dynamic jump intensities and risk premiums evidence from s p500 returns and options we build a new class of discrete time models that are relatively easy to estimate using returns and or options the distribution of returns is driven by two factors dynamic volatility and dynamic jump intensity each factor has its own risk premium the models significantly outperform standard models without jumps when estimated on s p500 returns we find very strong support for time varying jump intensities compared to the risk premium on dynamic volatility the risk premium on the dynamic jump intensity has a much larger impact on option prices we confirm these findings using joint estimation on returns and large option samples

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

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

option valuation with systematic stochastic volatility we use an extension of the equilibrium framework of rubinstein 1976 and brennan 1979 to derive an option valuation formula when the stock return volatility is both stochastic and systematic our formula incorporates a stochastic volatility process as well as a stochastic interest rate process in the valuation of options if the mean volatility and covariance processes for the stock return and the consumption growth are predictable our option valuation formula can be written in preference free form further many popular option valuation formulae in the literature can be written as special cases of our general formula in this paper we investigate the valuation of individual stock options when the volatility of the underlying stock return is stochastic and has a systematic component which is related to the stochastic volatility of the consumption growth or the market return such an investigation is timely and of significant interest because there is now a considerable amount of evidence that the volatility of stock prices is not only stochastic but that it is also highly correlated with the volatility of the market as a whole for example see black 1975 conrad kaul and gultekin 1991 jarrow and rosenfeld 1984 jorion 1988 and ng engle and rothschild 1992 furthermore empirical work by black and scholes 1972 gultekin rogalski and tinic 1982 and whaley 1982 has shown that the empirical biases inherent in the black scholes option prices are different for options on high and low risk stocks because low risk stocks are mainly large firm stocks with stochastic return volatilities that are highly correlated with the return volatility of the market and high risk stocks are mainly small firm stocks with a lessimportant systematic volatility component incorporating systematic volatility effects in option valuation models has the potential to reduce the empirical biases exhibited by prices computed from the black scholes formula we use equilibrium arguments that extend the consumption based representative agent framework of rubinstein 1976 brennan 1979 and stapleton and subrahmanyam 1984 to allow individual asset returns and the consumption growth to exhibit stochastic volatility in particular we permit the volatility of individual asset returns to consist of a systematic component that is related to the consumption or market volatility in addi

strike coordination and dismissal in uniform wage settings abstract we study a gift exchange game with 12 employees and one employer when the employer can offer individually differentiated wages in a setting without collective action we observe high levels of wages effort choices and total earnings when the employer is restricted to offering a uniform wage trust and reciprocity drop dramatically due to widespread shirking the stepwise introduction of two collective action mechanisms strike and coordination increases the employees share of the total earnings but does not mitigate the free riding problem adding employment risk to the collective action setup drives up wages reduces free riding and leads to higher total earnings however this increase in productivity is not sufficient to achieve the high levels of wages efforts and earnings that we observe with individually differentiated wages

bond pricing and the term structure of interest rates a new methodology for contingent claims valuation this paper presents a unifying theory for valuing contingent claims under a stochastic term structure of interest rates the methodology based on the equivalent martingale measure technique takes as given an initial forward rate curve and a family of potential stochastic processee for its subsequent movements a no arbitrage condition restricts this family of processes yielding valuation formulae for interest rate sensitive contingent claims which do not explicitly depend on the market prices of risk examples are provided to illustrate the key results in relation to the term structure of interest rates arbitrage pricing theory has two purposes the first is to price all zero coupon default free bonds of varying maturities from a finite number of economic fundamentals called state variables the second is to price all interest rate sensitive contingent claims taking as given the prices of the zero coupon bonds this paper presents a general theory and a unifying framework for understanding arbitrage pricing theory in this context of which all existing arbitrage pricing models are special cases in particular vasicek 1977 brennan and schwartz 1979 langetieg 1980 ball and torous 1983 ho and lee 1986 schaefer and schwartz 1987 and artzner and delbaen 1988 the primary contribution of this paper however is a new methodology for solving the second problem i e the pricing of interest rate sensitive contingent claims given the prices of all zero coupon bonds the methodology is new because i it imposes its stochastic structure directly on the evolution of the forward rate curve ii it does not require an inversion of the term structure to eliminate the market prices of risk from contingent claim values and iii it has a stochastic spot rate process with multiple stochastic factors influencing the term structure the model can be used to consistently price and hedge all contingent claims american or european on the term structure and it is derived from necessary and more importantly sufficient conditions for the absence of arbitrage the arbitrage pricing models of vasicek 1977 brennan and schwartz 1979 langetieg 1980 and artzner and delbaen 1988 all require an iformerly titled bond pricing and the term structure of interest rates a new methodology

