TIME‐CONSISTENT AND MARKET‐CONSISTENT EVALUATIONS

We consider evaluation methods for payoffs with an inherent financial risk as encountered for instance for portfolios held by pension funds and insurance companies. Pricing such payoffs in a way consistent to market prices typically involves combining actuarial techniques with methods from mathematical finance. We propose to extend standard actuarial principles by a new market‐consistent evaluation procedure which we call “two‐step market evaluation.” This procedure preserves the structure of standard evaluation techniques and has many other appealing properties. We give a complete axiomatic characterization for two‐step market evaluations. We show further that in a dynamic setting with continuous stock prices every evaluation which is time‐consistent and market‐consistent is a two‐step market evaluation. We also give characterization results and examples in terms of g‐expectations in a Brownian‐Poisson setting.     

The Influence of Vested Interests on Healthcare Legislation in the USA, 2009–2010

Collective lobbying organizations and some big companies acted as cautious partners in the design of the Affordable Care Act of the Obama Administration. In addition to being consulted by government executives, these entities intensively lobbied legislators. The qualitative and statistical analysis I conduct here shows a positive impact of healthcare lobbying. Collective lobbying organizations have a significant impact on lawmaking and complementary lobbying enhances their impact. However, not all (disjointed) lobbying is successful. Perspective-based distortion might explain why organizations lobby on issues against all odds of ever being effective.     

Libor Market Models versus Swap Market Models for Pricing Interest Rate Derivatives: An Empirical Analysis

We empirically compare Libor and Swap Market Models for thepricing of interest rate derivatives, using panel data on pricesof US caplets and swaptions. A Libor Market Model can directlybe calibrated to observed prices of caplets, whereas a SwapMarket Model is calibrated to a certain set of swaption prices.For both models we analyze how well they price caplets and swaptionsthat were not used for calibration. We show that the Libor MarketModel in general leads to better prediction of derivative pricesthat were not used for calibration than the Swap Market Model.Also, we find that Market Models with a declining volatilityfunction give much better pricing results than a specificationwith a constant volatility function. Finally, we find that modelsthat arechosen to exactly match certain derivative prices areoverfitted; more parsimonious models lead to better predictionsfor derivative prices that were not used for calibration. JELClassification: G12, G13, E43.     

PRICING SWAPTIONS AND COUPON BOND OPTIONS IN AFFINE TERM STRUCTURE MODELS

We propose an approach to find an approximate price of a swaption in affine term structure models. Our approach is based on the derivation of approximate swap rate dynamics in which the volatility of the forward swap rate is itself an affine function of the factors. Hence, we remain in the affine framework and well-known results on transforms and transform inversion can be used to obtain swaption prices in similar fashion to zero bond options (i.e., caplets). The method can easily be generalized to price options on coupon bonds. Computational times compare favorably with other approximation methods. Numerical results on the quality of the approximation are excellent. Our results show that in affine models, analogously to the LIBOR market model, LIBOR and swap rates are driven by approximately the same type of (in this case affine) dynamics.     

Similarities and Dissimilarities between Original Institutional Economics and New Institutional Economics

Original Institutional Economics and New Institutional Economics display several similarities. However, differences in methodology and normative stance are too big to reconcile both approaches. Both approaches may keep each other sharp.     

Theory and Reality of Cryptocurrency Governance

I analyze cryptocurrency ecosystems with Elinor Ostrom’s meta-framework for self-governance. I conclude that Bitcoin falls short in its self-governing ambitions, while cryptocurrency software protocols and blockchain technologies have potentialities within “permissioned” peer-to-peer private or hybrid networks. However, regulation and supervision by trusted third parties are required.     

An adjustment process for nonconvex production economies

We prove the existence of a path of market conditions, i.e. combinations of market prices and production quantities, that links any arbitrarily chosen market condition with an equilibrium, in a general equilibrium model with possibly nonconvex production technologies based on Villar [Villar, A., 1994. Equilibrium with nonconvex production technologies. Economic Theory 4, 629–638] and Villar [Villar, A., 1999. Equilibrium and Efficiency in Production Economies, second ed., Springer Verlag, Berlin]. This existence theorem holds for any semi-algebraic version of the model and the adjustment of market conditions along the path can be given an economic interpretation as a tâtonnement process. Any such path can be approximated arbitrarily close by applying a simplicial algorithm. By restarting this algorithm in a different market condition, we may find more than one equilibrium.     

The Role of Governments in Aligning Functional Income Distribution with Full Employment

Demand is an incentive for investment. The latter is necessary to create employment. If demand lags behind supply, then unemployment and underemployment rise. Persistent unemployment and underemployment indicate a dysfunctional price mechanism. Then, only governments can stimulate demand. They may equalize ex ante saving and investment by public investment, income redistribution, or market regulation.