efficiency and information aggregation in auctions the tension between allocative efficiency and information aggregation is explored in the context of an auction k identical objects of unknown quality are auctioned off to n bidders whose tastes affect their valuation of an object of given quality bidders receive a signal about the quality of the objects the k highest bidders get an object and pay a price equal to the k first highest bid we find conditions under which in the limit objects are allocated efficiently to those with the highest tastes and price converges in probability to the value of an object to the marginal taste type

efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

how to value employee stock options one of the arguments often used against expensing employee stock options is that calculating their fair value at the time they are granted is very difficult this article presents an approach to calculating the value of employee stock options that is practical easy to implement and theoretically sound it explicitly considers the vesting period the possibility that employees will leave the company during the life of the option the inability of employees to trade their options and the relevant dilution issues this approach is an enhancement of the approach suggested by the financial accounting standards board s statement of financial accounting standards no 123 because it does not require an arbitrary reduction in the life of the option to allow for early exercise caused by the inability of employees to trade their options

combining fair pricing and capital requirements for non life insurance companies the aim of this article is to identify fair equity premium combinations for non life insurers that satisfy solvency capital requirements imposed by regulatory authorities in particular we compare target capital derived using the value at risk concept as planned for solvency ii in the european union with the tail value at risk concept as required by the swiss solvency test the model framework uses merton s jump diffusion process for the market value of liabilities and a geometric brownian motion for the asset process valuation is conducted using option pricing theory in this setting we study the impact of model parameters and corporate taxation on fair pricing solvency capital requirements and shortfall probability for different safety levels measured by the default put option value we show that even though corporate taxes can have a substantial impact on pricing and capital structure they do not affect capital requirements if the safety level is retained before and after taxation

default premiums in commodity markets theory and evidence we model the effect of nonperformance risk on forward and futures pricing and look for evidence of nonperformance risk in precious metals futures prices from the hunt brothers episode changes in default premiums are measured and related to the sequence of events in the metals markets during this period results suggest first that ex ante costs of nonperformance can be a significant priced factor in commodity markets and second that the arrival of new information is often associated with changes in these costs the evidence has implications for both theoretical and empirical research on commodity markets organized commodity markets offer traders an efficient medium in which to execute their hedging and speculative strategies in particular the markets have developed mechanisms that reduce the costs of nonperformance which would be substantial in the absence of an organized exchange devices such as margin requirements position limits daily marking to market price limit moves and the clearinghouse reduce the expected costs of distress and default in commodity markets while organized exchanges greatly reduce expected costs of nonperformance they do not eliminate such costs throughout the history of organized futures trading there have been many instances of markets collapsing or coming to the brink of collapse after a period of unusual trading activity the most prominent example in recent times is the near collapse of the new

arbitrage continuous trading and margin requirements this paper studies the impact that margin requirements have on both the existence of arbitrage opportunities and the valuation of call options in the context of the blackscholes economy margin restrictions are shown to exclude continuous trading arbitrage opportunities and with two additional hypotheses still to allow the black scholes call model to apply the black scholes economy consists of a continuously traded stock with a price process that follows a geometric brownian motion and a continuously traded bond with a price process that is deterministic continuous trading security market models constitute a significant area of continuing reesearch in financial economics these models form the basis of the option pricing methodology see merton 16 for a review and current intertemporal asset pricing models see merton 15 breeden 3 and cox ingersoll and ross 5 given the importance of these models it is of no surprise that there has been significant academic concern see dybvig 9 cox ingersoll and ross 4 p 341 and ingersoll 13 pp 13 25 over the discovery of a continuous trading strategy by harrison and kreps 10 called the doubling strategy that generates a sure dollar from a zero investment the existence of this doubling strategy violates a basic premise of the option pricing methodology the premise of no arbitrage opportunities given this violation the question naturally arises as to whether the option pricing methodology is internally consistent fortunately harrison and pliska 11 showed that the exclusion of arbitrage opportunities and the doubling strategy does not invalidate the familiar derivation of the black scholes call option formula the exogenous exclusion of these doubling strategies is somewhat arbitrary however types of constraints that exclude continuous trading arbitrage opportunities were studied by kreps 14 harrison and kreps 10 and dybvig 9 these papers provide constraints that are unsatisfactory from an institutional point of view since they have no market analogue margin requirements on the other hand have a market analogue one purpose of this paper is to show that margin requirements also exclude continuous trading arbitrage opportunities to make this argument self contained we first provide a unified framework that synthesizes the previously stated results our assertion concerning margin re