the dispersion of employees wage increases and firm performance previous studies examining intra firm wage dispersion and firm performance have focused on wage levels the authors of this study argue that for purposes of comparing wage dispersion s positive inc

partial gift exchange in an experimental labor market impact of subject population differences productivity differences and effort requests on behavior we report a gift exchange experiment firms make wage offers workers respond by determining an effort level higher effort is more costly to workers and firms have no mechanism for punishing or rewarding workers consistent with the gift exchange hypothesis workers provide more effort at higher wages but undergraduates provide substantially less effort than mbas evidence suggests this results from differences in prior work experience firms nonbinding effort requests are at least partially honored resulting in increased overall effort for undergraduates although higher wages are relatively more costly for lower productivity firms workers do not provide them with more effort

social security and the retirement decision the effect of social security and private pensions on individual retirement decisions is modeled relaxing in turn three commonly maintained assumptions perfect capital markets actuarial fairness and certain lifetimes which together imply that there is no effect in each case raising the contribution level can cause systematic changes of either sign in general in individual retirement decisions for social security the effects associated with forced saving and deviations from actuarial fairness probably tend to advance retirement but those effects that arise solely from the insurance aspect of social security and private pensions are ambiguous in sign owing to the presence of a substitution effect that tends to delay retirement because the insurance benefits can be fully realized only by working longer

pricing options under generalized garch and stochastic volatility processes in this paper we develop an efficient lattice algorithm to price european and american options under discrete time garch processes we show that this algorithm is easily extended to price options under generalized garch processes with many of the existing stochastic volatility bivariate diffusion models appearing as limiting cases we establish one unifying algorithm that can price options under almost all existing garch specifications as well as under a large family of bivariate diffusions in which volatility follows its own perhaps correlated process through an equilibrium argument duan 1995 shows that options can be priced when the dynamics for the price of the underlying instrument follows a general autoregressive conditionally heteroskedastic garch process the theory of pricing under such processes is now well understood however the design of efficient numerical procedures for pricing them is lacking most applications resort to large sample simulation methods with a variety of variance reduction techniques the complexity of pricing arises from the massive path dependence inherent in garch models this path dependence causes typical lattice based procedures to grow exponentially in the number of time increments the lack of efficient numerical schemes hinders empirical tests among the wide array of competing garch models most tests of garch models limit themselves to the use of high frequency data on spot assets with little attention placed on the information content of options 1

wage dispersion and productive efficiency evidence for sweden the swedish record of enormous compression of relative wages under centralized solidarity bargaining followed by substantial decompression of wages after central bargaining broke down supplies observations well suited to empirical evaluation of arguments about the response of productive efficiency to shifts in wage distribution we obtain no results supporting fairness morale and cohesiveness theories implying that wage leveling within workplaces and industries may enhance productivity reduction of interindustry wage differentials evidently did however contribute positively to aggregate output and productivity growth most likely for the structural reasons first emphasized by swedish trade union economists almost a half century ago

fairness spillovers the case of taxation abstract it is standardly assumed that individuals react to perceived unfairness or norm violations in precisely the same area or relationship where the original offense has occurred however grievances over being exposed to injustice may have even broader consequences and also spill over to other contexts causing non compliant behavior there we present evidence that such fairness spillovers can incur large economic costs a belief that there is unfairness in taxation in the sense that the rich do not pay enough taxes is associated with a twenty percent higher level of paid absenteeism from work

pricing claims under garch level dependent interest rate processes this article considers the pricing of interest rate sensitive claims when the underlying interest rate is driven by a two state variable garch process analytical solutions are established for the case when the innovations in the short rate are normal and or chi squared random variables and the volatility of rates take on a special garch form garch models that nest level dependent interest rate models including the cox ingersoll and ross model are also considered algorithms are provided that permit the efficient pricing of american style interest rate claims under a rather broad array of garch level dependent processes

pricing hang seng index options around the asian financial crisis a garch approach abstract this paper investigates how well the hang seng index options the most important class of option contracts traded in hong kong are priced using the garch approach we calibrated the garch parameters using the call and put option data and used them to price options in the subsequent weeks we found the garch model performs very well in comparison with the black scholes model even after allowing for a smile smirk adjustment its superior performance was also evident both before and during the recent asian financial turmoil

