On an efficient multiple time step Monte Carlo simulation of the SABR model

In this paper, we will present a multiple time step Monte Carlo simulation technique for pricing options under the Stochastic Alpha Beta Rho model. The proposed method is an extension of the one time step Monte Carlo method that we proposed in an accompanying paper Leitao et al. [Appl. Math. Comput. 2017, 293, 461–479], for pricing European options in the context of the model calibration. A highly efficient method results, with many very interesting and nontrivial components, like Fourier inversion for the sum of log-normals, stochastic collocation, Gumbel copula, correlation approximation, that are not yet seen in combination within a Monte Carlo simulation. The present multiple time step Monte Carlo method is especially useful for long-term options and for exotic options.     

Economic Dynamics of Tree Planting for Carbon Uptake on Marginal Agricultural Lands

As a result of the 1997 Kyoto Protocol, afforestation of agricultural lands can be expected to take on an important role in the CO₂ emissions reduction policy arsenal of some countries. To date, identification of suitable (marginal) agricultural lands has been left mainly to foresters, but their criteria fail to take into account economic nuances. In this study, an optimal control model is used to determine the optimal level of afforestation in the western Canada. The results indicate that, while planting fast-growing trees for carbon uptake on marginal agricultural land may be important, the path dynamics matter in determining whether Canada can rely on afforestation to meet its obligations under Kyoto.
Sous l'impulsion duprotocole de Kyoto (1997), on peuts'attendre à voirle reboisement des terres agricoles prendre une place importante dans l'arsenal de mesures de réduction des émissions de CO₂ de certains pays. Jusqu'à présent, le choix des terres agricoles utilisables (c.-à-d. marginales pour l'agriculture) a été laissé principalement aux forestiers, mais les critères sur lesquels ces derniers se basent ne tiennent pas compte des aspects économiques. Nous utilisons ici un modèle de contrôle optimal pour déterminer le niveau optimal de reboisement qui conviendrait pour l'ouest du Canada. Il se dégage des résultats que, sans remettre en question l'importance de la plantation d'arbres à croissance rapide pour la capture du C dans les terres agricoles marginales, les décideurs devront tenir compte de la dynamique des sentiers avant que le reboisement puisse ètre la solution adoptée par le Canada pour honorer les engagements pris dans le cadre du Protocole.     

The affine Heston model with correlated Gaussian interest rates for pricing hybrid derivatives

In this article we define a multi-factor equity–interest rate hybrid model with non-zero correlation between the stock and interest rate. The equity part is modeled by the Heston model and we use a Gaussian multi-factor short-rate process. By construction, the model fits in the framework of affine diffusion processes, allowing fast calibration to plain vanilla options. We also provide an efficient Monte Carlo simulation scheme.     

ANIMAL HEALTH SERVICES: FINDING THE BALANCE BETWEEN PUBLIC AND PRIVATE DELIVERY

Growing fiscal deficits and greater awareness of the huge economiccost of often-inefficient government activities have renewedinterest in transferring the delivery of important servicesfrom the public to the private sector in developing countries.This article, drawn from a longer study, offers a frameworkfor determining the appropriate roles of the public and privatesectors in delivering animal health services, such as veterinarysurveillance, disease vector control, vaccination, clinicaltreatment of sick animals, inspection of livestock products,and veterinary research and extension. The profitability and therefore the supply of private veterinaryservices is governed by several factors arising from economiesof scale, such as the size of the livestock enterprises in thelocality, the nature of potential or actual diseases, and thetypes of animals raised in the production systems. Thus, inareas where private veterinary work is unprofitable or whereother types of market failure occur, economic or social concernsmay make some type of public intervention necessary. The transferof animal health services from the public to the private sectormust be done selectively, and government support may be neededto ensure the success of such transfers.      

Model-free stochastic collocation for an arbitrage-free implied volatility: Part I

This paper explains how to calibrate a stochastic collocation polynomial against market option prices directly. The method is first applied to the interpolation of short-maturity equity option prices in a fully arbitrage-free manner and then to the joint calibration of the constant maturity swap convexity adjustments with the interest rate swaptions smile. To conclude, we explore some limitations of the stochastic collocation technique.

     

Expert opinion versus actual transaction evidence in the valuation of non-market amenities

Actual property values are overwhelmingly employed as a dependent variable in hedonic pricing models. Yet, assessed property values are generally more readily available than actual sales values and have, in some studies, been used in lieu of market prices. In this study, we compare estimates of different non-market amenity values based on actual transactions and assessed values. We estimate a Seemingly Unrelated Regression (SUR) model with two hedonic price equations, one with actual market values as the dependent variable and the other with assessed property values, and compare the resulting estimates of shadow prices for open space amenities. We also take into account spatial autocorrelation and combine Method of Moment estimates of the spatial parameters in both equations to create our test statistic. The results indicate that we cannot accept the hypothesis that the impacts of open space on property values are the same for actual sales and assessed values. Moreover, we do observe some differences between the distributions of assessed versus sales values, although the difference between the sizes of open space effects measured within the two equations is rather limited. Thus, while this one study is insufficient to enable one to draw definitive conclusions, there remains the possibility that policy makers cannot reliably base decisions on amenity values obtained from a hedonic model using assessed values.     

