Option pricing with stochastic volatility models

A general class of models for derivative pricing with stochastic volatility is analyzed. We include the possibility of jumps for the paths of the asset's price and for those of its volatility. We also consider the case of correlation between the process of the asset's price and that of its volatility. In this way we are able to give a unifying view on most of the models studied in the literature. We will examine theoretical issues related to the market price of volatility risk, the equivalent martingale measures and the possibility of obtaining a numerically tractable formula for contingent claim pricing. Finally, we propose some methodologies to test the behavior of stochastic volatility models when applied to market data.     

Global networks of trade and bits

Considerable efforts have been made in recent years to produce detailed topologies of the Internet, but so far these data have been overlooked by economists. In this paper, we suggest that such information could be used to characterize both the size of the digital economy and outsourcing at country level. We analyse the topological structure of the network of trade in digital services (trade in bits) and compare it with the more traditional flow of manufactured goods across countries. To perform meaningful comparisons across networks with different characteristics, we define a stochastic benchmark for the number of connections among each country-pair, based on hypergeometric distribution. Original data are filtered so that we only focus on the strongest, i.e. statistically significant, links. We find that trade in bits displays a sparser and less hierarchical network structure, which is more similar to trade in high-skill manufactured goods than total trade. Moreover, distance plays a more prominent role in shaping the network of international trade in physical goods than trade in digital services.     

Relocation of second degree: Moving towards a new place or returning home?

We study the “Relocations of Second Degree” (RSDs), i.e., the location decisions that modify the country of destination of a previous offshoring investment. Specifically, we distinguish between two types of RSDs, i.e., “Relocation to the Home Country (RHC)”, also known as back-reshoring, and “Relocation to a Third Country (RTC)”, i.e., the choice to move to a second host country.Specifically, we explore how the location advantages underlying the previous offshoring decision affect the probability to undertake an RHC, rather than an RTC. Location advantages reflect the favourable conditions that a foreign country offers with respect to the home one, in terms of market-seeking, asset-seeking and efficiency-seeking (i.e., cost-saving and productivity-enhancing) opportunities. Using data from the European Restructuring Monitor, we focus on the RSDs regarding manufacturing activities, implemented across European countries between 2002 and 2015. We find that, on the one hand, when a previous offshoring investment is driven by market-seeking location advantage, firms undertaking the RSD are more likely to opt for an RHC, except during the economic crisis where market-seeking European firms seem to prefer RTCs. On the other hand, RTC is a preferred choice when the location advantage is of efficiency-seeking type. In addition to offering a broader characterization of RSDs, our study provides empirical evidence of the relationship between the offshoring and relocation decisions. Managers should be aware of this connection when designing their manufacturing internationalization strategies.     

Which shape fits best? Designing the organizational form of local government procurement

The way that public procurement activities are organized has an impact on the performance of public institutions. By reviewing the literature on public procurement organization dimensions this study offers a conceptual framework for public procurement organizational design, distinguishing between the macro, micro and process level dimensions. The framework is tested across the procurement departments of 15 local governments in Wales and Italy. We identify six alternative organizational configurations, differing in their level of centralization and their procurement status within the institution. Their suitability and potential for redesign depend on several internal and external contextual factors (goals, government decision, regulation, geographical environment) in line with the contingency view of organizational design.     

Selecting structural innovations in DSGE models

Dynamic stochastic general equilibrium (DSGE) models are typically estimated assuming the existence of certain structural shocks that drive macroeconomic fluctuations. We analyze the consequences of estimating shocks that are “nonexistent” and propose a method to select the economic shocks driving macroeconomic uncertainty. Forcing these nonexisting shocks in estimation produces a downward bias in the estimated internal persistence of the model. We show how these distortions can be reduced by using priors for standard deviations whose support includes zero. The method allows us to accurately select shocks and estimate model parameters with high precision. We revisit the empirical evidence on an industry standard medium‐scale DSGE model and find that government and price markup shocks are innovations that do not generate statistically significant dynamics.     

Updates management in mobile applications: iTunes versus Google Play

This paper focuses on a specific strategy that developers of mobile applications may use to stimulate demand: The release of updates. We develop a theoretical analysis that shows that developers have incentives to release updates when experiencing a drop in performance. The predictions of the model are then tested using an unbalanced panel of top 1,000 apps in iTunes and Google Play for five European countries. We estimate that while in iTunes the release of an update stimulates a 26% increase in download growth, in Google Play updates play a less significant role. This difference is partly due to systematic differences in apps and in developers operating in the two stores (“selection effect”), and partly to a lack of quality control on apps and updates in Google Play (“quality check effect”). These findings highlight the crucial importance of an appropriate management of updates as well as the relevance of institutional characteristics of the app stores.     

Falling Wage Shares in Europe and the United States: How Important is Aggregation Bias?

This paper sheds light on the importance of aggregation bias in the analysis of wage shares developments over time and across countries. We focus on five European countries and the United States and show that the trend decline in the aggregate wage share observed in these countries over much of the 1980s and 1990s partly reflects changes in the sectoral composition of the economy. The application of a fixed-weight aggregation method changes the profile of the observed wage share in a significant way: in particular there is no longer sign of an overshooting of the wage share levels of the early-1970s. Error-correction wage equations based on the adjusted wage shares generally have a better regression fit and show long-run elasticities of real wages to unemployment that vary less across countries and are substantially lower than those obtained with observed shares.     

Random Recursive Partitioning: a matching method for the estimation of the average treatment effect

In this paper we introduce the Random Recursive Partitioning (RRP) matching method. RRP generates a proximity matrix which might be useful in econometric applications like average treatment effect estimation. RRP is a Monte Carlo method that randomly generates non‐empty recursive partitions of the data and evaluates the proximity between two observations as the empirical frequency they fall in a same cell of these random partitions over all Monte Carlo replications. From the proximity matrix it is possible to derive both graphical and analytical tools to evaluate the extent of the common support between data sets. The RRP method is “honest” in that it does not match observations “at any cost”: if data sets are separated, the method clearly states it. The match obtained with RRP is invariant under monotonic transformation of the data. Average treatment effect estimators derived from the proximity matrix seem to be competitive compared to more commonly used estimators. RRP method does not require a particular structure of the data and for this reason it can be applied when distances like Mahalanobis or Euclidean are not suitable, in the presence of missing data or when the estimated propensity score is too sensitive to model specifications. Copyright © 2008 John Wiley & Sons, Ltd.     

Evolution paths on the equilibrium manifold

In a pure exchange smooth economy with fixed total resources, we define the length between two regular equilibria belonging to the equilibrium manifold as the number of intersection points of the evolution path connecting them with the set of critical equilibria. We show that there exists a minimal path according to this definition of length.     

Filtral preorders and opportunity inequality

We compare profiles of opportunity sets by means of set-inclusion filtral preorders (SIFPs). Some significant results of the classic theory of income inequality are reproduced in the SIFP-framework.