a market to implement the core abstract i present a mechanism whose subgame perfect equilibrium outcomes coincide with the core of an underlying convex tu game the mechanism resembles an asset market in which one of the players is randomly selected as a broker who centralizes trade in addition the rules of the mechanism are independent of the coalitional function therefore the mechanism is useful for an incompletely informed designer who wishes to implement the core of these games the mechanism is inspired by the reduced games relevant for the consistency of the core journal of economic literature classification numbers c71 and c72

why do we smile on the determinants of the implied volatility function abstract we report simple regressions and granger causality tests in order to understand the pattern of implied volatilities across exercise prices we employ all calls and puts transacted between 16 00 and 16 45 on the spanish ibex 35 index from january 1994 to april 1996 transaction costs proxied by the bid ask spread seem to be a key determinant of the curvature of the volatility smile moreover time to expiration the uncertainty associated with the market and the relative market momentum are also important variables in explaining the smile

asymmetry and leverage in garch models a news impact curve perspective models for conditional heteroskedasticity belonging to the garch class are now common tools in many economics and finance applications among the many possible competing univariate garch models on

the importance of the volatility risk premium for volatility forecasting in this paper we study the role of the volatility risk premium for the forecasting performance of implied volatility we introduce a non parametric and parsimonious approach to adjust the model free implied volatility for the volatility risk premium and implement this methodology using more than 20 years of options and futures data on three major energy markets using regression models and statistical loss functions we find compelling evidence to suggest that the risk premium adjusted implied volatility significantly outperforms other models including its unadjusted counterpart our main finding holds for different choices of volatility estimators and competing time series models underlying the robustness of our results

dynamic spillover effects among crude oil precious metal and agricultural commodity futures markets abstract this paper examines spillover effects among six commodity futures markets gold silver west texas intermediate crude oil corn wheat and rice by employing the multivariate deco garch model and the spillover index specifically we investigate the dynamics of return and volatility spillover indices to reveal the intensity and direction of transmission during the recent global financial and european sovereign debt crises our empirical results are as follows first we estimate a positive equicorrelation between commodity futures market returns and find that it increased sharply during the crises this effect can persist during periods of economic and financial turmoil diminishing the benefits of international portfolio diversification for investors second we identify bidirectional return and volatility spillovers across commodity futures markets and find more pronounced trends in their levels in the post crisis period this indicates the strong impact of spillovers during crisis periods third both gold and silver are information transmitters to other commodity futures markets while the remaining four commodity futures investigated were receivers of spillovers during recent periods of financial stress finally we analyse the optimal portfolio weights and time varying hedge ratios between metal and other commodities futures markets overall our findings provide new insights into channels of information transmission which may improve investment decisions and inform portfolio investors trading strategies

recovering probability distributions from option prices this article derives underlying asset risk neutral probability distributions of european options on the s p 500 index nonparametric methods are used to choose probabilities that minimize an objective function subject to requiring that the probabilities are consistent with observed option and underlying asset prices alternative optimization specifications produce approximately the same implied distributions a new and fast optimization technique for estimating probability distributions based on maximizing the smoothness of the resulting distribution is proposed since the crash the risk neutral probability of a three four standard deviation decline in the index about 36 percent 46 percent over a year is about 10 100 times more likely than under the assumption of lognormality recently the increasing popularity of derivatives and some highly publicized failures to control risk have led to increased efforts to find reasonable methods to measure the sensitivity of large institutional derivatives portfolios to extreme events merely because such events are rare is not sufficient to ignore them since on the few occasions when they do occur significant amounts of money can change hands potentially wiping out profits accumulated over long prior periods a key assumption behind methods of estimation is the joint probability distribution of constituent underlying asset returns this has long been a concern of financial economists since probability assumptions are critical to much of their research during the last quarter century heretofore probability distributions of stock market returns have typically been estimated from historical time series unfortunately common hypotheses may not capture the probability of extreme events and the events of interest are rare or may not be present in the historical record even though they are clearly possible

bargaining foundations of shapley value1 a transferable utility economy in which each agent holds a resource which can be used in combination with the resources of other agents to generate value according to the characteristic function v is studied using a dynamic model of bargaining the main theorem establishes that the payoffs associated with efficient equilibria converge to the agents shapley values as the time between periods of the dynamic game goes to zero in addition it is demonstrated that an efficient equilibrium exists and is unique when an additivity condition is satisfied to demonstrate the sensitivity of the solution to the institutional detail we modify the model to allow for partnerships and show that the shapley value is no longer achieved

the informational content of implied volatility implied volatility is widely believed to be informationally superior to historical volatility because it is the markets forecast of future volatility but for s p 100 index options the most actively traded contract in the united states we find implied volatility in aggregate and across subsamples separated by maturity and strike price implied volatility has virtually no correlation with future volatility and it does not incorporate the information contained in recent observed volatility article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

measuring price risk in rating revenue coverage bs or no bs the black scholes bs option pricing model has been a cornerstone of modern financial theories since its introduction by black and scholes 1973 and its subsequent refinement by merton 1973 the model has realized widespread adoption for a number of purposes inherent in the model are a number of assumptions an important and potentially restrictive assumption is that the underlying asset price is log normally distributed among the many diverse uses of the bs model the model and underlying theory are used to derive measurements of the variance of expected harvest time prices for use in rating revenue coverage in the federal crop insurance program revenue coverage currently accounts for about 80 of the total liability insured in the program this liability frequently exceeds 100 billion and thus the accuracy of revenue premium rates is of vital importance the use of the bs model by the risk management agency rma of the usda has been the focus of recent criticisms of the program critics have argued in favor of retrospective measures of price variability that are based on historical price movements or have recommended other approaches to measuring price risk this article reports on a contracted review of revenue insurance rating methodology commissioned by rma we evaluate a number of alternative approaches to measuring expected price variability including several approaches recommended by critics of the federal program our results suggest that the bs model is preferred to recommended alternatives on the basis of numerous criteria

