Market impact: a systematic study of the high frequency options market

This paper deals with a fundamental subject that has seldom been addressed in recent years, that of market impact in the options market. Our analysis is based on a proprietary database of metaorders—large orders that are split into smaller pieces before being sent to the market—on one of the main Asian markets. In line with our previous work on the equity market [Said, E., Bel Hadj Ayed, A., Husson, A. and Abergel, F., Market impact: A systematic study of limit orders. Mark. Microstruct. Liq., 2018, 3(3&4), 1850008.], we propose an algorithmic approach to identify metaorders, based on some implied volatility parameters, the at the money forward volatility and at the money forward skew. In both cases, we obtain results similar to the now well-understood equity market: Square-Root Law, Fair Pricing Condition and Market Impact Dynamics.     

A rational rank four demand system

Past parametric tests of demand system rank employed polynomial Engel curve systems. However, by Gorman's ( 1981 ) theorem, the maximum possible rank of a utility‐derived polynomial demand system is three. The present paper proposes a class of demand systems that are utility derived, are close to polynomial, and have rank four. These systems nest rational polynomial demands, and so can be used to test ranks up to four. These systems are suitable for applications where high rank is likely, such as demand systems involving a large number of goods. A test of rank using this new class of systems is applied to UK consumer demand data. Copyright © 2002 John Wiley & Sons, Ltd.     

Saving Accounts versus Stocks and Bonds in Household Portfolio Allocation

We study the structure of household portfolios of financial wealth by analyzing both the determinants of total financial wealth and the choice between risky (stocks and bonds) and riskfree assets (saving accounts). The econometric specification is a generalized trivariate Tobit model, estimated on a cross section of 3,077 households in the Netherlands in 1988. We account for endogeneity of financial wealth and for selectivity due to nonreporting. Results show that the level of financial wealth and the marginal tax rate are major determinants of the allocation between riskfree and risky assets.     

Procedures for revising management judgments forecasts

Forecast improvement is often approached by attempting to find the “best” model for a given situation. Less attention has been paid to the possibility of examining past prediction errors for patterns that may suggest forecast adjustments for the future. This empirical study involves one firm’s management judgment forecasts for product sales and the attempts made to improve their accuracy by removing certain types of bias. In three of the five series examined, error reduction averaging close to thirty percent occurs as a result of the adjustment procedure. The other two series proved to be relatively free from bias and were therefore not in need of the correction method described.     

An examination of the literature relating to issues affecting the human variable in just-in-time environments

There has been an extensive body of research conducted into the technical aspects of the just-in-time (JIT) manufacturing methodology, particularly prior to 1990. It is only in more recent times that the focus has turned toward the more subtle people-related aspects. The recognition of JIT as a truly holistic approach to managing manufacturing operations has led to an appreciation of the importance of the role played by the human variable as well as an emphasis on the impact that organisational structure and management style can have on successful operation. This article examines and analyses the content of a wide range of articles related to issues such as: the need for change in corporate culture, the role of organisational structures, factors significantly impacting chances of success, the importance of employee involvement, how best to involve employees, the importance of training, how/whom/when to train, different team-based organisational structures, the impact of changing roles on various levels of the organisation and the appropriateness of particular change management strategies. An overall picture of the current state of thinking on these issues is thus developed and the importance of these factors to the successful implementation and operation of JIT highlighted. Opportunities for further research in this important area are identified.     

The Falsification of Four Popular Hypotheses About the Asian Crisis

Various claims have been made about the causes of the Asian crisis and its spread. Here, we use data on the behaviour of capital flows during the crisis to test the strong forms of four such hypotheses, that portfolio investors and hedge funds played a dominant role in initiating and/or spreading the crisis; that moral hazard kept efficient markets from predicting the crisis; and, finally, the common lender hypothesis of Kaminsky and Reinhart. In the process we also test implications of the Calvo-Mendoza model of rational investor ignorance. All are falsified as monocausal explanations. For example, portfolio investments that could not have been subject to substantial moral hazard continued to flow into Asia until very shortly before the crisis. Likewise, banks were a much larger source of capital outflows during the crisis than were portfolio investors. While falsified in their strongest forms, several of these hypotheses in less strong forms should play a role in a more nuanced analysis. It is necessary to move past simple single-factor approaches in order to produce a more complete, synthetic explanation of this episode.     

Background Risk and the Performance of Insurance Markets under Adverse Selection

Background risk can influence the performance of insurance markets that must deal with adverse selection when applicants are risk vulnerable, since they are more averse to bearing the insurable risk as a result of their exposures to background risk. We show that background risk always results in a lower deductible for the incentive constrained contract, and that a broader range of markets attains the stable sequential equilibrium cross-subsidized pair of separating contracts. We conclude that background risk always improves the performance of markets for coverage against (insurable) foreground risks that must deal with adverse selection. We also find, however, that these improvements are never sufficient to offset the cost to insureds of bearing the background risk.     

The evolution of rationality and the Red Queen

Strategic rationality is subjected here to natural selection. In a zero-sum repeated game of incomplete information, one long-run individual is informed of the state of the world, and plays against a sequence of short-run opponents who are not. Strategies are noisy and have bounded recall. An equilibrium in these is shown to exist. Relative to any such equilibrium, sufficiently greater recall enjoys an advantage that is not decreasing in the original level of recall, thus capturing the Red Queen effect. The selection pressure to reduce a small amount of noise is less than that to increase recall.     

The e-integration dilemma: The linkages between Internet technology application, trading partner relationships and structural change

The evidence from an empirical study involving 281 Australian organizations suggests that the availability, open nature, and (comparative) ease of implementation of Internet technologies for integration with trading partners, whilst on the one hand providing the means by which organizations can integrate processes and systems in a cost effective way, can amplify the need for both structural change and closer collaboration with trading partners. The relationships proposed and tested in the model are justified and explained based on a number of theoretical perspectives. These include Transaction Cost Economics, Socio-technical Systems, Resource Dependency, Knowledge Based View, Stakeholder Theory and Organizational Learning. The implications of the findings for Transaction Cost Theory are noteworthy firstly because they support the appropriateness of the inter-organizational governance structure in the context of this study, and secondly because although application of these technologies may reduce information search and related costs, whether this necessarily leads to reduced coordination costs is problematic. The potential benefits from improved coordination may be constrained by the perceived costs, and risks, of transition to new structural forms. The implication for practice is that increased use of Internet technologies creates substantial pressure to invest in organizational change. The attractiveness of investing in technologies that place managers in a position where they need to promote organizational change in order to extract adequate returns creates a significant dilemma. On the one hand Internet technologies enable extensive sharing and integration of data among trading partners, but at the same time they create conditions requiring managers to embrace fundamental organizational change in order to leverage the potential of such integration.