Pricing commercial mortgages and their mortgage-backed securities

This article has taken considerable effort to accurately model the complexity of a commercial mortgage and its mortgage-backed security. In fact, it is the first example in the general literature on mortgage pricing to present a comprehensive set of numerical results in which the valuation of a mortgage-backed security is explicitly tied to that of the underlying mortgage. The conclusion we reach is that option pricing provides an accurate and flexible approach to valuing the complex mortgage instruments now being developed in the financial community.     

Defining Poverty Lines As a Fraction of Central Tendency

We show under lognormality that when the Gini coefficient is stable over time, defining the poverty line as a fraction of a central tendency of the living standard distribution restricts the evolution of the poverty measures to stability. That is. poverty does not change if the Gini coefficient does not change. Moreover, when the Gini coefficient slightly changes, most of the poverty change can be considered a change in inequality. The consequences of using different poverty lines are then analyzed. Thus, important features in studies of poverty change based on these lines may result from methodological choices, rather than from economic mechanisms.     

Sudden crash or long torture: The timing of market reactions to operational loss events

An emerging literature investigating market responses to operational loss announcements concludes that financial markets tend usually to overreact to loss events. This overreaction is commonly interpreted as reputational damage. We revisit this issue by focusing on the timing of markets’ reactions and highlight two variables: the start and the speed of stock markets’ responses. It appears that when operational losses are caused by internal fraud the negative market reaction materializes earlier and faster. Industry sectors and prevailing market conditions influence the timing of market reactions as well. Our empirical findings reveal moreover that a higher initial grading of the company is associated with a later stock market reaction to the announcement. While the relative magnitude and the length of markets’ overreactions is positively correlated to the concomitant downgrading our study shows that overreaction magnitudes are also strongly correlated to our estimate of the total duration of the reaction.     

Pension plan accounting estimates and the freezing of defined benefit pension plans

This study provides evidence that, when “hard” freezing their defined benefit pension plans, employers select downward biased accounting assumptions to exaggerate the economic burden of their benefit plans. Downward biased expected rates of return and discount rates allow managers to increase reported pension expenses and, for discount rates, allow managers to increase reported pension liabilities. We find that prior to the Sarbanes-Oxley Act, both rates are downward biased when firms freeze their plans, whereas after SOX the bias is lower. This finding is consistent with managers opportunistically biasing pension estimates to obtain labor concessions during periods of reduced regulatory scrutiny.     

Combining Rational Choice and Evolutionary Dynamics: The Indirect Evolutionary Approach

In this study we propose a formal framework for the indirect evolutionary approach initiated by Guth and Yaari. It allows us to endogenize preferences and to study their evolution. We define two‐player indirect evolutionary games with observable types and show how to incorporate symmetric as well as asymmetric situations. We show how to apply solution concepts that are well known from game theory and evolutionary game theory to solve these games. For illustration we include two examples.