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

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

effort and comparison income experimental and survey evidence the authors test the hypothesis that individual effort on the job depends both on one s own income and on the individual s position in the relevant income distribution combining experimental evidence from a gift exchange game with multi country issp survey data they analyze the extent to which relative income affects an individual s effort finding that an individual s rank in the income distribution more strongly determines effort than does others average income which suggests that comparisons are more ordinal than cardinal their experiment also reveals that comparisons over time affect effort individuals who received higher income offers or enjoyed higher income rank in the past exerted lower levels of effort for a given current income and rank

choosing the joneses endogenous goals and reference standards a growing economic literature stresses the importance of relative comparisons e g for savings and consumption or happiness in this literature it is usually assumed that reference standards against which people compare themselves are exogenously given in contrast findings from social psychology suggest that people play an active role in determining their reference standards we introduce a social comparison model where people choose their reference standards to serve motives of self improvement and self enhancement the model predicts that reference standards increase in individuals abilities and that people thus tend to compare themselves to similar others the results of a questionnaire study confirm the prediction of the model

wage transparency and performance a real effort experiment abstract without transparency about peer wages in a real effort experiment a change of wages does not affect performance with transparency however higher paid workers tend to work more accurately and lower paid workers shirk more under piece rates

savings and pensions some uk evidence the sort of problem we shall be interested in is the following how much does a small change in a mature pay as you go pension scheme change aggregate current consumption in the context of a community of workers and pensioners with a variable retirement date and a pension scheme where the government taxes workers to pay pensions two sorts of effects have been posited first changes in pensions re distribute current disposable income this may lead to changes in aggregate consumption the redistribution effect secondly future pension rights constitute a form of wealth and unanticipated changes in the size or composition of wealth holdings may affect current consumption plans wealth effects see gultekin and logue i979 for a survey and references looking at the redistribution effect we observe that if pensioners have a higher short run marginal propensity to consurme than workers and the same long run marginal propensity to consume then an increase in pensions will ceteris paribus raise aggregate consumption initially but cause it to fall in the medium run the long run elasticity will be zero turning to wealth effects we distinguish two principal elements firstly an unanticipated increase in pensions in a pay as you go scheme increases the lifetime income of pensioners and workers close to retirement for workers who intend retiring at pensionable age this will lead to an increase in current consumption so long as it is a normal good this income effect will be less marked for workers at the beginning of their working life since the net income effect may even be negative for many workers as time goes by the aggregate net income effect consequent on a rise in pensions is diminished so that we would expect to see an initial rise in consumption followed by a very slow decline in incremental consumption the long run elasticity of mean consumption with respect to a rise in pensions would be zero note that imperfections in the capital market are unlikely to modify these conclusions since those who wish to increase their consumption are likely to have savings that can be reduced whilst those for whom borrowing constraints are binding i e younger workers are unlikely to wish to increase current consumption by much anyway there are two important caveats to the above the first is that workers who intend to work after the pensionable age may decrease current consumption if the increase in pensions induces a large enough fall in planned post pensionable age labour supply see crawford and lilien i98i for a theoretical discussion

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

forecasting financial volatilities with extreme values the conditional autoregressive range carr model we propose a dynamic model for the high low range of asset prices within fixed time intervals the conditional autoregressive range model henceforth carr the evolution of the conditional range is specified in a fashion similar to the conditional variance models as in garch and is very similar to the autoregressive conditional duration acd model of engle and russell 1998 extreme value theories imply that the range is an efficient estimator of the local volatility e g parkinson 1980 hence carr can be viewed as a model of volatility out of sample volatility forecasts using the s p500 index data show that the carr model does provide sharper volatility estimates compared with a standard garch model

the economic value of realized volatility using high frequency returns for option valuation many studies have documented that daily realized volatility estimates based on intraday returns provide volatility forecasts that are superior to forecasts constructed from daily returns only we investigate whether these forecasting improvements translate into economic value added

