black scholes approximations of call option prices with stochastic volatilities a note a piecewise linear weighting function for black scholes implied volatilities is used in conjunction with the black scholes call pricing model to approximate stochastic volatility european call prices a sensitivity analysis is conducted to compare simulated stochastic volatility call prices to the black scholes prices calculated with the weighted implied vo latilities the analysis indicates that a simple model can provide close approximations to the simulated prices with far less computational effort i introduction the volatility of the underlying asset is one of the more difficult parameters to estimate in any option pricing model the stochastic nature of the volatility of most financial assets is responsible for much of the difficulty while the early tests of the black scholes 1973 option pricing model rely upon historical prices for volatility estimates latane and rendleman s 1976 implied volatility technique has become the standard method of estimation unfortunately as beckers 1981 stresses although implied volatilities calculated from a stationary vari ance model may be of practical use it is inconsistent to use the black scholes model with a constant variance to obtain estimates of nonstationary variances l recent work conducted by hull and white 1987 and johnson and shanno 1987 has been directed at solving the problem of pricing european calls on assets with stochastic volatilities while hull and white provide a series solution for the case in which the variance and stock price are uncorrelated convergence is slow unless the variance of the assets volatility is relatively small for more general cases both hull and white and johnson and shanno rely upon monte carlo simulations to estimate option prices although the application of simulation techniques to option pricing first explored by boyle 1977 is often a useful method of estimating option prices the monte carlo method tends to be expensive and is often too time consuming for real time applications this study examines a simple method of approximat

analytical upper bounds for american option prices american options require numerical methods namely lattice models to provide accurate price estimates the computations can become expensive when more than one state variable is involved analytical upper bounds can therefore provide a useful guideline for how high american values can reach in this paper we derive analytical closed form upper bounds for american option prices under stochastic interest rates stochastic volatility and jumps where american option prices are difficult to compute with accuracy in a stochastic volatility model heston 1993 and scott 1997 that has two random factors we demonstrate that the upper bound only takes a very small fraction of the time that the american option needs to compute

taxation and the allocation of risk inside the multinational firm abstract this paper provides the first theoretical and empirical analysis of how taxation shapes the joint allocation of risk and profits inside the multinational firm theoretically we identify three mechanisms through which corporate taxes may shape the within firm allocation of risk 1 transfer pricing rules requiring risk to be compensated with higher expected returns create incentives to shift risk to low tax jurisdictions as a means to shift profits 2 risk averse owners create incentives to allocate risk to high tax affiliates to maximize risk sharing with governments 3 limited loss offset creates incentives to shift risk to affiliates in other countries empirically we show that multinational firms disproportionately allocate risk to low tax countries and that the key mechanism is the nexus between risk and profits established by transfer pricing rules within firm differences in risk explain a significant fraction of the well established correlation between profits and tax rates suggesting that risk shifting is a quantitatively non negligible channel for profit shifting

transfer pricing double taxation and the cost of capital the effects of double taxation are analysed when a multinational enterprise can shift profits by transfer pricing behaviour it is shown that the well known hartman sinn neutrality result may not hold in this case surprisingly an increase in the taxation of foreign dividends may lead to a lower cost of capital for the foreign subsidiary i introduction in recent years there has been growing awareness that multinational firms can evade a large portion of their statutory tax burden by manipulating transfer prices in cross border transactions one reason for shifting profits between jurisdictions using transfer pricing is the differences in corporate tax rates by underpricing intra company sales and overpricing intracompany purchases a subsidiary located in a high tax country can increase the multinational s overall profit since the parent s gain in after tax profit is higher than the subsidiary s net of tax loss a second reason for setting

defining the rebound effect abstract this paper gives rigorous definitions of the rebound effect not only in the well described single commodity case khazzoom 1980 the energy journal 1 4 21 40 but also for a multiple commodity case it is shown that the familiar laws for the single case do not hold for the multiple case the paper describes the state of the art of empirical estimation of the rebound effect with special focus on the estimates done for the netherlands we conclude that according to every definition empirical evidence shows that the re is probably small between 0 and 15

option pricing when the variance changes randomly theory estimation and an application in this paper we examine the pricing of european call options on stocks that have vari ance rates that change randomly we study continuous time diffusion processes for the stock return and the standard deviation parameter and we find that one must use the stock and two options to form a riskless hedge the riskless hedge does not lead to a unique option pricing function because the random standard deviation is not a traded security one must appeal to an equilibrium asset pricing model to derive a unique option pricing function in general the option price depends on the risk premium associated with the random standard deviation we find that the problem can be simplified by assuming that volatility risk can be diversified away and that changes in volatility are uncorrelated with the stock return the resulting solution is an integral ofthe black scholes formula and the distribution function for the variance of the stock price we show that accurate option prices can be computed via monte carlo simulations and we apply the model to a set of actual prices

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

evidence of direct and indirect rebound effect in households in eu 27 countries abstract this research estimates the direct and indirect rebound effect of energy efficiency in households for the eu 27 countries the first twenty seven member states of the european union a hybrid methodology that combines econometric estimates environmental extended input output analysis and re spending models has been developed although most of the economies present values below 100 there are seven countries situated above this critical threshold by weighting individual estimates by gdp an average value for the overall eu 27 economy has been found between 73 62 and 81 16 these results suggest that the energy policy at the european level should be rethought if efficiency measures pursue reducing energy consumption and tackling climate change

