Investment and capital structure decisions of foreign subsidiary with international debt shifting and exchange rate uncertainty

This paper examines the impact of international debt shifting and exchange rate uncertainty on investment and capital structure decisions of foreign subsidiary. We find that debt shifting induces earlier investment, earlier default, higher leverage, and larger ex ante firm value of foreign subsidiary. When debt shifting is not so costly, the optimal leverage of foreign subsidiary increases as the tax rate differential increases. Moreover, when the correlation between exchange rate and foreign cash flow uncertainties is positive (negative, respectively), foreign investment advances as exchange rate uncertainty increases (decreases) as well as the correlation increases. These results reveal that the impact of debt shifting and exchange rate uncertainty on investment and capital structure policies cannot be ignored, supporting existing empirical findings.     

On the Hoggard–Whalley–Wilmott Equation for the Pricing of Options with Transaction Costs

The Hoggard–Whalley–Wilmott equation is introduced to model portfolios of European type options incorporating transaction costs. The model gives rise to a nonlinear parabolic partial differential equation (PDE), whose nonlinearity reflects the presence of transaction costs. We show analytically the existence of solutions which are not necessarily convex nor concave. Numerical treatments are also given, which are devised to effectively handle an infinite domain and unbounded solutions.      

A dynamic analysis of the differential incidence of capital and labour taxes in a two-class economy

This paper studies a differential incidence model, where a rise in a capital tax is accompanied by a change in a labour tax to hold constant the per capita government revenue, in a two-class growing economy. The major concern is to analyse the conditions necessary for the burden of such a tax substitution to fall solely, partially, or inconsequentially on capitalists or workers. The results obtained indicate that a higher rate of capital tax tends to impose a greater burden on workers.     

On the theory of interregional tax incidence

The state of factor income distribution prevailing in a local jurisdiction may be greatly influenced by the change in tax policies carried out by some other local jurisdictions through the market mechanism. The theory of interregional tax incidence is concerned with the problem of interactive distributional effects among local jurisdictions when each local government executes independently tax policies. This paper develops a new method of conducting a comparative static analysis on the current issue by making use of a general equilibrium model of interregional tax incidence characterized by the assumption that labor is perfectly immobile between different jurisdictions.     

Credit Events and the Valuation of Credit Derivatives of Basket Type

Thispaper provides a simple model for valuing a credit derivativewhose payoff depends on the identity (or identities) of the first(or first two) to occur of a given list of credit events, suchas defaults. The joint survival probability of occurrence timesof credit events is formulated in terms of stochastic intensityprocesses under the assumption of conditional independence. Basedon the joint survival probability, we can easily obtain the pricingformulas of such credit derivatives under the risk-neutral valuationframework. When the default intensity processes follow the extendedVasicek model, closed-form solutions of the pricing formulasare given.     

Does the Hurst index matter for option prices under fractional volatility?

This study examines the effect of fractional volatility on option prices. To this end, we develop an approximation method for the pricing of European-style contingent claims when volatility follows a fractional Brownian motion. Through extensive numerical experiments, we confirm that the decrease in the smile amplitude under fractional volatility is much slower than that under the standard stochastic volatility model. We also show that the Hurst index under fractional volatility has a crucial impact on option prices when the maturity is short and speed of mean reversion is slow. On the contrary, the impact of the Hurst index on option prices reduces for long-dated options.     

PORTFOLIO SELECTION PROBLEMS VIA THE BIVARIATE CHARACTERIZATION OF STOCHASTIC DOMINANCE RELATIONS1

Stochastic dominance (SD) is a very useful tool in various areas of economics and finance. the purpose of this paper is to provide the results of SD relations developed in other areas such as applied probability which, we believe, are useful for many portfolio selection problems. In particular, the bivariate characterization of SD relations given by Shanthikumar and Yao (1991) is a powerful tool for the demand and the shift effect problems in optimal portfolios. the method enables one to extend many results that hold for the case where the underlying lying assets are statistically independent to the dependent case directly.     

Strategy clusters in japanese markets: Firm performance implications

This study identifies generic Japanese strategy clusters and explores their performance implications. It is based on Japanese executives’ perceptions of the veracity of various PIMS strategy principles in Japan. Three distinct strategy clusters are identified around market position and product strategy dimensions. These Japanese strategy clusters, when moderated by such contingency factors as strategic orientation and product life cycle stage, offer unique performance implications for the Japanese market. His research interests center on global sourcing, competitive strategy, and cross-cultural comparative issues. His recent publications includeGlobal Sourcing Strategy: R&D, Manufacturing, and Marketing Interfaces (Quorum Books, 1992) andThe Japanese Distribution System: Opportunities and Obstacles, Structure and Practices (Probus Publishing, 1993). His research interests include strategy, international marketing, marketing management, and research methodology. His research has appeared in theJournal of Marketing, Journal of Marketing Research, andIndustrial Marketing Management, among others.     

A comparative static analysis of tax incidence

The model presented by Harberger (1962) in his famous article has received a good deal of attention from economists concerned with the incidence of taxes in a general equilibrium setting. Through problems posed by using the Harberger model have been frequently pointed out by several authors, no attempt has been made to generalize the model to deal adequately with the tax incidence problem. This paper aims to follow a new method of conducting a comparative static analysis of tax incidence, and to extend the results derived by earlier contributions in a more general context.     

Monotonicities in a Markov Chain Model for Valuing Corporate Bonds Subject to Credit Risk

In recent years, it has become common to use a Markov chain model to describe the dynamics of a firm's credit rating as an indicator of the likelihood of default. Such a model can be used not only for describing the dynamics but also for valuing risky discount bonds. The aim of this paper is to explain how the Markov chain model leads to the known empirical findings such that prior rating changes carry predictive power for the direction of future rating changes and a firm with low (high, respectively) credit rating is more likely to be upgraded (downgraded) conditional on survival as the time horizon lengthens. The model will also explain practically plausible statements such as that bond prices as well as credit risk spreads would be ordered according to their credit qualities. Stochastic monotonicities of absorbing Markov chains play a prominent role in these issues.