common persistence in conditional variances since the introduction of the autoregressive conditional heteroskedastic arch model in engle 1982 numerous applications of this modeling strategy have already appeared a common finding in many of these studies with high frequency financial or monetary data concerns the presence of an approximate unit root in the autoregressive polynomial in the univariate time series representation for the conditional second order moments of the process as in the so called integrated generalized arch igarch class of models proposed in engle and bollerslev 1986 in the igarch models shocks to the conditional variance are persistent in the sense that they remain important for forecasts of all horizons this idea is readily extended to a multivariate framework even though many time series may exhibit persistence in variance it is likely that several different variables share the same common long run component in that situation the variables are naturally defined to be co persistent in variance and the co persistent linear combination is interpretable as a long run relationship conditions for co persistence to occur in the multivariate linear garch model are presented these conditions parallel the conditions for linear co integration in the mean as developed by engle and granger 1987 the presence of co persistence has important implications for asset pricing relationships and in optimal portfolio allocation decisions an empirical example relating to the time series properties of nominal u s dollar exchange rates for the deutschemark and the british pound provides a simple illustration of the ideas

bargaining and value we present and analyze a model of noncooperative bargaining among n participants applied to situations describable as games in coalitional form this leads to a unified solution theory for such games that has as special cases the shapley value in the transferable utility tu case the nash bargaining solution in the pure bargaining case and the recently introduced maschler owen consistent value in the general nontransferable utility ntu case moreover we show that any variation in a certain class of our bargaining procedure which generates the shapley value in the tu setup must yield the consistent value in the general ntu setup

forming coalitions and the shapley ntu value a simple protocol for coalition formation is presented first an order of the players is randomly chosen then a coalition grows by sequentially incorporating new members in this order the protocol is studied in the context of non transferable utility ntu games in characteristic function form if weighted utility transfers are feasible when everybody cooperates then the expected subgame perfect equilibrium payoff allocation anticipated before any implemented game is the shapley ntu value

the asymmetric impact of oil prices interest rates and oil price uncertainty on unemployment in the us abstract in this study we investigate the presence of asymmetric interactions between oil prices oil price uncertainty interest rates and unemployment in a cointegration framework utilizing the nonlinear auto regressive distributed lag nardl approach we show the asymmetric responses of unemployment to changes in oil prices oil price uncertainty and interest rates in the long run more specifically the results of our analyses suggest that an increase in oil price results in increased unemployment while there is no significant impact of reduced oil prices on the one hand reduced oil price uncertainty leads to a decrease in unemployment whereas an increase in oil price uncertainty does not have an impact we also observe increased unemployment in response to a decrease in interest rates as the impact of increased interest rates is not significant last but not least we find that option implied oil price volatility as a measure of oil price uncertainty outperforms the conditional volatility of crude oil prices in predicting unemployment this study provides valuable implications for policymakers to design sound economic policies

forecasting volatility of the u s oil market abstract we examine the information content of the cboe crude oil volatility index ovx when forecasting realized volatility in the wti futures market additionally we study whether other market variables such as volume open interest daily returns bid ask spread and the slope of the futures curve contain predictive power beyond what is embedded in the implied volatility in out of sample forecasting we find that econometric models based on realized volatility can be improved by including implied volatility and other variables our results show that including implied volatility significantly improves daily and weekly volatility forecasts however including other market variables significantly improves daily weekly and monthly volatility forecasts

conditional heteroscedasticity in time series of stock returns evidence and forecasts this article presents new evidence about the time series behavior of stock prices daily return series exhibit significant levels of second order dependence and they cannot be modeled as linear white noise processes a reasonable return generating process is empirically shown to be a first order autoregressive process with conditionally heteroskedastic innovations in particular generalized autoregressive conditional heteroskedastic garch 1 1 processes fit to data very satisfactorily various out of sample forecasts of monthly return variances are generated and compared statistically forecasts based on the garch model are found to be superior copyright 1989 by the university of chicago

empirical of the taiwan stock index option price forecasting model applied artificial neural network this work presents a novel neural network model for forecasting option prices using past volatilities and other options market factors out of different approaches to estimating volatility in the option pricing model this study uses backpropagation neural network to forecast prices for taiwanese stock index options the ability to develop accurate forecasts of grey prediction volatility enables practitioners to establish an appropriate hedging strategy at in the money option

the predictive power of implied volatility evidence from 35 futures markets abstract using data from 35 futures options markets from eight separate exchanges we test how well the implied volatilities ivs embedded in option prices predict subsequently realized volatility rv in the underlying futures we find that for this broad array of futures options iv performs well in a relative sense for a large majority of the commodities studied the implieds outperform historical volatility hv as a predictor of the subsequently rv in the underlying futures prices over the remaining life of the option indeed in most markets examined regardless of whether it is modeled as a simple moving average or in a garch framework hv contains no economically significant predictive information beyond what is already incorporated in iv these findings add to previous research that has focused on currency and crude oil futures by extending the analysis into a very broad array of contracts and exchanges our results are consistent with the hypothesis that futures options markets in general with their minimal trading frictions are efficient

correlations in price changes and volatility across international stock markets the short run interdependence of prices and price volatility across three major international stock markets is studied daily opening and closing prices of major stock indexes for the tokyo london and new york stock markets are examined the analysis utilizes the autoregressive conditionally heteroskedastic arch family of statistical models to explore these pricing relationships evidence of price volatility spillovers from new york to tokyo london to tokyo and new york to london is observed but no price volatility spillover effects in other directions are found for the pre october 1987 period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