energy conservation more effective with rebound policy this article sketches the problem of indirect energy use effects also known as rebound of energy conservation there is widespread support for energy conservation especially when it is voluntary as this seems a cheap way to realize environmental and energy climate goals however this overlooks the phenomenon of rebound the topic of energy rebound has mainly attracted attention from energy analysts but has been surprisingly neglected in environmental economics even though economists generally are concerned with indirect or economy wide impacts of technical change and policies this paper presents definitions and interpretations of energy and environmental rebound as well as four fundamental reasons for the existence of the rebound phenomenon it further offers the most complete list of rebound pathways or mechanisms available in the literature in addition it discusses empirical estimates of rebound and addresses the implications of uncertainties and difficulties in assessing rebound suggestions are offered for strategies and public policies to contain rebound it is advised that rebound evaluation is an essential part of environmental policy and project assessments as opposed to earlier studies this paper stresses the relevance of the distinction between energy conservation resulting from autonomous demand changes and from efficiency improvements in technology equipment in addition it argues that rebound is especially relevant for developing countries

interest rate volatility and the term structure a two factor general equilibrium model we develop a two factor general equilibrium model of the term structure the factors are the short term interest rate and the volatility of the short term interest rate we derive closed form expressions for discount bonds and study the properties of the term structure implied by the model the dependence of yields on volatility allows the model to capture many observed properties of the term structure we also derive closed form expressions for discount bond options we use hansen s generalized method of moments framework to test the cross sectional restrictions imposed by the model the tests support the two factor model there are essentially two approaches to the modeling of the term structure of interest rates in continuous time the equilibrium approach pioneered by

transaction data tests of s p 100 call option pricing this paper examines the pricing of s p 100 calls using 14 months of transactions data we find that market prices of s p 100 calls differ systematically from black scholes values the biases in black scholes model prices are both statistically and economically significant and correspond to biases that arise if market prices incorporate a stochastically changing volatility of the index

economic and environmental gains of china s fossil energy subsidies reform a rebound effect case study with eimo model abstract energy consumption and efficiency emerged as the hottest topic in the context of china s sustainable development energy subsidies and rebound effect were closely related to this topic while few combinative studies on them with a focus on china this paper employed a co thinking approach focusing on how the energy subsidies reform could mitigate the rebound effect in china and how to achieve an economic and environmental gains that reduced pecuniary spending improved the distorted energy market and reduced energy consumption simultaneously firstly with price gap approach we calculated the total energy subsidies scale of china in 2007 which amounted to582 0 billion cny then we detected and identified rebound effect of china energy consumption with the features furthermore based on china 2007 monetary input output table and energy flow analysis we compiled a hybrid physical energy input and monetary output model eimo to simulate the mitigation effect of subsidies reform results showed that removing energy subsidies would decrease ultimate demand of different economy sectors and reduce the accumulatively physical consumption of coal oil natural gas and electricity by 17 74 13 47 3 64 and 15 82 million tce respectively finally we discussed relevant policy issues on china s energy subsidies reform in depth

repatriation taxes repatriation strategies and multinational financial policy abstract several investment repatriation strategies are added to the standard model of a multinational in which an affiliate is located in a low tax country and is limited to two alternatives repatriating taxable dividends to the parent or investing in its own real operations in our model affiliates can invest in passive assets which the parent can borrow against or in related affiliates which can be used as vehicles for tax favored repatriations we show analytically how the availability of alternative strategies can effect real investment throughout the worldwide corporation we use firm level data for us multinationals to test for the importance of alternative strategies the evidence is generally consistent with the theory particularly the strategies using related affiliates

a theory of economic growth with material energy resources and dematerialization interaction of three growth mechanisms the nature of energy and material resources in a non optimizing growth theory framework is clarified this involves two modifications of the conventional theory firstly multiple feedback mechanisms or growth engines are identified such that the impact of the cost of production through demand on growth is accounted for secondly a production function distinguishes between resource use technical efficiency and value creation the resulting model is analytically solved under the condition of a constant growth rate given model complexity numerical experiments are performed as well providing relevant insights to the academic and political debates on environmental kuznets curves and dematerialization

displaced diffusion option pricing this paper develops a new option pricing formula that pushes the underlying source of risk back to the risk of individual assets of the firm the formula simultaneously encompasses differential riskiness of the assets of the firm their relative weights in determining the value of the firm the effects of firm debt and the effects of a dividend policy with both constant and random components although this setting considerably generalizes the black scholes 1 analysis it nonetheless produces a formula via riskless arbitrage arguments that given estimated inputs is as easy to use as the black scholes formula

international corporate tax avoidance a review of the channels magnitudes and blind spots this paper reviews the rapidly growing empirical literature on international tax avoidance by multinational corporations it surveys evidence on main channels of corporate tax avoidance including transfer mispricing international debt shifting treaty shopping tax deferral and corporate inversions moreover it performs a meta analysis of the extensive literature that estimates the overall size of profit shifting we find that the literature suggests that for the most recent year a 1 percentage point lower corporate tax rate compared to other countries will expand before tax income by 1 5 percent an effect that is larger than reported as the consensus estimate in previous surveys and tends to be increasing over time the literature on tax avoidance still has several unresolved puzzles and blind spots that require further research

monte carlo methods for security pricing the monte carlo approach has proved to be a valuable and flexible computational tool in modern finance this paper discusses some of the recent applications of the monte carlo method to security pricing problems with emphasis on improvements in efficiency we first review some variance reduction methods that have proved useful in finance then we describe the use of deterministic low discrepancy sequences also known as quasi monte carlo methods for the valuation of complex derivative securities we summarize some recent applications of the monte carlo method to the estimation of partial derivatives or risk sensitivities and to the valuation of american options we conclude by mentioning other applications

