Second order multiscale stochastic volatility asymptotics: stochastic terminal layer analysis and calibration

Multiscale stochastic volatility models have been developed as an efficient way to capture the principal effects on derivative pricing and portfolio optimization of randomly varying volatility. The recent book by Fouque et al. (Multiscale Stochastic Volatility for Equity, Interest-Rate and Credit Derivatives, 2011) analyzes models in which the volatility of the underlying is driven by two diffusions – one fast mean-reverting and one slowly varying – and provides a first order approximation for European option prices and for the implied volatility surface, which is calibrated to market data. Here, we present the full second order asymptotics, which are considerably more complicated due to a terminal layer near the option expiration time. We find that to second order, the implied volatility approximation depends quadratically on log-moneyness, capturing the convexity of the implied volatility curve seen in data. We introduce a new probabilistic approach to the terminal layer analysis needed for the derivation of the second order singular perturbation term, and calibrate to S&P 500 options data.     

Choosing the right instrument

This paper analyses the optimal choice of second-best optimal environmental policies. Using a partial equilibrium model, the paper first reconfirms the well-known result that the existence of a double dividend (in its weak definition) favours environmental policy instruments which maximise tax revenues for a given improvement in environmental quality. Additional revenues can be used to reduce the distortion of existing taxes such as taxes on labour and capital income. Without uncertainty, environmental taxes and auctioned permits are equally appropriate. In the presence of uncertainty, however, the optimal choice of taxes or tradable permits depends on the relative magnitudes of the marginal environmental damage and the marginal benefit from consuming a polluting good. In the second part, the paper, therefore, analyses how the revenue capacity affects the optimal choice of environmental policy instruments in the presence of uncertainty. The paper shows that the first-best choice rule between price and quantity regulation (Weitzman, 1974) remains valid in a second-best world with distortionary taxation.     

Corporate social reporting in action: An evaluation of British, European and American practice

This paper presents a critical assessment of the social report practices of 400 large companies. The major shortfalls encountered involved, firstly, an overconcentration on conventional wisdom; secondly, a lack of inclination to fully exploit new avenues which had been tentatively opened up; thirdly, a tendency to rationalise away inadequate performance; and, finally, an inclination to simplify unduly in the face of complexity.