valuing asian and portfolio options by conditioning on the geometric mean price the valuation of asian or a average price options and of european options on portfolios in a black scholes environment has given researchers trouble the difficulty with these problems is that the probability distribution of the variable which determines the option payoff at expiration a sum of correlated lognormal random variables has no closed form representation for the asian case the approach generally taken has been to approximate the distribution of the arithmetic average price while for the portfolio option case attempts have focused on discretizing the joint distribution of the terminal prices of the assets comprising the portfolio and approximating the expected risk neutral option payoff with a discrete sum these approaches are not entirely satisfactory the distribution approximating procedures for asian options are not very accurate for some cases while the computational requirements for obtaining a reasonably accurate estimate using the discretizing or multinomial approaches for por

minimum return guarantees with fund switching rights an optimal stopping problem abstract recently there is a growing trend to offer guaranteed products where the investor is allowed to shift her account investment value between multiple funds the switching right is granted a finite number of times per year i e it is american style with multiple exercise possibilities in consequence the pricing and the risk management is based on the switching strategy which maximizes the value of the guarantee put option we analyze the optimal stopping problem in the case of one switching right within different model classes and compare the exact price with the lower price bound implied by the optimal deterministic switching time we show that within the class of log price processes with independent increments the stopping problem is solved by a deterministic stopping time if and only if the price process is in addition continuous thus in a sense the black and scholes model is the only meaningful pricing model where the lower price bound gives the exact price it turns out that even moderate deviations from the black and scholes model assumptions give a lower price bound which is really below the exact price this is illustrated by means of a stylized stochastic volatility model setup

strategic price complexity in retail financial markets abstract there is mounting empirical evidence to suggest that the law of one price is violated in retail financial markets there is significant price dispersion even when products are homogeneous also despite the large number of firms in the market prices remain above marginal cost and may even rise as more firms enter in a non cooperative oligopoly pricing model i show that these anomalies arise when firms add complexity to their price structures complexity increases the market power of the firms because it prevents some consumers from becoming knowledgeable about prices in the market in the model as competition increases firms tend to add more complexity to their prices as a best response rather than make their disclosures more transparent because this may substantially decrease consumer surplus in these markets such practices have important welfare implications

cross hedging minimum return guarantees basis and liquidity risks we reveal pitfalls in the hedging of insurance contracts with a minimum return guarantee on the underlying investment e g an external mutual fund we analyze basis risk entailed by hedging the guarantee with a dynamic portfolio of proxy assets for the funds we also take account of liquidity risk which arises since the insurer may need to advance funds for performing the hedge based on a least squares monte carlo simulation we study the economic implications of basis and liquidity risks we demonstrate that both risks may be surprisingly high and show how the design of the contract and the hedging strategy may help to alleviate them

hedging and liquidity this article develops a model for evaluating alternative hedging strategies for financially constrained firms a key advantage of the model is the ability to capture the intertemporal effects of hedging on the firm s financial situation we characterize the optimal hedge a wide range of alternative hedging strategies can be specified and the model allows us to determine in each case if the hedging strategy raises or lowers firm value and by how much we show that hedging firm value hedging cash flow from operations and hedging sales revenue are not optimal the article highlights the fact that every hedging strategy comes packaged with a borrowing strategy which requires careful consideration futures markets often provide the most liquid and convenient instruments for managing risk however because futures contracts are marked to market it is often impossible to simultaneously hedge cash flows and values for example a futures contract that locked in the value of gold that a corporation planned to extract in one year would generate an uncertain cash flow pattern over the year this article examines how liquidity and cash flow timing problems associated with different hedging strategies can affect a firm s value in our model the objective for hedging is to increase the firm s financial flexibility an optimal hedge maximizes the firm s liquidityslack in the form of excess cash or unused debt capacitywhen liquidity is most valuable this lowers the danger of costly financial distress reduces the effective cost of external financial constraints and makes value maximizing investments affordable a firm with no financial constraints does not gain from hedging and the higher the firm s financial constraints the greater the potential value of hedging the value of hedging depends critically on the design of the hedging strategy we show that the optimal hedge minimizes the variability in the marginal value of the firm s cash balances such a hedge efficiently redistributes cash balances across different states and periods taking cash from those states for which the marginal cost of the financial constraint is low and giving cash to those states for which the marginal

