Commodity Spread Option with Cointegration

We derive the valuation formula of a European call option on the spread of two cointegrated commodity futures prices, based on the Gibson–Schwartz with cointegration (GSC) model. We also analyze the American commodity spread option including the early exercise premium representation and an analytical approximation valuation formulae with cointegration. In the numerical analysis, we compare the spread option values calculated by the GSC model and the Gibson–Schwartz (GS) model that ignores cointegration. Consistent with the intuition that the cointegration prevents the prices from diverging, the GSC model prices the commodity spread option lower than the GS model which have longer maturity of more than 6 years. In other words, the GS model may overprice the commodity spread options for those with longer maturity without taking account of cointegration. Thus, incorporating cointegration is important for valuation and hedging of long-term commodity spread options such as large scale oil refining plant developments.     

ON THE EMERGENCE OF NON‐PROFIT FIRMS AS ALTERNATIVES TO THE GOVERNMENT*

It is well known that many non‐profit firms coexist with government firms in industries that provide collectively consumed goods and services, such as education, healthcare, social services, and art and culture. This paper explores the specific circumstances under which non‐profit firms can emerge as alternatives to the government. We show that a non‐profit firm emerges only when the residents’ median preference for a collective good is significantly low. This finding implies that, somewhat paradoxically, a non‐profit firm emerges to replace the government and provide a collective good only when the majority of residents consider the good non‐essential.     

A theory of heterogeneous city growth

We consider an economy with three cities producing different outputs. Two cities produce intermediate goods, a type 1 city producing an intermediate “agricultural” good with capital and labor only, and a type 2 city producing an intermediate “industrial” good with capital, labor, and human capital. A type 3 city produces the final good which is obtained from the two intermediate goods and labor. The asymmetric introduction of human capital allows us to prove that the three cities experience, at equilibrium, heterogeneous endogenous growth rates which are proportional to the growth rate of human capital. We show that the “industrial” type 2 city is characterized by the larger growth rate while the “agricultural” type 1 city experiences the lower growth rate, and thus the type 3 city is characterized by a growth rate which is a convex combination of the two former growth rates. This implies that the relative size in terms of output of the “agricultural” city decreases over time. This property allows us to recover the empirical fact that most non‐agricultural production occurs in growing metropolitan areas. But, simultaneously, as we prove that total labor employed in each city is proportional to the total population, the relative population size distribution of cities is constant over time, as shown in empirical studies.     

Pay-as-you-go public pensions with endogenous fertility

A 1986 "model of public pensions is generalized to allow for endogenous fertility. We show that gifts to the old, which can be viewed as social security contributions, are always positive in the steady state. An optimal stationary allocation is sustainable if savings are zero and fertility is exogenous. However, the optimal allocation is in general not sustainable. In particular, if a government enforces a social security plan setting the pension level at the optimal gifts and individuals optimize under the pension constraint, the resulting sustainable outcome is in general different from either the optimal or Nash outcome." The geographical focus is on developed countries.     

Strategic delegation when public inputs for a global good are imperfect substitutes

This paper explores the outcome of non-cooperative decision making by elected politicians under transnational externalities. In each country, the delegate (the government) is elected by means of majority voting. Thereafter, delegates of each country choose their environmental policy, which becomes a public input to the global common good. In equilibrium, the median voter deliberately elects a delegate whose preferences differ from his/her own, to pursue advantages in international decision making. In this paper we use the social composition function to capture various cases of environmental problems with complementarity (imperfect substitutability). Our analysis shows the following results: with sufficient complementarity of the public inputs, strategic delegation can lead to the delegation of decisions to a “greener” politician. However, with almost perfect substitutability of public inputs, the only equilibria may involve asymmetric provision of public inputs to the global common good, even if the countries are identical.     

Guidebook use by Japanese tourists: a qualitative study of Australia inbound travellers

This qualitative investigation into guidebook use reports on in‐depth interviews conducted with 26 Japanese individuals and one couple who had visited Australia during the five previous years. Focusing on the stages before, during and after travel the research framework was based on Vogt and Fesenmaier's model of information needs. It was found that functional needs were the dominant influences during the prior to travel phase, with some non‐functional needs (hedonic, aesthetic and innovation) also being influential. During the travel phase, only functional needs were evident. Some respondents were identified as being deliberate non‐users of guidebooks. The variable ‘tourist type’ was found to be helpful for distinguishing between users and non‐users and for identifying those with functional needs. The use of guidebooks by those whose needs are both functional and non‐functional may be unaffected by this variable. When the attitudes of those who actively dislike guidebooks and those who hesitate to use them are aggregated, a view emerges of guidebooks as a symbol of standardised tourism. Copyright © 2006 John Wiley & Sons, Ltd.     

China’s Exchange-Rate Regime Reform and Trade Between China and the Eurozone

This article investigates the effects of China’s exchange-rate regime reform on trade between China and the eurozone. Both the exchange rate between the euro (EUR) and the renminbi (RMB) and exchange-rate volatility are included in the autoregressive distributed lag (ARDL) model, and our empirical work also considers the third-country effect. Our findings show that, during the reform period, China’s exports to the eurozone are affected only by the EUR–RMB exchange rate per se and not by its volatility. However, neither the exchange rate nor its volatility significantly influences the eurozone’s exports to China during the reform period. Such asymmetry might be attributed to the discrepancy between Chinese exporters and their eurozone counterparts in the knowledge and ability to manage exchange-rate risk.     

Cost-effectiveness analysis of suvorexant for the treatment of Japanese elderly patients with chronic insomnia in a virtual cohort

Aims: This study assessed the cost-effectiveness of the orexin receptor antagonist suvorexant against zolpidem, the most widely used hypnotic benzodiazepine receptor agonist in Japan. To this end, a model was used that factored in insomnia and the risk for hip fractures, which have devastating effects on the elderly.

Methods: Data were derived from published papers. The target population was a virtual cohort of elderly patients (≥65 years) with insomnia residing in Japan. Cost-effectiveness was evaluated using quality-adjusted life years (QALYs) and the incremental cost-effectiveness ratio as effectiveness measures. The investigators assumed the perspective of healthcare payers.

Results: In the base-case analysis, suvorexant was cost-saving (suvorexant: $252.3, zolpidem: $328.7) and had higher QALYs gained (suvorexant: 0.0641, zolpidem: 0.0635) for elderly Japanese patients with insomnia compared with zolpidem, indicating that suvorexant was dominant. In the sensitivity analysis, the outcome changed from dominant to dominated due to the relative risk for hip fractures associated with suvorexant. However, when the other parameters were varied from the lower to the upper limits of their ranges, suvorexant remained dominant compared to zolpidem.

Limitations: The relative risk for hip fractures for suvorexant used in the model was based on data from pre-approval clinical trials. More precise data may be needed.

Conclusions: Suvorexant seemed to be more cost-effective than the alternative zolpidem. The findings suggested that suvorexant might be a viable alternative to zolpidem for elderly patients with insomnia. A sensitivity analysis showed that outcome varied depending on the relative risk for hip fractures associated with suvorexant. Further investigations may be needed for more precise results.