Complete Models with Stochastic Volatility

The paper proposes an original class of models for the continuous-time price process of a financial security with nonconstant volatility. The idea is to define instantaneous volatility in terms of exponentially weighted moments of historic log-price. The instantaneous volatility is therefore driven by the same stochastic factors as the price process, so that, unlike many other models of nonconstant volatility, it is not necessary to introduce additional sources of randomness. Thus the market is complete and there are unique, preference-independent options prices.
We find a partial differential equation for the price of a European call option. Smiles and skews are found in the resulting plots of implied volatility.     

Measuring the performance of and tradeoffs within the triple bottom line

In this article, we use the data of Organization for Economic Cooperation and Development (OECD) trucking industry to illustrate a new analysis framework based on data envelopment analysis (DEA) using the concept of the triple bottom line to show the internal tradeoffs among economic, environmental and social issues within individual Decision Making Unit (DMU). We evaluate the various efficiencies of each national trucking industry by comparing it to its peers and develop indices that allow us to investigate the internal tradeoffs among the three areas of the triple bottom line. These measures help us understand how each country can choose to emphasize certain inputs and outputs to increase efficiency. The framework can be extended to other applications.     

The effects of tariff increases on supply base complexity: A conceptual framework

Recent protectionist trends around the world have raised interest in newly enforced or increased tariffs and their effects on global supply chains. For firms sourcing globally, tariff introductions or increases significantly affect importing costs, which ultimately affect product costs. Such tariff changes may incentivize firms to adjust their supply base to mitigate these cost increases, thus altering the structure and complexity of firms' supply bases. In this paper, we first characterize the U.S. tariff landscape from 1997 to 2017. We then develop a conceptual model to explain how the severity and timing uncertainty of expected tariff increases influence a firm's speed of adapting to the changing tariff environment. Specifically, we explore firms' propensity to form or delete ties to suppliers, which influences supply base complexity. Moreover, we consider factors that moderate the relationship between severity, timing uncertainty, and supply base complexity, including a tariff's geographical scope, a firm's relative purchase spend, and supply risk. Our conceptual model offers both research and managerial implications.     

Modeling and Analysis of Reverse Logistics

Many modeling techniques have been developed to maximize the effectiveness and efficiency of forward logistics and supply chain management. As this article will illustrate, modeling techniques can be helpful in improving the management of reverse logistics as well. Companies and researchers are just beginning to appreciate the important differences between forward and reverse chains, and there is great opportunity to apply modeling methodologies to managing reverse logistics problems and issues. This article describes how modeling techniques can be utilized to improve reverse logistics processes and aid in solving real‐world reverse logistics problems. We focus on specific reverse logistics processes that firms, which sell products, are likely to address. In fact, the area of reverse logistics has broadened of late to include many activities that were not originally part of simply returning consumer products to a retailer. Herein, we present an overview of opportunities, where improved modeling efforts should be able to provide substantial benefits to supply chain professionals.     

Monte Carlo valuation of American options

This paper introduces a dual way to price American options, based on simulating the paths of the option payoff, and of a judiciously chosen Lagrangian martingale. Taking the pathwise maximum of the payoff less the martingale provides an upper bound for the price of the option, and this bound is sharp for the optimal choice of Lagrangian martingale. As a first exploration of this method, four examples are investigated numerically; the accuracy achieved with even very simple choices of Lagrangian martingale is surprising. The method also leads naturally to candidate hedging policies for the option, and estimates of the risk involved in using them.     

Food Stamps and Food Spending: An Engel Function Approach

Estimation of Food Stamp Program (FSP) effects has been complicated by self-selection and by a contradiction between observed spending patterns and the economic theory of consumer choice. We developed a modified version of the traditional theory, in which participant households may be partly extramarginal even if they have some cash spending on at-home food. Using Current Population Survey (CPS) data for 2001–2005, we estimated Engel functions for at-home and away-from-home food spending for FSP participants and nonparticipants. Compared to nonparticipants with the same level of total income, participants had higher at-home food spending and lower away-from-home food spending.     

The Accounting Profession: Substantive Change and/or Image Management

The accounting profession’s image and reputation is built upon the members of the profession acting with the “highest sense of integrity” in “the public interest” (AICPA, 2003, www.aicpa.org/about). The Enron debacle initiated the latest crisis facing the profession regarding its image and reputation. The American Institute of Certified Public Accountants (AICPA) is the largest professional body representing the accounting profession and the one to which regulators have looked in establishing and upholding professional standards relating to the public practice of accounting and auditing. One of the AICPA’s responsibilities is to “promote public awareness and confidence in the integrity, objectivity, competence and professionalism of CPAs ....” (AICPA, 2003, www.aicpa.org/about). We analyze the public statements issued by the AICPA (i.e., press releases, speeches of officers, testimony, published articles) during this ethical and identity crisis beginning with the AICPA’s first public statement on the Enron debacle (AIPCA 2001) and concluding with the AICPA recognizing the need for a “new accounting culture” (Melancon 2002). In order to better understand the public discourse, we use image restoration theory (Benoit, 1995), because it provides a typology of strategies for dealing with the public face of crises. We identify the three most common strategies the AICPA employs during this period. Proposals for taking corrective action represent the most commonly employed strategy, but the analysis also indicates an attempt to evade responsibility by claiming defeasibility and to reduce the offensiveness of the situation by employing a bolstering strategy. A second analysis using DICTION, a software package useful in revealing latent dimensions in a text, indicates that early statements tend to use language related to accomplishing specific action while the later statements tend more toward general language that relates to peoples’ everyday lives. The findings raise questions as to substantive nature of the changes proposed by the AICPA, and thus, the extent to which the public interest is being served by them.     

National Judicial Power and the Dormant Commerce Clause

We develop a game in which a court monitors states as they regulatetrade among themselves. Contrary to commentators who see SupremeCourt oversight of state burdens on interstate commerce as theproduct of a powerfully ascendant court, we argue that the "dormantCommerce Clause" (DCC) originates as the strategic product ofan institutionally weak court. We provide three lines of argument.First, we refute the notion that merely observing the courtruling against state governments and those governments complyingwith its ruling is evidence of judicial power. Second, we showthat the equilibria of our "weak court" model directly impliesthe doctrinal contours of the DCC while the ascendancy hypothesisdoes not. Finally, we provide evidence that the court announceda weaker version of the DCC doctrine than sincerely preferredby pivotal justices on the court. Our arguments invite a revisedunderstanding of the role of the court in the development ofthe American political system.     

Classical and technological convergence: beyond the Solow-Swan growth model

Recent investigations into cross-country convergence followMankiw, Romer, and Weil (1992) in using a log-linear approximationto the Swan-Solow growth model to specify regressions. Thesestudies tend to assume a common and exogenous technology. Incontrast, the technology catch-up literature endogenises thegrowth of technology. The use of capital stock data rendersthe approximations and over-identification of the Mankiw modelunnecessary and enables us, using dynamic panel estimation,to estimate the separate contributions of diminishing returnsand technology transfer to the rate of conditional convergence.We find that both effects are important.