a hybrid stock trading system using genetic network programming and mean conditional value at risk abstract this paper describes a hybrid stock trading system based on genetic network programming gnp and mean conditional value at risk model gnp cvar the proposed method combining the advantages of evolutionary algorithms and statistical model has provided useful tools to construct portfolios and generate effective stock trading strategies for investors with different risk attitudes simulation results on five stock indices show that model based on gnp and maximum sharpe ratio portfolio performs the best in bull market and that based on gnp and the global minimum risk portfolio performs the best in bear market the portfolios constructed by markowitz s mean variance model performs the same as mean cvar model it is clarified that the proposed system significantly improves the function and efficiency of original gnp which can help investors make profitable decisions

option pricing under garch processes using pde methods in this paper we propose a partial differential equation formulation for the value of an option when the underlying asset price is described by a discrete time garch process our numerical approach involves a spectral fourier chebyshev interpolation numerical illustrations are provided and the results are compared with other available valuation methods our numerical procedure converges exponentially fast and allows for the efficient computation of option prices achieving a high level of precision in a few seconds of computing time

in search of workers real effort reciprocity a field and a laboratory experiment we present a field experiment to assess the effect of own and peer wage variations on actual work effort of employees with hourly wages work effort neither reacts to an increase of the own wage nor to a positive or negative peer comparison this result seems at odds with numerous laboratory experiments that show a clear own wage sensitivity on effort in an additional real effort laboratory experiment we show that explicit cost and surplus information that enables an exact calculation of an employer s surplus from the work contract is a crucial prerequisite for a positive wage effort relation this demonstrates that an employee s reciprocity requires a clear assessment of the surplus at stake jel c91 c92 j41

aggregate consumption function and public social security the first time series study for a developing country turkey this article is the first attempt in the literature to investigate the effects of public social security on aggregate consumption in a time series setting for a developing country turkey that has one of the most generous social security systems in the organization for economic cooperation and development oecd region in order to quantify the social security variable this article uses the social security wealth ssw series calculated for turkey in a separate study this study indicates that ssw is the largest part of the household wealth in turkey and therefore should not be ignored in the aggregate consumption studies the results show that its effect on consumption is positive and robust

the valuation of path dependent contracts on the average this article values option contracts based on the average price realized over a finite time horizon such contracts are of importance to traders who periodically transact in spot markets and who require protection from adverse moves in their total accrued costs realized over their trading horizons explicit valuation models for pricing a variety of path dependent contracts based on geometric and arithmetic averages are developed the early exercise features of american contracts are investigated and it is shown that this feature has significant value

nonlinear portfolio selection using approximate parametric value at risk abstract as the skewed return distribution is a prominent feature in nonlinear portfolio selection problems which involve derivative assets with nonlinear payoff structures value at risk var is particularly suitable to serve as a risk measure in nonlinear portfolio selection unfortunately the nonlinear portfolio selection formulation using var risk measure is in general a computationally intractable optimization problem we investigate in this paper nonlinear portfolio selection models using approximate parametric value at risk more specifically we use first order and second order approximations of var for constructing portfolio selection models and show that the portfolio selection models based on delta only delta gamma normal and worst case delta gamma var approximations can be reformulated as second order cone programs which are polynomially solvable using interior point methods our simulation and empirical results suggest that the model using delta gamma normal var approximation performs the best in terms of a balance between approximation accuracy and computational efficiency

gift exchange incentives and heterogeneous workers by incorporating reciprocity in an otherwise standard principal agent model i investigate the relation between monetary gift exchange and incentive pay while allowing for worker heterogeneity i assume that some but not all workers care more for their principal when they are convinced that the principal cares for them the principal can be egoistic or altruistic absent worker heterogeneity an altruistic principal signals his altruism by offering relatively weak incentives and a relatively high expected total compensation however the latter is not always required to credibly signal altruism furthermore since some workers do not reciprocate the principal s altruism the principal may find it optimal to write a contract that simultaneously signals his altruism and screens reciprocal worker types such a contract is characterised by excessively strong incentives and a relatively high expected total compensation