bargain hunting or star gazing investors preferences for stock mutual funds investors who wish to purchase shares in mutual funds balance many types of information from a variety of sources when making their fund selection this research examines how investors choose a mutual fund within a given class of funds among the major findings are that investors pay a great deal of attention to past performance and vastly overweight loads relative to expense ratios when evaluating a fund s overall fee structure i also find that investors with a greater knowledge of basic finance are less likely not more likely to make reasonable fund choices

pricing asian options under a hyper exponential jump diffusion model we obtain a closed form solution for the double laplace transform of asian options under the hyper exponential jump diffusion model similar results were available previously only in the special case of the black scholes model bsm even in the case of the bsm our approach is simpler as we essentially use only ito s formula and do not need more advanced results such as those of bessel processes and lamperti s representation as a by product we also show that a well known recursion relating to asian options has a unique solution in a probabilistic sense the double laplace transform can be inverted numerically via a two sided euler inversion algorithm numerical results indicate that our pricing method is fast stable and accurate and it performs well even in the case of low volatilities

reprint of investors distraction and strategic repricing decisions abstract in this paper i analyze investors reactions to changes in the expense ratios of equity mutual funds i show that investment flows response to fees cannot be fully explained by looking at investors performance sensitivity while performance sensitivity monotonically increases with past performance price sensitivity does not investors who buy top past performers seem to be distracted by the fund s previous return and pay relatively little attention to the expense ratios moreover price sensitivity increases with fund visibility while performance sensitivity decreases and while looking at data from 1986 to 2006 no discernible trend can be observed in the average performance sensitivity price sensitivity strongly increases due to the dramatic increase in the availability of mutual funds information for retail investors finally i show that investment companies strategically time their repricing decisions in order to exploit time variations in price and performance sensitivities and that fund governance quality affects the degree to which investment companies engage in this opportunistic behavior

a dynamic programming procedure for pricing american style asian options pricing european style asian options based on the arithmetic average under the black and scholes model involves estimating an integral a mathematical expectation for which no easily computable analytical solution is available pricing their american style counterparts which provide early exercise opportunities poses the additional difficulty of solving a dynamic optimization problem to determine the optimal exercise strategy a procedure for pricing american style asian options of the bermudan flavor based on dynamic programming combined with finite element piecewise polynomial approximation of the value function is developed here a convergence proof is provided numerical experiments illustrate the consistency and efficiency of the procedure theoretical properties of the value function and of the optimal exercise strategy are also established

electricity supply reliability estimating the value of lost load the office of electricity regulation offer reviews the performance of electricity distribution companies on reliability of supply while physical indicators of supply reliability such as number of outages and minutes of electricity lost per customer per year are readily available little is known about the monetary value placed on supply reliability by customers this paper briefly reviews different methods to derive monetary values of power interruptions avoided before arguing that a method which values the lost utility to consumers from outages is the most appropriate a contingent ranking method is used to derive such lost utility values from a survey of industrial firms the value customers place on outages avoided is higher than that currently used in appraisals of infrastructure investment and in the determination of electricity prices in the uk

credit constraints and gdp growth evidence from a natural experiment abstract before 1998 texas was the only state that greatly restricted home equity loans and cash out refinancing for non housing consumption such borrowing was authorized in texas for the first time through a constitutional amendment in 1998 using state level panel data and recently developed synthetic control methods based on machine learning we find that the texas constitutional amendments relaxing credit constraints had an insignificant impact on gdp growth our findings have important policy implications for the stimulative effect of easier home equity access on gdp growth

