Toward improved and practical incentive regulation

The first half of this paper overviews traditional methods of ratemaking—embedded and marginal cost pricing—and four recent alternatives—automatic rate adjustments, profit-sharing, tariff menus, and the Vogelsang-Finsinger convergence mechanism—that have come to challenge them. We develop a list of nine desirable properties that are suitable to gauge any regulatory mechanism. In the second half of the paper, we explore in greater detail two recent incentive plans—the FCC's price caps approach and a mechanism that the three authors proposed in a FERC document. Based on the nine properties, these two mechanisms are compared.     

Incorporating correlation regimes in an integrated stressed risk modeling process

The practice of using stress tests to complement Value at Risk (VaR) estimates suffers from some limitations such as the lack of coherence between a statistical risk measure and a subjective one. On the other hand there is a wide consensus that using the same correlation matrix to design various stress tests is not likely to provide an accurate representation of relationship amongst risk factors in periods of market stress. In this paper we introduce a solution to these problems by explicitly considering different correlation regimes and incorporating the result of the stress test to the traditional market risk measurement models.

The determinants of the voting premium in Italy: The evidence from 1974 to 2003

We examine the voting premium in Italy in the period 1974 to 2003, when it ranged from 1% to 100%. At firm level, the measure of the price differential between voting and non-voting stocks cannot be fully explained without taking into account the effect of the largest shareholder’s identity. Family-controlled firms have higher voting premiums, especially when the family owns a large stake in the company’s voting equity and the founder is the firm’s CEO and/or Chairman. We explain this result by showing that families attach greater importance to control and are more prone than other types of controlling shareholders to expropriate the non-voting class of shareholders.     

Valuation of asset and volatility derivatives using decoupled time-changed Lévy processes

In this paper we propose a general derivative pricing framework that employs decoupled time-changed (DTC) Lévy processes to model the underlying assets of contingent claims. A DTC Lévy process is a generalized time-changed Lévy process whose continuous and pure jump parts are allowed to follow separate random time scalings; we devise the martingale structure for a DTC Lévy-driven asset and revisit many popular models which fall under this framework. Postulating different time changes for the underlying Lévy decomposition allows the introduction of asset price models consistent with the assumption of a correlated pair of continuous and jump market activity rates; we study one illustrative DTC model of this kind based on the so-called Wishart process. The theory we develop is applied to the problem of pricing not only claims that depend on the price or the volatility of an underlying asset, but also more sophisticated derivatives whose payoffs rely on the joint performance of these two financial variables, such as the target volatility option. We solve the pricing problem through a Fourier-inversion method. Numerical analyses validating our techniques are provided. In particular, we present some evidence that correlating the activity rates could be beneficial for modeling the volatility skew dynamics.     

Ex post Merger Evaluation in the U.K. Retail Market for Books

This paper evaluates the price effects of the merger of two major U.K. book retailers. We use a dataset containing monthly scanner data on a sample of 200 books in 50 local markets for four years around the merger. We compare the price changes after the merger in shops located in areas where both chains were present before the merger and in areas where only one chain was present. We also investigate the country‐wide effect of the merger. We find that the merger did not result in any price increase either at the local or at the national level.     

Unveiling the breakthrough potential of established technologies: an empirical investigation in the aerospace industry

The present article sheds new light on the role of established technologies as a driving force behind technological evolution, hence unveiling their breakthrough potential. Specifically, going against the conventional wisdom that only nascent technologies significantly shape future technological developments, we examine the likelihood that established technologies have to become breakthrough solutions. Furthermore, we also analyse if and how the breadth of knowledge base characterising those inventions influences this probability. Based on a sample of 21,000 patents belonging to the aerospace industry granted at the United States Patent and Trademark Office (USPTO), our results reveal that established technologies have an inverted U-shaped effect on the likelihood of becoming breakthroughs, and that such relationship is negatively influenced by a wide knowledge breadth.     

From the islands of knowledge to a shared understanding: interdisciplinarity and technology literacy for innovation in smart electronic product design

In the context of the evolving Internet, a balance between technological advances and meaning change is crucial to develop innovative and breakthrough “connected electronics” that enable the Internet of Things. Designers and technologists are key enablers of this process respectively, ensuring adequate users’ needs and technology development, inside the evolving context of social environment and human relations. Smart electronic product design must be a truly interdisciplinary process, in which technologists are aware of how much their decisions impact the user-product relationship and designers understand the full potential and associated limitations of technology involved. Shared knowledge and communication are essential in this scenario, but, due to their technological limitations, designers are often excluded from high-level decision processes. In this paper, we address the design of constructivist tools and associated strategy to enhance the technological literacy of designers, as a strong foundation for knowledge-based dialogue between these realms. We demonstrate its effectiveness in a long-term multidisciplinary Project-Based Learning application with Design and Electronics students. We present the cases from 2 years’ experimentation (with the first year as control group) that demonstrate improvement in the quality of teamwork; in learning results; improved performance of the students reflected in the quality of the projects developed; and positive teachers’ and students’ evaluations. We conclude that the use of the proposed tool not only provides the designer an active voice in the process of designing smart electronics, but also promotes an effective common language between these two worlds.     

Option-implied preferences adjustments, density forecasts, and the equity risk premium

The main objective of this paper is to analyse the value of information contained in prices of options on the IBEX 35 index at the Spanish Stock Exchange Market. The forward looking information is extracted using implied risk-neutral density functions estimated by a mixture of two-lognormals and several alternative risk adjustments. Our results show that, between October 1996 and March 2000, we can reject the hypothesis that the risk-neutral densities provide accurate predictions of the distributions of future realisations of the IBEX 35 index at 4- and 8-week horizons. When forecasting through risk-adjusted densities the performance of this period is statistically improved and we no longer reject that hypothesis. We show that risk adjustments based on a power specification for the stochastic discount factor—which is the approach used so far in the literature that derives the objective density function from option prices- generates an excessive volatility of risk premia. We use alternative risk adjustments and find that the forecasting performance of the distribution improves slightly in some cases when risk aversion is allowed to be time-varying. Finally, from October 1996 to December 2004, the ex-ante risk premium perceived by investors and that are embedded in option prices is between 12 and 18% higher than the premium required to compensate the same investors for the realised volatility in stock market returns.