Sequential American Exchange Property Options

Property development activities often occur in stages, which are appropriately modeled as sequential American exchange property options, where there are interim expenditures required in order to keep the property development options “alive”. Normally American exchange options require a numerical solution, but herein there is a new closed-form approximate solution, which is computationally efficient and accurate. This method combines repeats of Margrabe European exchange and Geske compound option solutions with tight upper boundaries of either American perpetuities or European exchange options with a high volatility. Illustrations are provided of the sensitivity of the real sequential options and optimal timing to changes in several parameters, which provide a framework for property policy (tax, subsidy and regulatory) guidelines and for property development strategy evaluation. There are several plausible applications of these real option models in commercial and residential property development, within commercial property leases, with regard to switching tenants, and agricultural alternatives.     

Corporate and personal income tax declarations

Decisions by firms and individuals on the extent of their tax payments have generally been treated as separate choices. Empirically, a positive relationship between corporate and personal income tax evasion can be observed. The theoretical analysis in this paper shows that a manager's decision on the firm's behaviour will be independent of his personal preferences if the gain from reducing corporate tax payments is certain, as in the case of tax avoidance. If, however, the firm evades taxes so that the manager's income depends on whether the firm's activities are detected or not, corporate and personal income tax evasion choices cannot be separated. Jel Code H 24 · H 25 · H 26     

Influence of cultural factors on price clustering and price resistance in China's stock markets

This paper builds on prior research by analysing the impact of cultural factors on both price clustering and price resistance in China's stock markets. The results support the presence of cultural factors impacting on price clustering with the digit 8 showing a higher propensity for clustering and the digits 4 and 7 showing a lower propensity in the A‐share market, where stock is denominated in renminbi and traded by mainland Chinese. These results are further supported by an analysis of the B‐share market, where cultural factors have no (or less) impact on the price of Chinese stocks traded by foreign investors in US dollars (or in Hong Kong dollars). A range of measures for price resistance show the digits 0 and 5 to be significant resistance points in the A‐share market. Although digit 8 cannot be considered as a resistance point, its resistance level is highest among the remaining numbers. In conclusion, cultural factors help to explain not only price clustering in the Chinese stock markets but price resistance levels as well, albeit at a weak level.     

Adoption of activity management practices in public sector organizations

This paper examines the extent to which activity management practices are adopted by Australian public sector organizations at each of Gosselin's (1997) levels of Activity Analysis, Activity Cost Analysis, and Activity‐based Costing. The present paper replicates Baird et al. (2004), thereby enabling a comparison of the extent of adoption of activity management in the public sector with that reported in the private sector in Baird et al. (2004). The results reveal that the adoption of higher level activity management practices (Activity Cost Analysis and Activity‐based Costing) is less prevalent in public sector organizations, whereas they adopt Activity Analysis to the same extent as the private sector.     

Tax liens: a novel application of asset pricing theory

Although relatively obscure, the market for distressed real estate tax liens exists in over 30 U.S. states, with a market size estimated to be around 20 billion dollars. While this niche asset class is relatively unknown to academics, internet advertising hypes tax liens to the populace as providing extraordinary returns. Not yet scientifically studied, this market provides a fertile and untouched arena for the application of asset pricing theory. Using insights from several areas of asset pricing, we formulate and test a pricing model for tax liens. The empirical evidence supports the pricing model, the (increasing) competitiveness of the tax lien market, and an unfair tax auction bidding mechanism for property owners that may provide extraordinary returns to investors, lending some credibility to the industry claims. We suggest avenues for extensions and further research.     

Information reduction via level crossings in a credit risk model

This paper provides an alternative credit risk model based on information reduction where the market only observes the firm’s asset value when it crosses certain levels, interpreted as changes significant enough for the firm’s management to make a public announcement. For a class of diffusion processes we are able to provide explicit expressions for the firm’s default intensity process and its zero-coupon bond prices.      

Reflections on the general theory of second best at its golden jubilee

The origin of the second best article is described and criticisms assessed. Distortions making impossible the achievement of either first or second best optima are outlined. Attempts to establish the applicability of first best rules are criticised, as are general rules for making piecemeal efficiency improvements. Both often use models containing empirically invalid assumptions and a selected few of the full set of distortions. Practical policy advice requires more parochial objective functions than community welfare; must rely on formal and appreciative theory, empirical evidence, and large doses of judgment; and should concentrate on making piecemeal improvements in context-specific situations.     

Homeownership as a Constraint on Asset Allocation

Personal preferences and financial incentives make homeownership desirable for most families. Once a family purchases a home they find it impractical (costly) to frequently change their ownership of residential real estate. Thus, by deciding how much home to buy, a family constrains their ability to adjust their asset allocation between residential real estate and other assets. To analyze the impact of this constraint on consumption, welfare, and post-retirement wealth, we first investigate an individual’s optimal asset allocation decisions when they are subject to a “homeownership constraint.” Next, we perform a “thought experiment” where we assume the existence of a market where a homeowner can sell, without cost, a fractional interest in their home. Now the housing choice decision does not constrain the individual’s asset allocations. By comparing these two cases, we estimate the differences in post-retirement wealth and the welfare gains potentially realizable if asset allocations were not subject to a homeownership constraint. For realistic parameter values, we find that the homeowner would require a substantial increase in total net worth to achieve the same level of utility as would be achievable if the choice of a home could be separated from the asset allocation decision. The robustness of the analysis is evaluated with respect to the model’s parameters and initial state variables. We find that changes in the values of the constraint (i.e., the value of the home) and the expected real rate of home value appreciation are the only state variables or parameter that is associated with a large change in asset allocation and/or the burden imposed by the housing constraint. This finding suggests the importance of a detailed examination of the impact of inter-regional differences in home prices and expected rates of appreciation on asset allocation and post-retirement wealth.     

The return to retail and the performance of US banks

The US banking industry is experiencing a renewed focus on retail banking, a trend often attributed to the stability and profitability of retail activities. This paper examines the impact of banks’ retail intensity on performance from 1997 to 2004 by developing three complementary definitions of retail intensity (retail loan share, retail deposit share, and branches per dollar of assets) and comparing these measures with both equity market and accounting measures of performance. We find that an increased focus on retail banking across US banks is linked with significantly lower equity market and accounting returns for all banks, but lower volatility for only the largest banking companies. We conclude that retail banking may be a relatively stable activity, but it is also a low return one.     

Wird der vom Regierungsentwurf eines VVG geplante Direktanspruch des Geschädigten gegen den Pflichthaftpflichtversicherer ein stumpfes Schwert? Zur Notwendigkeit eines Informationsanspruchs des Geschädigten in der neuen Pflichthaftpflichtversicherung

The amendment of the German Act on Insurance Contracts comprises a number of substantial modifications regarding liability insurance. The most important modification is the introduction of a direct claim against the insurer with regard to all compulsory insurances. Such a direct claim is up to now only known from the motor vehicle liability insurance. Yet, a direct claim will be advantageous for the aggrieved claimant only if he manages to identify the proper insurer. As a result of the structural differences to the motor vehicle liability insurance the act of identifying the insurer is almost utterly impossible for the claimant without any help by the insured. Thus the claimant must also be given a claim against the insured to be furnished with all necessary information regarding the insurer. This right originates from sec. 242 of the German Civil Code.