Pricing average options on commodities

This study proposes a new approximation formula for pricing average options on commodities under a stochastic volatility environment. In particular, it derives an option pricing formula under Heston and an extended λ‐SABR stochastic volatility models (which includes an extended SABR model as a special case). Moreover, numerical examples support the accuracy of the proposed average option pricing formula. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark Mark 31:407–439, 2011     

Efficient static replication of European options under exponential Lévy models

This study proposes a new scheme for the static replication of European options and their portfolios. First, a general approximation formula for efficient static replication as an extension of Carr P. and Chou A. (1997, 2002) and Carr P. and Wu L. (2002) is derived. Second, a concrete procedure for implementing the scheme by applying it to plain vanilla options under exponential Lévy models is presented. Finally, numerical examples in a model developed by Carr, P., Geman, H., Madan, D., and Yor M. (2002) are used to demonstrate that the replication scheme is more efficient and more effective in practice than a standard static replication method. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29:1–15, 2009     

Global environment and dynamic games of environmental policy in an international duopoly

This paper examines a differential game model of international pollution control in which polluting oligopolists compete in a third country market. Two alternative policy instruments (emission taxes and command-and-control regulations) are considered. A tougher emission policy in the home country enhances the foreign firm’s competitiveness because of the static “rent-shifting” effect. The foreign country also enjoys a future improvement of the global environmental quality by “free riding” on the home country’s emission reduction effort. Because of these strategic effects, the levels of environmental policy determined in the noncooperative policy game are distorted away from the socially optimal level. Moreover, the emission tax game produces a more distortionary outcome than that in the command-and-control game; it generates more pollution and lower welfare.      

Inductive Game Theory: Discrimination and Prejudices

This paper proposes a new theory, which we call inductive game theory . In this theory, the individual player does not have a priori knowledge of the structure of the game that he plays repeatedly. Instead, he accumulates experiences induced by occasional random trials in the repeated play. A stationary state is required to be stable against intentional deviations based on the player's experiences, and then it turns out to be a Nash equilibrium. The main part of the paper is the consideration of possible individual views of the society based on individual experiences. This view is defined to be a model of the society which the player builds from his experiences. Coherency with these experiences and a condition called rationalization are required for a model. As concrete objects of the theory, this paper analyzes the phenomena of discrimination and prejudice. The development of the new theory is undertaken by contrasting its observational and behavioral aspects with mental and judgmental aspects. The relationship between discrimination and prejudice will emerge in this dichotomous consideration.     

Japanese nationalism and geographical thought

There has been simultaneous emergence in many countries of the world of political disputes over aspects of national history in the 1990s. Geographical knowledge has political implications. Hence it is concerned with the formation of national identity as well as historical knowledge. This paper examines the relationships between Japanese modernisation and geographical thought, the characteristics of school textbooks and geopolitics in Japan during the Asia Pacific War, and recent disputes about views of history and the meaning of views of geography in the post‐Cold War era. Consequently, it is shown that the view of geography promoted the formation of national identity in the same way as that of history through geographical education and geopolitics. Taking the roles of geography into consideration, it can be said that an imaginative geography based on an ethnocentric view plays an important role in the time of rethinking national history. We should be aware of such an ethnocentric view of geography and make an effort to overcome differences in views between nations.     

Evolution in mechanisms for public projects

Summary This paper considers the explicit, real time dynamic processes in which cooperation emerges in a class ofbinary decision mechanisms, each of which determines funding for a public project. This class includes the Voluntary Contribution and the Majority Voting mechanisms. The population is subject to turnover so that new individuals enter society with possibly different beliefs about the future evolution of societal behavior than their predecessors. Individuals in this society maximize their discounted expected utilities. Due to the frequent turnover, however, these expectations may not be mutually consistent. Nevertheless, we find, for each mechanism, the nonempty set of the parameters for which the behavior pattern starting from states with nonprovision is absorbed into states with full provision with probability one. Moreover, for a sufficiently large population, outcomes with full provision are absorbing states if and only if certain types of voting mechanisms are used.We wish to thank an anonymous referee for valuable comments. We have also benefitted from the helpful comments of Srihari Ghovindan, Peter Linhart, George Mailath, Stephen Morris, Roy Radner, Rafael Rob, Nicholas Yannelis, and numerous seminar participants.     

A THEORY OF MONEY AND MARKETPLACES*

This article considers an infinitely repeated economy with divisible fiat money. The economy has many marketplaces that agents choose to visit. In each marketplace, agents are randomly matched to trade goods. There exist a variety of stationary equilibria. In some equilibrium, each good is traded at a single price, whereas in another, every good is traded at two different prices. There is a continuum of such equilibria, which differ from each other in price and welfare levels. However, it is shown that only the efficient single‐price equilibrium is evolutionarily stable.     

Public infrastructure for production and international trade in a small open economy: a dynamic analysis

This paper develops a dynamic trade model with a stock of public infrastructure, which has a property of “unpaid factor of production”. We show that a country with a smaller (larger) labor endowment tends to become an exporter of a good whose productivity is more (less) sensitive to the stock of public infrastructure. We also show that after the opening of trade, the labor-scarce country becomes unambiguously better off but the labor-abundant country may become worse off. Overall, these results contrasts with those obtained in the case of public intermediate goods with a “creation of atmosphere” property.     

SEARCH,ADVERSE SELECTION,AND MARKET CLEARING

We examine a dynamic decentralized trading model with infinitesimal sellers and buyers to investigate whether or not the market fails to clear in the limit of search friction vanishing. A seller, who has private information about product quality, and a buyer are matched to bargain over price. They form a long‐term relationship if they reach agreement. They return to the matching pool if they fail to agree or the existing relationship is dissolved. The market fails to clear if and only if the ratio of agents' patience over the dissolution rate exceeds a threshold.     

Organizations and overlapping generations games: Memory,communication, and altruism

This paper studies the role of memory and communication in overlapping generations (OLG) games between ongoing organizations. In each organization, each individual, upon entry into the game, replaces his predecessor who has the same preferences and faces the same strategic possibilities. An individual has no prior memory - that is, he does not directly witness the events that occur before his tenure. Instead, each individual relies on information about the past from his predecessor via cheap talk. This paper highlights the role of communication as a surrogate for memory.It has been shown elsewhere that Folk Theorems hold in OLG games with long enough lived individuals who can perfectly observe the past. However, the Folk Theorem fails for many games when individuals have no prior memory. We show that for OLG games without prior memory but with costly communication, a Folk Theorem holds only when there is some altruistic link between cohorts in an organization. Our main result asserts that if communication costs are sufficiently small, or if altruistic weights on successors are sufficiently large, then a strongly stationary Folk Theorem (i.e., equilibrium payoffs are time invariant) obtains if a managers message is public information. The equilibria in this Folk Theorem require a special form of intergenerational sanctions. In these sanctions, punishment is sometimes carried out long after both victim and perpetrator have left the game. Without this special structure, altruism may in fact destroy cooperation when it would otherwise be possible.Received: 18 April 2003, Accepted: 20 October 2003, JEL Classification: C72, C73, D74, D82We have benefitted from helpful comments and conversations with Luca Anderlini, Kirk Bailey, Hans Haller, Matthew Jackson, and Takashi Shimizu, and numerous seminar participants. This research is partially supported by the National Science Foundation, and by grants-in-aid for scientific research of the Ministry of Education of Japan. Of course, any remaining error is our own.