the distributional impact of price changes in hungary and the united kingdom in soviet type economies commodity prices were distorted as part of the redistributive system of the state but with the transition prices have been liberalized and taxes made more uniform has this change adversely affected the distribution of purchasing power this paper develops a new method of measuring the distributional impact of price changes by computing the distributional characteristics of commodities from household budget survey data and applies it to hungary and the united kingdom finding that the distributional impacts over the past decade were negligible and not significantly different from zero in both cases copyright 1995 by royal economic society

costly search and mutual fund flows this paper studies the flows of funds into and out of equity mutual funds consumers base their fund purchase decisions on prior performance information but do so asymmetrically investing disproportionately more in funds that performed very well the prior period search costs seem to be an important determinant of fund flows high performance appears to be most salient for funds that exert higher marketing effort as measured by higher fees flows are directly related to the size of the fund s complex as well as the current media attention received by the fund which lower consumers search costs

the finance and growth nexus revisited we find that an expansion of credit has a positive effect on per capita output growth only up to a point beyond this threshold the impact of finance on growth is not statistically significant anymore we show however that the estimated non linear relationship may stem from the omission of factors not considered in the literature so far these factors may have a negative impact on growth in mature financial systems and include the magnitude of financial cycles as well as the importance of non intermediation activities in banks business models

financial dependence global growth opportunities and growth revisited abstract we show that financial development has a non monotonic effect on growth in the rajan and zingales 1998 and fisman and love 2007 sample beyond a threshold financially dependent industries and industries facing good growth opportunities grow disproportionately more slowly

the persistence of risk adjusted mutual fund performance the authors examine predictability for stock mutual funds using risk adjusted returns they find that past performance is predictive of future risk adjusted performance applying modern portfolio theory techniques to past data improves selection and allows the authors to construct a portfolio of funds that significantly outperforms a rule based on past rank alone in addition they can form a combination of actively managed portfolios with the same risk as a portfolio of index funds but with higher mean return the portfolios selected have small but statistically significant positive risk adjusted returns during a period where mutual funds in general had negative risk adjusted returns copyright 1996 by university of chicago press

investment with a conscience examining the impact of pro social attitudes and perceived financial performance on socially responsible investment behavior this article addresses the growing industry of retail socially responsible investment sri profiled mutual funds very few previous studies have examined the final consumer of sri profiled mutual funds therefore the purpose of this study was to in an exploratory manner examine the impact of a number of pro social financial performance and socio demographic variables on sri behavior in order to explain why investors choose to invest different proportions of their investment portfolio in sri profiled funds an ordinal logistic regression analysis on 528 private investors revealed that two of the three pro social variables had a positive impact on how much the consumer invested in sri profiled funds moreover there was proof of a non altruistic motive for investing in sri as consumers who perceive that financial return of sri is equal or better than regular mutual funds invested a greater proportion of their portfolio in sri profiled mutual funds furthermore the results showed that women and better educated investors were more likely to invest a greater proportion of their investment portfolio in sri overall the findings indicate that both financial perceptions and pro social attitudes are connected to consumer investment in sri

hedging using simulation a least squares approach abstract this paper presents a new and flexible computational approach to derivative hedging it is based on the use of least squares regression in order to compute the hedging portfolio this nonparametric methodology can be readily applied to any derivative contract written on a single underlying risky asset in a complete market with continuous markov price paths we illustrate this technique computing sensitivities on plain vanilla and exotic options with both european and american exercise style the achieved numerical accuracy is always comparable with the best simulation and semianalytic techniques presented in the literature

winners and losers from the privatization and regulation of utilities lessons from a general equilibrium model of argentina a computable general equilibrium cqe model is used to estimate the macroeconomic and distributional effects of the privatization and regulation of utilities in argentina begun in 1989 based on data available after the privatization that indicate different kinds of efficiency gains in electricity gas water and telecommunications both the privatization and effective regulation are estimated to yield significant macroeconomic benefits gains from the privatization accrue mainly to high income classes while gains from the effective regulation of newly privatized utilities accrue mainly to low income classes computable general equilibrium cge estimates of overall employment effects suggest that privatization was not a major contributor to the dramatic rise in unemployment in argentina between 1993 and 1995 this rise was more likely due to the tequila effect of an interest rate shock

