the valuation of european options in uncertain environment abstract a new model on european options with uncertainty of both randomness and fuzziness in output is presented by introducing fuzzy logic to the stochastic financial model the randomness and fuzziness in the systems are evaluated by both probabilistic expectation and fuzzy expectation taking account of seller s buyer s subjective judgment prices of european call put options with uncertainty are given and their valuation and properties are discussed under a reasonable assumption this paper demonstrates black scholes formula to give rational expected price of the european options and buyer s writer s seller s permissible range of expected prices the meaning and properties of rational expected prices are discussed in a numerical example the hedging strategies are also considered for marketability of the european options for portfolio selection

supply shocks and monetary policy revisited written almost a decade after the first attempts in 1974 to develop a theory of policy response to supply shocks this paper uses a simple algebraic framework to summarize the central issues posed by supply shocks for macroeconomic policy primary emphasis goes to the case for and against monetary accommodation on the nature and extent of wage indexation and on the distinction between permanent and transitory shocks given the difficult tradeoffs faced by monetary policy makers supply side alternatives may represent the best available policy options 20 references

contingent capital with a capital ratio trigger contingent capital in the form of debt that converts to equity when a bank faces financial distress has been proposed as a mechanism to enhance financial stability and avoid costly government rescues specific proposals vary in their choice of conversion trigger and conversion mechanism we analyze the case of contingent capital with a capital ratio trigger and partial and ongoing conversion the capital ratio we use is based on accounting or book values to approximate the regulatory ratios that determine capital requirements for banks the conversion process is partial and ongoing in the sense that each time a bank s capital ratio reaches the minimum threshold just enough debt is converted to equity to meet the capital requirement so long as the contingent capital has not been depleted we derive closed form expressions for the market value of such securities when the firm s asset value is modeled as geometric brownian motion and from these we get formulas for the fair yield spread on the convertible debt a key step in the analysis is an explicit expression for the fraction of equity held by the original shareholders and the fraction held by converted investors in the contingent capital this paper was accepted by gerard p cachon stochastic models and simulation

valuing risky fixed rate debt an extension this paper develops a corporate bond valuation model that takes into account both early default and interest rate risk it corrects a defect of recent contributions where pricing equations do not assure that the payment to bondholders upon bankruptcy is no greater than firm value the bankruptcy triggering mechanism is directly related to the payoff received by bondholders when early bankruptcy is forced upon the firm more specifically the default barrier is defined simply as a fixed quantity discounted at the riskless rate up to the maturity date of the risky corporate bond as soon as this threshold is crossed bondholders receive an exogenously specified fraction ofthe remaining assets deviations from the absolute priority rule also are captured because it accounts for gaussian interest rate uncertainty default risk and deviations from the absolute priority rule this model is capable of producing quite diverse shapes for the term structure of yield spreads

stabilization with liberalization an evaluation of ten years of chile s experience with free market policies 1973 1983 the recent post 1973 economic experience of chile has attracted considerable attention both from professional economists and from the media most observers have been particularly impressed by the sharp contrasts observed in chile in such a short period of time for example in 1973 chile had one of the highest rates of inflation in the world over 600 whereas in 1981 it experienced one of the lowest rates of inflation 9 5 also in 1975 real gnp declined by 12 9 but during 1977 80 real gnp grew at an average rate of 8 5 per annum in 1982 however the country faced a new recession with real gnp dropping by 14 5 in 1983 the gnp was reduced further by 2 3 the fact that these episodes developed while the military government was actively pursuing free market oriented policies that greatly liberalized the economy adds considerable interest to the chilean case 2 the year 1973 marked an important turning point in chile s economic and political history in september of that year the military took over the government from president salvador allende and a period of dramatic economic changes began chile was transformed from an economy isolated from the rest of the world with strong government intervention into a liberalized world integrated economy where market forces were left free to guide most of the economy s decisions the period 1973 81 was characterized by important achievements inflation was greatly reduced the government deficit was virtually eliminated the economy went through a dramatic liberalization of its foreign sector tariffs were reduced to a uniform 10 level and prices including interest rates were full liberalized probably one of the most interesting aspects of the chilean economy during this period is that major