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

the pension costs from a defined benefit to individual pension accounts do they cost more in the case of taiwan this article develops a market based liability valuation model to price individual pension costs of a defined benefit db pension plan the purpose is to compare them with the new labour pension plan individual pension accounts ipas in the case of taiwan the results based on the numerical approach show that the new ipas cost a company more than the old db plan except if the average wage growth relative to the risk free interest rate is high enough

optimal exercise of executive stock options and implications for firm cost this paper conducts a comprehensive study of the optimal exercise policy for an executive stock option and its implications for option cost average life and alternative valuation concepts the paper is the first to provide analytical results for an executive with general concave utility wealthier or less risk averse executives exercise later and create greater option cost however option cost can decline with volatility we show when there exists a single exercise boundary yet demonstrate the possibility of a split continuation region we also show that for constant relative risk averse utility the option value does not converge to the black and scholes value as the correlation between the stock and the market portfolio converges to one we compare our model s option cost with the modified black and scholes approximation typically used in practice and show that the approximation error can be large or small positive or negative depending on firm characteristics

uncertainty about uncertainty and delay in bargaining we study a one sided offers bargaining game in which the buyer has private information about the value of the object and the seller has private information about his beliefs about the buyer s valuation we show that this uncertainty about uncertainties dramatically changes the set of outcomes in particular second order beliefs can lead to a delay in reaching agreement even when the seller makes frequent offers we show that not all types of second order beliefs lead to a delay when the buyer assigns positive probability to the seller knowing the buyer s value then delay not only can occur but it must occur for a class of equilibria however in all other cases delay will never occur

the delivery option on forward contracts many futures contracts contain a delivery option which allows the short position a choice to deliver one of several varieties of a commodity several authors have argued that deliv ery options can have considerable value for a forward contract with a delivery option this paper shows that a continuously adjusted hedge will drive the value of the delivery option towards zero assuming perfect and frictionless markets tract the option to deliver one of several grades of a commodity on the delivery date recent papers by garbade and silber 3 and gay and manaster 4 have examined this delivery option and have suggested that this option reduces the futures price prior to the delivery date this paper examines a perfect market with continuous prices with an infinite number of deliverable varieties with ac tive forward markets for all deliverable varieties and without marking to market under these assumptions the value of the delivery option is shown to ap proach zero the paper shows that a continuously adjusted hedge exists that guarantees this result therefore the attachment of value to the delivery option

financial expertise as an arms race we show that firms intermediating trade have incentives to overinvest in financial expertise in our model expertise improves firms ability to estimate value when trading a security expertise creates asymmetric information which under normal circumstances works to the advantage of the expert as it deters opportunistic bargaining by counterparties this advantage is neutralized in equilibrium however by offsetting investments by competitors moreover when volatility rises the adverse selection created by expertise triggers breakdowns in liquidity destroying gains to trade and thus the benefits that firms hope to gain through high levels of expertise

gathering information before signing a contract after being offered a contract an agent has the possibility to observe the state of nature this enables him to refuse the contract in unfavorable states but burdens him with an observation cost the authors show that the principal offers a contract in which the agent has no incentive to observe the state of nature and they explore its terms later they show that the principal finds it profitable to organize competition between several agents even though he has monopoly power and can push a single agent down to his reservation utility copyright 1992 by american economic association

alternating offer bargaining with two sided incomplete information i study alternating offer bargaining games with two sided incomplete information about the players discount rates for both perfect bayesian equilibrium and a rationalizability style notion i characterize the set of expected payoffs which may arise in the game i also construct bounds on agreements that may be made the set of expected payoffs is easy to compute and incorporate into applied models my main result is a full characterization of the set of perfect bayesian equilibrium payoffs for games in which the distribution over the players discount rates is of wide support yet is in a weak sense close to a point mass distribution i prove a lopsided convergence result each player cannot gain from a slight chance that she is a strong type but the player can suffer greatly if there is a slight chance that she is a weak type

