A direct solution method for pricing options involving the maximum process

One often encounters options involving not only the stock price, but also its running maximum. We provide, in a fairly general setting, explicit solutions for optimal stopping problems concerned with a diffusion process and its running maximum. Our approach is to use excursion theory for Markov processes and rewrite the original two-dimensional problem as an infinite number of one-dimensional ones. Our method is rather direct without presupposing the existence of an optimal threshold or imposing a smooth-fit condition. We present a systematic solution method by illustrating it through classical and new examples.     

Competitiveness and Subsidy or Tax Policy for New Technology Adoption in Duopoly

We consider a problem of subsidy or tax policy for new technology adoption by duopolistic firms. The technology is developed in and transferred by a foreign country to the domestic country. It is free but each firm must expend some fixed set-up cost for education of its staff to adopt and use it. Assuming that each firm maximizes the weighted average of absolute and relative profits, we examine the relationship between competitiveness and subsidy or tax policies for technology adoption, and show that when firm behavior is not competitive (the weight on the relative profit is small), the optimal policy of the government may be taxation; when firm behavior is competitive (the weight on the relative profit is large), the optimal policy is subsidization or inaction and not taxation. However, if firm behavior is extremely competitive (close to perfect competition), taxation case re-emerges.     

The estimation of monetary policy reaction function in a data-rich environment: The case of Japan

This paper reports the estimates of a monetary policy reaction function for the Bank of Japan in a data-rich environment. There are two main findings. First, a weak identification problem arises in the estimates under the specifications that some previous works employ, though in a data-rich environment it may be possible to avoid this problem. Second, the evidence from the estimates in a data-rich environment suggests that the Bank of Japan only controlled the inflation forecast, and placed no weight on output stabilization directly over the period from November 1988 through February 2001.