On Leland's strategy of option pricing with transactions costs

We compute the limiting hedging error of the Leland strategy for the approximate pricing of the European call option in a market with transactions costs. It is not equal to zero in the case when the level of transactions costs is a constant, in contradiction with the claim in Leland (1985).     

Inertia in the key currency

This paper empirically analyzes inertia in the position of the dollar as the key currency. We extend a money-in-the-utility model to one with parallel international currencies. We use an extended model to estimate a parameter in the utility function. Also, given the estimated parameter, we simulate a relation between depreciation and share of the dollar. The result indicates that the share of the dollar will not decrease even if the dollar depreciates at a moderate rate. Thus the dollar will keep its position as the key currency – inertia works in the key currency.     

Interbank credit and the money manufacturing process: a systemic perspective on financial stability

Interbank lending and borrowing occur when financial institutions seek to settle and refinance their mutual positions over time and circumstances. This interactive process involves money creation at the aggregate level. Coordination mismatch on interbank credit may trigger systemic crises. This happened when, since summer 2007, interbank credit coordination did not longer work smoothly across financial institutions, eventually requiring exceptional monetary policies by central banks, and guarantee and bailout interventions by governments. Our article develops an interacting heterogeneous agent-based model of interbank credit coordination under minimal institutions. First, we explore the link between interbank credit coordination and the money generation process. Contrary to received wisdom, interbank credit has the capacity to remove the inner limits of monetary system capacitance. Second, we develop simulation analysis on imperfect interbank credit coordination, studying impact of interbank dynamics on financial stability and resilience at individual and aggregate levels. Systemically destabilizing forces prove to be related to the working of the banking system over time, especially interbank coordination conditions and circumstances.

     

No arbitrage of the first kind and local martingale numéraires

A supermartingale deflator (resp. local martingale deflator) multiplicatively transforms nonnegative wealth processes into supermartingales (resp. local martingales). A supermartingale numéraire (resp. local martingale numéraire) is a wealth process whose reciprocal is a supermartingale deflator (resp. local martingale deflator). It has been established in previous works that absence of arbitrage of the first kind (\(\mbox{NA}_{1}\)) is equivalent to the existence of the (unique) supermartingale numéraire, and further equivalent to the existence of a strictly positive local martingale deflator; however, under \(\mbox{NA}_{1}\), a local martingale numéraire may fail to exist. In this work, we establish that under \(\mbox{NA}_{1}\), a supermartingale numéraire under the original probability \(P\) becomes a local martingale numéraire for equivalent probabilities arbitrarily close to \(P\) in the total variation distance.     

In the insurance business risky investments are dangerous: the case of negative risk sums

We investigate models with negative risk sums when the company invests its reserve into a risky asset whose price follows a geometric Brownian motion. Our main result is an exact asymptotic of the ruin probabilities for the case of exponentially distributed benefits. As in the case of non-life insurance with exponential claims, the ruin probabilities are either decreasing with a rate given by a power function (the case of small volatility) or equal to one identically (the case of large volatility). The result allows us to quantify the share of reserve to invest into such a risky asset to avoid a catastrophic outcome, namely the ruin with probability one. We address also the question of smoothness of the ruin probabilities as a function of the initial reserve for generally distributed jumps.     

Private information in futures markets: An experimental study

This paper presents the results of an experimental study on how people use their private information to estimate the “fair” futures price and how the quality of this information affects the traders' behavior and desire to trade. It finds that subjects are able to use their information correctly and that their desire to rely on it depends positively on the information precision. It shows that subjects are able to recognize that they are expected to lose money on futures trading when other traders have better quality information. However, subjects failed to recognize the symmetry of the futures contracts.     

Proud volunteers: the role of self- and vicarious-pride in promoting volunteering

This research examines the role of self- and vicarious-pride in eliciting divergent mindsets and behaviors toward volunteering. We propose that the congruent matching of self-pride (vicarious-pride) emotions with promotion (prevention) focus-framed messages increases the effectiveness of promoting volunteering behaviors. The positive “match-up” effects arise because self-pride elicits a competitive mindset, whereas vicarious-pride elicits a collaborative mindset toward volunteering. We test our predictions across three experimental studies using behavioral measures in different non-profit organizational settings. The findings contribute to research on the role of pride in prosocial consumer behavior by providing empirical evidence that self-pride and vicarious-pride lead to different mindsets and behavioral outcomes.     

Inequality,mobility and the financial accumulation process: a computational economic analysis

Our computational economic analysis investigates the relationship between inequality, mobility and the financial accumulation process. Extending the baseline model by Levy et al., we characterise the economic process through stylised return structures generating alternative evolutions of income and wealth through time. First, we explore the limited heuristic contribution of one and two-factors models comprising one single stock (capital wealth) and one single flow factor (labour) as pure drivers of income and wealth generation and allocation over time. Second, we introduce heuristic modes of taxation in line with the baseline approach. Our computational economic analysis corroborates that the financial accumulation process featuring compound returns plays a significant role as source of inequality, while institutional arrangements including taxation play a significant role in framing and shaping the aggregate economic process that evolves over socioeconomic space and time.