equilibrium in a market with sequential bargaining this paper considers a market where pairs of agents who are interested in carrying out a transaction are brought together by a stochastic process and upon meeting initiate a bargaining process over the terms of the transaction the basic bargaining problem is treated with the strategic approach the paper derives the steady state equilibrium agreements analyzes their dependence on market conditions such as the relative numbers of agents of different types and discusses their relations with the competitive equilibrium outcome and other results in the search equilibrium literature this paper considers a market that operates in the following way pairs of agents who have mutual interest in carrying out a transaction are brought together by a stochastic process when two agents meet they initiate a bargaining process over the terms of the transaction if two agents reach an agreement a transaction takes place and they leave the market of course the bargaining positions and hence the agreement reached in any particular meeting will be affected by the conditions prevailing in the market these will include the chances that each of the negotiating parties have of meeting other partners in the event that the agreement in the current negotiations is delayed also the expected length of time required to achieve an alternative transaction and the expected behavior of alternative partners the study of such a market mechanism is of interest for two reasons firstly it captures some realistic aspects of the trade in certain specific markets e g asset markets such as housing and some labor markets secondly it contributes to an understanding of the micro mechanisms of price formation and their role in shaping market outcomes in both cases the features studied are largely neglected in the traditional market equilibrium analyses the related literature includes the articles by diamond 4 5 diamond and maskin 6 mortensen 8 9 and zusman and bell 13 these articles consider markets of the type described above in which transactions are concluded at pairwise meetings of agents the major difference between our work and these articles is in the approach to the basic bargaining problem in the cited articles it is assumed that a meeting is concluded with an instantaneous agreement which divides the associated surplus in an arbitrary predetermined way when the surplus is assumed to be divided equally the division rule is in fact nash s axiomatic bargaining solution in contrast the present paper treats the basic bargaining problem with the strategic approach see rubinstein 19 which constitutes an attempt to look into the bargaining black box this approach explicitly models the time dimension of the bargaining process describes in detail the bargaining procedure and justifies the agreement as a perfect equilibrium in

the weekend effect on the distribution of stock prices abstract evidence of weekend effects on the distribution of security returns suggests that returns are generated by a process operating closer to trading time rather than calendar time in contrast accumulation of interest over the weekend follows a calendar time process since both the variance of returns and the interest rate are important parameters of the black scholes option pricing model this paper suggests that the model be stated to account for this by utilizing a trading time variance and a calendar time interest rate empirical evidence indicates that this allows the model to better explain market option prices

the effect of uncertainty on investment evidence from texas oil drilling this paper estimates the response of investment to changes in uncertainty using data on oil drilling in texas and the expected volatility of the future price of oil using a dynamic model of firms investment problem i find that i the response of drilling activity to changes in price volatility has a magnitude consistent with the optimal response prescribed by theory ii the cost of failing to respond to volatility shocks is economically significant and iii implied volatility data derived from futures options prices yields a better fit to firms investment behavior than backward looking volatility measures such as garch jel c58 d92 g13 g31 l71 q31 the real options literature beginning with marschak 1949 and arrow 1968 and developed in bernanke 1983 pindyck 1991 and dixit and pindyck 1994 explains how firms should make decisions about investments that involve sunk costs real options theory views such investments as options in that at any point in time a firm may choose to either invest immediately or delay and observe the evolution of the investment s payoff a key insight is that the option to delay has value when future states of the world with positive returns to investing and states with negative returns are both possible even holding the expected future return constant at its present level thus in the presence of irreversibility and uncertainty a naive investment timing rule proceed with an investment if its expected benefit even slightly exceeds its cost is suboptimal because it does not account for the value of continuing to hold the option instead firms should delay irreversible investments until a significant gap develops between the investments expected benefits and costs moreover as uncertainty increases real options theory tells us that the incentive to delay should grow stronger and the gap between the expected benefit and cost necessary to trigger investment should widen while real options theory therefore prescribes how firms should carry out irreversible investments in uncertain environments it is not empirically well known

asset market linkages evidence from financial commodity and real estate assets abstract we use a general markov switching model to examine the relationships between returns over three different asset classes financial assets us stocks and treasury bonds commodities oil and gold and real estate assets us case shiller index we confirm the existence of two distinct regimes a tranquil regime with periods of economic expansion and a crisis regime with periods of economic decline the tranquil regime is characterized by lower volatility and significantly positive stock returns during these periods there is also evidence of a flight from quality from gold to stocks by contrast the crisis regime is characterized by higher volatility and sharply negative stock returns along with evidence of contagion between stocks oil and real estate furthermore during these periods there is strong evidence of a flight to quality from stocks to treasury bonds

dynamic return volatility dependence and risk measure of covar in the oil market a time varying mixed copula model abstract this study investigates the risk level in the oil market measured by value at risk var and conditional var covar as well as the dynamic and asymmetric dependence between wti returns and crude oil volatility index ovx by constructing six time varying mixed copula models results show that mixed copula between t copula and the 270 degree rotated clayton copula is the optimal fitting copula to measure dynamic dependence the estimated time varying kendall coefficients indicate that wti returns and ovx present negative dependence most of the time there exists a structural change point of dependence between wti returns and ovx changes on april 17 2009 while the dependence characteristics within the subsamples are similar to that in the whole sample indicating the rationality of our time varying mixed copula models finally the tests show significant risk spillover from ovx to wti returns and also asymmetric effects for covars in response to different upside and downside extreme ovx movements

