Markov-switching in target stocks during takeover bids

This paper examines shifts in the market betas and the conditional volatility of stock prices of takeover targets. Using daily stock prices of five European and American targets, we find that adequately specified Markov-switching GARCH models are capable of detecting statistically significant regime-switches in all takeover deal-types (in cash bids, pure share-exchange bids, mixed bids). In particular, conditional volatility regime-switches are found to be most clear-cut for cash bids. Our econometric findings have implications for a broad range of financial applications such as the valuation of target stock options.     

Forward-looking versus recursive-dynamic modeling in climate policy analysis: A comparison

This paper develops a multi-regional general equilibrium model for climate policy analysis based on the latest version of the MIT Emissions Prediction and Policy Analysis (EPPA) model. We develop two versions so that we can solve the model either as a fully inter-temporal optimization problem (forward-looking, perfect foresight) or recursively. The standard EPPA model on which these models are based is solved recursively, and it is necessary to simplify some aspects of it to make inter-temporal solution possible. The forward-looking capability allows one to better address economic and policy issues such as borrowing and banking of GHG allowances, efficiency implications of environmental tax recycling, endogenous depletion of fossil resources, international capital flows, and optimal emissions abatement paths among others. To evaluate the solution approaches, we benchmark each version to the same macroeconomic path, and then compare the behavior of the two versions under a climate policy that restricts greenhouse gas emissions. We find that the energy sector and CO₂ price behavior are similar in both versions (in the recursive version of the model we force the inter-temporal theoretical efficiency result that abatement through time should be allocated such that the CO₂ price rises at the interest rate.) The main difference that arises is that the macroeconomic costs are substantially lower in the forward-looking version of the model, since it allows consumption shifting as an additional avenue of adjustment to the policy. On the other hand, the simplifications required for solving the model as an optimization problem, such as dropping the full vintaging of the capital stock and fewer explicit technological options, likely have effects on the results. Moreover, inter-temporal optimization with perfect foresight poorly represents the real economy where agents face high levels of uncertainty that likely lead to higher costs than if they knew the future with certainty. We conclude that while the forward-looking model has value for some problems, the recursive model produces similar behavior in the energy sector and provides greater flexibility in the details of the system that can be represented.     

Industrial clusters,flagship enterprises and regional innovation

ABSTRACT

For a sample of all 88 counties in the State of Ohio over a 5-year period, this study documents the effect of flagship enterprises and concentrated industrial clusters on regional innovation. Consistent with the agglomeration arguments and the knowledge spillover theory of entrepreneurship, both appear to affect regional innovation positively. Additionally, regional educational attainment positively moderates the effect of industrial clusters on innovation. At the same time, flagship enterprises primarily affect regional innovation in regions with low education levels. Results are obtained with the help of conservative econometric techniques and are robust to the choice of alternative dependent variables and estimators. The findings have major policy implications and provide insights into alternative routes to encouraging regional innovation.     

Liquidity effects of trading frequency

In this paper, we present a discrete‐time modeling framework, in which the shape and dynamics of a Limit Order Book (LOB) arise endogenously from an equilibrium between multiple market participants (agents). We use the proposed modeling framework to analyze the effects of trading frequency on market liquidity in a very general setting. In particular, we demonstrate the dual effect of high trading frequency. On the one hand, the higher frequency increases market efficiency, if the agents choose to provide liquidity in equilibrium. On the other hand, it also makes markets more fragile, in the sense that the agents choose to provide liquidity in equilibrium only if they are market neutral (i.e., their beliefs satisfy certain martingale property). Even a very small deviation from market neutrality may cause the agents to stop providing liquidity, if the trading frequency is sufficiently high, which represents an endogenous liquidity crisis (also known as flash crash) in the market. This framework enables us to provide more insight into how such a liquidity crisis unfolds, connecting it to the so‐called adverse selection effect.     

In pursuit of impeccable veracity

I study the institution of avoiding hiring one’s own Ph.D. graduates for assistant professorships. I argue that this institution is necessary to create better incentives for researchers to incorporate new information in studies, facilitating the convergence to asymptotic learning of the studied fundamentals.     

Tangent Lévy market models

In this paper, we introduce a new class of models for the time evolution of the prices of call options of all strikes and maturities. We capture the information contained in the option prices in the density of some time-inhomogeneous Lévy measure (an alternative to the implied volatility surface), and we set this static code-book in motion by means of stochastic dynamics of It?’s type in a function space, creating what we call a tangent Lévy model. We then provide the consistency conditions, namely, we show that the call prices produced by a given dynamic code-book (dynamic Lévy density) coincide with the conditional expectations of the respective payoffs if and only if certain restrictions on the dynamics of the code-book are satisfied (including a drift condition à la HJM). We then provide an existence result, which allows us to construct a large class of tangent Lévy models, and describe a specific example for the sake of illustration.     

LOCAL VARIANCE GAMMA AND EXPLICIT CALIBRATION TO OPTION PRICES

In some options markets (e.g., commodities), options are listed with only a single maturity for each underlying. In others (e.g., equities, currencies), options are listed with multiple maturities. In this paper, we analyze a special class of pure jump Markov martingale models and provide an algorithm for calibrating such models to match the market prices of European options with multiple strikes and maturities. This algorithm matches option prices exactly and only requires solving several one‐dimensional root‐search problems and applying elementary functions. We show how to construct a time‐homogeneous process which meets a single smile, and a piecewise time‐homogeneous process which can meet multiple smiles.     

Dynamic Equilibrium with Overpriced Put Options

It is a well-known anomaly that prices of put options are too high when options are out-of-the-money. This paper presents a simple general equilibrium model of the market where European put options become substantially overpriced when they are out-of-the-money. Overpricing is due to the presence of short-sale constraints on trading stocks and derivatives, as well as the heterogeneity between investors. We confirm the predicting power of the model by comparing its implications with existing empirical results.     

Quality Meets Structure: Generalized Reciprocity and Firm‐Level Advantage in Strategic Networks

In this paper we extend previous research by combining network structural and network process approaches. Specifically, in a six‐year, three‐wave study of 41 firms in two strategic networks, we found that the interaction between generalized reciprocity among a focal firm's partners and network tie intensity and betweenness centrality improved firm performance. No influences were observed for the interaction involving degree centrality and generalized reciprocity. Our research suggests that managers in strategic networks may need to consider the balance between relationship‐extensive and relationship‐intensive strategies.     

The impact of financial and human resources on the export performance of Russian firms

This study contributes to the literature by investigating for the first time the effects of the entrepreneurial environment on export survival in Russia. Using the continuous-time Cox model and discrete-time complementary log-log and probit models, we study the effects of the availability of human and financial resources on export survival across Russian regions between 2002 and 2010. Taking into account uncertainty and time effects reveals that these effects are falling over time and are more important for larger exporters. Thus, there is evidence of a learning curve for exporters when the latter become more efficient in dealing with regional-level resources and the regulatory environment over time.