Option Pricing on Stocks in Mergers and Acquisitions

We develop an arbitrage‐free and complete framework to price options on the stocks of firms involved in a merger or acquisition deal allowing for the possibility that the deal might be called off at an intermediate time, creating discontinuous impacts on the stock prices. Our model can be a normative tool for market makers to quote prices for options on stocks involved in such deals and also for traders to control risks associated with such deals using traded options. The results of tests indicate that the model performs significantly better than the Black–Scholes model in explaining observed option prices.     

A secure,real-time stock market protocol

Stock markets constitute the largest electronic commerce market in the world. The tremendous growth in trading volume and the need for fast and accurate transaction execution has made the stock market one of the most technology friendly markets. The fastest growing stock exchange, NASDAQ, is a wholly electronic stock exchange with all transactions conducted over computer networks. However, the transaction model used by NASDAQ and other electronic stock markets still borrows heavily from the older traditional models used by non-electronic stock exchanges. Two important requirements of modern day stock market transactions are: (a) customer's ability to place sophisticated transaction orders to buy/sell stock, and (b) customer's ability to detect transaction delays. Modern electronic stock exchanges lack both the ability to place newer, more sophisticated transaction orders and the ability to detect delays in transaction execution. In this paper, we propose a protocol for stock market transaction that can model a new sophisticated model for transaction orders while continuing to support traditional transaction orders. The protocol is augmented with a mechanism to detect delays in transaction execution. It is further shown that the protocol proposed is secure, atomic, anonymous, private, and incurs low overhead costs. This revised version was published online in June 2006 with corrections to the Cover Date.     

Customer e-complaining behaviours using social media

This paper develops a conceptual framework about customer complaining behaviours (CCB), using social media. Specifically, this research expands the current understanding of CCB by examining the differential impact of unfairness, firm response, retaliation, locus attribution, stability attribution, and personal identity on public complaining and private complaining using social media, and their subsequent impact on post-complaining satisfaction (PCS) and loyalty. Public complaining refers to customer complaints directed to a service provider, while private complaining refers to service failure complaints directed towards other customers. A structural equation model shows that high levels of unfairness, firm response, locus, and personal identity have a strong influence on public complaining, while desire for retaliation is a significant factor influencing private complaining. The findings contribute to practice by providing useful and pertinent information for developing suitable web care interventions to effectively deal with public complaining and private complaining through social media platforms.     

“Instrumentalism” and Friedman’s methodology: a short objection

‘Instrumentalist’ interpretations of economic theories have been held to provide justification for the rightness of being indifferent to the ‘realism’ or otherwise of the assumptions underlying a theory. In this view, what is important for an economist engaged in formulating policy is to have a theory which is capable of generating accurate predictions. This note asserts, with the help of a very simple example, that theories based on unrealistic assumptions are—precisely contrary to its claim—inimical to the interests of an instrumentalist view of theories. Tests of predictive accuracy can be narrow or broad. When narrow, the likelihood is high of there being a large number of theories passing the test—but this could also raise the chances of survival of (unrealistic) theories which may have unintended and undesirable policy outcomes. On the other hand, when the scope of the test of predictive accuracy is widened, the set of contending theories is likely to be small, with the survivors restricted to those based on ‘realistic’ assumptions.     

Currency Undervaluation and Sovereign Wealth Funds: A New Role for the World Trade Organization

Two aspects of global imbalances – undervalued exchange rates and sovereign wealth funds – require a multilateral response. For reasons of inadequate leverage and eroding legitimacy, the International Monetary Fund has not been effective in dealing with undervalued exchange rates. This paper proposes new rules in the World Trade Organization to discipline cases of significant undervaluation that are clearly attributable to government action. The rationale for WTO involvement is that there are large trade consequences of undervalued exchange rates, which act as both import tariffs and export subsidies, and that the WTO's enforcement mechanism is credible and effective. The World Trade Organization would not be involved in exchange rate management, and would not displace the International Monetary Fund. Rather, the authors suggest ways to harness the comparative advantage of the two institutions, with the International Monetary Fund providing the essential technical expertise in the World Trade Organization's enforcement process. There is a bargain to be struck between countries with sovereign wealth funds, which want secure and liberal access for their capital, and capital‐importing countries, which have concerns about the objectives and operations of sovereign wealth funds. The World Trade Organization is the natural place to strike this bargain. Its General Agreement on Trade in Services already covers investments by sovereign wealth funds, and other agreements offer a precedent for designing disciplines for these funds. Placing exchange rates and sovereign wealth funds on the trade negotiating agenda may help revive the Doha Round by rekindling the interest of a wide variety of groups.     

Networks in transition: how industry events (re)shape interfirm relationships

Interfirm relationship networks are strategic resources that can potentially be shaped by managerial action. As a first step towards understanding how managers can shape networks, we develop a framework which explains how industry networks evolve over time and in response to specific events. Our main thesis is that industry events may be either structure-reinforcing or structure-loosening, and that their potential structural impact may be predicted in advance. We validate our hypotheses with longitudinal data on the strategic alliance network in the global steel industry. © 1998 John Wiley & Sons, Ltd     

The Liquidity Discount

This paper characterizes the liquidity discount, the difference between the market value of a trader's position and its value when liquidated. This discount occurs whenever traders face downward sloping demand curves for shares and execution lags in selling shares. This characterization enables one to modify the standard value at risk (VaR) computation to include liquidity risk.     

The Disappearing Delaware Effect

Refining and extending the methodology introduced by Daines(2001), I present evidence that small Delaware firms were worthmore than small non-Delaware firms during the period 1991–1996but not afterwards. I also present evidence that larger firms,which comprise 98% of my sample by size, exhibit no Delawareeffect for any year during the period 1991–2002. Thusthe Delaware effect "disappears" when examined over time andwhen examined for firms that are economically meaningful. Thesenew contours of the Delaware effect suggest that the benefitassociated with Delaware incorporation was an order of magnitudesmaller than estimated by Daines (2001) during the early 1990s,and nonexistent by the late 1990s. The trajectory of the Delawareeffect further suggests that it cannot provide support for the"race to the top" view of regulatory competition, as some commentatorshave argued, and may in fact provide support for the "race tothe bottom" view. Finally, the findings presented here identifytwo puzzles: (1) Why did small Delaware firms exhibit a positiveDelaware effect during the early 1990s but larger firms didnot? (2) Why did this effect disappear in the late 1990s? Iidentify doctrinal changes in Delaware corporate law in themid-1990s, increased managerial incentives to sell during thisperiod, and a cohort selection effect during the 1980s as potentialexplanations.