multinomial approximating models for options with k state variables contingent claims whose values depend on multiple sources of uncertainty arise in many financial contracts and in the analysis of real projects unfortunately closed form solutions for these options are rare and numerical methods can be computationally expensive this article extends the literature on multinomial approximating models specifically new multinomial models are presented that include as special cases existing models the more general models are shown to be computationally more efficient

sovereign debt markets in light of the shadow economy we investigate the controversial role of the informal sector in the economy of 64 countries between 2003 and 2007 by focusing for the first time on the impact it has on sovereign debt markets in addition to a standard ordered probit regression we employ two nonparametric neural network modeling techniques in order to capture possible complex interactions between our variables results confirm our main hypothesis that the informal sector has significant adverse effects on credit ratings and lending costs mlp neural networks offer the best fit to the data followed by the rbf neural networks and probit regression respectively the results do not change with respect to the stage of economic development of a country and contradict views about the possibility of significant economic benefits arising from the informal sector our study has important implications especially in the context of the ongoing sovereign debt crisis since it suggests that a reduction in the informal sector of financially challenged countries is likely to help in relaxing credit risk concerns and cutting down lending costs finally a decision tree analysis is used to exploit the inherent discreteness in the data and derive intuitive rules with respect to the level of the informal sector

generalised soft binomial american real option pricing model fuzzy stochastic approach abstract the stochastic discrete binomial models and continuous models are usually applied in option valuation valuation of the real american options is solved usually by the numerical procedures therefore binomial model is suitable approach for appraising the options of american type however there is not in several situations especially in real option methodology application at to disposal input data of required quality two aspects of input data uncertainty should be distinguished risk stochastic and vagueness fuzzy traditionally input data are in a form of real crisp numbers or crisp stochastic distribution function therefore hybrid models combination of risk and vagueness could be useful approach in option valuation generalised hybrid fuzzy stochastic binomial american real option model under fuzzy numbers t numbers and decomposition principle is proposed and described input data up index down index growth rate initial underlying asset price exercise price and risk free rate are in a form of fuzzy numbers and result possibility expected option value is also determined vaguely as a fuzzy set illustrative example of equity valuation as an american real call option is presented

structural recovery of face value at default abstract we carefully study the transmission mechanisms from default free rates to corporate bond prices within structural models of endogenous default risk the transmission critically depends on whether the model is value based or cashflow based on the assumptions made for the drift of the state variable and on the way the residual value at default is shared among bondholders the recovery assumption is crucial recovery of face value which entails receiving the same share of residual value at default regardless of the remaining maturity greatly helps explaining the empirical evidence on bond price sensitivities to interest rates

diffusion or confusion clustered shocks and the conditional diffusion of democracy scholars observing clustering in transitions to democracy argue that democratization diffuses across borders as citizens in autocracies demand the same reforms they witness in neighboring states we disagree this article demonstrates that diffusion plays only a highly conditional role in democratization we advance and test an alternative two step theory of clustered democratization 1 economic and international political shocks which are clustered spatially and temporally induce the breakdown of authoritarian regimes then 2 democratic diffusion in turn influences whether a fallen dictatorship will be replaced by a democracy or a new autocracy diffusion despite playing an important role is insufficient to explain the clustering of transitions using data on 125 autocracies from 1875 to 2004 we show that economic crises trigger authoritarian breakdowns while diffusion influences whether the new regime is democratic or authoritarian

