Real option pricing with mean-reverting investment and project value

In this work, we are concerned with valuing the option to invest in a project when the project value and the investment cost are both mean-reverting. Previous works on stochastic project and investment cost concentrate on geometric Brownian motions (GBMs) for driving the factors. However, when the project involved is linked to commodities, mean-reverting assumptions are more meaningful. Here, we introduce a model and prove that the optimal exercise strategy is not a function of the ratio of the project value to the investment V/I – contrary to the GBM case. We also demonstrate that the limiting trigger curve as maturity approaches traces out a nonlinear curve in (V, I) space and derive its explicit form. Finally, we numerically investigate the finite-horizon problem, using the Fourier space time-stepping algorithm of Jaimungal and Surkov [2009. Lev´y based cross-commodity models and derivative valuation. SIAM Journal of Financial Mathematics, to appear. http://www.ssrn.com/abstract=972837]. Numerically, the optimal exercise policies are found to be approximately linear in V/I; however, contrary to the GBM case they are not described by a curve of the form V*/I*=c(t). The option price behavior as well as the trigger curve behavior nicely generalize earlier one-factor model results.     

Dis-Ag-reement: the construction and negotiation of risk in the Swedish controversy over antibacterial silver

What constitutes a potentially hazardous object is often debated. This article analyses the polemic construction and negotiation of risk in the Swedish controversy over the use of antibacterial silver in health care and consumer products. This debate engages the media, government agencies, parliament and government, non-governmental organizations and companies. Texts and websites from these actors were studied using content analysis. Antibacterial silver is construed by some actors as a risk object with harmful effects on a series of objects at risk: the environment, public health, organisms and sewage treatment. In contrast, other actors deny that antibacterial silver is a risk object, instead construing it as mitigating risk. In such a schema, antibacterial silver is conceived of as managing the risk objects of bacteria and micro-organisms, in turn managing the risk objects of infection, bad smell and washing, and in turn helping the environment and public health (objects at risk). The structure of the debate suggests two basic modes of risk communication. First, antibacterial silver is construed as a risk object, endangering a variety of objects at risk, such as organisms, public health, the environment and sewage treatment. Second, this association between antibacterial silver and objects at risk is obstructed, by denying that antibacterial silver is a risk object or by associating silver with the benefit of mitigating risk.     

Model-independent bounds for option prices—a mass transport approach

In this paper we investigate model-independent bounds for exotic options written on a risky asset using infinite-dimensional linear programming methods. Based on arguments from the theory of Monge–Kantorovich mass transport, we establish a dual version of the problem that has a natural financial interpretation in terms of semi-static hedging. In particular we prove that there is no duality gap.     

The origins of terrorism: Cross-country estimates of socio-economic determinants of terrorism

Prior research has concluded that socio-economic development does not significantly affect terrorism. We take an alternative view. First, we note that a country's socio-economic circumstances affect terrorists' behavior through terrorism's opportunity costs. We argue that this reasoning also holds for the case of supreme value terrorism. Then, we run a series of negative binomial regressions for 110 countries between 1971 and 2007 to test the hypothesis that poor socio-economic development is conducive to terrorism. We find that socio-economic variables indeed matter to terrorism, contrary to other results. Our findings imply that countries can benefit from economic development and growth in terms of a reduction in terrorism.     

The advantages of a small European Monetary Union

The question whether European Monetary Union should include all the EC countries from the start or should initially be limited to a few core countries is again being discussed more intensely. What advantages would a small EMU have from an economic point of view? Which countries should be its founder members?     

Factor-price equalization under joint and nonjoint production

We investigate how joint production affects the likelihood of factor price equalization (FPE) through trade. Following up on recent contributions by Samuelson (1992) and Jones (1992), we propose to take the relative size of the FPE region of endowment distributions to measure this likelihood, and we show that it mayincrease even if joint production leads to adecrease of the number of basic production processes, and it maydecrease even if the number of basic production processes operated in equilibrium isthe same as under nonjoint production. A 2×2×2 example is analyzed in more detail. Moreover, we show that the argument of Jones (1992) can be reinterpreted in a more applied direction by considering the effects of switching from a regime where only intermediate products are traded to a regime where all products are traded. The paper shows that the likelihood of FPE may decrease by integrating product markets in this way. Still more surprising is the fact that integration may even destroy FPE.     

Buildings’ Energy Efficiency and the Probability of Mortgage Default: The Dutch Case

The Journal of Real Estate Finance and Economics - We investigate the relationship between building energy efficiency and the probability of mortgage default. To this end, we construct a novel...