strategic behavior and learning in repeated voluntary contribution experiments abstract voluntary contribution experiments systematically find that contributions decline over time we use a two stage voluntary contribution game to investigate whether this decrease is caused by learning or strategic behavior using a strategy method we find a robust pattern of declining contributions contributions in stage 2 are 45 percent lower than in stage 1 repeating the game five times we find that experience generates a smaller decline in contributions stage 1 contributions decrease by around 7 percent per game finally we find no significant differences between the strategy and direct response method which suggests that our results help explain behavior in the latter

a closed form garch option valuation model this paper develops a closed form option valuation formula for a spot asset whose variance follows a garch p q process that can be correlated with the returns of the spot asset it provides the first readily computed option formula for a random volatility model that can be estimated and implemented solely on the basis of observables the single lag version of this model contains heston s 1993 stochastic volatility model as a continuous time limit empirical analysis on s p500 index options shows that the out of sample valuation errors from the single lag version of the garch model are substantially lower than the ad hoc black scholes model of dumas fleming and whaley 1998 that uses a separate implied volatility for each option to fit to the smirk smile in implied volatilities the garch model remains superior even though the parameters of the garch model are held constant and volatility is filtered from the history of asset prices while the ad hoc black scholes model is updated every period the improvement is largely due to the ability of the garch model to simultaneously capture the correlation of volatility with spot returns and the path dependence in volatility article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

monetary rewards and decision cost in experimental economics a survey of thirty one experimental studies which report data on the comparative effects of monetary rewards and opportunity cost shows 1 several studies in which increased rewards shift the central tendency of the data toward the predictions of rational models 2 in virtually all cases rewards reduce the variance of the data around the predicted outcome this is consistent with a model in which rewards are balanced against decision cost in agent behavior and explicates the argument that when rational models fail it can be attributed to low opportunity cost of deviations from the rational prediction

gift exchange in a multi worker firm one of the main findings of a large body of gift exchange experiments is that in an incomplete contracts environment workers on average do not shirk and usually provide more than the minimum enforceable effort level in general 40 to 60 percent of the workers reward higher wages with higher effort these results are observed for simple one employer one worker relationships in this paper we investigate whether they generalize to the more realistic situation in which the employer employs several workers we compare a bilateral gift exchange game with a treatment in which each employer has four workers we find that effort levels in the latter treatment are only marginally lower gift exchange thus appears to be robust to increases in the size of the workforce and intention based reciprocity rather than social preferences seems to be the main driving force behind gift exchange

reciprocity and wage undercutting it is well documented that employers refuse to hire workers who o er their services at less than the prevailing wage the received explanation is that workers are motivated by reciprocity they desire to reward kindness and punish hostility to refuse an outsider s underbid is viewed as a kind choice that is met with good e ort a low wage is viewed as an insult that is met with shirking we have developed a general theory of reciprocity which in this paper is applied to a wage setting game played by an employer and two workers we show that when workers are motivated by reciprocity equilibrium behaviour accords well with the aforementioned stylized facts 2000 elsevier science b v all rights reserved jel classixcation d63 e24 j41

the performance of alternative valuation models in the otc currency options market abstract we compare option valuation models based on regime switching garch and jump diffusion processes to a standard smile model in which black and scholes 1973 implied volatilities are allowed to vary across strike prices the regime switching garch and jump diffusion models provide significant improvement over a fixed smile model in fitting gbp and jpy option prices both in sample and out of sample the jump diffusion model achieves the tightest fit a time varying smile model however provides hedging performance that is comparable to the other models for the gbp options this result suggests that standard option valuation techniques may provide a reasonable basis for trading and hedging strategies

lattice models for pricing american interest rate claims this article establishes efficient lattice algorithms for pricing american interest sensitive claims in the heath jarrow and morton paradigm under the assumption that the volatility structure of forward rates is restricted to a class that permits a markovian representation of the term structure the class of volatilities that permits this representation is quite large and imposes no severe restrictions on the structure for the spot rate volatility the algorithm exploits the markovian property of the term structure and permits the efficient computation of all types of interest rate claims specific examples are provided

american garch employee stock option valuation abstract we implement a flexible simulation based approach for the fair value of employee stock option eso that accounts for the vesting period departure risk and voluntary suboptimal early exercise we introduce garch effects on the underlying asset and we analyze the price bias with respect to the constant volatility case we also perform a sensitivity analysis with respect to changes in several eso characteristics we compare this valuation with fas 123 method revealing a fas overvaluation finally we value a real eso plan providing the confidence intervals for the estimated eso prices

