valuation of foreign currency options some empirical tests this paper investigates the efficiency of the market for foreign currency options with the help of a modified version of the black scholes model the evidence in the ex post tests is inconsistent with this hypothesis since we find a large number of opportunities for abnormal profits a second set of tests is conducted on an ex ante basis to determine whether these profit opportunities exist even if the execution of the strategy is delayed by one day the evidence from these tests provides more support for the hypothesis of market efficiency

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

monetary policy effectiveness and stock market cycles in asean 5 this article examines the asymmetric effects of monetary policy on real output in bull and bear phases of stock market in five asean economies malaysia singapore indonesia the philippines and thailand using the recently developed pooled mean group pmg technique stock market cycles are identified by employing markov switching models and the rule based nonparametric approach estimating the models using monthly data from 1991 1 to 2011 12 the results show that monetary policy measured by short term interest rate has a negative and statistically significant long run effect on real output in bull and bear market periods while the effects are stronger in bear periods than bulls in the short run there is no statistically significant relationship between monetary policy and real output these results are consistent with finance constraints capital market imperfection models that predict that monetary policy is more effective during bear periods than bulls

the early exercise of american puts abstract this paper shows that american puts on dividend paying stocks are most likely to be exercised either just after an ex dividend date or just prior to expiration at any other time the option to exercise an american put early may have less value thus put writers and converters can predict when protection against premature exercise will be most valuable the probability of early exercise is shown to be sensitive to managerial policy regarding the suspension of dividend payments transaction costs and interest rates however dividend payments are demonstrated to be the primary deterrent to early exercise

x efficiency and scale economies in policing a comparative study using the distribution free approach and dea this study uses both parametric and nonparametric techniques to analyse scale economies and relative efficiency levels in policing in england and wales both techniques suggest the presence of significant scale effects in policing and considerable divergence in relative efficiency levels across police forces

long and short run non parametric cost frontier efficiency an application to spanish savings banks the utilisation rate of installed capacity is a popular concept in both the performance appraisal literature and in publications on industrial organisation however a common consensus has yet to be reached concerning the most appropriate way to measure the capacity utilisation of physical inputs and its final effect on company results on the one hand there are approaches that establish capacity utilisation with reference to the maximum level of production that can be achieved in contrast there are other approaches more strictly related to economic analysis of operating costs in this paper our main objective is to define an analytical process that uses non parametric frontier methodology to provide the distance between the total costs of a given unit and the short run frontier costs as a natural extension of this proposal it is possible to compute the short run inefficiency caused by a non optimal dimension of the fixed inputs we define this as capacityefficiency the proposed evaluation process is applied to spanish savings banks covering the period between 1986 and 1995 throughout the period analysed the greater part of cost inefficiency is due to capacity efficiency 2002 elsevier science b v all rights reserved

the american put option valued analytically an analytic solution to the american put problem is derived herein the hedge ratio and other derivatives of the solution are presented the formula derived implies an exact duplicating portfolio for the american put consisting of discount bonds and stock sold short the formula is extended to consider put options on stocks paying cash dividends a polynomial expression is developed for evaluating these formulae values and hedge ratios for puts on both dividend and nondividend paying stocks are calculated tabulated and compared with values derived by numerical integration and binomial approximation as with european options evaluating an analytic formula is more efficient than approximating the stock price process or the partial differential equation by binomial or finite difference methods finally applications of this american put solution are discussed

scale economies x efficiency and convergence of productivity among bank holding companies abstract are the less productive banks catching up to the more productive ones and if so how quickly and by what means the objective of this study is to answer these questions by looking for convergence in productivity among bank holding companies bhcs in the us past research has identified two major factors governing productivity in the banking sector scale economies and x efficiency if the gains from scale economies decline with firm size and if the only difference between bhcs lies in their initial size then the initially smaller bhcs should eventually catch up to the initially larger ones because the former tend to grow more quickly however the findings from this study do not support this hypothesis of absolute convergence indeed the findings show strong evidence for conditional convergence which means that the steady state productivity to which a bhc is converging is conditional on the bhcs own level of x efficiency conditional convergence implies that initial differences in x efficiency among bhcs can between them create permanent differences in steady state productivity