tests of international capm with time varying covariances we perform maximum likelihood estimation of a model of international asset pricing based on capm we test the restrictions imposed by capm against a more general asset pricing model the betas in our capm vary over time as the supplies of assets change and as the conditional covariances or returns on those assets change we let the covariances change over time as a function of macroeconomic data and an alternative model allows the covariances to follow a multivariate arch process we also can identify a modified capm model with measurement error we find that the estimated capm performs much better when variances are not constant over time nonetheless capm is rejected in favour of the lessrestricted model of asset pricing

the relation between implied and realized volatility abstract previous research finds the volatility implied by s p 100 index option prices to be a biased and inefficient forecast of future volatility and to contain little or no incremental information beyond that in past realized volatility in contrast we find that implied volatility outperforms past volatility in forecasting future volatility and even subsumes the information content of past volatility in some of our specifications our results differ from previous studies because we use longer time series and nonoverlapping data a regime shift around the october 1987 crash explains why implied volatility is more biased in previous work

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

bargaining with asymmetric threat points abstract the 2 person version of hart and mas colell econometrica 64 1996 357 is studied reinterpreted as a bargaining game with asymmetric threat points multiplicity of stationary subgame perfect equilibria is necessary for multiplicity of subgame perfect equilibria and depends on risk aversion and the point constructed with the payoff that responders get if breakdown occurs

performance pricing in bank debt contracts abstract performance pricing links bank debt interest rate spreads to a borrower s performance via two options interest decreasing performance pricing reduces spreads if credit quality improves it is more common when prepayment is more likely or costly and when adverse selection costs are higher and is less common when multiple performance measures better predict credit quality interest increasing performance pricing increases spreads if credit quality deteriorates it is more common when lenders reduce interest rates to add this provision when downgrades are more likely and when moral hazard costs are higher we find lower spreads for contracts with interest increasing performance pricing

reinterpreting the kernel the reduced game relevant for the consistency of the prekernel is used to reinterpret this solution concept in a way that makes it independent of interpersonal utility comparisons based on this reinterpretation a non cooperative model is presented that yields in stationary equilibria the prekernel kernel for the class of monotonic transferable utility games next we apply the same non cooperative model to more general coalitional games for pure bargaining problems the model yields the nash solution for general non transferable utility games a natural extension of the prekernel arises thus the prekernel is obtained as the set of payoffs where the relevant bargaining range between every pair of players is split in half journal of economic literatureclassification numbers c71 c72 c78

ceo optimism and forced turnover abstract we show theoretically that optimism can lead a risk averse chief executive officer ceo to choose the first best investment level that maximizes shareholder value optimism below above the interior optimum leads the ceo to underinvest overinvest hence if boards of directors act in the interests of shareholders ceos with relatively low or high optimism face a higher probability of forced turnover than moderately optimistic ceos face using a large sample of turnovers we find strong empirical support for this prediction the results are consistent with the view that there is an interior optimum level of managerial optimism that maximizes firm value

the nash program non convex bargaining problems we define and characterize an extension of the nash bargaining solution to non convex bargaining problems and in the spirit of the nash program of implementing cooperative solutions non cooperatively we show that this solution is supported by rubinstein s econometrica 50 1982 97 110 model of bargaining and its corresponding set of stationary subgame perfect equilibria

does vix or volume improve garch volatility forecasts abstractthis article considers whether the inclusion of two additional variables can improve volatility forecasts over a standard garch based model we consider three alternative ways of incorporating the volatility index vix and trading volume as exogenous variables within a selection of garch models we are particularly interested in whether these variables have additional incremental forecast power over and above the baseline garch specification our results suggest that both the vix and volume do provide some additional forecast power and this is generally improved when considering both of these series jointly in the model however while the results may be statistically significant the gain is marginal and the coefficient values small moreover in a horse race exercise vix does not outperform the garch approach in answering the question of whether vix produces better forecasts than the garch model then the answer is no but the informational content of vix cannot be ignored and should be incorp

predicting volatility in the foreign exchange market measures of volatility implied in option prices are widely believed to be the best available volatility forecasts in this article we examine the information content and predictive power of implied standard deviations isds derived from chicago mercantile exchange options on foreign currency futures the article finds that statistical time series models even when given the advantage of ex post parameter estimates are outperformed by isds isds however also appear to be biased volatility forecasts using simulations to investigate the robustness of these results the article finds that measurement errors and statistical problems can substantially distort inferences even accounting for these however isds appear to be too variable relative to future volatility it is widely believed that the volatility implied in option prices is the market s best estimate of future volatility after all if it were not one could devise a trading strategy that could generate profits by identifying mispriced options the purpose of this article is to investigate the information content and predictive power of volatility implied in options on foreign currencies the paper focuses on options on currency futures traded on the chicago mercantile exchange cme because of the depth and liquidity of cme futures and options traded side by side in the same market implied standard deviations isds allow for clean tests of the predictive power of implied volatilities early studies of the information content of isds have generally found that these contain substantial information for future volatility latane and rendleman 1976 chiras and manaster 1978 and beckers 1981 for example regress future volatility on the weighted implied volatility across a broad sample of chicago board options exchange cboe stocks and find that options contain volatility forecasts that are more accurate than historical measures 1 these studies performed shortly after the 1973 beginning of the cboe option market could only use a relatively short time span and therefore focused on cross sections rather than time series predictions

overconfidence ceo selection and corporate governance we develop a model that shows that an overconfident manager who sometimes makes value destroying investments has a higher likelihood than a rational manager of being deliberately promoted to ceo under value maximizing corporate governance moreover a risk averse ceo s overconfidence enhances firm value up to a point but the effect is nonmonotonic and differs from that of lower risk aversion overconfident ceos also underinvest in information production the board fires both excessively diffident and excessively overconfident ceos finally sarbanes oxley is predicted to improve the precision of information provided to investors but to reduce project investment

