The asymptotic expansion of the regular discretization error of Itô integrals

We study an Edgeworth‐type refinement of the central limit theorem for the discretization error of Itô integrals. Toward this end, we introduce a new approach, based on the anticipating Itô formula. This alternative technique allows us to compute explicitly the terms of the corresponding expansion formula. Two applications to finance are given; the asymptotics of discrete hedging error under the Black–Scholes model and the difference between continuously and discretely monitored variance swap payoffs under stochastic volatility models.     

Sourcing strategies of U.S. service companies: a modified transaction–cost analysis

Global procurement of services has been receiving an increasing amount of managerial attention in recent years. Service firms seem to have begun sourcing part of their service activities from abroad in much the same way as manufacturing firms have sourced components and finished goods in the past 30 years. However, little is known about the nature of service sourcing strategy. In this study, we employ a modified transaction–cost analysis to examine empirically the locational (domestic vs. global sourcing) and the ownership (internal vs. external sourcing) aspects of service sourcing strategy. In addition, performance implications on both the locational and ownership aspects of service sourcing are investigated. The results show that, similar to components and finished goods procurement, supplementary services are sourced globally, either internally or externally. Furthermore, the relationship between asset specificity and internal sourcing of supplementary services is moderated by the level of inseparability and transaction frequency. Finally, internal sourcing and foreign sourcing of supplementary services are negatively related to a service’s market performance. Copyright © 1999 John Wiley & Sons, Ltd.     

Investment and capital structure decisions of foreign subsidiary with international debt shifting and exchange rate uncertainty

This paper examines the impact of international debt shifting and exchange rate uncertainty on investment and capital structure decisions of foreign subsidiary. We find that debt shifting induces earlier investment, earlier default, higher leverage, and larger ex ante firm value of foreign subsidiary. When debt shifting is not so costly, the optimal leverage of foreign subsidiary increases as the tax rate differential increases. Moreover, when the correlation between exchange rate and foreign cash flow uncertainties is positive (negative, respectively), foreign investment advances as exchange rate uncertainty increases (decreases) as well as the correlation increases. These results reveal that the impact of debt shifting and exchange rate uncertainty on investment and capital structure policies cannot be ignored, supporting existing empirical findings.     

Pricing Mortgage-Backed Securities (MBS)

This paper presents a pricing formula for MBSs andproposes a specific model for MBS prices thatdescribes the so-called burnout phenomenon ofprepayments due to refinancing. A numerical exampleof the model is demonstrated by Monte Carlosimulation. An estimation procedure is alsodescribed.     

Credit Events and the Valuation of Credit Derivatives of Basket Type

Thispaper provides a simple model for valuing a credit derivativewhose payoff depends on the identity (or identities) of the first(or first two) to occur of a given list of credit events, suchas defaults. The joint survival probability of occurrence timesof credit events is formulated in terms of stochastic intensityprocesses under the assumption of conditional independence. Basedon the joint survival probability, we can easily obtain the pricingformulas of such credit derivatives under the risk-neutral valuationframework. When the default intensity processes follow the extendedVasicek model, closed-form solutions of the pricing formulasare given.     

Strategy clusters in japanese markets: Firm performance implications

This study identifies generic Japanese strategy clusters and explores their performance implications. It is based on Japanese executives’ perceptions of the veracity of various PIMS strategy principles in Japan. Three distinct strategy clusters are identified around market position and product strategy dimensions. These Japanese strategy clusters, when moderated by such contingency factors as strategic orientation and product life cycle stage, offer unique performance implications for the Japanese market. His research interests center on global sourcing, competitive strategy, and cross-cultural comparative issues. His recent publications includeGlobal Sourcing Strategy: R&D, Manufacturing, and Marketing Interfaces (Quorum Books, 1992) andThe Japanese Distribution System: Opportunities and Obstacles, Structure and Practices (Probus Publishing, 1993). His research interests include strategy, international marketing, marketing management, and research methodology. His research has appeared in theJournal of Marketing, Journal of Marketing Research, andIndustrial Marketing Management, among others.     

The microstructural foundations of leverage effect and rough volatility

We show that typical behaviors of market participants at the high frequency scale generate leverage effect and rough volatility. To do so, we build a simple microscopic model for the price of an asset based on Hawkes processes. We encode in this model some of the main features of market microstructure in the context of high frequency trading: high degree of endogeneity of market, no-arbitrage property, buying/selling asymmetry and presence of metaorders. We prove that when the first three of these stylized facts are considered within the framework of our microscopic model, it behaves in the long run as a Heston stochastic volatility model, where a leverage effect is generated. Adding the last property enables us to obtain a rough Heston model in the limit, exhibiting both leverage effect and rough volatility. Hence we show that at least part of the foundations of leverage effect and rough volatility can be found in the microstructure of the asset.     

Marketing–Industrial Design Integration in New Product Development: The Case of China*

Despite the acknowledgement of functional integration as an important driver of new product development (NPD) success and the growing recognition of the significance of industrial design (ID), the integration between industrial design and other functional units in NPD has been rarely researched. In this article, we examine the marketing and ID integration in NPD in the context of China. Mainly based on Cooper's (1994) stage‐gate phases of NPD process and Gupta, Raj, and Wilemon's (1985) categorization of NPD activities, we develop a conceptual framework that identifies 29 areas that might require integration or where integration might occur between marketing and ID. Specifically, we investigate and compare the current and the ideal integration between marketing and ID perceived by the two functions. An analysis of data from 113 companies reveals that the current level of integration fell short of the ideal level of integration in all the phases of NPD. Both managers believed in the descending trend of integration along the stage‐gate NPD phases and were dissatisfied with the current level of integration in all the NPD phases. Except for a few areas of agreement, marketing and ID managers showed significant differences with each other in their perceptions of the current and the ideal integration in most of the 29 areas. Despite the disagreements however, the two functions agreed with each other on the most important areas that require integration and achieved the highest level of marketing–ID integration. These findings suggest that firms should improve the marketing–ID integration in all the NPD phases and that management could improve the effectiveness of marketing–ID integration by prioritizing and focusing on the most important areas. Research and managerial implications, limitations, and future research directions are presented in the paper.     

Monotonicities in a Markov Chain Model for Valuing Corporate Bonds Subject to Credit Risk

In recent years, it has become common to use a Markov chain model to describe the dynamics of a firm's credit rating as an indicator of the likelihood of default. Such a model can be used not only for describing the dynamics but also for valuing risky discount bonds. The aim of this paper is to explain how the Markov chain model leads to the known empirical findings such that prior rating changes carry predictive power for the direction of future rating changes and a firm with low (high, respectively) credit rating is more likely to be upgraded (downgraded) conditional on survival as the time horizon lengthens. The model will also explain practically plausible statements such as that bond prices as well as credit risk spreads would be ordered according to their credit qualities. Stochastic monotonicities of absorbing Markov chains play a prominent role in these issues.     

Central limit theorem for the realized volatility based on tick time sampling

A central limit theorem for the realized volatility estimator of the integrated volatility based on a specific random sampling scheme is proved, where prices are sampled with every ‘continued price change’ in bid or ask quotation data. The estimator is shown to be robust to market microstructure noise induced by price discreteness and bid–ask spreads. More general sampling schemes also are treated in case that the price process is a diffusion.