A PDE method for estimation of implied volatility

In this paper it is proved that the Black–Scholes implied volatility satisfies a second order non-linear partial differential equation. The obtained PDE is then used to construct an algorithm for fast and accurate polynomial approximation for Black–Scholes implied volatility that improves on the existing numerical schemes from literature, both in speed and parallelizability. We also show that the method is applicable to other problems, such as approximation of implied Bachelier volatility.     

Political and Fiscal Risk Determinants of Sovereign Spreads in Emerging Markets

Using a panel of 46 emerging market economies from 1997 to 2008, this paper investigates the key determinants of country risk premiums as measured by sovereign bond spreads. Unlike previous studies, the results indicate that both political and fiscal factors matter for credit risk in emerging markets. Lower levels of political risk are associated with tighter spreads, particularly during financial turmoil. Efforts at fiscal consolidation narrow credit spreads, especially in countries with high initial public debt levels. The composition of fiscal policy also matters as higher public investment lowers spreads as long as the fiscal position remains sustainable and the fiscal deficit does not worsen.     

Organizational form and output quality

This paper re‐examines the relationship between a firm's organizational form, not‐for‐profit versus for‐profit, and its output quality. The Arrow‐Hansmann theory of hidden action on the part of providers predicts higher quality for not‐for‐profit suppliers. This prediction has a puzzling lack of support in the empirical literature. We propose a theory that resolves the empirical puzzle and generates additional testable implications. The theory starts with the traditional assumptions of hidden action and supplier altruism. It then incorporates two additional features of real‐world markets: hidden information on supplier ability to provide high quality and a variation across buyers in the degree of informational asymmetry. The central prediction of the theory is that quality has a higher variance across for‐profits than across not‐for‐profits. Preliminary evidence from the US market for hospital care is consistent with this prediction.