trend definition or holding strategy what determines the profitability of candlestick charting abstract we ask what determines the profitability of candlestick trading strategies is it the definition of trend and or the holding strategy that one uses in candlestick charting analysis to answer this we systematically consider three definitions of trend and four holding strategies applying candlestick trading strategies to the djia component data we find that regardless of which definition of trend is used eight three day reversal patterns with a caginalp laurent holding strategy are profitable when we set the transaction cost at 0 5 and after we account for data snooping bias while the patterns with a marshall young rose holding strategy are not profitable for sensitivity analysis we also find that our results are not qualitatively changed on a lower transaction cost of 0 1 or when we conduct the subsample analyses based on three equal periods and three distinct market conditions when considering a more volatile market evidence in favor of candlestick trading strategies is strengthened

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

the analytic valuation of american options no analytic solutions exists for the valuation of american options written on futures contracts and foreign currencies for which early exercise may be optimal this article formulates the american option valuation problem in economically and mathematically meaningful ways this enables us to derive valuation formulas for american options the properties associated with the optimal exercise boundary are examined and a numerical technique to implement the valuation formulas is presented article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

nontraditional activities and the efficiency of us commercial banks abstract in recent years an increasing portion of bank income has been generated through nontraditional activities most studies of bank efficiency do not include any measure of nontraditional activities when measuring outputs in this paper cost revenue and profit efficiency are estimated by using models with and without nontraditional output the results suggest that the standard model which omits nontraditional output understates bank efficiency evidence also surfaces that based on efficiency the relative ranking of individual banks changes when nontraditional activities are included as a type of output

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

big bank mergers in europe an analysis of the cost implications this paper examines the cost implications from hypothetical cross border bank mergers in the eu in light of recent claims that substantial cost savings could be expected as the result of the eu s single market programme for financial services in fact our results suggest only limited opportunities for costs saving from big bank mergers and indicate that such mergers are more likely to result in an increase in total costs while there is a large variation in the simulated cost outcomes the greatest opportunities for cost savings would appear to be generated by mergers between german and italian banks in contrast mergers between french and german banks appear likely to result in substantial cost increases although the overall findings suggest limited benefits from cross border mergers between large banks this may be a reflection of the methodology merger simulations are carried out hypothetically ignoring any prior information about the pairings we assume no premiums or merger costs and no further synergies resulting from such things as branch closures or a restructuring of the product mix these assumptions may cause us to understate the potential reduction in total costs resulting from large bank mergers and therefore our estimates provide the most pessimistic of total cost reduction outcomes in conclusion the substantial variation of cost outcomes generated suggests that large banks seeking economies through cross border mergers should select potential partners with great care

smooth pasting as rate of return equalization abstract we further elucidate the smooth pasting condition behind optimal early exercise of options it is easy to show that smooth pasting implies rate of return equalization between the option and the levered position that results from exercise this yields new economic insights into the optimal early exercise condition that the option holder faces

what happens during recessions crunches and busts we provide a comprehensive empirical characterization of the linkages between key macroeconomic and financial variables around business and financial cycles for 21 oecd countries over the period 1960 2007 in particular we analyse the implications of 122 recessions 113 28 credit contraction crunch episodes 114 28 episodes of house price declines busts 245 61 episodes of equity price declines busts and their various overlaps in these countries over the sample period our results indicate that the interactions between macroeconomic and financial variables can play a major role in determining the severity and duration of a recession specifically we find evidence that recessions associated with credit crunches and house price busts tend to be deeper and longer than other recessions stijn claessens m ayhan kose and marco e terrones

pricing and static hedging of american style options under the jump to default extended cev model abstract this paper prices and hedges american style options through the static hedge approach shp proposed by chung and shih 2009 and extends the literature in two directions first the shp approach is generalized to the jump to default extended cev jdcev model of carr and linetsky 2006 and plain vanilla american style options on defaultable equity are priced the robustness and efficiency of the proposed pricing solutions are compared with the optimal stopping approach offered by nunes 2009 under both the jdcev framework and the nested constant elasticity of variance cev model of cox 1975 using different elasticity parameter values second the early exercise boundary near expiration is derived under the jdcev model

