The representation of American options prices under stochastic volatility and jump-diffusion dynamics

This paper considers the problem of pricing American options when the dynamics of the underlying are driven by both stochastic volatility following a square-root process as used by Heston [Rev. Financial Stud., 1993, 6, 327–343], and by a Poisson jump process as introduced by Merton [J. Financial Econ., 1976, 3, 125–144]. Probability arguments are invoked to find a representation of the solution in terms of expectations over the joint distribution of the underlying process. A combination of Fourier transform in the log stock price and Laplace transform in the volatility is then applied to find the transition probability density function of the underlying process. It turns out that the price is given by an integral dependent upon the early exercise surface, for which a corresponding integral equation is obtained. The solution generalizes in an intuitive way the structure of the solution to the corresponding European option pricing problem obtained by Scott [Math. Finance, 1997, 7(4), 413–426], but here in the case of a call option and constant interest rates.     

Evaluating the effectiveness of model specifications and estimation approaches for empirical accounting-based valuation models

This study considers the effectiveness of different model specifications and estimation approaches for empirical accounting-based valuation models in the UK. Primarily, we are interested in the accounting determinants of market value and, in particular, whether accounting-based valuation models can be estimated that not only have in-sample explanatory power but also potentially can be used as a tool of financial statement analysis in developing useful estimates of value out-of-sample. This requires models to be estimated on one sample, and tested for effectiveness on a different sample. Then, issues of model specification arise, together with choosing between methods of estimating the empirical models, in identifying the effectiveness of each combination. Using the criteria of bias and accuracy to capture effectiveness, we suggest estimation methods and models that, overall, provide the most effective models in this context.     

Can hedge funds time market liquidity?

We explore a new dimension of fund managers' timing ability by examining whether they can time market liquidity through adjusting their portfolios' market exposure as aggregate liquidity conditions change. Using a large sample of hedge funds, we find strong evidence of liquidity timing. A bootstrap analysis suggests that top-ranked liquidity timers cannot be attributed to pure luck. In out-of-sample tests, top liquidity timers outperform bottom timers by 4.0–5.5% annually on a risk-adjusted basis. We also find that it is important to distinguish liquidity timing from liquidity reaction, which primarily relies on public information. Our results are robust to alternative explanations, hedge fund data biases, and the use of alternative timing models, risk factors, and liquidity measures. The findings highlight the importance of understanding and incorporating market liquidity conditions in investment decision making.     

The Impact of Irreversibility,Uncertainty and Timing Options on Deprival Valuations and the Detection of Monopoly Profits

This paper has two purposes. The first is to derive rules identifying the deprival value of an asset (i) which is irreversible to one extent or another; (ii) the benefit stream of which is subject to continuing uncertainty; and (iii) for which an option to wait exists as to when to reacquire should the owner be deprived of it. The second is to consider whether accounting rates of return employing these deprival value rules can be developed to help in the detection of monopoly profits in circumstances where investment decision-making takes place in the presence of irreversibility, uncertainty and the existence of timing options. The ‘new’ deprival value rules for an asset differ from the ‘conventional’ ones in that present value less the value of the option to reinvest in the asset appears in the ‘new’ rules wherever present value appears in the ‘conventional’ rules. Examples are provided which suggest that ‘new’ and ‘conventional’ deprival value rules can differ materially. A further result is that accounting rates of return can be developed using the ‘new’ deprival value rules that are, in principle, useful in the detection of monopoly profits. Nonetheless, in practice such use requires a level of information that renders the result superfluous in the sense that the provision of replacement cost balance sheet data, combined with the level of information needed, is sufficient to reveal the presence of monopoly profits directly.     

Opportunist dealing in the UK pig meat supply chain: Trader mentalities and alternatives

The scandal surrounding the presence of horsemeat in UK supermarket meat products has focused public attention on the problems of complex, fragmented food supply chains. Through a study of the UK's pig meat supply chain, this paper proposes a new framing of the problem in terms of opportunistic dealing adopted by the supermarkets in vertically disintegrated supply chains, where all actors attempt to pass the risks and costs onto somebody else. This outcome is the result of cultural practices and competences in buyer-led supermarket organizations where strong supermarket chains have the power to capture processor and producer margins. One consequence is that mass-market meat production and processing is close to unviable, as evidenced here by the analysis of the VION Food Group. However, there are mainstream alternatives to the retail-led dysfunctional supply chain. This paper presents an alternative integrated supply chain model using the case of Morrisons, the UK's fourth largest supermarket chain. If fragmented supply chains are not inevitable, the important issue explored in the conclusion is how the inadequacies of government policy, which understands the problem of the sector but is stuck with a competition-based mindset, obstruct the creation of a more sustainable supply chain.     

Systemic sovereign credit risk: Lessons from the U.S. and Europe

We study the nature of systemic sovereign credit risk using CDS spreads for the U.S. Treasury, individual U.S. states, and major Eurozone countries. Using a multifactor affine framework that allows for both systemic and sovereign-specific credit shocks, we find that there is much less systemic risk among U.S. sovereigns than among Eurozone sovereigns. We find that both U.S. and Eurozone systemic sovereign risk are strongly related to financial market variables. These results provide strong support for the view that systemic sovereign risk has its roots in financial markets rather than in macroeconomic fundamentals.     

On the determinants of UK unemployment and the Great Recession: analysing the gross flows data

This article provides a detailed analysis of the gross worker flows data in the United Kingdom between 1997 and 2010, with particular emphasis on the 2008/2009 recession and its aftermath. Utilizing flows data from the Labour Force Survey (LFS), the dominant macroeconomic factors driving unemployment in the United Kingdom before, during and after the recessionary period are identified. Amongst the salient findings of this article is a striking decline in job-to-job movements throughout and beyond the recent recession. This discovery adds a new dimension to the existing literature in this field.     

Dictator monopolies and essential goods: experimental evidence

Monopolists set prices and if the good is unessential this may place the consumer in an uncomfortable position. But if the good is essential the consumer faces a pay-to-live or -die choice. Dictator and ultimatum games are superficially similar in that one game offers the right of refusal, while the other does not. The dictator monopoly is, however, not a game, and behaviour could be radically different in the market environment versus game environment. We recast the dictator game as a dictator monopoly experiment and find that the fairness characteristic of the game evaporates quickly as rounds progress.     

Denmark’s Agricultural Institutions: An Instrumental Evaluation

This paper begins with a tax and a specially organized commission proposed by John R. Commons. Commons made his proposal because high tariffs were not benefiting workers. The paper contends that his proposal also applies to a current problem - the failure of trade agreements to improve working conditions. The paper bases its argument on data, standard economic reasoning, and Commons’ approach in “constructive research” to wage transactions, public purpose, limiting factors, and power imbalances.

The paper argues that Commons’ proposal could improve the evolution of American labor law and that it could ameliorate power imbalances created by laws that give corporations and trade associations a bargaining advantage over nations and organizations such as the International Labor Organization (ILO). It concludes that economic discourse could benefit from consideration of the belief behind Commons’ proposal - that costs of production passed on to consumers should include the cost of good working conditions.