On the range of options prices

In this paper we consider the valuation of an option with time to expiration and pay-off function which is a convex function (as is a European call option), and constant interest rate , in the case where the underlying model for stock prices is a purely discontinuous process (hence typically the model is incomplete). The main result is that, for “most” such models, the range of the values of the option, using all possible equivalent martingale measures for the valuation, is the interval , this interval being the biggest interval in which the values must lie, whatever model is used.     

EVIDENCE ON THE COMPENSATION OF PORTFOLIO MANAGERS

We surveyed 396 portfolio managers about the structure of their compensation. Overall, more compensation packages are subjective/discretionary than objective/formula based. Firm success factors such as firm profitability have more effect on bonuses than do client success factors such as investment performance. Differences in the structure of compensation across firms, clients, job types, and manager characteristics reflect likely differences in the underlying contracting environments, especially differences in the difficulty of monitoring performance and exerting control.     

Multi‐dimensional search: choosing the right path

This article seeks to analyse processes of decision‐making where multiple costly observations can be made about individual decision outcomes. It presents a simple model of a decision in which information is collected sequentially. Most economic models of sequential collection of costly information have focused on price‐search. It is argued that this is a very specialized type of search. This has led such models to focus on the issue of when search should stop. The article attempts to show how the principles of sequential search can be applied to other types of problems, such as innovation, where the choice of path is also of central concern.     

Agglomeration economies and location choice: Foreign direct investment in Hungary1

Since the beginning of the transition process, Hungary has attracted a significant amount of foreign direct investment (FDI), although this is unevenly distributed among the twenty Hungarian counties. This paper examines the determinants of FDI at a regional level in Hungary and more particularly assesses the importance of agglomeration effects among determinants. A panel model of the location determinants of FDI in Hungary is developed and estimated. Empirical testing suggests that counties with higher labour availability, greater industrial demand and higher manufacturing density attract more FDI. Surprisingly, higher unit labour costs attract FDI. In addition, inter‐industrial agglomeration economies and infrastructure availability are found to be important.     

Export variety and export performance: Empirical evidence for the OECD countries

Export Variety and Export Performance: Empirical Evidence for the OECD Countries. — Does product variety matter for export performance? This has been suggested by the new trade theory. In the present paper, we investigate empirically whether increasing export variety has contributed to the export growth of the OECD countries. We calculate direct measures of export variety and estimate pooled export demand equations for 15 OECD countries. The econometric results suggest that producing highly differentiated export goods gives a competitive advantage which allows to sell more products.     

Can a Mixed Health Care System be Desirable on Equity Grounds?*

Should health care provision be public, private, or both? We consider this question in a setting where people differ in their earnings capacity and face some illness risk. We assume that illness reduces an individual's time endowment when waiting for treatment. Treatment can be obtained in a competitive private sector (through private insurance) or in the National Health Service (NHS) where it is provided free of charge but after some (endogenous) waiting time. The equilibrium in the health care sector consists of a waiting time in the NHS such that no patient wants to switch health care provider. This equilibrium is governed by two public policies: the income tax system and the size of the NHS. We find that: (i) a mixed system with a small NHS is never desirable; (ii) actuarially fair sickness insurance is never desirable either; (iii) a mixed system with a sufficiently large NHS may improve on a pure public system if the dispersion of earnings capacities is large enough; and (iv) the welfare gains from such a mixed system are not likely to be significant.     

Risk Taking in Asymmetric Tournaments

Abstract. A tournament is examined in which two agents with different abilities choose efforts as well as risks. According to the previous literature, the more (less) able agent should choose a low (high) risk strategy, because the first one does not want to imperil his favorable position, whereas the last one can only gain by increasing risk. We show that this is not necessarily true. Risk taking affects equilibrium efforts as well as winning probabilities. Depending on both effects diverse equilibria are possible. For example, the low and the high ability agent may both choose high risks or both choose low risks.     

Gains to Mutual Fund Sponsors Offering Multiple Share Class Funds

Although the number of mutual funds grew during the 1990s, much of the growth is attributable to the introduction of multiple share class (MS) funds. Proponents argue that the MS structure leads to cost savings, which can be passed onto investors as lower expenses. However, if the structure lowers costs, sponsors are likely to profit from it. Though investors are concerned about the base expense ratio, the sum of administrative and management fees, fund sponsors generate profits from the management fees. As such, they would prefer to increase the management fee if they can simultaneously lower administrative fees. Our results indicate that MS fund investors pay lower administrative fees, but management fees are approximately 7 basis points higher than single-class funds. Overall, base expense ratios are higher than for single-class funds, suggesting fund sponsors capture the cost benefits the MS structure provides. Our results are robust to different model specifications and different estimation techniques.     

Combining Significance of Correlated Statistics with Application to Panel Data*

The inverse normal method, which is used to combine P‐values from a series of statistical tests, requires independence of single test statistics in order to obtain asymptotic normality of the joint test statistic. The paper discusses the modification by Hartung (1999, Biometrical Journal, Vol. 41, pp. 849–855) , which is designed to allow for a certain correlation matrix of the transformed P‐values. First, the modified inverse normal method is shown here to be valid with more general correlation matrices. Secondly, a necessary and sufficient condition for (asymptotic) normality is provided, using the copula approach. Thirdly, applications to panels of cross‐correlated time series, stationary as well as integrated, are considered. The behaviour of the modified inverse normal method is quantified by means of Monte Carlo experiments.