x efficiency in banking looking beyond the balance sheet the distribution free and stochastic frontier estimation methods are used to derive bank specific measures of cost and profit xefficiency this is done to investigate the importance of including aggregate measures of off balance sheet obs activities the results indicate that economic cost and production cost x efficiency estimates increase with the inclusion of the obs measure profit xefficiency estimates are largely unaffected further the composition of bankso obs activities appears to help explain interbank differences in cost and profit x efficiency estimates whereas bank size and the mix between on and off balance sheet banking activities are largely uncorrelated with the x efficiency estimates

the asymmetric effects of investor sentiment and monetary policy on stock prices we examine the impact of investor sentiment and monetary policy on the stock prices under different market states based on the markov switching vector autoregression ms var model the results show that the sentiment shocks more than monetary policy shocks lead to not only much larger fluctuations of stock prices but also much longer duration in the stock market downturn than in the stock market expansion which shows obvious asymmetric effect moreover the responses of stock prices to the sentiment shocks present an immediate effect while the responses of stock prices to the monetary policy shocks show one period lag effect

stock market reaction to fed funds rate surprises state dependence and the financial crisis this paper examines the response of us stock returns to federal funds rate ffr surprises between 1989 and 2012 focusing on the impact of the recent financial crisis we find that outside the crisis period stock prices increased as a response to unexpected ffr cuts state dependence is identified with stocks exhibiting larger increases when interest rate easing coincided with recessions bear markets and tightening credit conditions however an important structural shift occurred during the crisis changing the stocks response to ffr shocks and the nature of state dependence throughout the crisis period stocks did not react positively to unexpected ffr cuts which were interpreted as signals of worsening future economic conditions this triggered a rebalancing of investment portfolios away from falling equities and towards safe haven assets our results highlight the severity of the crisis and the ineffectiveness of conventional monetary policy close to the zero lower bound

financial sustainability and poverty outreach within a network of village banks in cameroon a multi dea approach abstract microfinance institutions face a double bottom line they perform financial tasks by giving microcredits to their customers and support projects aiming at reducing poverty in doing so they have to be financially self sufficient and to target poor people excluded from the traditional financial systems however a trade off may exist between financial sustainability and poverty outreach for these institutions by using a multi dea approach this paper shows that even if a trade off exists for 15 of the mc 2 mutuelles communautaires de croissance in cameroon there is no trade off for 46 of them in order to increase without trade off financial and social performance of inefficient mc 2 a benchmarking approach combing dea and performance indicators has been developed dea is used for identifying best practices and setting benchmarking goals performance indicators are used for characterizing areas needing improvements and following the evolution of mc 2 toward their goals i e for implementing benchmarking complementarity of both approaches provides a tool box for improving financial and social efficiency and reducing the trade off between financial sustainability and poverty outreach of microfinance institutions

valuation of capped variable rate loan commitments abstract the early exercise of capped variable rate loan commitments is formalized as the first passage time to a critical boundary in a compound option model as early exercised commitment puts are american style options numerical procedures are used to obtain simulated values it appears from the latter that the value of the early exercise premium is nontrivial and increasing with the terms to option expiry put values are also sensitive to the volatility of credit market rates as these affect the variance of the borrower s indebtedness value

the pricing of futures and options contracts on the value line index this paper considers the problems peculiar to the value line index because of its use of geometric averaging as regards the pricing of options and futures on that index the value line composite index vlci is an equally weighted geometric average index of nearly 1700 stocks the vlci futures market has existed since 1982 while the vlci options market was established in 1985 this paper provides valuation formulas and analyzes the economic properties of these contracts because of the geometric averaging in the vlci its contingent claims have special properties for example the futures price may fall short of the spot price and the value of a vlci call option may decline when the volatility of the index is increased vlci futures are shown to provide a direct means for duplicating an equally weighted portfolio of the underlying stocks the value line composite index vlci is an unweighted geometric average of stock prices expressed in index form the index on june 30 1961 was set at 100 and subsequent values are compared against it futures contracts on the vlci are traded on the kansas city board of trade kcbt they were the first stock index futures to be traded in the united states starting on february 24 1982 unlike commodity futures contracts no delivery ever takes place instead any open contracts on expiration day are settled in cash according to the actual vlci value 1 more recent market innovations are options on the vlci that have been traded on the philadelphia stock exchange pse since january