macroeconomic variables and corporate performance increased economic and financial integration and substantial macroeconomic fluctuations require that corporate managers and investment analysts pay more attention than in the past to the link between the noise that these fluctuations represent and the company s performance past and future for many reasons company managers must weed out the effects of the noise to obtain a clear picture of the company s intrinsic competitiveness and long term sustainable profits the question is to what extent can outside shareholders and investment analysts adopt this approach to corporate performance current reporting practice does not provide these outsiders with an adequate idea of the character and magnitude of the impact of macroeconomic variables on the company the recommendations of international accounting standard 1 presentation of financial statements as revised in 1997 however offer an improvement in this important area this article presents four levels of implementation of ias 1 and what these lev

an integrated pricing model for defaultable loans and bonds abstract in recent years credit risk has played a key role in risk management issues practitioners academics and regulators have been fully involved in the process of developing studying and analysing credit risk models in order to find the elements which characterize a sound risk management system in this paper we present an integrated model based on a reduced pricing approach for market and credit risk its main features are those of being mark to market and that the spread term structure by rating class is contingent on the seniority of debt within an arbitrage free framework we introduce issues such as the integration of market and credit risk the use of stochastic recovery rates and recovery by seniority moreover we will characterize default risk by estimating migration risk through a mortality rate actuarial based approach the resultant probabilities will be the base for determining multi period risk neutral transition probability that allow pricing of risky debt in the trading and banking book

the adaptive mesh model a new approach to efficient option pricing abstract most derivative securities must be priced by numerical techniques these models contain distribution error and nonlinearity error the adaptive mesh model amm sharply reduces nonlinearity error by grafting one or more small sections of fine high resolution lattice onto a tree with coarser time and price steps three different amm structures are presented one for pricing ordinary options one for barrier options and one for computing delta and gamma efficiently the amm approach can be adapted to a wide variety of contingent claims for some common problems accuracy increases by several orders of magnitude with no increase in execution time

foreign currency translation and changing prices in perfect and complete markets our purpose is to explore some properties of the major methods of foreign currency translation under the assumptions of perfect and complete markets in doing so we identify a set of sufficient conditions under which the various methods possess properties claimed by their advocates moreover the role played by the controversial and elusive translation gain or loss becomes clearly defined neither the properties of the various methods nor the role of the translation gain or loss are obvious notwithstanding the considerable debate during the recent attempt to resolve the issue in the policy domain in order to interpret the disclosures under the various methods of translation it is necessary to make an assumption about the economic forces that induce changes in the exchange rates the perspective we adopt is that changes in exchange rates are driven solely by differential rates of inflation among the respective countries given this assumption we analyze the properties of three accounting models translation methods historical cost accounting with foreign denominated subsidiary financial statements translated at historical rates of exchange compre

evaluating corporate bonds with complicated liability structures and bond provisions this paper presents a general and numerically accurate lattice methodology to price risky corporate bonds it can handle complex default boundaries discrete payments various asset sales assumptions and early redemption provisions for which closed form solutions are unavailable furthermore it can price a portfolio of bonds that accounts for their complex interaction whereas traditional approaches can only price each bond individually or a small portfolio of highly simplistic bonds because of the generality and accuracy of our method it is used to investigate how credit spreads are influenced by the bond provisions and the change in a firm s liability structure due to bond repayments

debt valuation renegotiation and optimal dividend policy the valuation of debt and equity reorganization boundaries and firm s optimal dividend policies are studied in a framework where we model strategic interactions between debt holders and equity holders in a game theoretic setting which can accommodate varying bargaining powers to the two claimants two formulations of reorganization are presented debt equity swaps and strategic debt service resulting from negotiated debt service reductions we study the effects of bond covenants on payout policies and distinguish liquidity induced defaults from strategic defaults we derive optimal equity issuance and payout policies the debt capacity of the firm and the optimal capital structure are characterized

a discrete time model of american put option in an uncertain environment abstract a discrete time mathematical model for american put option with uncertainty is presented and the randomness and fuzziness are evaluated by both probabilistic expectation and fuzzy expectation defined by a possibility measure from the viewpoint of fuzzy expectation taking account of decision maker s subjective judgment an optimality equation for the optimal stopping problem in a fuzzy stochastic process is derived and an optimal exercise time is given for the american put option it is shown that the optimal fuzzy price is a solution of the optimality equation under a reasonable assumption the permissible range of the writer s seller s optimal expected price in the american put option is presented and the meaning and properties of the optimal expected prices are discussed in numerical examples in a numerical example the discrete time approximation model is discussed for the continuous time model