taxes and the division of foreign operating income among royalties interest dividends and retained earnings abstract how do taxes influence the way u s corporations divide foreign affiliate operating income among royalties dividends interest and retained earnings the paper goes beyond previous work that focused largely on dividend repatriation behavior and provides a comprehensive analysis of the disposition of foreign subsidiary operating income the empirical results show that taxes have a large and statistically significant effect on the composition of payments own tax prices discourage the payment of dividends royalties and interest but dividend and other repatriation taxes do not increase retained earnings they only alter the composition of payments the results are therefore consistent with a generalized hartman sinn model of the mature controlled foreign corporation that has various alternative repatriation vehicles finally this paper integrates the choice of payments with income shifting among countries because the latter may be part of a low tax strategy for repatriations in this general framework conventional composite tax prices are not appropriate because the response to a change in a composite tax price depends on which components changed

pricing stock and bond options when the default free rate is stochastic we derive formulas for the valuation of call options on stocks and bonds when the defaultfree rate is stochastic the formulas highlight the role of the correlation between the unanticipated returns on the underlying security and the changes in the short term rate in determining the options value our numerical analysis indicates that option prices predicted by the proposed formula differ from those predicted by the black and scholes formula when this correlation is relatively large and the short term rate s instantaneous variance is relatively large as well moreover the proposed formula predicts higher lower stock option prices than those predicted by the black and scholes formula for correlation values that are lower higher than some positive critical value

on the taxation of multinational corporate investment when the deferral method is used by the capital exporting country abstract the user cost of capital for a subsidiary is derived when the capital exporter uses the deferral method for the taxation of the parent s foreign source income the hartman sinn result implying that the capital exporter s tax on remitted dividends is irrelevant to a subsidiary using retentions to finance investment is shown to be correct only when host and home countries have similar corporate income tax bases otherwise both the home and host country corporate tax provisions influence the cost of capital it is also shown that a cash flow tax by the capital importer is not neutral owing to interactions with the capital exporter s tax regime

the use of the control variate technique in option pricing this paper presents a generalized version of the lattice approach to pricing options it shows how the control variate technique can produce significant improvements in the effi ciency ofthe approach the control variate technique is illustrated using american puts on dividend and nondividend paying stocks

which garch model for option valuation characterizing asset return dynamics using volatility models is an important part of empirical finance the existing literature on garch models favors some rather complex volatility specifications whose relative performance is usually assessed through their likelihood based on a time series of asset returns this paper compares a range of garch models along a different dimension using option prices and returns under the risk neutral as well as the physical probability measure we judge the relative performance of various models by evaluating an objective function based on option prices in contrast with returns based inference we find that our option based objective function favors a relatively parsimonious model specifically when evaluated out of sample our analysis favors a model that besides volatility clustering only allows for a standard leverage effect

reducing rebound effect through fossil subsidies reform a comprehensive evaluation in china abstract china has committed a sharp reduction in its carbon intensity by 2020 and proposed to take integrated policy package including energy subsidy reform to achieve this goal while energy efficiency improvement is the key influencing factor for this goal its effectiveness is significantly determined by rebound effect energy subsidy as an economic regulation policy would significantly affect rebound effect to explore how china s fossil subsidies reform would affect rebound effect this study conducts a comprehensive evaluation based on a multi sector computable general equilibrium cge model rebound effects at different technological improvement levels are investigated and the impacts of different subsidies reform scenarios on mitigating rebound effects and on the whole economy is analyzed the results provide significant policy insights firstly rebound effect does exist in china larger for electricity than for primary energies secondly by removing fossil energy subsides the rebound effect would be effectively mitigated and removing all subsides would reduce the rebound effect most however it would bring significant negative impacts on the macro economy thirdly an integrated policy with removal of fossil energy subsidies and increment of clean energy subsidies would be more effective greatly reducing rebound effect and also bring benefits for both economy and environment our findings would be critical for china s low carbon policy making in the future

the term structure of implied forward volatility recovery and informational content in the corn options market using a flexible method we develop the term structure of volatility implied by corn futures options with differing maturities and evaluate its ability to predict subsequent realized price volatility the implied forward volatilities anticipate realized volatility well for the nearby interval the implied forward volatilities provide unbiased forecasts and are superior to forecasts based on historical volatilities for more distant intervals early year options predict the direction and magnitude of future volatility changes about as well as a three year moving average and better than a naive forecast however later year options display less forecast power in part due to reduced trading activity

pricing european currency options a comparison of the modified black scholes model and a random variance model we use the modified black scholes model and a random variance option pricing model to study prices of european currency options traded in geneva the options which cannot be exercised early include calls and puts on the dollar swiss franc exchange rate in the empirical analysis we examine the model fit and the biases with respect to the strike price time to maturity and volatility there is some evidence of mispricing and there are small gains available by trading with the random variance model

initial margin policy and stochastic volatility in the crude oil futures market this article examines the relationship between the volatility of the crude oil futures market and changes in initial margin requirements to closely match changes in futures market volatility with the corresponding changes in margin requirements we infer the volatility of the futures market from the prices of crude oil futures options contracts using a mean reverting diffusion process for volatility we show that changes in margin policy do not affect subsequent market volatility