resolving the deposit dilemma a new dea bank efficiency model abstract one of the weaknesses of current bank efficiency models is a disagreement as to the role of deposits in the bank production process some models view deposits as an input while others view them as an output such disparity of approaches results in inconsistent efficiency estimates in this study we propose an alternative data envelopment analysis dea bank efficiency model that treats deposits as an intermediate product thus emphasizing the dual role of deposits in the bank production process consequently the effect of the amount of deposits on bank efficiency depends on the efficiency at both stages of the bank production process the main advantage of our model is that it does not require a researcher to make a judgment call as to whether having more production approach or less intermediation approach deposits is better for bank efficiency our unified framework has the potential to produce more consistent efficiency estimates

a study on long run inefficiency levels of a panel dynamic cost frontier under the framework of forward looking rational expectations abstract this paper aims to provide a theoretical underpinning of the dynamic efficiency model pioneered by ahn s c good d h sickles r c 2000 estimation of long run inefficiency levels a dynamic frontier approach econometric reviews 19 461 492 in the context of a quadratic loss function this paper formulates a multi period forward looking rational expectations model on the evolution of the technical inefficiency level which correctly produces a dynamic panel data model the model is illustrated using panel data of 112 french banks encouraging evidence of superiority in favor of the model is reached substantial cost inefficiency prevails in this industry where the constituent banks are characterized as having volatile adjustment speeds toward their long run steady states the sample banks exhibit increasing returns to scale and product mix economies

energy contagion analysis a new perspective with application to a small petroleum economy abstract we put forward the novel concept of energy contagion i e a deepening of energy finance linkages under crisis conditions in energy markets further we show how to construct tests for energy contagion through correlation co skewness and co volatility channels the samples of our contagion measures are defined in terms of calm and crisis periods in the international crude oil market in particular we compare how these various co moments in the energy finance nexus change during 1 oil booms and slumps using semi parametric rule based algorithms 2 tranquil and turbulent oil price volatility episodes using a non hierarchical k means clustering algorithm energy contagion analysis is essential for financial stability analysis in economies where prosperity is linked to the prices of hard commodities our applications are performed on the oil exchange rate and oil stock market relationships of the small petroleum economy of trinidad and tobago the main results show a negative oil real effective exchange rate dependency a weak oil stock returns association and the existence of several energy contagion channels in both financial relationships which are sensitive to the contemporary global financial crash

on measuring synchronization of bulls and bears the case of east asia abstract this paper implements estimation and testing procedures for comovements of stock market cycles or phases in asia we extend the harding and pagan harding d pagan a p 2006 synchronization of cycles journal of econometrics 132 1 59 79 test for strong multivariate nonsynchronization smns between business cycles to a test that allows for an imperfect degree of multivariate synchronization between stock market cycles moreover we propose a test for endogenously determining structural change in the bivariate and multivariate synchronization indices upon applying the technique to five asian stock markets we find a significant increase in the cross country comovements of asian bullish and bearish periods in 1997 a power study of the stability test suggests that the detected increase in comovement is more of a sudden nature i e contagion or asian flu instead of gradual i e financial integration it is furthermore argued that stock market cycles and their propensity toward increased synchronization contain useful information for both investors policy makers and financial regulators

are china s new energy stock prices driven by new energy policies abstract this paper studies the impact of china s new energy policies on expected changes and volatility in new energy stock prices considering different kinds of policies energy legislation binding targets for new energies economic incentives and technological research and development and several new energy indexes china s new energy sector and the solar wind nuclear and lithium battery subsectors we used a regression model with a garch specification and dummy variables to differentiate policy pre and post announcement effects on expected returns and volatility our evidence indicates that pre and post announcement energy legislation policies dampened price volatility in all subsector indexes and that economic incentives had a positive policy announcement effect on all subsector index prices other new energy policies had no significant impact on either the mean or the volatility of the new energy assets the potential implications for policy makers and investors are discussed

testing option pricing models for several contingent claims using a generalized methodology abstract a general methodology is presented to test option pricing models for several contingent claims this methodology is used to test the black scholes model and the binomial model for call and put options simultaneously results show that these two models are inadequate for the pricing of both call and put options

