A Note on Tests for Market Integration in a Multivariate Non‐Stationary Framework

In this note relationships among agricultural prices are studied to offer a guide to the degree of market integration. Unlike many previous studies, which examine market integration using pairs of prices, we conduct testing in a multivariate framework to exploit the information embodied in the indirect price linkages. We focus on the formulation of hypotheses that identify the cointegration space using time series data on European pork and lamb markets. Results indicate that the national markets for pork are more closely integrated than those for lamb. Extraneous market information is exploited in an attempt to identify the cause of this segmentation in the European lamb market, although results do not support any of the hypotheses proposed.     

Knowledge spillovers: cooperation between universities and KIBS

Knowledge is increasingly perceived as a fulcral factor to company competitiveness. As the transfer of knowledge is one of the key functions of knowledge intensive business services (KIBS), this research seeks to analyse how the transfer of knowledge takes place between the higher education sector and KIBS type firms. The empirical results show that cooperation between KIBS and universities occurs irrespective of the typology (whether professional or technological in focus). We also empirically establish how geographic proximity is the factor bearing greatest influence over cooperation while such cooperation proves to have a positive impact on the company capacity to innovate. We furthermore find that this innovation capacity also drives a positive company financial performance.     

Equal Life Group Method of Depreciation: Part II Straight-Line Method of Cost Allocation for Integrated Properties

The Equal Life Group Plan (E.L.G.).is the ultimate refinement of the straight-line method of depreciation-rate determination. The straight-line method is designed to spread the cost of property as equally as possible year by year over its useful life. As usually interpreted, this means that an average depreciation rate is intended to be used throughout the life of a group of property units. The trend has been toward more and more groups, until now a group is often a vintage group, i.e., the property of a given class installed in one year.

If one average rate is applied to a vintage throughout its life span, only a part of the cost of short-lived units will be recovered during their lives. The shortage is made up during the life of the surviving units, but it is not fully made up until the year when the last surviving unit of the vintage is retired. What this means is that the depreciation reserve never reaches a ratio to plant in service as the age-to-life ratio of the plant.

The E.L.G. plan is designed to overcome this difficulty. Basically, it is a procedure which has the effect of charging to operations the cost of short-lived units during their life, and of longer-lived units during their life. In short, the cost of each unit is charged to operations during its expected life. Thus the depreciation reserve at all times should have a ratio to plant investment equal to the age-to-life ratio of existing plant.

In practice, the E.L.G. depreciation rate for a vintage of plant is determined very easily if studies are available which provide a sound basis for estimating the age of distribution of retirements for a vintage of plant. Such a distribution means that the vintage is divided into groups, as many groups as there are years expected for the life of the longest-lived unit in the vintage. This breakdown, of course, is statistical, because no one knows which units will have each of these lives-- but the percentage falling into each age group can be estimated accurately enough for this purpose. The depreciation rate for the vintage is simply the summation of the products of these percentages and their respective component depreciation rates. The rate for each component is the reciprocal of its life, modified, if necessary, by its expected net salvage.     

PER UNIT COST ALLOCATION OF INVESTED CAPITAL WITH ANTICIPATED NON-LEVEL PRODUCTION: THE CASE OF EXTRACTIVE INDUSTRIES

The concept of equivalent annual annuity (EAA) has long been used as a method of costing recovery of invested capital and the required return on invested capital over the productive life of a capital project. Academic texts almost universally use EAA methodology with level payment streams (annuities) to allocate capital costs. We develop a methodology for allocating capital costs evenly over each unit of production for projects with anticipated non-level production. This methodology uses a modified EAA approach that allows non-level annuity payment streams. Capital cost allocation is an important component in computing the value of extracted minerals for severance tax purposes; however, many firms and state and federal agencies use ad hocdepreciation schedules to allocate these costs. Ad hocdepreciation methods such as modified accelerated cost recovery system (MACRS) may be appropriate for income tax purposes but are inconsistent with commonly found requirements that severance taxes “shall be assessed on the wellhead or mine mouth fair market value.” The modified EAA approach provides a straightforward alternative that is based on sound financial methodology.     

Risks in new product development: devising a reference tool

This paper describes the development and applicability of a risk reference framework (RRF) for diagnosing risks in technological breakthrough projects. In contrast to existing risk identification strategies, the RRF centers on an integral perspective on risk (i.e. business, technological and organizational) and the assessment of risks in ongoing projects. The resulting RRF consists of 12 main risk categories and 142 connected critical innovation issues and has been developed for a globally operating company in the fast-moving consumer goods industry. Our analyses show that to some extent different project members identified the same risks and that saturation occurred in the number of new risk-issues brought to light. We conclude that the success of breakthrough innovation projects improves through formal risk-assessment.     

Pricing of perpetual Bermudan options

Abstract

We consider perpetual Bermudan options and more general perpetual American options in discrete time. For wide classes of processes and pay‐offs, we obtain exact analytical pricing formulae in terms of the factors in the Wiener‐Hopf factorization formulae. Under additional conditions on the process, we derive simpler approximate formulae.