stochastic volatility option pricing this paper examines alternative methods for pricing options when the underlying security volatility is stochastic we show that when there is no correlation between innovations in security price and volatility the characteristic function of the average variance of the price process plays a pivotal role it may be used to simplify fourier option pricing techniques and to implement simple power series methods we compare these methods for the alternative mean reverting stochastic volatility models introduced by stein and stein 1991 and heston 1993 we also examine the biases in the black scholes model that are eliminated by allowing for stochastic volatility and we correct some errors in the stein and stein 1991 analysis of this issue empirical evidence on underlying asset prices and on their derivatives strongly suggests that asset price volatility is stochastic the pricing of options under this condition is therefore an important problem in this paper we study alternative option pricing methods that account for stochastic volatility we are particularly concerned with power series methods which we show to be quite accurate and easy to implement for alternative volatility specifications we point out their relation with recently proposed exact methods this permits a precise assessment of the approximation involved in the simple power series approach and of the impact of stochastic volatility on option prices following garman 1976 stochastic volatility option prices must satisfy a bivariate fundamental partial differential equation pde in the two state variables security price and volatility since volatility is not spanned by assets in the econ omy the volatility risk may not be eliminated by arbitrage methods therefore its market price explicitly enters into the pde the associated risk premium is owen graduate school of management vanderbilt university nashville tn 37203 and universita di siena facolta di scienza economiche e bancarie 53100 siena italy respectively part of this research was supported from a grant from the dean s fund and the financial markets research center at the owen school of management vanderbilt university some of this research was completed while roma was visiting the anderson graduate school of management ofthe university of california at los angeles we thank participants of the finance accounting and economics workshop at the owen school of management vanderbilt university for useful comments we appreciate the suggestions of roger huang craig lewis ron masulis and walter torous we thank joanne ball for editorial

stock price distributions with stochastic volatility an analytic approach we study the stock price distributions that arise when prices follow a diffusion process with a stochastically varying volatility parameter we use analytic techniques to derive an explicit closed form solution for the case where volatility is driven by an arithmetic ornstein ublenbeck or ar1 process we then apply our results to two related problems in the finance literature 1 options pricing in a world of stochastic volatility and 2 the relationship between stochastic volatility and the nature of fat tailes in stock price distributions article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

do swedish multinationals pay less in taxes than domestic firms in recent years there has been growing concern that multinational enterprises mnes engage in strategic tax planning in order to shift profits to low tax jurisdictions this common perception is generally confirmed by empirical evidence which is foremost provided for countries with high corporate taxes and relatively complex tax systems we investigate whether multinational firms in a country with a comparatively more competitive tax system undertake profit shifting we do this by using detailed census data from corporate income statements and balance sheets filed by swedish manufacturing firms between 1997 and 2007 many previous studies have used tax rate differences to identify profit shifting these studies however run the risk of overestimating the amount of tax shifting as this method entangles tax planning activities with the effect a lower corporate tax rate has on resulting profits we avoid this by comparing mnes with domestic firms unable to benefit from other tax jurisdictions in particular we identify systematic differences in tax payments earnings before interest and taxes and equity ratios between multinational and comparable domestic firms based on propensity score matching in addition we examine the tax behavioral impact of acquiring multinational status using difference in differences estimations and or propensity score matching our results reveal that the extent to which multinational firms have lower tax payments than their domestic counterparts depends on their production characteristics and foreign market outreach in particular we find evidence indicating that firms operating in few foreign markets and firms that become multinational engage in profit shifting from sweden less

a continuous time arbitrage pricing model with stochastic volatility and jumps we formulate and test a continuous time asset pricing model using u s equity market data we assume that stock returns are driven by common factors including random jump size poisson processes and brownian motions with stochastic volatility the model places overidentifying restrictions on the mean returns allowing one to identify risk neutral probability distributions useful in pricing derivative securities we test for the restrictions and decompose moments of the asset returns into the contributions made by different factors our econometric methods take full account of time aggregation

the pricing of stock index options in a general equilibrium model this paper analyzes the pricing of stock index options in a simple general equilibrium model in this model the volatility of the stock index and the spot rate of interest are functions of a stochastic variable the paper investigates the biases that arise when using the black scholes model with the assumed volatility and interest rate dynamics it is shown that the model can in principle explain the biases observed in empirical work on stock index options

how important is the correlation between returns and volatility in a stochastic volatility model empirical evidence from pricing and hedging in the s p 500 index options market abstract this paper examines the importance of allowing for correlation between returns and volatility in a continuous time stochastic volatility option pricing model specifically it tests the closed form stochastic volatility model of heston review of financial studies 6 1993 327 343 that allows for non zero correlation in terms of pricing and hedging options on the s p 500 index it is found that non zero correlation in the stochastic volatility model leads to significant improvements in mispricing of out of the money options and overall pricing performance compared to if correlation is constrained to be zero in terms of hedging non zero correlation results in significantly lower hedging errors for out of the money options

forecasting stock return variance toward an understanding of stochastic implied volatilities we examine the behavior of measured variances from the options market and the underlying stock market under the joint hypotheses that markets are informationally efficient and that option prices are explained by a particular asset pricing model forecasts from time series models of the stockreturn process should not have predictive content given the market forecast as embodied in option prices both in sample and out of sample tests suggest that this hypothesis can be rejected using simulations we show that biases inherent in the procedure we use to imply variances cannot explain this result thus we provide evidence inconsistent with the orthogonality restrictions of option pricing models that assume that variance risk is unpriced these results also have implicationsfor optimal variance forecast rules

predicting currency return volatility abstract standard deviations and elasticity of variance coefficients implied in currency option prices are employed to predict subsequent currency return volatility despite documented variance non stationarity strong predictive relationships are found the predictive accuracies of standard deviations and elasticity coefficients are statistically indistinguishable finally predictive accuracy is invariant to the weighting techniques employed