executive compensation and tournament theory empirical tests on danish data this article adds to the empirical literature on tournament theory as a theory of executive compensation i test several propositions of tournament models on a rich data set containing information about 2 600 executives in 210 danish firms during a 4 year period i ask are pay differentials between job levels consistent with relative compensation is pay dispersion between levels higher in noisy environments is the dispersion affected by the number of tournament participants is average pay lower in firms with more compressed pay structures does wider pay dispersion enhance firm performance most of the predictions gain support in the data

hedging options under transaction costs and stochastic volatility in this paper we consider the problem of hedging contingent claims on a stock under transaction costs and stochastic volatility extensive research has clearly demonstrated that the volatility of most stocks is not constant over time as small changes of the volatility can have a major impact on the value of contingent claims hedging strategies should try to eliminate this volatility risk we propose a stochastic optimization model for hedging contingent claims that takes into account the effects of stochastic volatility transaction costs and trading restrictions simulation results show that our approach could improve performance considerably compared to traditional hedging strategies

if wages fell during a recession abstract many economies exhibit downward wage rigidity surveys of managers indicate that employers hold wages rigid because they believe morale will suffer after a wage cut otherwise there is little evidence for how employers beliefs contribute to wage rigidity and whether those beliefs are accurate using an experiment we demonstrate that effort falls after workers experience a wage cut despite this partial confirmation of the bewley 1999 morale theory half of the employers in our experiment cut wages and lose money as a result under nominal inflation real wage cuts do not have a significant effect on effort

dynamic programming approach for valuing options in the garch model in this paper we develop an efficient algorithm to value options under discrete time garch processes we propose a procedure based on dynamic programming coupled with piecewise polynomial approximation to compute the value of a given option at all observation dates and levels of the state vector the method can be used for the large garch family of models based on gaussian innovations and may accommodate all low dimensional european as well as american derivatives numerical implementations show that this method competes very advantageously with other available valuation methods

relative pay and labor supply we examine the impact of relative wages on labor supply in a laboratory experiment we test the hypothesis that ceteris paribus making a given wage high low relative to other wage levels will lead to an increase decrease in labor supply we find that labor supply does respond significantly to relative pay and in the expected direction however when a strong enough reason for the relative low pay is given this difference disappears

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

social comparison and performance experimental evidence on the fair wage effort hypothesis we investigate the impact of wage comparisons for worker productivity we present three studies which all use three person gift exchange experiments consistent with akerlof and yellen s 1990 fair wage effort hypothesis we find that disadvantageous wage discrimination leads to lower efforts while advantageous wage discrimination does not increase efforts on average two studies allow us to measure wage comparison effects at the individual level we observe strongly heterogeneous wage comparison effects we also find that reactions to wage discrimination can be attributed to the underlying intentions of discrimination rather than to payoff consequences