does anonymity matter in electronic limit order markets we develop a model in which limit order traders possess volatility information we show that in this case the size of the bid ask spread is informative about future volatility moreover if volatility information is in part private we establish that i the size of the bid ask spread and ii its informativeness about future volatility should change in the same direction when limit order traders identifiers stop being disclosed we test these predictions using data from the paris bourse as expected we find that the average quoted spread and its informativeness are significantly smaller when limit order traders identifiers are concealed these findings suggest that the limit order book is a channel for volatility information

beyond nash bargaining theory the nash set abstract we extend nash s bargaining theory to non convex and coalitional problems this paper investigates the implications of nash like axioms for bilateral problems and the properties of consistency and converse consistency over multilateral settings the result is a characterization of the nash set of ntu games defined as the solution concept where each pair of players is splitting the gains from trade at a point where the nash product of their utilities subject to efficiency is critical the intersection of the nash set and the core is also characterized with the same axioms for the class of games where the core is non empty journal of economic literatureclassification numbers c71 c78

standard deviations implied in option prices as predictors of future stock price variability abstract standard deviations implied in option prices have recently been introduced as being better than average predictors of future stock price variability this article specifically studies the predictive ability of implicit standard deviations taking into account the dividend problem and the problem of optimal weighting schemes of the standard deviations when there are several options on the same stock transaction data information was used to study the importance of non simultaneities in observing stock and option prices

an econometric model of the world market for dry cargo freight and shipping 1989 an econometric model of the world market for dry cargo freight and shipping applied economics vol 21 no 3 pp 339 356

handbook of game theory with economic applications volume 3 this is the second of three volumes surveying the state of the art in game theory and its applications to many and varied fields in particular to economics the chapters in the present volume are contributed by outstanding authorities and provide comprehensive coverage and precise statements of the main results in each area the applications include empirical evidence the following topics are covered communication and correlated equilibria coalitional games and coalition structures utility and subjective probability common knowledge bargaining zero sum games differential games and applications of game theory to signalling moral hazard search evolutionary biology international relations voting procedures social choice public economics politics and cost allocation this handbook will be of interest to scholars in economics political science psychology mathematics and biology handbook of game theory with economic applications vol i

real option valuation of free destination in long term liquefied natural gas supplies this paper presents a real option model for the valuation of destination flexibility in long term lng supplies stochastic price dynamics in the different markets is modelled through geometric brownian motion processes mean reversion is considered as well as correlation between markets but instead of the usual correlation in return shocks a price convergence term is introduced representing the arbitrage streams between markets model parameters are estimated from market data on lng prices by maximum log likelihood the goodness of the fit for the proposed model is tested as well as for two alternative models confidence intervals for the parameters are given results for the model are calculated by monte carlo simulation frequency distributions for the main results are plotted the effect of the main parameters of the model is studied i e price volatilities price convergence initial prices in the markets mean reversion extra transportation costs number of alternative markets the value of destination flexibility is found to be an important share of the value of lng

bargaining and bargaining sets abstract we argue that in exchange economies various versions of the bargaining set cannot be implemented in nash equilibrium we then propose an extensive form mechanism that exactly implements the aumann davis maschler bargaining set in subgame perfect equilibrium the mechanism corresponds closely to the description of the bargaining set and respects feasibility in and out of equilibrium journal of economic literature classification numbers c71 c72 c78 d51

overconfidence compensation contracts and capital budgeting a risk averse manager s overconfidence makes him less conservative as a result it is cheaper for firms to motivate him to pursue valuable risky projects when compensation endogenously adjusts to reflect outside opportunities moderate levels of overconfidence lead firms to offer the manager flatter compensation contracts that make him better off overconfident managers are also more attractive to firms than their rational counterparts because overconfidence commits them to exert effort to learn about projects still too much overconfidence is detrimental to the manager since it leads him to accept highly convex compensation contracts that expose him to excessive risk

are the gains from international portfolio diversification exaggerated the influence of downside risk in bear markets the fundamental rationale for international portfolio diversification is that it expands the opportunities for gains from portfolio diversification beyond those that are available through domestic securities however if international stock market correlations are higher than normal in bear markets then international diversification will fail to yield the promised gains just when they are needed most we evaluate the extent to which observed correlations to monthly returns in bear calm and bull markets are captured by three popular bivariate distributions 1 the normal 2 the restricted garch 1 1 of j p morgan s riskmetrics and 3 the student t with four degrees of freedom observed correlations during calm and bull markets are unexceptional compared to these models in contrast observed correlations during bear markets are significantly higher than predicted higher than normal correlations during extreme market downturns result in monthly returns to equal weighted portfolios of domestic and international stocks that are on average more than two percent lower than those predicted by the normal distribution if the extent of non normality during bear markets persists over time then a us investor allocating assets into foreign markets might want to allocate more assets into foreign markets with near normal correlation profiles and avoid markets with higher than normal bear market co movements 2002 published by elsevier science ltd

noncooperative foundations of the nucleolus in majority games abstract this paper studies coalition formation payoff division and expected payoffs in a divide the dollar by majority rule game with random proposers a power index is called self confirming if it can be obtained as an equilibrium of the game using the index itself as probability vector unlike the shapley value and other commonly used power indices the nucleolus has this property the proof uses a weak version of kohlberg s siam j appl math 20 1971 62 balancedness result reinterpreting the balancing weights as probabilities in a mixed strategy equilibrium