Risk-matching behavior in microcredit group formation: evidence from northern Ethiopia

Theoretical models on group lending assume the formation of groups of homogenous risk types. Recent theoretical and empirical findings challenge this view arguing that when markets for insurance are missing, risk homogeneity may not hold any more and risk heterogeneity can be the optimal outcome. Using data from an MFI in Tigray (Ethiopia), this article examines the homogeneity hypothesis and reflects on implications for repayment. No evidence is found that supports risk homogeneity, even accounting for matching frictions. However, we also do not find an explicit link between the presence of risk heterogeneity and side-payments due to missing insurance as suggested in the literature. Instead, other trust-based social networks seem to underlie heterogeneity. Such social networks are often synchronized with credit groups and influence the probability of repayment under heterogeneity. The implication is that successful repayment rates in group lending need not arise only under risk homogeneity but can also arise under risk heterogeneity. Heterogeneity may also serve to bridge missing insurance markets in poor rural environments. MFIs therefore need to consider such local conditions when designing their lending schemes.     

Stimulating organic farming via publicly provided services and an auction-based subsidy

Governments generally use a mix of temporary hectare paymentsand provision of public services to stimulate the organic cropsector. In this paper, a conceptual model is developed for determininga socially optimal hectare payment for any given level of publicservices. Farm heterogeneity, due to the variability of soilquality and management skills, is explicitly taken into account.Using an nth price auction mechanism, farmers indicate whattheir reservation subsidy is for a given level of public inputprovision. The results of this auction are used to determinethe government's optimal policy choices.     

The effect of information sources on technology adoption and modification decisions

This article focuses on adoption and modification decisions on improved maize storage technologies in southern Benin. Modification implies changing a technology to adapt to farmers' circumstances. A sample selection framework is used to account for selectivity bias as some farmers were not aware of the new technologies. Using this framework, the study investigates the effect of alternative information sources on adoption and modification decisions. Farmers are either informed by extension agents or by other farmers. The empirical results show that there are differences in adoption and modification decisions between these two groups.     

Farmland Preservation Verdicts—Rezoning Agricultural Land in British Columbia

The Agricultural Land Reserve (ALR) in British Columbia (BC), Canada, is a provincial zoning scheme designed to protect agricultural land from development. Since 1973, landowners have not been permitted to use ALR land for nonagricultural purposes, prompting some to seek recovery of development option value by applying for exclusion from the ALR. Using Geographic Information System (GIS) technology and a binary choice (logit) model, this study examines factors that impact the acceptance of ALR exclusion applications. With data from two regions in southwestern BC, we find that applications are more likely to be approved when the land is closer to the major highway, has a smaller parcel size, consists of a smaller portion of the total parcel area, or has poorer quality soils. Therefore, as intended by public policy, agricultural capability is a key determinant in exclusion decisions, retaining properties of greater agricultural value in the ALR. Even though public opinion has suggested otherwise, the political party in power at the time of the decision was only a weak factor, mostly moderated by the number of applications in a given year. A spatial‐effects model found no evidence of spatial autocorrelation, supporting the conclusions drawn from the nonspatial model estimations. La réserve de terres agricoles de la Colombie‐Britannique (ALR), au Canada, est un plan de zonage provincial destinéà protéger les terres agricoles contre le développement urbain. Depuis 1973, les propriétaires fonciers ne peuvent utiliser les terres de la réserve à des fins non agricoles, ce qui incite certains à tenter de récupérer une certaine valeur d’option en faisant une demande d’exclusion. À l’aide de la technologie des systèmes d’information géographique (SIG) et d’un modèle de choix binaire (type logit), nous avons examiné les facteurs qui influencent l’acceptation des demandes d’exclusion. À l’aide de données sur deux régions du sud‐ouest de la Colombie‐Britannique, nous avons observé que les demandes d’exclusion sont plus susceptibles d’être acceptées lorsque les terres sont situées en bordure d’une route importante, sont de petite taille, ne représentent qu’une portion d’une superficie plus grande ou présentent des sols de mauvaise qualité. En conséquence, comme le prévoit la politique du gouvernement, la capacité agricole est un facteur clé dans les décisions d’exclusion qui permet de conserver les propriétés de grande valeur agricole dans la réserve. Bien que l’opinion publique indique le contraire, le parti politique au pouvoir au moment de la décision ne constituait qu’un faible facteur, principalement réduit par le nombre de demandes au cours d’une année donnée. Un modèle d’effets spatiaux n’a pas réussi à montrer l’existence d’une autocorrélation spatiale appuyant les conclusions tirées des estimations du modèle non spatial.