Asymptotic arbitrage with small transaction costs

We give characterizations of asymptotic arbitrage of the first and second kind and of strong asymptotic arbitrage for a sequence of financial markets with small proportional transaction costs λ _n on market n, in terms of contiguity properties of sequences of equivalent probability measures induced by λ _n -consistent price systems. These results are analogous to the frictionless case; compare (Kabanov and Kramkov in Finance Stoch. 2:143–172, 1998; Klein and Schachermayer in Theory Probab. Appl. 41:927–934, 1996). Our setting is simple, each market n contains two assets. The proofs use quantitative versions of the Halmos–Savage theorem (see Klein and Schachermayer in Ann. Probab. 24:867–881, 1996) and a monotone convergence result for nonnegative local martingales. Moreover, we study examples of models which admit a strong asymptotic arbitrage without transaction costs, but with transaction costs λ _n >0 on market n; there does not exist any form of asymptotic arbitrage. In one case, (λ _n ) can even converge to 0, but not too fast.     

A correction note to “Discrete time hedging errors for options with irregular payoffs”

This short note corrects an error (a factor is missing) in two formulas related to L ²-limits, established in “Discrete time hedging errors for options with irregular payoffs” by E. Gobet and E. Temam, Finance and Stochastics, 5, 357–367 (2001).     

Traffic congestion: an experimental study of the Downs-Thomson paradox

This study considers a model of road congestion with average cost pricing. Subjects must choose between two routes—Road and Metro. The travel cost on the road is increasing in the number of commuters who choose this route, while the travel cost on the metro is decreasing in the number of its users. We examine how changes to the road capacity, the number of commuters, and the metro pricing scheme influence the commuters’ route-choice behavior. According to the Downs-Thomson paradox, improved road capacity increases travel times along both routes because it attracts more users to the road and away from the metro, thereby worsening both services. A change in route design generates two Nash equilibria; and the resulting coordination problem is amplified even further when the number of commuters is large. We find that, similar to other binary choice experiments with congestion effects, aggregate traffic flows are close to the equilibrium levels, but systematic individual differences persist over time.     

Financial reforms and credit growth in Nigeria: empirical insights from ARDL and ECM techniques

In the last 37 years, Nigeria has undergone several stages of financial reforms with different impacts on the economy. This paper analyses the impact of these financial reforms on credit growth in Nigeria using annual data from 1980 to 2016. The research work hinges on the theoretical underpinning of McKinnon-Shaw hypothesis on the relevance of financial reforms in a lagging economy. Analysing the data with autoregressive distributed lag error correction representation and bounds testing techniques, we find evidence supporting this hypothesis, and specifically that at higher real interest rates there is increased financial intermediation evidenced by credit growth. Other findings are that in the long-run, financial system deposits, inflation rate and per capita GDP are strong asymmetrical predictors of credit growth and real interest rates (the financial reform indicator), while the short-run relationships are indicator-specific. We further show that a long-run cointegration relationship exists between domestic credit and other covariates and likewise between the real interest rate and its regressors.     

THE TRACKING ERROR RATE OF THE DELTA‐GAMMA HEDGING STRATEGY

We analyze the convergence rate of the quadratic tracking error, when a Delta‐Gamma hedging strategy is used at N discrete times. The fractional regularity of the payoff function plays a crucial role in the choice of the trading dates, in order to achieve optimal rates of convergence.     

An analysis of risk factors associated with road crash severities in Namibia

Abstract

Road crash is a leading cause of death and disabilities in Namibia and other developing countries. Based on recent trends, the World Health Organization indicated that progress to realize Sustainable Development Goal (SDG) target 3.6 – which calls for a 50% reduction in the number of road traffic deaths by 2020 – remains far from sufficient. To contribute to efforts in reducing road fatalities in Namibia, this study examined risk factors associated with the severity of crashes recorded in the country. Mixed logit modelling methodology was adopted to address the problem of unobserved heterogeneity in injury severity analysis. Model estimation results reveal that collision with pedestrians, head-on collisions, ran-off road collisions and crashes involving high occupancy passenger vehicles were more likely to result in fatalities and severe injuries. The findings and recommendations of this study are expected to enhance countermeasure implementation to reduce road crashes in Namibia.     

The effect of remittances on the current account in developing and emerging economies

This paper presents an analysis of the effect of remittances on the current account in developing and emerging economies, incorporating an assessment of the extent to which exchange rate regimes impact the relationship. The main findings suggest that there is a positive effect of remittances on the current account contemporaneously, but that the lagged effect is negative, which could be indicative of the existence of some underlying mechanisms characteristic of the Dutch disease phenomenon. In addition, the results show that a more flexible exchange regime dampens the contemporaneous positive effect that remittances have on the current account. The paper, therefore, asserts that policymakers face trade‐offs pertaining to the use of exchange rate policy in managing the effects of remittances on the current account, which should be given due consideration when such policy choices are made.     

The Role of Information Provision as a Policy Instrument to Supplement Environmental Taxes

This paper examines, within a dynamic framework, the role of information provision as a policy instrument to supplement environmental taxation. Several products are responsible for health as well as environmental damages. Many consumers do not possess the required information to optimally substitute away from these products. However, as the stock of information regarding the negative effects of these products builds up, an increasing fraction of consumers behaves optimally. The government uses two policy instruments, environmental taxation and information provision. We show that as the accumulated stock of information increases, the optimal tax rate declines over time. Information provision can shift market demand towards environmentally friendly goods over time, and thus reduce the required level of the tax rate. Our results provide strong evidence in support of information campaigns as a policy instrument to supplement traditional environmental policies.     

Do mergers and acquisitions improve firms' financial performance? The case of the U.S. generic drug industry

This paper examines the financial performance of all mergers and acquisitions (M&A) involving publicly traded companies that occurred in the U.S. generic drug industry from 1996 to 2017. The control group was chosen using a nearest neighbor matching procedure. Our empirical strategy controls for unobservable firm-specific fixed effects as well M&A fixed effects. Our findings suggest that profit levels do not change significantly following M&As, but total revenues decline after M&As. Firms undergoing an M&A cut operating expenses but not through reduction in labor expenses or number of employees.     

Proactive environmental strategy and firm performance at the bottom of the pyramid

This paper utilizes insights from the natural resource-based view to examine the conditions under which proactive environmental strategy (PES) drive firm performance. Using data collected from 266 small- and medium-sized enterprises operating in Ghana, the results suggest that the impact of PES on firm performance is more pronounced in firms that do not purse bottom of the pyramid orientation but not significant for firms pursuing the bottom of the pyramid orientation. Besides, the findings show that the influence of PES on firm performance is amplified for firms adopting imitation orientation but not significant for nonimitation-oriented firms. Implications and directions for future research are discussed.