the saga of the american put abstract the american put is one of the oldest problems in mathematical finance we review the development of the relevant literature over the last 40 years today the mainstream computational problems have been solved satisfactorily and the target of research is shifting towards the development of further insights into the value of timing investment decisions

an analytic approximation for the american put price black and scholes 1 derived the pricing equation for a european put when the stock price follows geometric brownian motion for this same case merton 5 derived the pricing equation for an american put with infinite time to maturity brennan and schwartz 2 rubinstein and cox 7 and parkinson 6 have developed numerical solutions for the price of an american put numerical solutions are expensive and do not provide much intuition naturally an analytic solution would be much preferred unfortunately pricing the american put requires solving a formidable and presumably intractable boundary value problem

cost structures of banks grouped by strategic conduct the hypothesis that the banking system consists of firms that use the same production technology is tested and rejected in this study six groupings of the population of commercial banks are identified using cluster analysis the banks are grouped to reflect similar production technologies within groups but different technologies across groups as defined by the strategic conduct i e activities of the banks the results suggest that banks in different clusters employ production processes that feature different degrees of substitutability between factors of production and that the estimates of input substitutability for those groups look quite different from those estimated based on the full population of commercial banks the impact of the homogeneity production technology assumption on the measurement of cost efficiency is also assessed the results show that partitioning the industry by strategic conduct reduces the average inefficiency in the industry these results support those found by others wh

dissecting the cycle a methodological investigation following burns and mitchell we define the cycle as a pattern in the level of aggregate economic activity an algorithm to locate turning points is developed as is a new measure of pro cyclicality a link between turning points and the moments of the series is established thereby providing the statistical foundation that burns and mitchell s work lacked using these tools we are able to dissect cycles in terms of the contributions made by trend growth volatility serial correlation and non linear effects we dissect several models and find little evidence that certain non linear effects are important to the nature of business cycles

pde methods for pricing barrier options abstract this paper presents an implicit method for solving pde models of contingent claims prices with general algebraic constraints on the solution examples of constraints include barriers and early exercise features in this unified framework barrier options with or without american style features can be handled in the same way either continuously or discretely monitored barriers can be accommodated as can time varying barriers the underlying asset may pay out either a constant dividend yield or a discrete dollar dividend the use of the implicit method leads to convergence in fewer time steps compared to explicit schemes this paper also discusses extending the basic methodology to the valuation of two asset barrier options and the incorporation of automatic time stepping

candlestick technical trading strategies can they create value for investors abstract we conduct the first robust study of the oldest known form of technical analysis candlestick charting candlestick technical analysis is a short term timing technique that generates signals based on the relationship between open high low and close prices using an extension of the bootstrap methodology which allows for the generation of random open high low and close prices we find that candlestick trading strategies do not have value for dow jones industrial average djia stocks this is further evidence that this market is informationally efficient

the returns and risk of alternative put option portfolio investment strategies this paper is the second in a series of analyses we have prepared based on simulations of a variety of portfolio strategies over a significant period of time the first of these analyses examined the fully covered call option writing strategy and the buying strategy which combines purchase of call options and commercial paper in the study presented here we examine the uncovered put writing strategy and the buying strategy which combines the purchase of put options and the underlying stocks as a preface to the simulations we analyze the quantitative discrepancies between the parity model of put pricing and a model which takes into account the possibility of early exercise of the put in connection with this analysis we simulate the returns to the conversion strategy which combines the purchase of put options and the underlying stocks with the simultaneous sale of the corresponding call options as in our earlier paper on call option strategies we find in this study that investors can use uncovered putoption writing and protective put optionbuying strategies to produce patterns of returns for investment portfolios not reproducible by any simple strategy of combining stock with fixed income securities put options are viewed as term insurance insuring against a loss in value of underlying stock investors sell insurance by using the uncovered put writing strategies and investors buy insurance protecting the value of stocks within a portfolio by using protective put optionbuying strategies no put strategy or call strategy can dominate any other strategy if options are priced correctly although there is no single best strategy for all investors they are not indifferent among strategies because the patterns of returns differ we therefore show these important patterns of returns on put option strategies not only using single stocks but also using portfolios of stocks this research was financed in part by grants from donaldson lufkin jenrette new york the center for research in security prices university of chicago and the national science foundation washington d c 1 merton scholes and gladstein 1978 in the present paper all references to our earlier paper are to this study