are ceos really paid like bureaucrats a common view is that there is little correlation between firm performance and ceo pay using a new fifteen year panel data set of ceos in the largest publicly traded u s companies we document a strong relationship between firm performance and ceo compensation this relationship is generated almost entirely by changes in the value of ceo holdings of stock and stock options in addition we show that both the level of ceo compensation and the sensitivity of compensation to firm performance have risen dramatically since 1980 largely because of increases in stock option grants

volatility equicorrelation a cross market perspective this paper contains the first empirical application of the dynamic equicorrelation deco model to a cross market dataset composed of equities bonds foreign exchange rates and commodities during 1983 2013 the originality of our approach consists of examining the volatility equicorrelations by updating the concept of volatility surprise we document that the average volatility equicorrelation across markets is around 15 while being time varying with regime shifts before after september 2005 and with a low mean reversion level

value based trading of real assets in shipping under stochastic freight rates the article uses a real options valuation model with stochastic freight rates to investigate market efficiency and the economics of switching between the dry bulk and the tanker markets in international shipping a dry bulk carrier is replaced with a tanker when the expected net present value of such a switch is optimal from a real options based decision rule depending on the development of the markets a reversal may take place later the cost and demand parameters upon which the decisions to switch are made including the stochastic characteristics of freight rates are estimated from an empirical analysis that is updated every week throughout a 12 year time period from 1993 to 2005 the second hand market for bulk ships seems to have been efficient most of these years in the sense that market switching usually did not pay off with one major exception it seemed profitable in expectation to leave the dry bulk market and enter the tanker market over a significant period of time shortly after the millenn

the predictive power of the implied volatility of options traded otc and on exchanges abstract this paper investigates the efficiency of stock index options traded over the counter otc and on the exchanges in hong kong and japan our findings suggest that implied volatility is superior to either historical volatility or a garch type volatility forecast in predicting future volatility in both the otc and exchange markets this paper is also one of the first to compare the predictive power of the implied volatility of stock index options traded otc to that of exchange traded stock index options our evidence suggests that the otc market is more efficient than the exchanges in japan but that the opposite is true in hong kong

dynamic risk spillovers between gold oil prices and conventional sustainability and islamic equity aggregates and sectors with portfolio implications this paper investigates the time varying equicorrelations and risk spillovers between crude oil gold and the dow jones conventional sustainability and islamic stock index aggregates and 10 associated disaggregated islamic sector stock indexes basic materials consumer services consumer goods energy financials health care technology industrials telecommunications and utilities using the multivariate deco fiaparch model and the spillover index of diebold and yilmaz 2012 we also conduct a risk management analysis at the sector level for commodity islamic stock sector index portfolios using different risk exposure measures for comparison purposes we add the aggregate conventional dow jones global index and the dow jones sustainability world index the results show evidence of time varying risk spillovers between these markets moreover there are increases in the correlations among the markets in the aftermath of the 2008 2009 gfc further the oil gold energy financial technology and telecommunications sectors are net receivers of risk spillovers while the sustainability and conventional aggregate djim indexes as well as the remaining islamic stock sectors are net contributors of risk spillovers finally we provide evidence that gold offers better portfolio diversification benefits and downside risk reductions than oil

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

relations among the central rules in bankruptcy problems a strategic perspective abstract we consider the bankruptcy problem in which the liquidation value of a bankrupt firm has to be allocated among its creditors by applying the nash program to justify a bilaterally consistent rule bilateral negotiations are traditionally resolved by applying the rule dagan et al 1997 chang and hu 2008 we introduce games in which bilateral negotiations are resolved by non cooperative bargaining procedures and show that these games strategically justify the constrained equal awards rule the constrained equal losses rule the proportional rule and the talmud rule by focusing on the differences in the non cooperative bargaining procedures that capture the spirit of the rules our results unveil novel connections among them

overoptimism and the performance of entrepreneurial firms recent theoretical and empirical research on cognitive bias in decision making suggests that overoptimism critically influences entrepreneurs decisions to establish and sustain new ventures we investigate whether such cognitive bias influences entrepreneurial venture performance using data on commercialization efforts for university inventions in contrast to prior studies our results suggest that entrepreneurial overoptimism does not appear to be the determining factor in the decision to found a firm we do find that entrepreneurs continue unsuccessful development efforts for longer periods of time than do established firms which is consistent with entrepreneurial overoptimism in the development of technologies with uncertain market prospects this latter finding is also consistent with rationality based models of decision making behavior however we find that the economic returns associated with many of the technologies in our sample are realized after the start up has been acquired by an established firm suggesting that start ups may serve as a transitional organizational form in the market for technology commercialization

the day of the week effects on the volatility the role of the asymmetry in this paper we propose to evaluate whether asymmetry influences the day of the week effects on volatility we also investigate empirically the impact of the day of the week effect in major international stock markets using garch family models from a forecast framework indeed the existence of calendar effects might be interesting only if their incorporation in a model results in better volatility forecasts

managerial biases and debt contract design the case of syndicated loans we examine whether managerial overconfidence impacts the use of performance pricing provisions in loan contracts performance sensitive debt psd managers with biased views may issue psd because

estimating the value of employee stock option portfolios and their sensitivities to price and volatility the costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives accounting choice financing decisions and the valuation of equity we present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock return volatility that is easily implemented using data from only the current year s proxy statement or annual report this method can be applied to either executive stock option portfolios or to firm wide option plans in broad samples of actual and simulated ceo option portfolios we show that these proxies capture more than 99 of the variation in option portfolio value and sensitivities sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics and is most severe in samples of ceos with a large proportion of out of the money options however the proxies explanatory power remains above 95 in all subsamples

