Options with Constant Underlying Elasticity in Strikes

Closed-form solutions are derived and interpreted for European options, with stochastic strike prices, that maintain constant elasticity of the strike with respect to the price of the underlying asset. We refer to such options as CUES. CUES preserve the relative shares of exercise price risk for both the buyer and writer of the option, regardless of whether the price of the underlying asset moves up or down. The relevance of the CUES concept is established through applications in two distinct fields. First, it is established that CUES-like options are embedded in private equity investments. This concept is then used in a novel application to determine the equity share of a private company corresponding to a given level of investment. Secondly, the advantages that CUES would provide over traditional executive stock option grants are considered and it is shown that CUES can provide enhanced incentive-alignment without increasing options expense to the company. JEL Classification: G130     

Portfolio Optimization under Solvency Constraints: A Dynamical Approach

We develop portfolio optimization problems for a nonlife insurance company seeking to find the minimum capital required that simultaneously satisfies solvency and portfolio performance constraints. Motivated by standard insurance regulations, we consider solvency capital requirements based on three criteria: ruin probability, conditional Value-at-Risk, and expected policyholder deficit ratio. We propose a novel semiparametric formulation for each problem and explore the advantages of implementing this methodology over other potential approaches. When liabilities follow a Lognormal distribution, we provide sufficient conditions for convexity for each problem. Using different expected return on capital target levels, we construct efficient frontiers when portfolio assets are modeled with a special class of multivariate GARCH models. We find that the correlation between asset returns plays an important role in the behavior of the optimal capital required and the portfolio structure. The stability and out-of-sample performance of our optimal solutions are empirically tested with respect to both the solvency requirement and portfolio performance, through a double rolling window estimation exercise.     

The Role of Beta and Size in the Cross-Section of European Stock Returns

This paper examines the ability of beta and size to explain cross-sectional variation in average returns in 12 European countries. We find that average stock returns are positively related to beta and negatively related to firm size. The beta premium is in part due to the fact that high beta countries outperform low beta countries. Within countries high beta stocks outperform low beta stocks only in January, not in other months. We reject the hypothesis that differences in average returns on size- and beta-sorted portfolios can be explained by market risk and exposure to the excess return of small over large stocks (SMB). Consistent with recent US evidence, we find that after controlling for size, there is no association between average returns and exposure to SMB.     

The auditor’s strategy selection for negotiation with management: Flexibility of initial accounting position and nature of the relationship

The audit partner is usually the first mover in a negotiation with client management and has an intended strategy set going into such a negotiation. Negotiation strategies that make up the set may be integrative (both parties can gain or at least not lose) and distributive (there is a winner and a loser). We focus on five strategies: two integrative (expanding the agenda or problem solving) and three distributive (contending, conceding or compromising) and measure the audit partner’s intent to use these strategies’ associated tactics. We report the results of an audit negotiation experiment in which 140 highly experienced audit partners planned a negotiation in response to a case scenario that incorporated two key theoretical variables: the flexibility of the client initial accounting position and the nature of the prior relationship between the auditor and client management. In addition to intended tactics, we also examine these two variables’ effects on commitment to the goal of reducing net income. Our results indicate that in contrast to findings in the generic negotiation literature that show negotiators have a preference for distributive tactics and have difficulty employing integrative ones, our audit partners generally favored the use of integrative tactics over distributive ones when entering negotiations, irrespective of circumstance. However, the two theorized variables led to particular strategic choices when distributive tactics were intended; for example, when the audit partner perceived he or she was facing a client management that was inflexible in its initial accounting position, the partner was more likely to use contending tactics and less likely to use conceding and compromising tactics. Finally, we discuss implications of these results for practice and research.     

Selling Versus Leasing of Durable Goods: The Impact on Marketing Channels

While many durable products are sold through intermediaries, there is limited understanding of how channel performance is influenced by transactions involving durable goods in a competitive market. In particular, extant research shows that intermediaries can significantly impact the leasing versus selling policy of a monopolistic manufacturer. This article seeks to fill that gap by examining the selling versus leasing choice of duopolistic manufacturers in the context of decentralized channels. Our analysis demonstrates that in addition to the unique equilibrium of selling, a prisoner's dilemma may arise where both manufacturers are better off if they were to lease their products.     

那捉摸不定的感觉

当你将手机调成振动状态或者用一个振动手柄玩赛车视频游戏,你正在享用触觉科技。人的身体可以感知多种不同的感觉并发生错觉,如果把感觉集于一隅,它会变得很有趣。     

Housing tenure choice and the dual income household

Housing tenure choice has been the subject of a very large literature. Many treatments have sought to estimate the effect of household income on the likelihood of home ownership. To date, no study has ever disaggregated the household income of married couples into the separate labor income components to see if one partner’s income has a different effect than the other. Using a derived likelihood function to control for censoring in the wife’s income, this paper estimates the effect of separate incomes on housing tenure choice, accounting for possible endogeneity of the wife’s income. To compare the results of this estimation method, the paper also estimates the standard IV models, 2SLS and IV probit. While the results show that there is no endogeneity of the wife’s income, ignoring the censoring of the endogenous variable (when a large fraction of observations are censored) can possibly lead to biased coefficient estimates. Also, this paper confirms the importance of total household income, which has a larger effect than the total disaggregated components.     

Agriculture and economic growth in Ethiopia: growth multipliers from a four-sector simulation model

Agriculture accounts for over half of Ethiopian GDP, yet 'he case for agriculture as a focus of economic growth strategies must rely on identifying a set of intersectoral linkages through which agricultural growth contributes to the growth of nonagriculture in the Ethiopian economy. This article develops a four-sector numerical simulation model of economic growth in Ethiopia which permits the calculation of macroeconomic growth multipliers resulting from income shocks to agriculture, services, modern industry, and traditional industry. The resulting growth multipliers are 1.54 for agriculture. 1.80 for services, 1.34 for modern industry, and 1.22 for traditional industry. These results depict an economy in which intersectoral linkages operate on a highly uneven basis. These limits are reflected in the wide disparity between sectoral growth multipliers and by substantial differences in the patterns ol their decomposition. The policy relevance of these findings relate, in part, to the distributional implications of growth in particular sectors. Poverty in Ethiopia is disproportionately rural. An income shock to agriculture is clearly the most progressive choice, indicating the need to highlight agricultural development in growth strategies for Ethiopia. Yet, the simulation results further indicate that doing so imposes relatively little trade off against total benefit. While a $1 service sector income shock generates $0.80 in indirect benefits, a $1 agricultural income shock still generates $0.54 in indirect gains-a somewhat smaller benelit, but one likely to make the greatest possible impact on poverty reduction.     

Contract theory and agricultural policy analysis: a discussion and survey of recent developments*

This paper surveys some recent developments in contract theory and illustrates how this theory might be useful for conceptualising policy issues related to vertical coordination and contracting in the agro‐food industry. The article begins by surveying contract theory to identify key economic distortions that can potentially justify government involvement. Next, the general ingredients of agricultural contracts that are most likely to create inefficiencies are discussed. Finally, controversial aspects of real‐world agricultural contracts are highlighted and lessons from the theory are used to determine whether government intervention is justified. Actual legislation that has been proposed in the USA is analysed where appropriate and topics that await further research are also discussed.