inventories and the three phases of the business cycle this article demonstrates that recessions typically are followed by high growth recovery phases that push output back to its prerecession level thus postwar fluctuations in real output in the united states have consisted of three sequential phases rather than two contractions high growth recoveries and moderate growth periods following recoveries data from before world war ii also exhibit this pattern for the postwar period the three phase pattern is shown to reflect swings in inventory investment and suggests that output fluctuations have an important transitory component the evidence in this article supports delong and summers s output gaps view and friedman s plucking model view of fluctuations

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

chinese stock market cyclical regimes 1991 2006 abstract chinese bull and bear market regimes are objectively identified and their statistical properties outlined chinese market cycles are extremely pronounced but have moderated as the market matures ex ante trading rule tests indicate the usefulness of regime identification for chinese investors

an analytic approximation for the american put price for options on stocks with dividends in a recent paper johnson 7 has given an analytic approximation to the american put price that delivers values that are very close to numerical solutions the limitation to the johnson approximation is that it is only applicable to put options on stocks without cash dividends this study modifies the johnson approximation to value options on stocks that have one exdividend date prior to the option expiration date and these approximation values are compared to the analytic solutions provided by the geske and johnson 6 american put option pricing model the approximation values are generally very close to the analytic solutions

stock market cycles financial liberalization and volatility in this paper we analyze the cycles of the stock markets in four latin american and two asian countries and we compare their characteristics we divide our sample in two subperiods in order to account for differences induced by the financial liberalization processes of the early 1990s we find that cycles in emerging countries tend to have shorter duration and larger amplitude and volatility than in developed countries however after financial liberalization latin american stock markets have behaved more similarly to stock markets in developed countries whereas asian countries have become more dissimilar concordance of cycles across markets has increased significantly over time especially for latin american countries after liberalization

time varying volatilities and calculation of the weighted implied standard deviation rogalski tinic have reported a monthly pattern in ex post stock return variances that differs between small and large market capitalization firms maloney rogalski find that option prices reflect these monthly patterns ex ante this study extends maloney rogalski s work by devising an expiration specific weighted implied standard deviation wisd it is found that i the monthly patterns in one month wisds are basically similar to the monthly patterns in ex post variances detected by rogalski tinic for both large and small size firms and ii use of expiration specific wisds as opposed to standard composite wisds results in improved performance of option pricing models

the productivity effects of bank mergers evidence from the uk building societies abstract this paper presents an empirical investigation of the impact of acquisition activity on financial intermediary productivity specifically it uses an augmented production function approach to investigate the impact of acquisition after controls for input changes the model is estimated on an unbalanced panel of 93 uk building societies over the period 1981 1993 using data on their core financial intermediation activities which it is suggested are particularly appropriate for our purposes in contrast to much of the existing merger literature which for the most part uses financial performance data our results do indicate significant and substantial productivity gains following acquisition these are consistent with an acquisitions process in which less efficient firms are acquired and reorganized the post merger gains appear to increase substantially in the post deregulation period when pressures to minimize cost are widely considered to have increased

the valuation of american barrier options using the decomposition technique in this paper we propose an alternative approach for pricing and hedging american barrier options speci cally we obtain an analytic representation for the value and hedge parameters of barrier options using the decomposition technique of separating the european option value from the early exercise premium this allows us to identify some new put call symmetry relations and the homogeneity in price parameters of the optimal exercise boundary these properties can be utilized to increase the computational e ciency of our method in pricing and hedging american options our implementation of the obtained solution indicates that the proposed approach is both e cient and accurate in computing option values and option hedge parameters our numerical results also demonstrate that the approach dominates the existing lattice methods in both accuracy and e ciency in particular the method is free of the di culty that existing

valuation of american options on foreign currency abstract pricing models for american call and put options on foreign currency are derived herein these models are used to investigate the efficiency of the market for foreign currency options the evidence presented here indicates that market prices for these options deviate substantially from their corresponding model prices in addition it is shown that a hedging strategy executed at transaction prices can be used to translate an observed deviation of market from model prices into positive excess profits however these profits are eliminated if the strategy is executed at bid and offer prices