application of the fuzzy stochastic methodology to appraising the firm value as a european call option abstract the valuing of a firm equity as a call option is a crucial problem in financial decision making there are two basic aspects that are studied contingent claim features payoff functions and risk stochastic process of underlying assets however non preciseness vagueness uncertainty of input data is often neglected thus a combination of risk stochastic and uncertainty fuzzy instruments could be a useful approach in calculating a firm value as a call option the black scholes methodology of appraising equity as a european call option is applied fuzzy stochastic methodology under fuzzy numbers t numbers is proposed and described fuzzy stochastic model of appraising a firm equity is proposed input data are in a form of fuzzy numbers and result firm possibility expected equity value is also determined vaguely as a fuzzy set illustrative example is introduced

evaluating corporate bonds and analyzing claim holders decisions with complex debt structure abstract although many different aspects of debt structures such as bond covenants and repayment schedules are empirically found to significantly influence values of bonds and equity many theoretical structural models still oversimplify debt structures and fail to capture phenomena found in financial markets this paper proposes a carefully designed structural model that faithfully models typical complex debt structures containing multiple bonds with various covenants for example the ability for an issuing firm to meet an obligation is modeled to rely on its ability to meet previous repayments and the default trigger is shaped according to the characteristics of its debt structure such as the amount and schedule of bond repayments thus our framework reliably provides theoretical insight and concrete quantitative measurements consistent with extant empirical research such as the shapes of yield spread curves under various firm s financial statuses and the impact of payment blockage covenants on newly issued and other outstanding bonds we also develop the forest a novel quantitative method to handle contingent changes in the debt structure due to premature bond redemptions a forest consists of several trees that capture different debt structures for instance those before or after a bond redemption this method can be used to analyze how poison put covenants in the target firm s bonds influence the bidder s costs of debt financing for a leveraged buyout or investigate how the presence of wealth transfer among the remaining claim holders due to a bond redemption influences the firm s call policy or further reconcile conflicts among previous empirical studies on call delay phenomena

valuation and accounting for inflation and foreign exchange inflation and foreign exchange raise new issues with respect to accounting representations of equity value for example inflation creates an earnings illusion as an artifact of the mismatching of expenses based on allocations of historical costs with current revenues in determining earnings this mismatching distorts mappings of aggregate earnings and book values into equity value such that value relevant information is lost in this article we consider the consequences of inflation and foreign exchange accounting policies including those contained in accounting standards on the value relevance of bottom line accounting numbers policies are identified that achieve efficient accounting in the sense that aggregate comprehensive earnings and book values are sufficient for an accounting representation of equity value the linear relations that emerge provide predictions on capitalization coefficients that help explain results of empirical inquiries as well our analysis provides a theoretical foundation for policies contained in accounting standards that contributes to the resolution of controversies such as that concerning foreign exchange accounting

stabilization crises and the breakdown of military authoritarianism in latin america over the last five years military authoritarian regimes broke down consistently throughout latin america the return to democratic government has had less to do with the internal political situation in these countries than with the economic crises faced by the military regimes the military regimes collapsed primarily because of the external debt crisis that emerged in the early 1980s there were two characteristic patterns in the macroeconomic policy of the military authoritarian systems according to one pattern the regimes attempted to maintain growth rates through reflation which led to chronic trade deficits that had to be covered through continuous reserve inflows alternatively particularly in the southern cone the regimes attempted disinflation through the heterodox strategy of underdevaluation of exchange rates although this slowed inflation this was achieved only at the cost of serious balance of payments disequilibrium and a decrease in external competitiveness which limited the ability