Exchange Rate Volatility and Macroeconomic Performance in Hong Kong

The paper presents evidence on whether Hong Kong’s currency board arrangement, in place since 1983, has affected the volatility of real macroeconomic variables. Simple evidence on the relative volatilities of relevant macroeconomic variables before and after 1983 is presented, before a more formal econometric framework is utilized to examine the linkages between the exchange rate and the real economy. It is found that the currency board period has been one of relative stability in Hong Kong, though it has also been a period where external factors have been relatively benign. Even after controlling for the external environment, it is found that the currency board period is one of low macroeconomic volatility.     

Pricing a class of exotic commodity options in a multi-factor jump-diffusion model

In a recent paper, Crosby introduced a multi-factor jump-diffusion model which would allow futures (or forward) commodity prices to be modelled in a way which captured empirically observed features of the commodity and commodity options markets. However, the model focused on modelling a single individual underlying commodity. In this paper, we investigate an extension of this model which would allow the prices of multiple commodities to be modelled simultaneously in a simple but realistic fashion. We then price a class of simple exotic options whose payoff depends on the difference (or ratio) between the prices of two different commodities (for example, spread options), or between the prices of two different (i.e. with different tenors) futures contracts on the same underlying commodity, or between the prices of a single futures contract as observed at two different calendar times (for example, forward start or cliquet options). We show that it is possible, using a Fourier transform-based algorithm, to derive a single unifying form for the prices of all these aforementioned exotic options and some of their generalizations. Although we focus on pricing options within the model of Crosby, most of our results would be applicable to other models where the relevant ‘extended’ characteristic function is available in analytical form.     

How first impressions of a customer impact effectiveness in an initial sales encounter

First impressions of others affect both the content and outcomes of a variety of interpersonal encounters. In sales encounters, a salesperson’s first impressions of a customer provide a starting point for probing customer needs and for adapting to those needs. This implies that salesperson effectiveness in an initial sales encounter is associated— at least in part—with a salesperson’s first impression of the customer. The reported quasi-experiment is the first study to explore empirically the connection between salespeople’s first impressions, their cognitive structures, and sales effectiveness in a single, initial sales encounter. The results provide an intriguing glimpse into the dilemma salespeople face in trying to establish the basis of a relationship while achieving short-term sales outcomes (e.g., closing a sale, satisfaction). Kleine & Associates Symmetrics Kenneth R. Evans received his D.B.A. from the University of Colorado. He has served on the faculty at Arizona State University and currently serves as associate dean and professor of marketing at the University of Missouri, Columbia. He has published articles in theJournal of Marketing, Journal of Personal Selling and Sales Management, Journal of Advertising, Industrial Marketing Management, and inDistinguished Essays in Marketing Theory. Robert E. Kleine, III, received his Ph.D. from the University of Cincinnati and has served on the marketing faculty at Arizona State University. He is presently chief scholar for Kleine & Associates. His work has appeared in theJournal of Consumer Research, Journal of Consumer Psychology, and in other journals. Timothy D. Landry is a doctoral candidate at the University of Missouri, Columbia. He has presented his work at the American Marketing Association’s conferences. Lawrence A. Crosby received his Ph.D. from the University of Michigan. He has served on the marketing faculty at the University of Nebraska and at Arizona State University. He served as managing director of CSM Worldwide, Inc., and is presently chief executive officer of Symmetrics. He has published several articles in theJournal of Marketing, Journal of Consumer Research, and in other journals.     

Property Taxation, Capitalization, and the Economic Implications of Raising Property Taxes

This study applies a hedonic pricing model to provide further empirical evidence whether, in the spirit of Tiebout (Journal of Political Economy 64(1):416?C424, 1956), Oates (Journal of Political Economy 77(6):957?C971, 1969), and Tullock (Journal of Political Economy 79(5):913?C918, 1971), property taxes in particular have been capitalized into housing prices in the city of Savannah, Georgia housing market. There were sufficient data in this context to study a total of 2,888 single-family houses for the six-year period 2000?C2005; 591 of these houses were located in the Savannah Historic Landmark District. Estimating the model in semi-log form reveals (after allowing for a variety of factors, including 12 spatial variables, four of which are de facto Tiebout type variables) that the natural log of the real sales price of a single-family house in the city of Savannah environment was in fact negatively affected by the city and county property tax level. This study is prompted by the fact that city and county governments are facing serious financial challenges and are searching for viable revenue sources. Increasing property taxes is one of the potential revenue sources being considered by elected officials. In providing current evidence on the effects of property tax in particular and on the Tiebout hypothesis in general, we seek to alert city and state governments of the potential consequences and perils of property tax hikes.     

The implied internal rate of return in conventional residual valuations of development sites

Explicit discounted cash flow methods are used in many countries to assess the value of real estate investments or their likely rate of return given a particular price. These are typically supplemented by simpler models for the purpose of estimating market value, leading to debate about different approaches. A parallel situation exists in the case of UK development sites: both cash flow appraisals and simpler residual valuations are used to assess site values. Yet debate here has been limited, even though traditional residual valuations involve steps that depart from project appraisal practices used in mainstream capital budgeting. We explore the relationship between the profit and interest allowances used in traditional residual valuations and the internal rates of return that they appear to imply. Published residual valuations typically allow for profit through use of a simple proportionate relationship between required profit and the cost or final value of a scheme. They also show limited variation in their profit assumptions, but this implies large differences in expected IRRs. Simulated examples then illustrate the implications of applying standard profit-on-cost rates to schemes of different lengths and with different levels of land value. Findings for project duration, in particular, are noteworthy since they indicate that lower IRRs are implied for longer projects, though this relationship is not necessarily rational.     

Refining the real estate pricing model

Investment theory dictates that capitalisation (cap) rates for freehold real estate should be determined by the risk-free nominal rate of return plus the risk premium (RP) less the expected growth rate, with an allowance for depreciation. However, importing the concept of the RP from the capital markets fails to guide investors through the complexities of the asset, or enable exploration of purchaser preferences and behaviour. A refined pricing model for real estate is proposed, based on a concept termed a risk scale, to distinguish between macro (market) and micro (stock) determinants of risk and growth within the RP. This pricing model is estimated for a major global investment market, using a cross-sectional inter-temporal framework, with a data-set of 497 transactions in the London office sector over 2010 Q2–2012 Q3. Average cap rates are estimated at just over 5%, with asset-specific attributes dominating yield determination, with submarket quality and tenant covenant most important; and unexpired term insignificant, surprising during the ‘flight to safety’ characterising the period. International investors bought at lower cap rates, despite the ongoing economic and financial instability of the study period. Improving understanding of pricing behaviour and market transparency is important and may be advanced through the pricing model.     

Optimal hedging of variance derivatives

We examine the optimal hedging of derivatives written on realised variance, focussing principally on variance swaps (VS) (but, en route, also considering skewness swaps), when the underlying stock price has discontinuous sample paths, i.e. jumps. In general, with jumps in the underlying, the market is incomplete and perfect hedging is not possible. We derive easily implementable formulae which give optimal (or nearly optimal) hedges for VS under very general dynamics for the underlying stock which allow for multiple jump processes and stochastic volatility. We illustrate how, for parameters which are realistic for options on the S&P 500 and Nikkei-225 stock indices, our methodology gives significantly better hedges than the standard log-contract replication approach of Neuberger and Dupire which assumes continuous sample paths. Our analysis seeks to emphasise practical implications for financial institutions trading variance derivatives.