dynamic correlation and equicorrelation analysis of global financial turmoil evidence from emerging east asian stock markets abstractthis study investigates the dynamic conditional correlations dccs between eight emerging east asian stock markets and the us stock market and analyses the dynamic equicorrelation among these nine stock markets we find a significant increase in the conditional correlations and equicorrelation in the first phase of the global financial crisis we refer to this finding as contagion from the us stock market to the emerging east asian markets we also find an additional significant process of increasing correlations and equicorrelation herding in the second phase of the global financial crisis further we employ two new models namely dccx mgarch a dcc multivariate garch model with exogenous variables and decox mgarch a dynamic equicorrelation multivariate garch model with exogenous variables to identify the channels of contagion we find that an increase in the vix index increases the conditional correlations and equicorrelation while increases in ted spreads decrease the conditional corre

the creation and resolution of market uncertainty the impact of information releases on implied volatility we model and examine the impact of information releases on market uncertainty as mea sured by the implied standard deviation isd from option markets distinguishing between scheduled and unscheduled announcements we hypothesize that since the timing although not the content of scheduled announcements is known a priori the pre release isd will impound the anticipated impact of important releases on price volatility and that the isd will normally decline post release as this uncertainty is resolved conversely we hypothesize that the unexpected high volatility caused by major unscheduled releases will cause market participants to adjust upward their estimates of likely volatility over the remaining life of the option resulting in an increase in the isd our evidence supports both hypotheses the isds that we consider are from the t bond eurodollar and deutschemark options markets we examine scheduled macroeconomic news releases such as the employment report and the ppi we also find that the observed tendency for the isd to fall on fridays and rise on mondays is due to the weekday pattern of scheduled news releases

modeling country default risk as a latent variable a multiple indicators multiple causes mimic approach we study the determinants of country default risk by applying a multiple indicators multiple causes mimic model this accounts for the fact that country default risk is an unobservable variable whereas existing regression based approaches typically use only one of several possible country default risk indicators as the dependent variable the mimic model enables us to consider several indicators at once the simultaneous consideration of sovereign yield spreads and standard and poor s p ratings may help to improve the identification of the latent country default risk our results confirm most of the literature s main findings regarding important determinants of country default risk refute others and provide new evidence to controversial questions

the dynamics of time varying volatilities in different size second hand ship prices of the dry cargo sector this paper examines the dynamics of conditional volatilities in the world dry bulk market for second hand ships in particular it models and compares volatility estimates between different size vessels using monthly data the recently developed class of autoregressive conditional heteroskedasticity arch models are utilized for this purpose it is found that broadly speaking prices of small vessels are less volatile than larger ones and the nature of these volatilities vary across sizes panamax volatilities are mostly driven by old news while new shocks are more important for handysize and capesize volatilities furthermore conditional volatilities of handysize and panamax prices are positively related to interest rates and capesize to time charters

using implied volatility on options to measure the relation between asset returns and variability abstract prior research has documented that volatility in financial asset markets is most directly related to trading rather than calendar days and that there is an inverse asymmetric relation between volatility and returns in both stocks and long term bonds we examine these relations in 37 futures options markets representing a wide variety of asset types using futures prices and implied volatilities from this extensive array of markets we confirm that in all of them save one market volatility is more directly related to trading days however the nature of the association between implied volatility and underlying asset returns varies greatly across asset categories and across exchanges thus we show that findings from equity markets apparently are not generalizable to other asset classes

market reforms and commodity price volatility the case of east african coffee market the goal of this paper is to examine the impact of commodity market reforms on producer price volatility using evidence from the east african coffee market the results based on time varying volatility models and key summary statistics show that coffee market reforms in the east african community eac are associated with changes in producer price volatility and volatility persistence at both country and regional levels however reforms were not the only cause of changes in price volatility the study further shows that reforms had different effects on prices volatilities of arabica and robusta varieties of coffee grown in individual eac countries these findings have wider implication for commodity market reforms and producer price stabilisation policies in the eac and coffee producing countries in sub sahara africa

why put all your eggs in one basket a competition based view of how technological uncertainty affects a firm s technological specialization conventional wisdom suggests that when a firm faces technological uncertainty it responds by becoming less technologically specialized so as to remain adaptable to subsequent resolution of this uncertainty we adopt a competition based view of technological uncertainty to identify an opposite effect in competitive settings the firm may instead become more specialized when faced with greater technological uncertainty so as to focus on advancing its technologies against competition and influence the resolution of uncertainty in its favor over rivals we propose that this effect is accentuated when the firm expects that it cannot easily adapt to rivals technologies subsequently specifically when rivals are a greater deterrent through being litigious or innovative using u s government funding for fuel cell research as a policy shock with stock option implied volatilities to measure expected uncertainty we find empirical support for our propositions among firms active in research and development in the u s communications equipment industry through these findings we demonstrate that a competition based view of uncertainty identifies an alternative path for the firm s resource accumulation under uncertainty and we stress that the resolution of uncertainty can be something the firm attempts to influence rather than adapt to

a revisit to the dependence structure between the stock and foreign exchange markets a dependence switching copula approach abstract this paper develops a dependence switching copula model to examine dependence and tail dependence for four different market statuses namely rising stocks appreciating currency falling stocks depreciating currency rising stocks depreciating currency and falling stocks appreciating currency the model is then applied to daily stock returns and exchange rate changes for six major industrial countries over the 1990 2010 period the dependence and tail dependence among the above four market statuses are asymmetric for most countries in the negative correlation regime but symmetric in the positive correlation regime these results enrich the findings in the existing literature and suggest that analyzing cross market linkages within a time invariant copula framework may not be appropriate

