A MULTINOMIAL APPROXIMATION FOR AMERICAN OPTION PRICES IN LÉVY PROCESS MODELS

This paper gives a tree-based method for pricing American options in models where the stock price follows a general exponential Lévy process. A multinomial model for approximating the stock price process, which can be viewed as generalizing the binomial model of Cox, Ross, and Rubinstein (1979) for geometric Brownian motion, is developed. Under mild conditions, it is proved that the stock price process and the prices of American-type options on the stock, calculated from the multinomial model, converge to the corresponding prices under the continuous time Lévy process model. Explicit illustrations are given for the variance gamma model and the normal inverse Gaussian process when the option is an American put, but the procedure is applicable to a much wider class of derivatives including some path-dependent options. Our approach overcomes some practical difficulties that have previously been encountered when the Lévy process has infinite activity.     

THE RETURNS TO ENDOGENOUS HUMAN CAPITAL IN PAKISTAN'S RURAL WAGE LABOUR MARKET

This paper estimates the private returns to human capital in Pakistani rural labour markets. The rich data used permit inclusion of several dimensions of human capital and control for endogeneity resulting from investment in human capital. The results suggest that, without data on determinants of human capital, it would not be possible to disentangle the separate effect of each dimension of human capital on wage differentials nor to distinguish human capital explanations for wage differentials from signalling and credentialist models. With control for endogeneity of human capital and selectivity into wage employment, cognitive achievement, but not schooling attainment separate from cognitive achievement nor long-run health status, affects wage differentials.     

Greater curvature antral flattening: A radiologic sign of NSAID-related gastropathy

We have occasionally encountered patients on nonsteroidal antiinflammatory drugs (NSAIDs) in whom double contrast barium studies revealed persistent flattening and stiffening of the distal greater curvature of the stomach. We therefore performed a study to determine the frequency of this finding in patients with NSAID-related gastropathy. Twenty-one cases of erosive gastritis, gastric ulcers, and/or gastric scarring associated with a known history of NSAID use were reviewed by two radiologists who made a joint decision regarding the presence or absence of greater curvature antral flattening. This finding was seen radiographically in five of the 21 patients (24%). Four of the five patients with antral flattening had associated erosions or ulcers in the gastric antrum. The remaining patient had antral flattening as an isolated finding. Our experience suggests that flattening of the greater curvature of the distal antrum, particularly if associated with erosive gastritis or gastric ulcers, is a useful radiologic sign of NSAID-related gastropathy.     

Intention and Stochastic Outcomes: An Experimental study

Do people care about intentions – even when good intentions do not produce good results? In our experiments we find that rates of punishment and reward react strongly to intentions (the wage a firm decides to pay) and more modestly to distributional outcomes (the higher or lower wage actually received including the stochastic component). For example, workers who end up receiving medium wages respond much more positively when this resulted from the firm offering a high wage but bad luck lowered the worker's pay than when this resulted from the firm offering a low wage and good luck raised the pay.     

Tariff evasion in global trade data

ABSTRACT

We find evidence of pervasive tariff evasion in the global data on trade from 1988 to 2015. Using over 35 million observations of data on import and export flows at the HS6 product category level, we find evidence of substantial underreporting of imports relative to export data on average and particularly when tariffs on product categories are high. These effects are stronger in more corrupt destination countries, as measured by the World Bank's Worldwide Governance Indicators [World Bank. 2016. Worldwide Governance Indicators. September 25, 2016]. In addition, evidence of tariff evasion increases significantly in economic downturns. We document these patterns in the global data and explore the welfare effects of this evasion by (1) putting a lower bound on the extent to which there are revenue losses from tariff evasion, and by (2) estimating the effects of corruption as measured by this indicator on global trade in a simple gravity model. We estimate that in total, revenue losses from tariff evasion are currently likely to exceed 400 to 670 million USD globally per year, and find that the effects of corruption on trade flows are ambiguous overall but change from weakly positive (‘grease the wheels’) to largely negative over the years in our sample.     

Timing the Start of Material Substitution Projects: Creating Switching Options under Volatile Material Prices

Firms developing new products often face the challenge of making investment decisions under uncertain input–cost conditions due to the price volatilities of the materials they use. These decisions need to be made long before the final products are launched on the market. Therefore, firms that invest in the opportunity to switch materials in a timely manner will have the flexibility to react to material price changes and realize competitive advantages. However, volatile material prices may also cause a firm to delay investment. Using real‐options reasoning, this paper studies the influence of input‐cost fluctuations on the timing decision to start new product development (NPD) and thus create the follow‐on opportunity to later replace an existing product. A model that combines waiting and switching options to derive influencing factors of the flexibility value that triggers the investment is developed and tested on a sample of material substitution projects from manufacturing firms. The results show how price uncertainty of the new and the old material, their joint price development, the expected project duration, and competitive preemption are related to the propensity to delay the start of NPD. The findings provide new insights on how timing in adopting materials can be used to hedge exposure to volatile material prices. The insights are relevant for adopters and producers of new materials, as well as for policy makers who strive for supporting the diffusion of new materials.