the rebound effect microeconomic definitions limitations and extensions abstract the rebound effect results in part from an increased consumption of energy services following an improvement in the technical efficiency of delivering those services this increased consumption offsets the energy savings that may otherwise be achieved if the rebound effect is sufficiently large it may undermine the rationale for policy measures to encourage energy efficiency the nature and magnitude of the rebound effect is the focus of long running dispute with energy economics this paper brings together previous theoretical work to provide a rigorous definition of the rebound effect to clarify key conceptual issues and to highlight the potential consequences of various assumptions for empirical estimates of the effect the focus is on the direct rebound effect for a single energy service indirect and economy wide rebound effects are not discussed beginning with khazzoom s original definition of the rebound effect we expose the limitations of three simplifying assumptions on which this definition is based first we argue that capital costs form an important part of the total cost of providing energy services and that empirical studies that estimate rebound effects from variations in energy prices are prone to bias second we argue that energy efficiency should be treated as an endogenous variable and that empirical estimates of the rebound effect may need to apply a simultaneous equation model to capture the joint determination of key variables third we explore the implications of the opportunity costs of time in the production of energy services and highlight the consequences for energy use of improved time efficiency the influence of time costs on the rebound effect and the existence of a parallel rebound effect with respect to time each of these considerations serves to highlight the difficulties in obtaining reliable estimates of the rebound effect and the different factors that need to be controlled for we discuss the implications of these findings for econometric studies and argue that several existing studies may overestimate the magnitude of the effect

the crash of ʼ87 was it expected the evidence from options markets transactions prices of s p 500 futures options over 1985 1987 are examined for evidence of expectations prior to october 1987 of an impending stock market crash first it is shown that out of the money puts became unusually expensive during the year preceding the crash second a model is derived for pricing american options on jump diffusion processes with systematic jump risk the jump diffusion parameters implicit in options prices indicate that a crash was expected and that implicit distributions were negatively skewed during october 1986 to august 1987 both approaches indicate no strong crash fears during the 2 months immediately preceding the crash attempts to explain what caused the stock market crashes around the world in october 1987 have suffered from the paucity of major economic developments occurring around that time that could have triggered the crashes shifting expectations regarding monetary policy foreign investors fears of a dollar decline increasing riskiness of assets none of these appeared major enough if present at all to explain the magnitude of the crashes and although portfolio insurance strategies could conceivably magnify the effects of a jump in fundamentals the initiating jump in fundamentals appears to be lacking

the ict electronics question structural change and the rebound effect abstract ict and related electronic appliances consumed 4 of global electrical energy in 2007 growing to 4 7 in 2012 with projections of continued increase in coming decades this is despite an average annual increase in energy efficiency of about 30 in ict electronics throughout the last 5 decades mainstream studies of energy related rebound effects have yet to produce a conceptual framework that adequately encapsulates a unique feature of ict electronics its tendency to induce changes in social practice and socio technical structures this study attempts to fill this gap surveying rebound effect literature it builds on studies which explore transformational change caused by energy efficiency increases it identifies structural changes in business education the military and households caused by energy efficiency increases in ict electronics which lead to a proliferation of ict electronic devices and consequently increased energy consumption it shows the cause and effect logic between energy efficiency and energy consumption in ict electronics and tentatively estimates rebound effects ranging between 115 and 161 in eight diverse empirical examples the history of ict electronics shows that energy efficiency increases inevitably lead to increases in energy consumption hence firm controls on co 2 e emission allowances may offer the best hope of curbing energy consumption and co 2 e emissions in this sector

american taxation of multinational firms publisher summary this chapter discusses the american taxation of multinational firms it is assumed that a multinational firm starts with an existing stock of foreign and domestic investment and seeks the optimal change in its position over the next year as the earnings generated by existing investments are an important source of capital for new investment one cannot ignore the role of the past in shaping the present the chapter presents an analysis that focuses not only on the levels of foreign and domestic investment but also on the financing of that investment it is also assumed that the foreign subsidiary can deduct from its taxable income interest on intrafirm debt as well as royalties head office charges and other such payments for intrafirm services

analysis of the term structure of implied volatilities from various empirical work it is well known that the volatility of asset returns changes over time this might be one of the reasons that implied volatilities differ for options that only differ in time to maturity we construct models for the relation between short and long term implied volatilities based on three different assumptions of stock return volatility behavior i e mean reverting garch and egarch models we test these relations on option price data and conclude that egarch gives the best description of asset prices and the term structure of options implied volatilities

the effect of the tax reform act of 1986 on the location of assets in financial services firms this paper examines the effects of the tax reform act of 1986 on the international location decisions of u s financial services firms the act included rule changes that made it substantially more difficult for u s firms to defer u s taxes on overseas financial services income held in low tax jurisdictions we use information from the tax returns of u s corporations to examine how local taxes affect the allocation of financial assets held abroad by financial services firms we find that before the act the location of reported assets in financial subsidiaries was responsive to differences in host country tax rates across jurisdictions however after the act differences in host country tax rates no longer explain the distribution of assets held in financial services subsidiaries abroad our results suggest that the tightening of the anti deferral provisions applicable to financial services companies has been successful in diminishing the effect of host country income taxes on asset location decisions

the taxation of passive foreign investment lessons from german experience the paper evaluates the working of german cfc rules that restrict the use of foreign subsidiaries located in low tax countries to shelter passive investment income from home taxation while passive investments make up a significant fraction of german outbound fdi we find that german cfc rules are quite effective in restricting investments in low tax jurisdictions we find evidence that the german 2001 tax reform which unilaterally introduced exemption of passive income in medium and high tax countries has led to some shifting of passive assets into countries for which the exemption was previously limited ce texte evalue l impact des regles imposees aux succursales a l etranger des societes allemandes regles qui limitent l usage de filiales etrangeres localisees dans des pays a fiscalite legere pour mettre les revenus d investissement passif a l abri de la fiscalite dans le pays d origine ces investissements passifs constituent une fraction significative de l investissement direct a l etranger des allemands et on decouvre que les regles allemandes sont tres efficaces pour restreindre les investissements dans des economies a fiscalite legere les resultats montrent que la reforme fiscale allemande de 2001 qui a unilateralement introduit une exemption du revenu passif dans les pays a fiscalite medium or lourde a entraine un deplacement des actifs passifs vers les pays pour lesquels l exemption etait limitee auparavant