an econometric analysis of some models for constructed binary time series macroeconometric and financial researchers often use binary data constructed in a way that creates serial dependence we show that this dependence can be allowed for if the binary states are treated as markov processes in addition the methods of construction ensure that certain sequences are never observed in the constructed data together these features make it difficult to utilize static and dynamic probit models we develop modeling methods that respect the markov process nature of constructed binary data and explicitly deals with censoring constraints an application is provided that investigates the relation between the business cycle and the yield spread

a simple framework for analysing bull and bear markets bull and bear markets are a common way of describing cycles in equity prices to fully describe such cycles one would need to know the data generating process dgp for equity prices we begin with a definition of bull and bear markets and use an algorithm based on it to sort a given time series of equity prices into periods that can be designated as bull and bear markets the rule to do this is then studied analytically and it is shown that bull and bear market characteristics depend upon the dgp for capital gains by simulation methods we examine a number of dgps that are known to fit the data quite well random walks garch models and models with duration dependence we find that a pure random walk provides as good an explanation of bull and bear markets as the more complex statistical models in the final section of the paper we look at some asset pricing models that appear in the literature from the viewpoint of their success in producing bull and bear markets which resemble those in the data copyright 2002 john wiley sons ltd

an empirical examination of the pricing of american put options this study is an ex post performance test comparing the accuracy of an american model to a european model for valuing listed options specifically the geske and johnson american put valuation model is compared with the black and scholes european put model on average both models undervalue relative to market prices put options however the geske and johnson model values are significantly closer to market prices than are the black and scholes values

intraday patterns and trading strategies in the spanish stock market different rating and investment companies have recently pointed out spain s brightening growth outlook which has energized the spanish stock market by anticipating greater interest in the behaviour of the spanish stock market we show that the best trading strategy is that in which the investor enters long or short after the opening of the new york stock exchange nyse till the end of the trading day at 17 30 this strategy should be complemented with that of entering long or short from the opening of the trading day till the closing price before the opening of the nyse in no coincidence phases

evidence of the duration dependence from the stock markets in the pacific rim economies this article investigates the duration dependent feature of five pacific rim economies the duration dependent markov switching model is employed to achieve this objective the savage dickey density ratio is also computed in support of the duration dependent markov switching model the possible bull and bear market dates for each stock market are also identified by the posterior probability from the empirical model it is unambiguous that japan south korea and hong kong are all characterized by duration dependence in a bear market but no duration dependence in a bull market in the case of taiwan and singapore the duration dependence feature holds for both the bear and bull markets

does monetary policy have asymmetric effects on stock returns this paper investigates whether monetary policy has asymmetric effects on stock returns using markov switching models different measures of a monetary policy stance are adopted empirical evidence from monthly returns on the standard poor s 500 price index suggests that monetary policy has larger effects on stock returns in bear markets furthermore it is shown that a contractionary monetary policy leads to a higher probability of switching to the bear market regime

business cycle durations and postwar stabilization of the u s economy average postwar expansions are twice as long as prewar expansions and contractions are one half as long this paper investigates three possible explanations the first explanation is that shocks to the economy have been smaller in the postwar period the second explanation is that the composition of output has shifted from very cyclical sectors to less cyclical sectors the third explanation is that the apparent stabilization is largely spurious and is caused by differences in the way that prewar and postwar business cycle reference dates were chosen by the national bureau of economic research the evidence presented in this paper favors this third explanation copyright 1994 by american economic association

index options the early evidence index options became the most important traded contracts during their first year of existence two contracts namely those on the s p100 and the major markets index have a trading volume which typically surpasses the trading volume in all individual stock option contracts in this paper we examine the pricing of the options on the s p100 and the major markets index using intra day prices we find the options frequently violate the arbitrage boundary put call parity and are substantially mispriced relative to theoretical values our results suggest that tests of option pricing models may be more difficult than previously realized due to nonsynchronous prices even using real time data from the exchanges

