VALUATION OF BARRIER OPTIONS VIA A GENERAL SELF‐DUALITY

Classical put–call symmetry relates the price of puts and calls under a suitable dual market transform. One well‐known application is the semistatic hedging of path‐dependent barrier options with European options. This, however, in its classical form requires the price process to observe rather stringent and unrealistic symmetry properties. In this paper, we develop a general self‐duality theorem to develop valuation schemes for barrier options in stochastic volatility models with correlation.     

Optimal monetary policy in a New Keynesian model with habits in consumption

In this paper we consider the implications of habits for optimal monetary policy, when those habits either exist at the level of the aggregate basket of consumption goods (‘superficial’ habits) or at the level of individual goods (‘deep’ habits: see Ravn et al., 2006). External habits generate an additional distortion in the economy and create new trade-offs for optimal policy, as the policy maker does not respond as aggressively to technology shocks in order to avoid exacerbating the habits externality. This can dramatically affect both the parameterization of optimal simple rules, as well as their determinacy properties. These effects are particularly strong when habits are of the deep kind.     

The average consumer, the unfair commercial practices directive, and the cognitive revolution

This article examines the merit of the test of the average consumer as a basis for judicial and regulatory action. In the first part, we describe the origin of the test, its application in the Unfair Commercial Practices Directive and its possible developments. In the second part, we discuss the theoretical grounds of the average consumer test (i.e., information and rationality), drawing upon the studies of cognitive psychology and behavioural economics concerning consumers’ behaviour. The result of our analysis is that we call into serious question the practical workability of the test of the average consumer, which requires consumers an overly demanding standard of rationality and information without dedicating much attention to the real functioning of consumer behaviour. The average consumer may be described as an interesting, anti-paternalistic and, to some extent, useful notion. It is, however, an overly simplistic concept with little correspondence with the real world of individual consumer behaviour and should be reinterpreted more flexibly, or even abandoned to mirror consumer behaviour more effectively.

On the risk premium in Nordic electricity futures prices

This paper examines empirically the relationship between electricity spot and futures prices, by analysing a decade of data for a set of short term-to-maturity futures contracts traded in the Nordic Power Exchange. It is found that, on average, there are significant positive risk premiums in short-term electricity futures prices. The significance and size of the premiums, however, varies seasonally over the year; whereas it is greatest during winter, it is zero in summer. It is also found that time-varying risk premiums are significantly related to unexpectedly low reservoir levels. Furthermore, before the unprecedented supply-shock that hit the market around the end of year 2002, the risk premiums were related to the variance and the skewness of future spot prices.     

Money secrets: How does trade secret legal protection affect firm market value? Evidence from the uniform trade secret act

Research summary : We investigate the impact of trade secret legal protection on firm market value in the context of acquisitions. On one hand, market value may increase because trade secret assets become better protected from rivals. On the other hand, market value may decrease because trade secret protection reduces information about the target and its competitors available to potential buyers, increasing uncertainty about its value. Buyers will discount their offers in expectation of being compensated for riskier deals. Using a sample of private equity investments in the United States, we find that trade secret protection has a positive effect in industries with high mobility of knowledge workers, but a negative effect in industries with (1) high resource–value uncertainty and (2) high poor‐investment risk. Managerial summary : We argue that an increase in trade secret legal protection might not unequivocally benefit firm owners when selling their business. A stronger trade secret protection increases the market value of firms in industries with high workers' mobility, but it decreases the market value of firms in industries with uncertain resource value and/or high risk of poor‐acquisition investments. Based on the contingent effect of trade secret protection, companies may want to adjust their strategic decisions, including where to locate or relocate, based in part on whether they will derive benefits or suffer losses when trade secrets are better protected. Finally, our study should help policymakers understand more fully the economic impact of government policies associated with trade secrets. Copyright © 2016 John Wiley & Sons, Ltd.     

Risk management and reinsurance strategies in the Spanish insurance market (1880–1940)

Reinsurance allows insurance companies to diversify their risks. However, from this original role, insurance companies have developed various reinsurance strategies in order to expand their market share. From the last decades of the nineteenth century to the 1940s, Spanish insurance companies used reinsurance in a largely unregulated context. This article analyses the reinsurance practices and their adaptation to the singularities of the Spanish market, namely: the difficulties for the consolidation of a core of pure reinsurers; the management of reinsurance in the internationalisation process; and the use of reinsurance by mutual societies to overcome their lack of equity capital.     

On the short-time behavior of the implied volatility for jump-diffusion models with stochastic volatility

In this paper we use Malliavin calculus techniques to obtain an expression for the short-time behavior of the at-the-money implied volatility skew for a generalization of the Bates model, where the volatility does not need to be a diffusion or a Markov process, as the examples in Sect. 7 show. This expression depends on the derivative of the volatility in the sense of Malliavin calculus. E. Alòs’ research is supported by grants MEC FEDER MTM 2006 06427 and SEJ2006-13537. J.A. León’s research is partially supported by the CONACyT grant 45684-F. J. Vives’ research is supported by grant MEC FEDER MTM 2006 06427.