The multinomial option pricing model and its Brownian and Poisson limits

The Cox, Ross, and Rubinstein binomial model is generalizedto the multinomial case. Limits are investigated and shown toyield the Black-Scholes formula in the case of continuous samplepaths for a wide variety of complete market structures. In thediscontinuous case of Merton-type formula is shown to result,provided jump probabilities are replaced by their correspondingArrow-Debreu prices.     

Simple binomial processes as diffusion approximations in financial models

A binomial approximation to a diffusion is defined as 'computationallysimple' if the number of nodes grows at most linearly in thenumber of time intervals. It is shown how to construct computationallysimple binomial processes that converge weakly to commonly employeddiffusions in financial models. The convergence of the sequenceof bond and European option prices from these processes to thecorresponding values in the diffusion limit is also demonstrated.Numerical examples from the constant elasticity of variancestock price and the Cox, Ingersoll, and Ross (1985) discountbond price are provided.     

The upstairs market for large-block transactions: analysis and measurement of price effects

This article develops a model of the upstairs market where ordersize, beliefs and prices are determined endogenously. We testthe model's predictions using unique data for 5,625 equity tradesduring the period 1985 to 1992 that are known to be upstairstransactions and are identified as either buyer or seller initiated.We find that price movements prior to the trade date are significantlypositively related to trade size, consistent with informationleakage as the block is 'shopped' upstairs. Further, the temporaryprice impact or liquidity effect is a concave function of ordersize, which may result from upstairs intermediation.     

Investigating the impact of endogeneity on inefficiency estimates in the application of stochastic frontier analysis to nursing homes

This paper examines the impact of an endogenous cost function variable on the inefficiency estimates generated by stochastic frontier analysis (SFA). The specific variable of interest in this application is endogenous quality in nursing homes. We simulate a dataset based on the characteristics of for-profit nursing homes in California, which we use to assess the impact on SFA-generated inefficiency estimates of an endogenous regressor under a variety of scenarios, including variations in the strength and direction of the endogeneity and whether the correlation is with the random noise or the inefficiency residual component of the error term. We compare each of these cases when quality is included and excluded from the cost equation. We provide evidence of the impact of endogeneity on inefficiency estimates yielded by SFA under these various scenarios and when the endogenous regressor is included and excluded from the model.     

The competitive nature of the nursing home industry: price mark ups and demand elasticities

Nursing home markets are likely to deviate from a competitive structure because of limitations on entry imposed by Certificate of Need (CON) regulations and the potential for product differentiation along such attributes as location, religious affiliation and quality. This paper investigates the structure of nursing home markets in New York State by calculating price mark ups and residual private pay demand elasticities. It shows that the residual demand elasticity is bound by estimates based on price mark ups above marginal costs and above Medicaid rates. This approach allows estimation of demand elasticities in all markets, whether or not CON regulations constrain bed supply. Mean price elasticities (in absolute value) calculated for nursing homes in New York State in 1991 ranged from 3.46 to 3.85.     

Signaling with dividends and share repurchases: a choice between deterministic and stochastic cash disbursements

We study firms signaling with cash disbursements and show thatthe choice of a deterministic or a stochastic disbursement dependson a property of the firm's production function that is analogousto absolute risk aversion for a utility function. With decreasing(increasing) absolute risk aversion, the high-quality firm prefersto distinguish itself from the low-quality firm with a stochastic(deterministic) outlay. We then study in detail two common formsof corporate cash distributions: dividends, a deterministicdisbursement, and share repurchases, a stochastic disbursement.     

Nursing home costs and quality of care outcomes

The relationship between cost and quality of care in nursing homes was examined using quality indicator measures of resident outcomes. While each individual quality measure makes only small contributions to costs, when considered across the facility, quality could have a substantial financial impact on the operations of the home.