Financial Recovery and Structural Changes in the Economy

How significant is the Soviet Union's financial crisis? Sergei Vasil'ev, of the Institute of Finance and Economics in Leningrad, argues that the financial crisis is the key to future developments in the Soviet economy and that heavy industry can be expected to suffer as the budget deficit is brought into balance.     

Early wealth effects of Asia Pacific and European NASDAQ-listed ADRs: a comparison of 1990s and 2000s issues

This study provides the one-month excess performance analysis of the 75 Asia Pacific and 77 European equities listed in the NASDAQ as American Depository Receipts (ADRs) from 1990 through 2009. The sample is broken down not only by region of issue, but also by timing of the issue (listed in the 1990s versus 2000s). ADRs from the Asia Pacific region outperformed the NASDAQ on average by 7.2% for the 1990s issues while those listed in the 2000s decade underperformed by 4.3% in the first month of trading. However, the monthly excess returns of European ADRs exceeded the NASDAQ by 6.2% and 6.1%, respectively, for each decade. Results suggest investing in newly listed ADRs from these regions may provide investors with early returns that exceed the market index.     

An ascending double auction

We show why the failure of the affiliation assumption prevents the double auction from achieving efficient outcomes when values are interdependent. This motivates the study of an ascending price version of the double auction. It is shown that when there is a sufficiently large, but still finite, number of sellers, this mechanism has an approximate perfect Bayesian equilibrium in which traders continue bidding if and only if their true estimates of the ‘value’ of the object being traded exceed the current price. This equilibrium is ex post efficient and has a rational expectations property in the sense that along the equilibrium path traders appear to have made the best possible trades conditional on information revealed by the trading process. We thank two anonymous referees and Dan Kovenock, the Editor, whose detailed comments and suggestions have allowed us to substantially improve the paper. We also thank seminar participants at University of Toronto, University of Wisconsin-Madison, Summer 2003 North American Meetings of the Econometric Society, 2004 NSF Decentralization Conference for their comments.     

Individually rational, budget-balanced mechanisms and allocation of surplus

We investigate the issue of implementation via individually rational ex-post budget-balanced Bayesian mechanisms. We show that all decision rules generating a nonnegative expected social surplus are implementable via such mechanisms if and only if the probability distribution of the agents’ type profiles satisfies two conditions: the well-known condition of Crémer and McLean [1988. Full extraction of the surplus in Bayesian and dominant strategy auctions, Econometrica 56, 1247–1257] and the Identifiability condition introduced in this paper. We also show that these conditions are necessary for ex-post efficiency to be attainable with budget balance and individual rationality, and that the expected social surplus in these mechanisms can be distributed in any desirable way. Lastly, we demonstrate that, like Crémer–McLean condition, the Identifiability condition is generic if there are at least three agents.     

City size and fund performance

The literature predicts that the average skill level and productivity are higher in larger cities. Prior studies use workers’ wage or education differentials to indirectly link city size and output. This article relates city size and productivity directly, using performance data of U.S. equity mutual funds. On average, funds in financial centers perform better than other funds in terms of both gross and risk-adjusted returns, but this difference is driven only by more experienced managers. Among funds in financial centers there is strong evidence of a positive relation between performance and manager experience in a given city, especially among New York funds. More importantly, we observe performance improvements of the same manager at the same fund in financial centers but not elsewhere. Our tests provide novel evidence of knowledge spillovers and learning in cities.     

Static and semistatic hedging as contrarian or conformist bets

In this paper, we argue that, once the costs of maintaining the hedging portfolio are properly taken into account, semistatic portfolios should more properly be thought of as separate classes of derivatives, with nontrivial, model‐dependent payoff structures. We derive new integral representations for payoffs of exotic European options in terms of payoffs of vanillas, different from the Carr–Madan representation, and suggest approximations of the idealized static hedging/replicating portfolio using vanillas available in the market. We study the dependence of the hedging error on a model used for pricing and show that the variance of the hedging errors of static hedging portfolios can be sizably larger than the errors of variance‐minimizing portfolios. We explain why the exact semistatic hedging of barrier options is impossible for processes with jumps, and derive general formulas for variance‐minimizing semistatic portfolios. We show that hedging using vanillas only leads to larger errors than hedging using vanillas and first touch digitals. In all cases, efficient calculations of the weights of the hedging portfolios are in the dual space using new efficient numerical methods for calculation of the Wiener–Hopf factors and Laplace–Fourier inversion.     

Initial wealth effects of the Brexit vote on UK ADRs

On 23 June 2016, the United Kingdom voted to exit the European Union. The outcome of this vote, called Brexit, impacted financial markets in the days following the vote results. This article investigates the impact of Brexit upon UK equities trading as American Depository Receipts (ADRs) on the New York Stock Exchange. On the day after the vote results were in, UK ADRs lost over 10% of their value with an additional loss of over 5% the following day. These losses were significantly greater than those of the S&P 500 and the FTSE 100 indexes.     

Optimal stopping made easy

This paper presents a simple discrete time model for valuing real options. A short and simple proof of optimal exercise rules for the standard problems in the real options theory is given in the binomial and trinomial models, and, more generally, when the underlying uncertainty is modelled as a random walk on a lattice. The method of the paper is based on the use of the expected present value operators. With straightforward modifications, the method works in discrete time-continuous space, continuous time-continuous space and continuous time-discrete space models.