An Isomorphism Between Asset Pricing Models With and Without Linear Habit Formation

We show an isomorphism between optimal portfolio selection orcompetitive equilibrium models with utilities incorporatinglinear habit formation, and corresponding models without habitformation. The isomorphism can be used to mechanically transformknown solutions not involving habit formation to correspondingsolutions with habit formation. For example, the Constantinides(1990) and Ingersoll (1992) solutions are mechanically obtainedfrom the familiar Merton solutions for the additive utilitycase, without recourse to a Bellman equation or first-orderconditions. More generally, recent solutions to portfolio selectionproblems with recursive utility and a stochastic investmentopportunity set are readily transformed to novel solutions ofcorresponding problems with utility that combines recursivitywith habit formation. The methodology also applies in the contextof Hindy–Huang–Kreps (1992) preferences, where ourisomorphism shows that the solution obtained by Hindy and Huang(1993) can be mechanically transformed to Dybvig's (1995) solutionto the optimal consumption-investment problem with consumptionratcheting.     

The Chinese steel industry in transition: industry perspective on innovation policy

There is little empirical research on how the Chinese Government should function in innovation management, particularly during its critical period of economic transition. This study explores and investigates the Chinese Government's innovation management structure, procedures and functions by interviewing government R&D management officials and industrial innovation managers and users. Questionnaires were distributed to industrial innovation practitioners and users of new steel products to solicit their perspectives on innovation policy issues. Findings indicate that current government innovation management procedures have received a tepid welcome from the industries. While there was general agreement that the government should maintain some involvement in industrial innovation, opinions regarding just how the government should intervene differed significantly between producers and users. Producers generally favoured more indirect government involvement. Policy implications are discussed.     

A term structure model with preferences for the timing of resolution of uncertainty

Summary In this paper we present a model of the term structure of interest rates with imperfect information and stochastic differential utility, a form of non-additive recursive utility. A principal feature of recursive utility, that distinguishes it from time-separable expected utility, is its dependence on the timing of resolution of uncertainty. In our model, we parametrize the nonlinearity of recursive utility in a way that corresponds to preferences for the timing of resolution. This way we show explicitly the dependence of prices on the rate of information, as a consequence of the nature of utilities. State prices and the term structure of interest rates are obtained in closed form, and are shown to have a form in which derivative asset pricing is tractable. Comparative statics relating to the dependence of the term structure on the rate of information are also discussed.We thank Bob Hodrick and Matt Jackson for their comments. Darrell Duffie is grateful for support from the National Science Foundation under NSF SBR-9409567. This paper presents the first model of an earlier, preliminary working paper titled: Two models of price dependence on the timing of resolution of uncertainty.     

Changes of numeraire for pricing futures, forwards, and options

A change of numeraire argument is used to derive a general optionparity, or equivalence, result relating American call and putprices, and to obtain new expressions for futures and forwardprices. The general parity result unifies and extends a numberof existing results. The new futures and forward pricing formulasare often simpler to compute in multifactor models than existingalternatives. We also extend previous work by deriving a generalformula relating exchange options to ordinary call options.A number of applications to diffusion models, including stochasticvolatility, stochastic interest rate, and stochastic dividendrate models, and jump-diffusion models are examined.     

Teaching across disciplines: using collaborative instruction in undergraduate education

Learning communities (LCs) are one example of collaborative instruction used in undergraduate and graduate level courses. This paper discusses the development and delivery of this collaborative instruction and learning model to teach economics principles and finance courses at Nassau Community College (NCC), a suburban two-year college in New York.     

Legitimacy and accelerated internationalisation: An Indian perspective

This paper extends the institutional theory perspective by examining the strategic behaviour of founders of smaller service firms in a key emerging economy—India. Building on accelerated internationalisation and legitimacy literature in the emerging market context, we provide a new perspective, emerging market aggressiveness, which explains why founders/managers are not always passive recipients of their environment. Their selections of locations are dependent on the vision and stretch goals of the founder and their ability to gain legitimacy quickly to move that vision to a reality. They do not appear to be limited by their potential liabilities of newness, foreignness, emergingness or outsidership. They adopt committed modes of entry from the outset to build their legitimacy and reduce their liability as an outsider. Using a qualitative multiple case study approach, we demonstrate that managers are able to use proactive, planned and unplanned strategies simultaneously, in order to quickly prepare themselves to take advantage of transient international opportunities, ahead of their competitors in advanced markets.     

LINKED RECURSIVE PREFERENCES AND OPTIMALITY

We study a class of optimization problems involving linked recursive preferences in a continuous‐time Brownian setting. Such links can arise when preferences depend directly on the level or volatility of wealth, in principal–agent (optimal compensation) problems with moral hazard, and when the impact of social influences on preferences is modeled via utility (and utility diffusion) externalities. We characterize the necessary first‐order conditions, which are also sufficient under additional conditions ensuring concavity. We also examine applications to optimal consumption and portfolio choice, and applications to Pareto optimal allocations.     

OPTIMALITY AND STATE PRICING IN CONSTRAINED FINANCIAL MARKETS WITH RECURSIVE UTILITY UNDER CONTINUOUS AND DISCONTINUOUS INFORMATION

We study marginal pricing and optimality conditions for an agent maximizing generalized recursive utility in a financial market with information generated by Brownian motion and marked point processes. The setting allows for convex trading constraints, non-tradable income, and non-linear wealth dynamics. We show that the FBSDE system of the general optimality conditions reduces to a single BSDE under translation or scale invariance assumptions, and we identify tractable applications based on quadratic BSDEs. An appendix relates the main optimality conditions to duality.