the value of early exercise in option prices an empirical investigation previous studies in the valuation of american options apparently undervalue the right of early exercise this study uses actual prices from the cboe s s p 100 option instead of model generated values deviations from the theoretical put call parity relationship are caused by the possibility of early exercise these deviations are used to infer the value of early exercise the actual value of early exercise is both statistically and economically significant as expected from theoretical considerations the value of early exercise for put options is greater than for call options

the rebound effect an evolutionary perspective the rebound effect presents a major flaw in to energy conservation policies that aim to reduce energy consumption through energy efficiency development economics and energy related disciplines have thus far developed tools to measure such a phenomenon this paper attempts to explain this seeming paradox using a thermodynamic evolutionary theoretical framework in addition to the traditional economic approach we here propose that evolutionary systems such as biological or even economic systems may rearrange themselves in a more complex fashion under the pressure of an increasing flux of energy driven by the higher conversion rate of greater efficiency higher complexity due to a greater energy density rate counteracts the positive effects of energy efficiency we investigated this hypothesis in the context of the road freight transport system and the productive structure the qualitative analysis in this paper further substantiated by figures provides a link between the dynamics of production patterns and the effect of efficiency in the light of the macro economic effects of increased energy demand the analysis departs from a rigorous investigation of the actual energy efficiency evolution in the road freight transport system to develop through a survey of the subsequent worldwide economic revolution in the production system it is then shown how outsourcing the key feature of globalization can be identified as the main source of traffic density growth finally four paradigms are used to stress how the shift in the production system must be considered a leap in structural complexity that consequently serves to increase the frequency of components interactions

option pricing when the variance is changing the monte carlo method is used to solve for the price of a call when the variance is changing stochastically

the impact of controlled foreign company legislation on real investments abroad a multi dimensional regression discontinuity design controlled foreign company cfc rules are frequently imposed by countries as part of their anti tax avoidance legislation this paper aims at quantifying the impact of the german cfc rule on the universe of foreign investments held by german multinational firms the german cfc legislation gives rise to a multi dimensional regression discontinuity design which allows us to estimate local average treatment effects along the dimensions determining treatment our results suggest a significant and economically large impact of the cfc legislation on multinationals real activity abroad we also find evidence of some heterogeneity in estimated treatment effects according to parametric as well as nonparametric estimates

stock price volatility mean reverting diffusion and noise abstract using weekly call option prices on twenty five stocks over a ten year period 1975 1985 and calls on the s p 500 stock index futures we find that ex ante market volatility follows a mixed mean reverting diffusion with noise process changes in volatility are correlated across stocks and a marketwide volatility effect is found strong forces pull the volatility back to its long term value the findings suggest the development of new option pricing models

nonparametric tests of alternative option pricing models using all reported trades and quotes on the 30 most active cboe option classes from august 23 1976 through august 31 1978

economic structure and energy savings from energy efficiency in households when an energy efficiency improvement occurs at the household level several mechanisms grouped under the name of the rebound effect increase the available income and consumption increasing the total energy consumption of the economic structure the present research analyses the links between energy efficiency improvements in households consumption and the economic structure in an input output framework we examine from an empirical perspective the relationship between energy efficiency improvements and the economic structure and between the direct and the indirect rebound effect the limits of the input output methodology in assessing the direct and indirect rebound effect have been empirically tested with respect to efficiency improvements of electricity uses in households in catalonia

a nonparametric kernel regression approach for pricing options on stock market index abstractprevious options studies typically assume that the dynamics of the underlying asset price follow a geometric brownian motion gbm when pricing options on stocks stock indices currencies or futures however there is mounting empirical evidence that the volatility of asset price or return is far from constant this article in contrast to studies that use parametric approach for option pricing employs nonparametric kernel regression to deal with changing volatility and accordingly prices options on stock index specifically we first estimate nonparametrically the volatility of asset return in the gbm based on the nadaraya watson n w kernel estimator then based on the n w estimates for the volatility we use monte carlo simulation to compute option prices under different settings finally we compare the index option prices under our nonparametric model with those under the black scholes model and the stein stein model

approximating volatility diffusions with cev arch models abstract this article develops a new model of the arch class which allows volatility to react nonlinearly to past shocks as a function of the past volatility level we show that this model approximates any cev diffusion model for stochastic volatility and we judge its empirical performance as a diffusion approximation to models of the short term rate with stochastic volatility and as a filter of the unobserved volatility we show that the estimation of the continuous time scheme to which the discrete time arch model converges can be safely based on simple moment conditions linking the discrete time to the continuous time parameters a natural substitute of a global specification test for just identified problems based on indirect inference shows in fact that this approximation to diffusions gives rise to a negligible disaggregation bias a monte carlo study reveals that the filtering performances of this model are remarkably good even in the presence of serious misspecification

misspecification and the pricing and hedging of long term foreign currency options abstract this study examines the effects of stochastic volatility upon the pricing and hedging of long term foreign currency options the traditional method of pricing such options uses a constant volatility option model with an implicit volatility derived from a short term traded option we show that the traditional method leads to small pricing errors for short and medium term options but does a poor job in pricing long term options the traditional method also does a poor job for all maturities in determining the derivatives of the option s value with respect to the exchange rate delta and the volatility vega the errors in calculating these derivatives which are used in forming the replicating portfolio lead to large and costly errors in error hedging