the role of policy in energy transitions lessons from the energy liberalisation era the aim of this paper is to discuss the period of energy privatisation and liberalisation which began in the 1980s within its wider historical context the key issues are what has been learned from this recent period and how significant is it in the light of an energy transition to low carbon energy system by 2050 energy liberalisation has led to positive and globally widespread but modest efficiency gains but a lack of clearly visible direct benefits to households in many countries it has significantly improved the governance of monopoly utilities via independent regulators the prospects for competition and innovation and the quality of policy instruments for environmental emissions control through the emergence of trading mechanisms we conclude that it is not liberalisation per se that will determine the movement towards a low carbon energy transition but the willingness of societies to bear the cost which will be significant no matter what the extent of liberalisation

refraining from imitation professional resistance and limited diffusion in a financial market why do some practices not spread although this is an important question for both diffusion theorists and those interested in institutional change we know surprisingly little about the limitations on diffusion because most diffusion studies sample on successful diffusion i address the question of why some practices fail to spread by introducing the concept of a deviance discount a deviance discount is a systematic downgrading of the observed adoption performance of controversial practices which limits the contagion of such practices i test and find qualitative and quantitative support for my thesis in the product introduction behavior of swedish mutual fund firms my findings hold implications for diffusion theory and theories of endogenous institutional change

practical policy iteration generic methods for obtaining rapid and tight bounds for bermudan exotic derivatives using monte carlo simulation abstract we introduce a set of improvements which allow the calculation of very tight lower bounds for bermudan derivatives using monte carlo simulation these tight lower bounds can be computed quickly and with minimal hand crafting our focus is on accelerating policy iteration to the point where it can be used in similar computation times to the basic least squares approach but in doing so introduce a number of improvements which can be applied to both the least squares approach and the calculation of upper bounds using the andersen broadie method the enhancements to the least squares method improve both accuracy and efficiency results are provided for the displaced diffusion libor market model demonstrating that our practical policy iteration algorithm can be used to obtain tight lower bounds for cancellable cms steepener snowball and vanilla swaps in similar times to the basic least squares method

implicit bank debt guarantees costs benefits and risks the expectation by market participants that public authorities might bailout the creditors of banks that are considered too important for financial system stability or another reason to be allowed to fail is commonly referred to as an implicit guarantee public authorities do not have any explicit commitment to intervene they may even honestly state that they not want to do so ex ante but may feel compelled to do so ex post a declared policy aim is to limit the value of implicit guarantees by making banks stronger more easily resolvable in case of distress as well as by imposing extra charges that rise as banks become more systemically important as part of the latter approach globally systemically important banks are identified and subjected to more costly and intrusive regulation there is little evidence that specific approach has been successful so far there is some evidence that the introduction of new resolution frameworks has been helpful while the use of newly available resolution tools and the involvement of bank creditors in the burden sharing associated with bank failure resolution has significantly reduced the value of implicit bank debt guarantees where it occurred in that sense actions speak louder than words

when cheaper is better fee determination in the market for equity mutual funds abstract in this paper we develop a model of the market for equity mutual funds that captures three key characteristics of this market first there is competition among funds second fund managers ability is not observed by investors before making their investment decisions third some investors do not make optimal use of all available information the main results of the paper are that 1 price competition is compatible with positive mark ups in equilibrium and 2 worse performing funds set fees that are greater or equal to those set by better performing funds these predictions are supported by available empirical evidence

the finance growth nexus in crisis while the literature on the finance growth nexus suggests a positive link between financial development and economic growth another strand of literature highlights the crucial role of credit growth for the occurrence and strength of financial and economic crises in this paper we link the two seemingly contradicting strands of the literature by a strong and robust empirical finding while financial development is indeed positively linked to gdp p c growth in normal non crisis times larger financial sectors lead to significantly worse economic outcomes in the case of a banking crisis