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

housing market cycles and duration dependence in the united states and canada housing wealth is a large component of households total wealth and plays an important role in aggregate business cycles in this article we explore data on real house price cycles at the aggregate level and city level for the us and canada using a panel of 137 cities we examine the duration and characteristics of housing market cycles in north america we find that north american housing cycles are long averaging 5 years of expansion and 4 years of contraction we estimate a discrete time survival model with a probit specification for house price expansions and contractions this model allows us to test for duration dependence we find that us housing market expansions have positive duration dependence since their exit probabilities increase with duration while contractions seem to have no duration dependence canadian house price cycles did not exhibit duration dependence standard determinants of house prices interest rates income and population growth are included as controls

the impact of financial liberalization on bank efficiency evidence from latin america and asia this article investigates the impact of financial liberalization on bank efficiency using data for a sample of over 4000 bank year observations from ten emerging economies for the period 1991 2000 we use data envelopment analysis dea to calculate bank efficiency at the individual bank level bank efficiency measures are then aggregated at the country level to investigate the relationship between financial liberalization and bank efficiency using a panel least square fixed effects model overall we find strong support for the positive impact of financial liberalization programmes on bank efficiency

on the persistence and volatility in european american and asian stocks bull and bear markets abstract in this paper we examine the statistical properties of several stock market indices in europe the us and asia by means of determining the degree of dependence in both the level and the volatility of the processes in the latter case we use the squared returns as a proxy for the volatility we also investigate the cyclical pattern observed in the data and in particular if the degree of dependence changes depending on whether there is a bull or a bear period we use fractional integration and garch specifications the results indicate that the indices are all nonstationary i 1 processes with the squared returns displaying a degree of long memory behaviour with respect to the bull and bear periods we do not observe a systematic pattern in terms of the degree of persistence though for some of the indices ftse dax hang seng and sti there is a higher degree of dependence in both the level and the volatility during the bull periods

pricing american options under the constant elasticity of variance model and subject to bankruptcy this paper proposes an alternative characterization of the early exercise premium that is valid for any markovian and diffusion underlying price process as well as for any parameterization of the exercise boundary this new representation is shown to provide the best pricing alternative available in the literature for medium and long term american option contracts under the constant elasticity of variance model moreover the proposed pricing methodology is also extended easily to the valuation of american options on defaultable equity and possesses appropriate asymptotic properties

real business cycles and the test of the adelmans abstract this paper conducts a modern variant of the test proposed and carried out by adelman and adelman 1959 using the methods developed by burns and mitchell 1946 we see if we can distinguish between the economic series generated by an actual economy and those analogous artificial series generated by a stochastically perturbed economic model in the case of the adelmans the model corresponded to the klein goldberger equations in our case the model corresponds to a simple real business cycle model the results indicate a fairly high degree of coincidence in key economic aggregates between the business cycle characteristics identified in actual data and those found in our simulated economy

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

how do banks adjust to changing input prices a dynamic analysis of u s commercial banks before and after the crisis abstract the 2000 2013 period was characterized by substantial regulatory monetary and technological change especially after the onset of the global financial crisis this study assesses the total impact of these policy shifts and technological changes on u s commercial banks short run and long run substitution elasticities an endogenous break test divides the sample into a pre crisis period and a post crisis period during the former period banks inputs tend to be inelastic substitutes after the onset of the crisis particularly the long run substitutability of most input factors decreases to even lower levels due to changes in both cost technology and economic conditions at the same time banks response to input price changes becomes more sluggish hence especially after the onset of the crisis banks have little flexibility regarding input factor usage and are thus sensitive to input price changes from a cost perspective

core deposits and physical capital a reexamination of bank scale economies and efficiency with quasi fixed inputs this paper compares measures of bank production efficiency assuming all bank inputs are completely variable with measures obtained from specifications which take account of the quasi fixed nature of core deposits and bank physical capital and the treatment of certain deposits as outputs the empirical results imply that scale economy measures vary substantially for small to medium sized banks whereas those for the largest banks are fairly robust to the different specifications estimates of economies of scope were found to be invariant to different input output specifications whereas efficiency measures varied significantly with changes in the specification of the cost function and with the definition of outputs and inputs copyright 1995 by ohio state university press

structural change test in duration of bull and bear markets abstract we propose a recursive test to analyze structural changes in duration of bull and bear markets using the dow jones industrial average index we detected a single structural break in the bull market duration in april 1942