Skew Brownian Motion and Pricing European Options

Abstract

The volatility smile and systematic mispricing of the Black–Scholes option pricing model are the typical motivation for examining stochastic processes other than geometric Brownian motion to describe the underlying stock price. In this paper a new stochastic process is presented, which is a special case of the skew-Brownian motion of Itô and McKean. The process in question is the sum of a standard Brownian motion and an independent reflecting Brownian motion that is similar in construction to the stochastic representation of a skew-normal random variable. This stochastic process is taken in its exponential form to price European options. The derived option price nests the Black–Scholes equation as a special case and is flexible enough to accommodate stochastic volatility as well as stochastic skewness.     

Policy implications of research on non-GAAP reporting

Over the past two decades, the regulatory landscape for non-GAAP reporting has evolved significantly. Despite a temporary decline in the frequency of non-GAAP reporting following Regulation G, the incidence of non-GAAP disclosure has continued to increase steadily, leading to a current all-time high in reporting activity. This proliferation of non-GAAP disclosure has captured the attention of standard setters and regulators in recent years. This paper provides an academic perspective on policy implications for both regulation and standard setting. We contend that current Compliance and Disclosure Interpretations (C&DIs) of the SEC staff may perhaps have gone too far in restricting certain types of non-GAAP disclosures. As a result, we advocate a slight relaxation of the current enforcement of Regulation G. We agree with FASB proposals for greater disaggregation in the income statement to allow for more transparency in non-GAAP reporting. Finally, we believe the PCAOB should consider requiring auditors to take a more direct role with respect to non-GAAP disclosures.     

The impact of leniency and whistle-blowing programs on cartels

Antitrust authorities have set up leniency programs for cartel members that denounce their collusive agreements. These programs help prosecute participants and can thereby deter collusion. We compare the impact of reduced fines and positive rewards and argue that rewarding individuals, including firm employees, can deter collusion in a more effective way.We discuss possible adverse effects of whistle-blowing programs on firms' behavior, and particularly on turnover, incentives to innovate and cooperation. We also explore explanations for the puzzling fact that managers keep incriminating evidence and argue reward programs actually provide additional incentives for keeping such evidence.     

中国成品油市场月度分析

回顾 1.需求 9月份,中国固定资产投资及工业增加值同比增速继续放慢,但采矿、冶金、制造业、交通等主要耗能行业的投资和生产增长依然旺盛,而且出口增长强劲,推动石油需求继续走高.估计当月石油平均消费水平上升到约93.96万吨/日,同比增长6.91%.成品油消费逐步走向旺季,其中汽油需求随着运输、旅行等活动的日益增加,特别是"十一"长假期的临近,比上月有明显增长;而柴油需求也随着从南到北逐步进入"三秋"农忙季节以及沿海渔期生产活动的恢复开始走向秋季消费高峰.月中台风"姗姗"在渤海、黄海登陆,对华东、华北、东北沿海地区渔业、农业、基建和运输业造成一定程度的影响,不仅降低了部分油品需求,而且还造成油品出港不畅及到港缓慢.估计9月份国内汽油需求达到14.53万吨/日,比上月上升4.54%,同比增长3.66%;柴油需求为31.96万吨/日,比上月上升1.17%,同比增长7.48%;需求的柴汽比为2.17(见表1).     

Persistence and the four‐factor model in the Australian funds market: a note

We investigate whether Australian fund managers are able to deliver persistent performance using Carhart’s (1997) four‐factor model. Short‐ and long‐term persistence is examined and the sample is also divided into unit trusts and superannuation funds. We do not find evidence of persistence in any sample of funds. We find that winner (loser) funds tend to hold past winner (loser) stocks. Winner and loser unit trusts both appear to have positive exposure to small stocks.     

The effect of political visibility on audit effort and audit pricing

This study examines whether auditors adjust their effort and pricing decisions for political visibility. We argue, from the behavioural literature, that political visibility will create the need for more justification by auditors. Using data on actual audit fees, hours and billing rates for a sample of New Zealand public sector companies, we find that total audit fees are positively related to the number of press mentions (our proxy for political visibility). Consistent with our expectations we find that audit fees are monotonically related to audit fees. We also find that auditors increase the hours spent on the audit but not billing rates, which further suggests defensive bolstering by auditors.     

The Demand for Life Insurance Policy Loans

Previous research has examined the demand for life insurance policy loans using aggregate policy loan data. In contrast, we use a detailed household survey data set containing life insurance and policy loan information to alternatively, and in some cases more directly, examine the four hypotheses traditionally associated with policy loan demand. Our research provides the first U.S. evidence (in the post–World War II period) in support of the policy loan emergency fund hypothesis. In particular, we find that the more detailed emergency fund proxies used here reveal a significantly positive relation between loan demand and recent expense or income shocks.     

The appropriateness of default investment options in defined contribution plans: Australian evidence

For participants in defined contribution (DC) plans who refrain from exercising investment choice, plan contributions are invested following the default investment option of their respective plans. Since default investment options of different plans vary widely in terms of their benchmark asset allocation, the most important determinant of investment performance, participants enrolled in these options face significantly different wealth outcomes at retirement. This paper simulates the terminal wealth outcomes under different static asset allocation strategies to evaluate their relative appeal as default investment choice in DC plans. We find that strategies with low or moderate allocation to stocks are consistently outperformed in terms of upside potential of exceeding the participant's wealth accumulation target at retirement as well as downside risk of falling below that target outcome by aggressive strategies whose allocation to stocks approach 100%. The risk of extremely adverse wealth outcomes for plan participants also does not appear to be very sensitive to asset allocation. Our evidence suggests the appropriateness of strategies heavily tilted towards stocks to be nominated as default investment options in DC plans unless plan providers emphasize predictability of wealth outcomes over adequacy of retirement wealth.     

Trigger happy or gun shy? Dissolving common‐value partnerships with Texas shootouts

The operating agreements of many business ventures include clauses to facilitate the exit of joint owners. In so‐called Texas Shootouts, one owner names a single buy‐sell price and the other owner is compelled to either buy or sell shares at that named price. Despite their prevalence in real‐world contracts, Texas Shootouts are rarely triggered. In our theoretical framework, sole ownership is more efficient than joint ownership. Negotiations are frustrated, however, by the presence of asymmetric information. In equilibrium, owners eschew buy‐sell offers in favor of simple offers to buy or to sell shares and bargaining failures arise. Experimental data support these findings.