investors distraction and strategic repricing decisions in this paper i analyze investors reactions to changes in the expense ratios of equity mutual funds i show that investment flows response to fees cannot be fully explained by looking at investors performance sensitivity while performance sensitivity monotonically increases with past performance price sensitivity does not investors who buy top past performers seem to be distracted by the fund s previous return and pay relatively little attention to the expense ratios moreover price sensitivity increases with fund visibility while performance sensitivity decreases and while looking at data from 1986 to 2006 no discernible trend can be observed in the average performance sensitivity price sensitivity strongly increases due to the dramatic increase in the availability of mutual funds information for retail investors finally i show that investment companies strategically time their repricing decisions in order to exploit time variations in price and performance sensitivities and that fund governance quality affects the degree to which investment companies engage in this opportunistic behavior

inferior products and profitable deception we analyse conditions facilitating profitable deception in a simple model of a competitive retail market firms selling homogenous products set anticipated prices that consumers understand and additional prices that naive consumers ignore unless revealed to them by a firm where we assume that there is a binding floor on the anticipated prices our main results establish that bad products those with lower social surplus than an alternative tend to be more reliably profitable than good products specifically 1 in a market with a single socially valuable product and sufficiently many firms a deceptive equilibrium in which firms hide additional prices does not exist and firms make zero profits but perversely 2 if the product is socially wasteful then a profitable deceptive equilibrium always exists furthermore 3 in a market with multiple products since a superior product both diverts sophisticated consumers and renders an inferior product socially wasteful in comparison it guarantees that firms can profitably sell the inferior product by deceiving consumers we apply our framework to the mutual fund and credit card markets arguing that it explains a number of empirical findings regarding these industries

hot hands in mutual funds short run persistence of relative performance 1974 1988 the relative performance of no load growth oriented mutual funds persists in the near term with the strongest evidence for a one year evaluation horizon portfolios of recent poor performers do significantly worse than standard benchmarks those of recent top performers do better though not significantly so the difference in risk adjusted performance between the top and bottom octile portfolios is six to eight percent per year these results are not attributable to known anomalies or survivorship bias investigations with a different previously used data set and with some post 1988 data confirm the finding of persistence

implicit bank debt guarantees costs benefits and risks implicit bank debt guarantees the expectation by market participants that public authorities might bailout the creditors of banks that are considered too important for financial system stability or another reason to be allowed to fail is commonly referred to as an implicit guarantee public authorities do not have any explicit commitment to intervene they may even honestly state that they not want to do so ex ante but may feel compelled to do so ex post a declared policy aim is to limit the value of implicit guarantees by making banks stronger more easily resolvable in case of distress as well as by imposing extra charges that rise as banks become more systemically important as part of the latter approach globally systemically important banks are identified and subjected to more costly and intrusive regulation there is little evidence that specific approach has been successful so far there is some evidence that the introduction of new resolution frameworks has been helpful while the use of newly available resolution tools and the involvement of bank creditors in the burden sharing associated with bank failure resolution has significantly reduced the value of implicit bank debt guarantees where it occurred in that sense actions speak louder than words

futures cross hedging with a stationary basis when managing risk frequently only imperfect hedging instruments are at hand we show how to optimally cross hedge risk when the spread between the hedging instrument and the risk is stationary for linear risk positions we derive explicit formulas for the hedge error and for nonlinear positions we show how to obtain numerically efficient estimates finally we demonstrate that even in cases with no clear cut decision concerning the stationarity of the spread it is better to allow for mean reversion of the spread rather than to neglect it

an exact bond option formula this paper derives a closed form solution for european options on pure discount bonds assuming a mean reverting gaussian interest rate model as in vasicek 8 the formula is extended to european options on discount bond portfolios

analysis of thermal coal pricing and the coal price distortion in china from the perspective of market forces abstract the price of thermal coal has always been the focus of the debate between coal mining industry and electric power industry the thermal coal price is always lower than other same quality coal and this phenomenon of thermal coal price distortion has been existing in china for a long time the distortion coal price can not reflect the external cost and the resource scarcity of coal which could result in environment deteriorating and inefficient resource allocation this paper studied the phenomenon of thermal coal price distortion through economic theoretical modeling and empirical cointegration analysis from the perspective of market forces the results show that thermal coal price is determined by electricity price the prediction elasticity of a electricity enterprise price elasticity of demand of electricity the input prediction elasticity of a electricity enterprise and the price elasticity of supply of thermal coal the main reason of coal price distortion is the unbalance market force of coal industry and thermal coal generation industry the distortion rate of coal price is positively related to the market force of electric power industry and negatively related to the industrial concentration of coal industry