pay secrecy and effort provision i introduction pay secrecy norms are widespread in many organizations a survey of 2 700 u s employees conducted in autumn 2010 found that almost 1 out of 2 employees face limitations to the extent to which they can access information about other employees compensation 1 similarly a recent survey of u s employers found that over one third of private sector organizations have in place formal rules prohibiting employees to discuss their pay with co workers reported in gely and bierman 2003 a common argument used to justify the adoption of pay secrecy is that it helps minimize the negative effects arising when employees compare their pay with the pay of their co workers colella et al 2007 2 pay comparisons are in fact thought to be a key factor in employees judgments of the fairness of their pay e g akerlof and yellen 1990 discovering the existence of pay differentials between oneself and co workers who are in comparable positions within the firm may spur perceptions of unfairness and reduce job satisfaction card et al 2012 this may ultimately lead to reduced work morale and lower effort whereas this conjecture finds considerable support among managers and compensation executives e g agell and lundborg 1995 bewley 1999 campbell iii and kamlani 1997 there is limited direct evidence that the availability of pay comparison information has detrimental effects on effort behavior 3 in this paper i use laboratory experiments to provide a controlled test of this proposition the experiments reported in this paper are based on a multilateral version of the gift exchange game fehr kirchsteiger and riedl 1993 in the standard bilateral gift exchange game a first mover the employer decides on the size of the gift wage she sends to a second mover the employee who can in turn reciprocate by choosing costly actions effort that reward the first mover a typical result of bilateral gift exchange game experiments is that employees are often willing to incur costs in order to reward employers who have treated them favorably for reviews of the experimental literature see fehr goette and zehnder 2009 and charness and kuhn 2011 in the multilateral version of the game used in this study described in detail in section ii the employer interacts with two employees at the same time and pays a wage to each of them employees receive their wage and then independently choose an effort level i observe effort choices in three different conditions in a first condition employees only learn their own wage while coworkers wages remain undisclosed i use this benchmark condition to assess how employees respond to given levels of the own wage under a wage secrecy regime in two other conditions i remove any limitation on the availability of information about other workers wages in these treatments employees are fully informed of the wage paid to co workers when they choose effort by comparing these public wages treatments with the wage secrecy treatment i can test whether the availability of pay comparison information is detrimental for effort provision the two public wages treatments differ in how wages are determined in one treatment the employer can choose the two wages she pays to the employees while in the other treatment the wage paid to one employee is mandated exogenously by the experimenter this allows to study the effect of pay comparisons in settings where the employer has full discretion on the firm s wage structure as well as in settings where an employer s wage policy is partly constrained by exogenous labor market regulations such exogenous constraints to firms wage policies are commonplace in natural workplaces e g minimum wage laws centralized pay regulations etc and previous experiments have shown that they can affect pay fairness considerations and effort behavior in important ways 4 differently from previous studies which either focused on bilateral labor relations or studied multilateral relations where workers received no information about the treatment of co workers in this experiment i study how employees effort is influenced by labor market regulations that affect the wage of their co workers

declining public pensions in an era of demographic ageing will private provision fill the gap abstract demographic crisis and imprudent commitments have induced a crisis in public pension programmes in oecd countries will present and prospective cutbacks lead to greater private saving either in the form of private pension provision or in other forms of saving the paper surveys existing evidence and provides new results on three questions do individuals substitute private for public provision of savings when public pension programmes are cut back voluntarily do individuals respond to incentives to join sponsored or tax subsidised arrangements if encouraged by the government and if individuals are prepared to make such arrangements and where saving is voluntary do they save enough to replace previous prospective public pension flows

who compares to whom the anatomy of income comparisons in europe this article provides unprecedented direct evidence from large scale survey data on both the intensity how much and direction to whom of income comparisons income comparisons are considered to be at least somewhat important by three quarters of europeans they are associated with both lower levels of subjective well being and a greater demand for income redistribution the rich compare less and are happier than average when they do which latter is consistent with relative income theory with respect to the direction of comparisons colleagues are the most frequently cited reference group those who compare to colleagues are happier than those who compare to other benchmarks

american option pricing under garch by a markov chain approximation abstract we propose a numerical method for valuing american options in general and for the garch option pricing model in particular the method is based on approximating the underlying asset price process by a finite state time homogeneous markov chain since the markov transition probability matrix can be derived analytically the price of an american option can be computed by simple matrix operations the markov transition probability matrix is typically sparse the use of a sparse matrix representation can substantially increase the dimension of the markov chain to obtain better numerical results the markov chain method works well for the garch option pricing framework and it serves as an alternative to the existing numerical methods for the valuation of american options in other pricing settings we provide a convergence proof for the markov chain method and analyze its numerical performance for the black scholes 1973 and garch option pricing models

numerical evaluation of multivariate contingent claims we develop a numerical approximation method for valuing multivariate contingent claims the approach is based on an n dimensional extension of the lattice binomial method closed form solutions for the jump probabilities and the jump amplitudes are obtained the accuracy of the method is illustrated in the case of european options when there are three underlying assets article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the effect of production technology on trust and reciprocity in principal agent relationships with team production we introduce differently sized teams rather than a single worker and three production technologies to an otherwise standard gift exchange environment to study experimentally whether and to what extent trust and reciprocity is affected moving to a team of workers introduces new motivations such as free riding and coordination burden that are likely to intensify with team size and the technology used by the firm we find that the positive relationship between wages and effort although affected still holds workers reduce their efforts when coordination for efficiency is more difficult using a particular production technology results also suggest that for any given technology firms react to their relevant outcome profitability and not just to workers efforts