long term asset tail risks in developed and emerging markets a power law typically governs the tail decay of financial returns but the constancy of the so called tail index which dictates the tail decay remains relatively unexplored we study the finite sample properties of some recently proposed endogenous tests for structural change in the tail index given that the finite sample critical values strongly depend on the tail parameters of the return distribution we propose a bootstrap based version of the structural change test our empirical application spans developed and emerging financial asset returns somewhat surprisingly emerging stock market tails are not more inclined to structural change than their developed counterparts emerging currency tails on the contrary do exhibit structural shifts in contrast to developed currencies our results suggest that extreme value theory evt applications in hedging tail risks can assume stationary tail behavior over long time spans provided one considers portfolios that solely consist of stocks or bonds

the bilateral consistent prekernel for ntu games abstract a bilateral consistency principle is used to generalize the nash bargaining solution to a new ntu solution concept it coincides with the prekernel for tu games and can be formulated in terms of a generalized concept of excess journal of economic literature classification number c71

lloyd shapley s matching and game theory this is a survey of lloyd shapley s contributions to matching theory and game theory in general starting with the work that inspired the swedish academy to award the 2012 nobel memorial prize in economic sciences to lloyd shapley and alvin roth

the information frown in option prices in the s p 500 options market the information content of implied volatilities differs by strike in a frown pattern that is a rough mirror image of the implied volatilitysmile implied volatilities calculated from moderatelyhigh strike price options are both unbiased and efficient predictors of future volatility implied volatilities calculated from low and at the money strikes are biased and less efficient this bias cannot be explained bymarket imperfections but is consistent with the hedging pressure argument of bollen and whaley j finan 59 2004 711 and ederington and guan j derivat 10 2002 winter 9 we also find that a serious estimation bias results when the relations are estimated using panel data 2004 elsevier b v all rights reserved

performance drivers of shipping loans an empirical investigation credit risk is a major issue for lenders and borrowers threatening the reliability of global logistics operations enhanced mechanisms of credit risk analysis are needed to safeguard banks and the flow of goods in supply chains little emphasis has been given to the contextual examination of such factors either in terms of market conditions or the particular characteristics of different industries this paper investigates the varying importance of a number of factors connected with the performance of corporate bank loans during times of financial turbulence in the shipping industry little extant literature exists on default risk drivers for loans made to shipping companies for new build vessels or second hand ship purchases a binary logit model is used to examine the criteria for assessing the security of shipping loans issued by banks thirty shipping loans made during the period 2005 2009 are examined results suggest that financial factors non financial factors shipowners experience and employability and market risk indicators are the best criteria for evaluating the performance of shipping loans during turbulent market conditions and periods when financing options are restricted the paper makes a specific contribution to the literature on risk management with regard to credit risk analysis by highlighting shipping specific factors and their importance for risk measurement the results are of interest to banks seeking to accurately assess the credibility of shipping loans shipowners who can identify credit risk factors on which to focus and supply chain participants where unfulfilled bank financing can cause disruptions to their logistics operations

heteroskedasticity in stock return data volume versus garch effects this paper provides empirical support for the notion that autoregressive conditional heterqskedasticity arch in daily stock return data reflects time dependence in the process generating information flow to the market daily trading volume used as a proxy for information arrival time is shown to have significant explanatory power regarding the variance of daily returns which is an implication of the assumption that daily returns are subordinated to intraday equilibrium returns furthermore arch effects tend to disappear when volume is included in the variance equation the autoregressive conditiqnal heteroskedasticity arch process of engle 1982 has been shown to provide a good fit for many financial return time series 1 arch imposes an autoregressive structure on conditional variance allqwing volatility shocks to persist over time this persistence captures the propensity of returns of like magnitude to clu ter in time and can explain the well documented nonnormality and nonstability of empirical asset return distributions see especially fama 1965 an appealing explanation for the presence of arch is based upon the hypothesis that daily returns are generated by a maiture of distributions in which the rate of daily information arrival is the stochastic mixing variable as suggested by diebold 1986 gallant hsieh and tauchen 1988 and stock 1987 1988 arch might capture the time series properties e g serial correlation of this mixing variable hqwever this linkage has not been broadly documented with the datia the objective of this study is to examine the validity of this explanation for daily stock returns the empirical strategy exploits the implication of the mixture model that the variance of daily price increments is heteroskedastic specifically positively related to the rate of daily information arrival using daily trading volume as a proxy for the mixing variable we show that for a sample of 20 common stocks arch effects vanish when volume is included as an explanatory variable in the conditional variance equation

economic linkages across commodity futures hedging and trading implications we investigate cross market trading dynamics in futures contracts written on seemingly unrelated commodities that are consumed by a common industry on the tokyo commodity exchange we find such evidence in natural rubber nr palladium pa and gasoline ga futures markets the automobile industry is responsible for more than 50 of global demand for each of these commodities var estimation reveals short run cross market interaction between nr and ga and from nr to pa cross market influence exerted by pa is felt in longer dynamics with pa volatility volume affecting nr ga volume volatility our findings are robust to lag specification volatility measure and consistent with full bekk garch estimation results further analysis which benchmarks against silver futures market tocom index and topix transportation index confirms that our results are driven by a common industry exposure and not a commodity market factor a simple trading rule that incorporates short run ga and long run pa dynamics to predict nr return yields positive economic profit our study offers new insights into how commodity and equity markets relate at an industry level and implications for multi commodity hedging

the forecasting accuracy of implied volatility from ecx carbon options abstract this study analyzes the forecasting accuracy of the implied volatility of options on futures contracts for the delivery of co 2 emission allowances carbon options traded on the european climate exchange we demonstrate that option implied volatility is highly informative about the variance of returns realized over the remaining life of the options it is also directionally accurate in predicting future volatility changes however we also find that implied volatility of carbon options is biased especially for periods of time which do not coincide with the remaining life of the option this suggests that the market has yet to fully mature