Dynamic Equilibrium with Overpriced Put Options

It is a well-known anomaly that prices of put options are too high when options are out-of-the-money. This paper presents a simple general equilibrium model of the market where European put options become substantially overpriced when they are out-of-the-money. Overpricing is due to the presence of short-sale constraints on trading stocks and derivatives, as well as the heterogeneity between investors. We confirm the predicting power of the model by comparing its implications with existing empirical results.     

Industrial clusters,flagship enterprises and regional innovation

ABSTRACT

For a sample of all 88 counties in the State of Ohio over a 5-year period, this study documents the effect of flagship enterprises and concentrated industrial clusters on regional innovation. Consistent with the agglomeration arguments and the knowledge spillover theory of entrepreneurship, both appear to affect regional innovation positively. Additionally, regional educational attainment positively moderates the effect of industrial clusters on innovation. At the same time, flagship enterprises primarily affect regional innovation in regions with low education levels. Results are obtained with the help of conservative econometric techniques and are robust to the choice of alternative dependent variables and estimators. The findings have major policy implications and provide insights into alternative routes to encouraging regional innovation.     

Quality Meets Structure: Generalized Reciprocity and Firm‐Level Advantage in Strategic Networks

In this paper we extend previous research by combining network structural and network process approaches. Specifically, in a six‐year, three‐wave study of 41 firms in two strategic networks, we found that the interaction between generalized reciprocity among a focal firm's partners and network tie intensity and betweenness centrality improved firm performance. No influences were observed for the interaction involving degree centrality and generalized reciprocity. Our research suggests that managers in strategic networks may need to consider the balance between relationship‐extensive and relationship‐intensive strategies.     

RETAKING IN HIGH STAKES EXAMS: IS LESS MORE?

Placement, both in university and in the civil service, according to performance in competitive exams is the norm in much of the world. Repeat taking of such exams is common despite the private and social costs it imposes. We develop and estimate a structural model of exam retaking using data from Turkey's university placement exam. Limiting retaking results in all agents gaining ex ante and most gaining ex post. This result comes from a general equilibrium effect: Retakers crowd the market and impose negative spillovers on others by raising acceptance cutoffs.     

Order flow and exchange rate dynamics in electronic brokerage system data

We analyze the association between order flow and exchange rates using a new dataset representing a majority of global interdealer transactions in the two most-traded currency pairs at the one minute frequency over a six-year time period. This long span of high-frequency data allows us to gain new insights about the joint behavior of these series. We first confirm the presence of a substantial association between interdealer order flow and exchange rate returns at horizons ranging from 1 min to two weeks, but find that the association is substantially weaker at longer horizons. We study the time-variation of the association between exchange rate returns and order flow both intradaily and over the long term, and show that the relationship appears to be stronger when market liquidity is lower. Overall, our study supports the view that liquidity effects play an important role in the relationship between order flow and exchange rate changes. This by no means rules out a role for order flow as a channel by which fundamental information is transmitted to the market, as we show that our findings are quite consistent with a recent model by Bacchetta and Van Wincoop (2006: Can information heterogeneity explain the exchange rate determination puzzle? American Economic Review, 96, pp. 552–576.) that combines both liquidity and information effects.     

Tangent Lévy market models

In this paper, we introduce a new class of models for the time evolution of the prices of call options of all strikes and maturities. We capture the information contained in the option prices in the density of some time-inhomogeneous Lévy measure (an alternative to the implied volatility surface), and we set this static code-book in motion by means of stochastic dynamics of It?’s type in a function space, creating what we call a tangent Lévy model. We then provide the consistency conditions, namely, we show that the call prices produced by a given dynamic code-book (dynamic Lévy density) coincide with the conditional expectations of the respective payoffs if and only if certain restrictions on the dynamics of the code-book are satisfied (including a drift condition à la HJM). We then provide an existence result, which allows us to construct a large class of tangent Lévy models, and describe a specific example for the sake of illustration.     

Random variables generated by ranks in dependent schemes

Some nonstationary sequences having independent vector of ranks and vector of order statistics are under consideration. We extend some characterizations in a class of independent r.v.'s to a class of Archimedean copula processes and construct the interpretation which gives us a simple way for simulating Archimedean copula processes. Received November 1997     

The growth of the firm in (and out of) emerging economies

Starting with Peng and Heath (Academy of Management Review, 21: 492–528, 1996), the growth of the firm in emerging economies (EE) has received increasing attention in the literature in the last two decades. This line of research has not only extended our knowledge on firms’ strategic choices to the context of EE, but also proposed new perspectives on the growth of the firm. Leveraging prior research, this article focuses on three major modes for firm growth—organic, acquisitive, and network-based. For each mode, we identify new themes and insights emerging from the last two decades of research. They center on (1) compositional capabilities and frugal innovations for organic growth, (2) business groups and cross-border acquisitions for acquisitive growth, and (3) network capitalism and institutional transitions for network-based growth. Overall, we not only identify new themes and insights, but also outline important yet unresolved debates as future research directions.     

Local volatility dynamic models

This paper is concerned with the characterization of arbitrage-free dynamic stochastic models for the equity markets when Itô stochastic differential equations are used to model the dynamics of a set of basic instruments including, but not limited to, the underliers. We study these market models in the framework of the HJM philosophy originally articulated for Treasury bond markets. The main thrust of the paper is to characterize absence of arbitrage by a drift condition and a spot consistency condition for the coefficients of the local volatility dynamics.