an empirical comparison of continuous time models of implied volatility indices abstract we explore the ability of alternative popular continuous time diffusion and jump diffusion processes to capture the dynamics of implied volatility indices over time the performance of the various models is assessed under both econometric and financial metrics to this end data are employed from major european and american implied volatility indices and the rapidly growing cboe volatility futures market we find that the addition of jumps is necessary to capture the evolution of implied volatility indices under both metrics mean reversion is of second order importance though the results are consistent across the various metrics markets and construction methodologies

reform of refined oil product pricing mechanism and energy rebound effect for passenger transportation in china new huadu business school research fund china sustainable energy program of the energy foundation g 1203 15828 national social science foundation of china 12zd059 ministry of education 10gbj013

optimal timing of transmission line investments in the face of uncertain demand an option valuation approach abstract grid based electrification programmes involve irreversible transmission line investments that can be delayed by temporarily resorting to decentralized powet supply technologies in this context decision makers face the difficulty that the future evolution of demand and thus the returns from postponing the transmission line investment are uncertain this imposes an opportunity cost resembling the value of a financial call option therefore standard option valuation techniques can be applied to solve the problem of timing transmission line investments in the presence of stochastic demand it is shown analytically and in terms of numerical examples that demand uncertainty may provide a strong incentive to defer the extension of the grid beyond the date that would be optimal under deterministic conditions

quadratic variation based dynamic strategies the paper analyzes a family of dynamic trading strategies which do not rely on any stochastic process assumptions aside from continuity and positivity and in particular do not require predicting future volatilities derivative payoffs can still be replicated except that this occurs at the stopping time at which the realized cumulative squared volatility hits a predetermined level the application of these results to portfolio insurance is emphasized and hedging strategies studied by black and jones and by brennan and schwartz are generalized classical results on european style options arise as special cases for example the initial cost of replicating a call or a put under the new method is given by a generalized black scholes formula which yields the ordinary black scholes formula when the volatility is derterministic

option values under stochastic volatility theory and empirical estimates abstract this paper numerically solves the call option valuation problem given a fairly general continuous stochastic process for return volatility statistical estimators for volatility process parameters are derived and parameter estimates are calculated for several individual stocks and indices the resulting estimated option values do not differ dramatically from black scholes values in most cases although there is some evidence that for longer maturity index options black scholes overvalues out of the money calls in relation to in the money calls

valuing futures and options on volatility abstract this paper presents simple closed form expressions for volatility futures and option prices and examines their implications for the characteristics of these securities we show that the properties of these volatility derivatives are fundamentally different from those of conventional option and futures contracts this analysis also provides insights into the role that volatility derivatives may play in managing and hedging volatility risk in financial markets

option arbitrage and strategy with large price changes abstract arbitrage pricing theorems are derived for options on stocks with jumps as a well as local movements the resulting valuation formulas depend on observable variables only closed form valuation expressions are obtained in the case of large positive and negative jumps these results translate into a simple algebra for characterizing the risk of arbitrage and investment portfolios a continuous time formulation of the infinite variance hypothesis leads to isomorphic pricing expressions

on valuing american call options with the black scholes european formula empirical papers on option pricing have uncovered systematic differences between market prices and values produced by the black scholes european formula such biases have been found related to the exercise price the time to maturity and the variance we argue here that the american option variant of the black scholes formula has the potential to explain the first two biases and may partly explain the third it can also be used to understand the empirical finding that the striking price bias reverses itself in different sample periods the expected form of the striking price bias is explained in detail and is shown to be closely related to past empirical findings the black scholes european option pricing model tends to exhibit systematic empirical biases when used to value american call options the reported biases

the e v stationarity of secure returns some empirical evidence abstract the joint hypothesis that the expected return vector and the variance covariance matrix of returns are intertemporally stationary is rejected for the monthly return data for securities included on the crsp file this finding is robust in that it is invariant to the type of sampling procedure used and to whether nominal or real security returns are used in contrast the hypothesis that the correlation matrix of returns is intertemporally stationary could not be rejected for the same samples of securities

double tax discrimination to attract fdi and fight profit shifting the role of cfc rules abstract governments worldwide use targeted tax policies to trade off the gains from increased fdi against the cost of excessive profit shifting by multinational firms we show that nationally optimal tax systems generally incorporate both thin capitalization rules which tax discriminate between purely national and multinational firms and controlled foreign company cfc rules which discriminate between home based and foreign based multinationals in the non cooperative policy equilibrium both thin capitalization rules and cfc rules are set more lenient than if tax policies were chosen cooperatively implying an excessive tax discrimination in favor of multinationals we also analyze the effects of reduced transaction costs for fdi and reduced costs for debt shifting on the optimal policy mix our results correspond to the observed developments of anti avoidance rules in oecd countries

evaluating the effects of ace systems on multinational debt financing and investment abstract theory recommends aligning the tax treatment of debt and equity a few countries notably belgium have introduced an allowance for corporate equity ace to achieve tax neutrality we study the effects of adopting an ace on debt financing passive investment and active investment of multinational firms using high quality administrative data on virtually all german based multinationals we use two main identification strategies based on 1 synthetic control methods and 2 variations across affiliates within the multinational group our results suggest that an ace reduces the corporate debt ratio of multinational affiliates additionally an ace increases intra group lending and other forms of passive investment but has no effects on production investment of multinational affiliates the findings indicate that a unilateral implementation of an ace system generates a tax planning opportunity using a structure combining the benefits from the ace with interest deductions

debt shifting and ownership structure abstract previous theoretical studies on the debt shifting behavior of multinationals have assumed affiliates of multinationals to be wholly owned we develop a model that allows a multinational firm to determine both the leverage and ownership structure in affiliates endogenously a main finding is that affiliates with minority owners have less debt than wholly owned affiliates and therefore a less tax efficient financing structure this is due to an externality that arises endogenously in our model where costs and benefits of debt shifting are shared asymmetrically between minority and majority owners our findings provide a theory framework for recent empirical findings

