Chebyshev interpolation for parametric option pricing

Recurrent tasks such as pricing, calibration and risk assessment need to be executed accurately and in real time. We concentrate on parametric option pricing (POP) as a generic instance of parametric conditional expectations and show that polynomial interpolation in the parameter space promises to considerably reduce run-times while maintaining accuracy. The attractive properties of Chebyshev interpolation and its tensorized extension enable us to identify broadly applicable criteria for (sub)exponential convergence and explicit error bounds. The method is most promising when the computation of the prices is most challenging. We therefore investigate its combination with Monte Carlo simulation and analyze the effect of (stochastic) approximations of the interpolation. For a wide and important range of problems, the Chebyshev method turns out to be more efficient than parametric multilevel Monte Carlo. We conclude with a numerical efficiency study.     

Private Information in Life Insurance,Annuity, and Health Insurance Markets

Economic theory predicts that private information on risks in insurance markets leads to adverse selection. To counterbalance private information, insurers collect and use information on applicants to assess their risk and to calculate premiums in an underwriting process. Using data from the English Longitudinal Study of Ageing (ELSA), this paper documents that differences in the information used in underwriting across life insurance, annuity, and health insurance markets attenuate private information to different extents. The results are in line with – and might help to reconcile – the mixed empirical evidence on adverse selection across these markets.     

The “Euro Illusion”: Illusion or Fact?

The changeover to the euro elicited an upsurge of research on the effects of the new currency on consumers’ conversion strategies, price estimates, price evaluations, choices, and purchases. This research includes longitudinal surveys, interviews, and controlled experiments, both natural and in the laboratory. The present article starts with an overview of this research after which it more specifically focuses on research showing an influence of the nominal value, as expressed in different currencies, on price evaluations and consumer choice. For most countries, the transition to the euro led to a lower nominal value currency. A bias known as the “euro illusion” has been documented such that the subjective value of money is influenced in the direction of the nominal value (i.e., in most countries prices and salaries seem smaller when expressed in euros than in the old domestic currency). Although the term was coined in connection with the euro changeover, the nominal representation of a currency has been shown to influence the subjective value of money in unfamiliar currencies other than the euro. Thus, tourists travelling abroad may frequently be subject to such an illusion. Different mechanisms have been proposed to account for the euro illusion. One is the numerosity heuristic and another the anchoring-and-adjustment heuristic in conjunction with biased conversion strategies. The size of the euro illusion is influenced by trade-offs between accuracy and effort. Consistent with this hypothesis, task importance, time constraints, familiarity with the conversion strategy, complexity of the conversion strategy, mood, and attitude towards the country or the currency all influence the size of the euro illusion.     

The Russian–Ukrainian earnings divide1

Ethnic differences are often considered to be powerful sources of diverse economic behaviour. In this article, we investigate to what extent ethnicity affects Ukrainian labour market outcomes. Using microdata from the Ukrainian Longitudinal Monitoring Survey and the Oaxaca–Blinder decomposition of earnings, we find a persistent and increasing labour market divide between ethnic Russians and Ukrainians throughout Ukraine’s transition era. We establish that language, rather than nationality, is the key factor behind this ethnic premium favouring Russians. Our findings further document that this premium is larger amongst males than females.     

Estimating the impact of social isolation on subjective health in Europe

Quality & Quantity - We investigate the relationship between social isolation and subjective health, considering that this relationship is potentially affected by endogeneity due to the...     

Accounting for preference dependency in target costing – a note

Review of Quantitative Finance and Accounting - Target costing is a well-established strategic cost management tool in theory and practice. The original target costing model implies independence of...     

Reservation wages of first- and second-generation migrants

We analyse the reservation wages of first- and second-generation migrants, based on rich survey data of the unemployed in Germany. Our results confirm the hypothesis that reservation wages increase over migrant generations and over time, suggesting that the mobility benefit of immigration may be limited in time.     

Consumers' switching inertia in a fictitious electricity market

Consumers in the deregulated Swedish electricity market do not switch from their incumbent supplier to the extent that would be economically beneficial. To examine potential causes for this switching inertia, a mail survey was administered to 540 Swedish electricity consumers who were randomly assigned to four experimental conditions and a control condition. Survey participants in the experimental conditions first made a choice of a supplier; then, they made choices between this alternative (their ‘incumbent supplier’) and other alternatives that differed from the incumbent supplier on price, quality of information, market share and availability of ‘green’ electricity. The results showed that lower price, higher quality of information, medium–large market share, and availability of green electricity increased switching to the alternatives to the incumbent supplier. A remaining general preference for choosing the incumbent supplier was reduced by instructions that removed feelings of loyalty and informed about the economic benefits of switching for all consumers.     

Choices of savings options related to trust in banks’ competence,benevolence and stability

The study investigates whether beliefs in professional investor skill in conjunction with trust in banks and other fund managers explain choices of options for long-term savings. From questionnaire data obtained for a population-based sample (n=178) and a sample of undergraduates (n=186), two index measures were constructed, one of beliefs in the skill of professional investors and another of trust in fund managers. The trust index was aggregated for the three interrelated components: competence, benevolence and stability. Regression analyses of the likelihood of savings in an actively managed fund showed an expected effect of investor-skill beliefs that was mediated by trust in the fund manager. In addition, self-reported knowledge played a larger role than trust for choices of passively managed index funds and in particular for own investment in stocks.