functions which is almost always imposed but has not been translated into behavioral terms. In applications, expected utility is usually maximized subject to a constraint, and the maximization is carried out by differentiating the utility function. This paper presents two sets of necessary and sufficient conditions for a risk averse von Neumann-Morgenstern utility function to be differentiable. The first of them is formulated in terms of the equivalent risk premia of small gambles. It says, in brief, that the equivalent risk premium is of a smaller order of magnitude than the risk itself, as measured by the expectation of the absolute value of the risk. The second set of necessary and sufficient conditions is formulated in terms of the probability premium of small lotteries. It says, essentially, that the probability premium for small binary lotteries goes to zero as the size of the lottery goes to zero. Received: May 11, 1997; revised version: May 14, 1998     

Analysis of SMEs partner proximity preferences for process innovation

This paper explores small and medium enterprises’ (SMEs) proximity preferences when selecting partners for collaborative process innovation. Drawing on a survey of 362 Danish SMEs, we address four partner proximity characteristics: geographic, cognitive, organizational, and social. The results show that SMEs prioritize geographic openness over regional clustering. Furthermore, to simultaneously facilitate collaboration and ensure innovation, firms tend to collaborate with partners that are characterized by cognitive similarity at a technological level and knowledge distance at a market level. Technological proximity is also found to be more relevant than social proximity when it comes to bridging the potential geographic and market distance between the collaborative partners. Finally, the results indicate that the tendency of organizational proximity to facilitate informal interactions with partners enhances process innovation only at two of four process innovation levels. Thus, the results highlight the fact that the value of partner proximity characteristics change with the level of process innovation considered.