A Simple Counterexample to Several Problems in the Theory of Asset Pricing

We give an easy example of two strictly positive local martingales that fail to be uniformly integrable, but such that their product is a uniformly integrable martingale. The example simplifies an earlier example given by the second author. We give applications in mathematical finance and we show that the phenomenon is present in many incomplete markets.     

No Arbitrage Condition for Positive Diffusion Price Processes

Using the Ray-Knight theorem we give conditions for anonnegative diffusion without drift to reach zero or not. These results also givenecessary and sufficient conditions for such a diffusion process to be a martingale (and notjust a local martinagle). We apply these results in order to give necessary and sufficientconditions for nonnegative diffusion to have equivalent local martingale measures.     

Institutions and the rise of taxes on labour in the OECD

Institutions and the Rise of Taxes on Labour in the OECD. —The aim of this paper is to explain differences among OECD countries in the evolution of taxes on labour during the last two decades. Its main message is that these taxes are to an important extent structurally and institutionally determined. Tax rates on labour are shown to have risen more strongly in countries where: (i) government has been controlled mainly by leftist parties; (ii) taxes (in general) are decided and collected mainly by central government (fiscal centralization); (iii) coalition and minority governments are frequent; (iv) the partisan composition (political colour) of these coalitions is unstable; (v) the labour market is neither centralized nor decentralized.     

Exponential Hedging and Entropic Penalties

We solve the problem of hedging a contingent claim B by maximizing the expected exponential utility of terminal net wealth for a locally bounded semimartingale X . We prove a duality relation between this problem and a dual problem for local martingale measures Q for X where we either minimize relative entropy minus a correction term involving B or maximize the Q -price of B subject to an entropic penalty term. Our result is robust in the sense that it holds for several choices of the space of hedging strategies. Applications include a new characterization of the minimal martingale measure and risk-averse asymptotics.     

Does Homeownership Lead to Longer Unemployment Spells? The Role of Mortgage Payments

This paper examines the impact of housing tenure choice on unemployment duration in Belgium using EU-SILC micro data. We contribute to the literature in distinguishing homeowners with mortgage payments and outright homeowners. Accounting for tenure endogeneity and unobserved heterogeneity, we find that homeowners with a mortgage exit unemployment first, while outright owners stay unemployed the longest. Tenants take an intermediate position. Our results emphasize the key role of housing costs in the link between housing tenure and labour market outcomes. Considered together with the results of recent macroeconomic research on housing and employment in Belgium, this paper provides indirect evidence for significant negative effects of homeownership on the labour market and the economy beyond the owners themselves.     

Coherent Measures of Risk

In this paper we study both market risks and nonmarket risks, without complete markets assumption, and discuss methods of measurement of these risks. We present and justify a set of four desirable properties for measures of risk, and call the measures satisfying these properties "coherent." We examine the measures of risk provided and the related actions required by SPAN, by the SEC/NASD rules, and by quantile-based methods. We demonstrate the universality of scenario-based methods for providing coherent measures. We offer suggestions concerning the SEC method. We also suggest a method to repair the failure of subadditivity of quantile-based methods.     

Coherent and convex monetary risk measures for unbounded càdlàg processes

Assume that the random future evolution of values is modelled in continuous time. Then, a risk measure can be viewed as a functional on a space of continuous-time stochastic processes. In this paper we study coherent and convex monetary risk measures on the space of all càdlàg processes that are adapted to a given filtration. We show that if such risk measures are required to be real-valued, then they can only depend on a stochastic process in a way that is uninteresting for many applications. Therefore, we allow them to take values in ( −∞, ∞]. The economic interpretation of a value of ∞ is that the corresponding financial position is so risky that no additional amount of money can make it acceptable. The main result of the paper gives different characterizations of coherent or convex monetary risk measures on the space of all bounded adapted càdlàg processes that can be extended to coherent or convex monetary risk measures on the space of all adapted càdlàg processes. As examples we discuss a new approach to measure the risk of an insurance company and a coherent risk measure for unbounded càdlàg processes induced by a so called m-stable set.Due to errors during the typesetting process, this article was published incorrectly in Finance Stoch 9(3):369–387 (2005). The address of the first author was printed incorrectly, and in the whole paper the angular brackets were misprinted as [ ]. The complete corrected article is given here. The online version of the original paper can be found at: http://dx.doi.org/10.1007/s00780-004-0150-7