the performance of bond mutual funds using linear and nonlinear models the authors examine two samples of bond funds one sample designed to eliminate survivorship bias and a second much larger sample overall and for subcategories of bond funds they find that bond funds underperform relevant indexes postexpenses the authors results are robust across a wide choice of models they find that on average a percentage point increase in expenses leads to a percentage point decrease in performance the nonlinear model weights closely match actual composition weights the authors find no evidence of predictability using past performance to predict future performance for their unbiased sample copyright 1993 by university of chicago press

does one size fit all a reexamination of the finance and growth relationship abstract recent research has found a strong positive effect of a country s financial development on economic growth we propose that this relationship may vary according to the level of financial development divided in three regions in the low region countries with very low levels of financial development additional improvements in financial markets have an uncertain effect on growth in the intermediate region financial development has a large positive effect on growth finally in the high region the effect is positive but smaller we examine a panel of 74 countries using generalized method of moments gmm dynamic panel techniques and find support for the different regions

the effect of financial development on convergence theory and evidence we introduce imperfect creditor protection in a multicountry schumpeterian growth model the theory predicts that any country with more than some critical level of financial development will converge to the growth rate of the world technology frontier and that all other countries will have a strictly lower long run growth rate we present evidence supporting these and other implications in the form of a cross country growth regression with a significant and sizable negative coefficient on initial per capita gdp relative to the united states interacted with financial intermediation in addition we find that other variables representing schooling geography health policy politics and institutions do not affect the significance of the interaction between financial intermediation and initial per capita gdp and do not show any independent effect on convergence in the regressions our findings are robust to removal of outliers and to alternative conditioning sets estimation procedures and measures of financial development

finance and the sources of growth the authors evaluate whether the level of development in the banking sector exerts a causal impact on economic growth and its sources total factor productivity growth physical capital accumulation and private saving they use 1 a pure cross country instrumental variable estimator to extract the exogenous component of banking development and 2 a new panel technique that controls for country specific effects and endogeneity they find that banks do exert a large causal impact on total factor productivity growth which feeds through to overall gdp gross domestic product growth the long run links between banking development and both capital growth and private savings are more tenuous

reassessing the law finance and growth nexus after the recent great recession abstract the paper provides a reassessment of the relationship between financial structure financial development and economic growth conducting cross section and panel econometric analyses for a sample of 62 countries over 1980 2016 in line with the traditional literature we confirm the existence of a positive cross country relationship between the legal system financial development and growth even including the experience of the recent great recession in addition when jointly assessing the effect of financial structure and financial development on growth it emerges that a more bank oriented economy enjoys higher benefits in terms of long run real gdp per capita growth than a market oriented one when we consider variations across countries and over time we find that both financial structure and financial development affect growth but in an opposite way as the cross section analysis in particular when we control for their joint effect on growth we observe a positive impact of market based financial systems and a negative impact of the overall financial development we also provide evidence of the existence of a positive and significant relationship between economic growth and shadow banking during the 2002 2016 period highlighting the crucial role played by non bank financial intermediation in complementing traditional banking and in affecting the real economy

welfare impacts of electricity generation sector reform in the philippines abstract this paper reports an empirical investigation into the welfare impacts of the introduction of private sector participation into the philippines electricity generation sector by liberalizing the market for independent power producers ipps during the power crisis of 1990 1993 this study uses a social cost and benefit analysis the main benefits came from ipps who contributed to resolving the crisis and promoted economic and social development consumers and investors were net gainers while the government lost and there was an air pollution cost the paper concludes that the reform with private sector participation increased social welfare