How to make Dupire’s local volatility work with jumps

There are several (mathematical) reasons why Dupire’s formula fails in the non-diffusion setting. And yet, in practice, ad-hoc preconditioning of the option data works reasonably well. In this note, we attempt to explain why. In particular, we propose a regularization procedure of the option data so that Dupire’s local vol diffusion process recreates the correct option prices, even in manifest presence of jumps.     

The disruptive potential of PWLAN at the country-level: The cases of Germany,the UK,and the USA

This paper analyzes the impact of WLAN technologies for incumbent MNOs based on an empirical cross-country study of the players in the public WLAN-hotspot market using the theory of disruptive innovation and theoretical extensions for the industry- and country-level. The main research question to be analyzed is whether and why PWLAN has shown a disruptive or sustaining impact trend for incumbent MNOs in the hotspot markets of Germany, the UK, and the USA in recent years. The results imply that incumbent MNOs and new entrants have taken advantage of the opportunity provided by PWLAN, but the market success of both types of players varies between the countries analyzed. Incumbent MNOs dominate in Germany but not in the UK and the USA. The reasons for these country-specific differences were further investigated, and the results suggest that the analysis of disruptive potential in telecommunications needs to include country- and firm-specific factors, which are, again, largely influenced by the local regulation.     

Existence of Lévy term structure models

Lévy driven term structure models have become an important subject in the mathematical finance literature. This paper provides a comprehensive analysis of the Lévy driven Heath–Jarrow–Morton type term structure equation. This includes a full proof of existence and uniqueness in particular, which seems to have been lacking in the finance literature so far.      

Network topology of the interbank market

We provide an empirical analysis of the network structure of the Austrian interbank market based on Austrian Central Bank (OeNB) data. The interbank market is interpreted as a network where banks are nodes and the claims and liabilities between banks define the links. This allows us to apply methods from general network theory. We find that the degree distributions of the interbank network follow power laws. Given this result we discuss how the network structure affects the stability of the banking system with respect to the elimination of a node in the network, i.e. the default of a single bank. Further, the interbank liability network shows a community structure that exactly mirrors the regional and sectoral organization of the current Austrian banking system. The banking network has the typical structural features found in numerous other complex real-world networks: a low clustering coefficient and a short average path length. These empirical findings are in marked contrast to the network structures that have been assumed thus far in the theoretical economic and econo-physics literature.     

To buy or not to buy? The value of contradictory analyst signals

We study the predictive ability of individual analyst target price changes for post-event abnormal stock returns within each recommendation category. Although prior studies generally demonstrate the investment value of target prices, we find that target price changes do not cause abnormal returns within each recommendation level. Instead, contradictory analyst signals (e.g., strong buy reiterations with large target price decreases) neutralize each other, whereas confirmatory signals reinforce each other. Further, our analysis reveals that large target price downgrades can be explained by preceding stock price decreases. However, upgrades are not preceded by stock price increases, thereby demonstrating asymmetric analyst behavior when adjusting target prices to stock prices. Our results suggest that investors should treat recommendations with caution when they are issued with large contradictory target price changes. Thus, instead of blindly following a recommendation, investors might put more weight on the change in the corresponding target price and consider transaction costs.     

Under What Conditions Is an Insurance Guaranty Fund Beneficial for Policyholders?

In this article, we derive conditions in an imperfect market setting, under which the introduction of a self‐supporting insurance guaranty fund improves the position of the policyholders. When a guaranty fund is advantageous given homogeneous firms in the market, all policyholders benefit from it to the same extent, if they have the same underlying risk preferences and are charged identical premiums. In a more realistic heterogeneous setting, the introduction of an insurance guaranty fund is in general no longer beneficial for all policyholders in the same manner. Hence, systematic wealth transfers take place between the policyholders of different insurance companies. As a possible solution, and in order to counteract this effect, we introduce a framework for utility‐based fund charges.     

Corporate diversification and firm value: a survey of recent literature

We survey the recent literature on corporate diversification. How does corporate diversification influence firm value? Does it create or destroy value? Until the beginning of this century, the predominant thinking among researchers and practitioners was that corporate diversification leads to an average discount on firm value; however, several studies cast doubt on the diversification discount. In the last decade, there has been no clear consensus as to whether there is a discount or even a premium on firm value. Recent literature concludes that the effect on value differs from firm to firm and that corporate diversification alone does not drive the discount or premium; rather, the effect is heterogeneous across certain industry settings, economic conditions, and governance structures.