option pricing and implicit volatilities abstract this paper demonstrates that black scholes implied volatilities can be used to value options in many situations where the assumptions of the black scholes model are violated including i alternative stock processes ii stochastic interest rates and iii market frictions given its computational simplicity this procedure provides an attractive alternative to the more complex models with a direct estimation procedure

a lattice framework for option pricing with two state variables a procedure is developed for the valuation of options when there are two underlying state variables the approach involves an extension of the lattice binomial approach developed by cox ross and rubinstein to value options on a single asset details are given on how the jump probabilities and jump amplitudes may be obtained when there are two state variables this procedure can be used to price any contingent claim whose payoff is a piece wise linear function of two underlying state variables provided these two variables have a bivariate lognormal distribution the accuracy of the method is illustrated by valuing options on the maximum and minimum of two assets and comparing the results for cases in which an exact solution has been obtained for european options one advantage of the lattice approach is that it handles the early exercise feature of american options in addition it should be possible to use this approach to value a number of financial instruments that have been created in recent years

the pricing of japanese equity warrants discrepancies between the black scholes value of japanese equity warrants and their observed prices are explained in part by the stochastic volatility of changes in prices of the underlying stocks we fit garch and egarch models to the stochastic volatility and briefly compare their performance to the cev model a hopscotch algorithm is used to value the warrants in the presence of the stochastic stock price volatility the stochastic volatility hopscotch warrant values still differ substantially from corresponding prices in contrast away from the money short term nikkei 225 options valued with the same stochastic volatility models are close to observed prices a regression model is used to fit the differences between warrant values and prices as a function of proxies for market impediments

modelling implied volatility with ols and panel data models abstract the paper performs an empirical estimation of time varying volatility using ols regression error components and dummy variable models by regressing the implied volatility on time to maturity the strike price and a dummy both the daily ols equations and the panel data model provide more accurate estimates of black and scholes option prices than the bench mark standard deviation of log returns ft se 100 index european options are used for empirical analysis

valuing target price support programs with average option pricing the u s government deficiency payment program supplements farm income by transferring income from taxpayers to farmers when revenue lost due to the acreage restriction exceeds revenue gained from participating in the program farmers lose money by participating therefore measuring expected revenue from the government program is important so that farmers can decide whether to participate in the program this study uses a garch average option pricing model and the black average option pricing model to predict the implicit premium of the u s government deficiency payment program the average option pricing model considers the average price of the underlying asset over a fixed period a regression model based on the simulation results is provided so that the average option models can be easily used to project deficiency payments the results can be used by extension economists to help producers decide whether to participate in the program

a bayesian approach to modeling stock return volatility for option valuation new measures of stock return volatility are developed to increase the precision of stock option price estimates with bayesian statistical methods volatility estimates for a given stock are developed using prior information on the cross sectional patterns in return volatil ities for groups of stocks sorted on size financial leverage and trading volume call option values computed with the bayesian procedure generally improve prediction accuracy for market prices of call options relative to those computed using implied volatility standard historical volatility or even the actual ex post volatility that occurred during each option s life although the bayesian methods produce biased call price estimators they do reduce the systematic tendency of standard pricing approaches to overprice underprice options on high low volatility stocks little bias improvement is observed with respect to the time to maturity and moneyness of the call options

constant rebound effects in domestic heating developing a cross sectional method policymakers are increasingly concerned about rebound effects which lead to lower savings than expected when energy efficiency increases there are difficulties in making coherent comparisons between magnitudes of rebound effects in different sectors such as home heating industry and transport a barrier to this in domestic heating is the conceptual difficulty of estimating rebound effects as energy efficiency elasticities since the large stepwise increases in energy efficiency through thermal retrofits fit uneasily with differential calculus this paper offers a solution firstly it develops a cross sectional method in which elasticity based rebound formulae are used to estimate implied average rebound effects in large datasets of energy consumption and energy efficiency it then shows how a simple power curve can model these datasets simplifying the mathematics giving constant rebound effect results that are immediately meaningful and extending compatibility to rebound effect modelling in other sectors the method is then extended to case studies of thermal retrofits of individual dwellings here the inherent inaccuracy of using linear approximations in rebound effect formulas is also illustrated the cross sectional constant rebound effect methodology is offered for wider use in estimating rebound effects in case studies and in domestic heating as more datasets of energy consumption and efficiency become available

market valuation of bank assets and deposit insurance in canada we examine a sample of canadian banks and use option pricing theory to infer the market value of a bank s assets from the observed market value and volatility of its equity we find that market value estimates are significantly different from corresponding book values these differences vary significantly across banks suggesting that market values provide bank specific information not found in book values we also derive that risk adjusted deposit insurance premia for these banks our results suggest that the current fixed rate deposit insurance premium system has resulted in significant

hedging derivative securities and incomplete markets an e arbitrage approach given a european derivative security with an arbitrary payoff function and a corresponding set of underlying securities on which the derivative security is based we solve the optimal replication problem find a self financing dynamic portfolio strategy involving only the underlying securities that most closely approximates the payoff function at maturity by applying stochastic dynamic programming to the minimization of a mean squared error loss function under markov state dynamics we derive recursive expressions for the optimal replication strategy that are readily implemented in practice the approximation error or e of the optimal replication strategy is also given recursively and may be used to quantify the degree of market incompleteness to investigate the practical significance of these e arbitrage strategies we consider several numerical examples including path dependent options and options on assets with stochastic volatility and jumps