valuation adverse selection and market collapses we study a market for funding real investment where valuation meaning investors devoting resources to acquiring information about future payoffs creates an adverse selection problem unlike previous models more valuation is associated with lower market prices and so greater returns to valuation this strategic complementarity in the capacity to do valuation generates multiple equilibria with multiple equilibria the equilibrium without valuation is most efficient despite funding some unprofitable investments switches to valuation equilibria valuation runs look like credit crunches a large investor can ensure the efficient equilibrium only if it can precommit to a price and potentially only if subsidized

convertible bonds model value attribution and analytics convertible bonds provide investors an option to convert the bond into the underlying equity for this reason a convertible bond is exposed to both equity and interest rate risk incorporating these two sources of risk into the model is particularly important for callable issues in this study a two factor model is used to analyze a sample of bonds the model shows that the correlation of stock risk and interest rate risk may affect convertible bond prices significantly the bond pricing model also provides portfolio analytics and can decompose a convertible bond into its basic components the stock and bonds with different maturities this approach enables an investor to implement a more precise hedging strategy than is possible using only delta

option pricing when the underlying asset earns a below equilibrium rate of return a note in their classic paper black and scholes 2 present two derivations of the european call option pricing formula the first which we will refer to as the replication derivation relies on the fact that the returns from the option can be replicated by holding a continuously revised position in the underlying asset and bonds this implies that if an option is not priced according to the blackscholes formula there is a sure profit to be made by some combination of either short or long sales of the option and underlying asset this argument is seemingly independent of considerations relating to capital market equilibrium the second derivation which we will call the equilibrium derivation evolves from the requirement that the option earn an expected rate of return commensurate with the risk involved in holding the option as an asset this note considers the pricing of a call option on an asset which earns an expected rate of return lower than that necessary to induce investors to hold it we show in this case that even if the replication strategy is feasible it is inefficient a consequence of this is that the correct option pricing formula is different than the black scholes formula unlike the black scholes formula our formula requires as an input the difference between the expected rate of return on the underlying asset and that expected rate of return which would be required to induce holding of the asset other papers have made a similar point constantinides 3 and cox et al 4 have argued that in equilibrium the prices of traded contingent claims must satisfy a partial differential equation which is identical to the black scholes partial differential equation only when the underlying asset pays no dividends and earns a rate of return sufficient to induce holding of the asset more recently ingersoll 5 has noted that commodities often pay a nonpecuniary service yield the value of which must be taken into account in deriving the option price none of these authors however explain why the black scholes formula is sometimes inappropriate the purpose of this note is to demonstrate why the black scholes formula needs modification even if replication is feasible we provide an intuitive derivation of the correct formula and discuss why divergences of the equilibrium price from the black scholes formula do not result in arbitrage opportunities

the delivery option on forward contracts a note a number of futures contracts conveys to the short position various delivery options re garding the quality and exact timing of delivery moreover the compensation to the long position is not solely determined by the market value of the delivered asset at the time of delivery sometimes the long position can hedge this delivery risk by holding an appropriate portfolio of the underlying asset it often has been stated that whenever the long position can form a dynamic hedge against the delivery risk the delivery option has a zero value this paper demonstrates the implication of such erroneous intuition to the pricing of options it is shown that the root of the issue is the property of diffusion processes whereas within a given time interval a random variable either will never cross a given boundary or else cross it an inflnite number of times

continuous price processes in frictionless markets have infinite variation the continuous time model is central to much of financial economics forming the basis of option pricing theory black and scholes 1973 merton 1973b and a number of intertemporal valuation models merton 1973a breeden 1979 the continuous time model involves two sets of assumptions the first concerns the characteristics of the market absence of frictions continuous trading opportunities and so forth the second concerns the stochastic process governing prices these assumptions are usually introduced as if they were independent that is as if the characteristics of the market did not constrain the nature of the stochastic process in this paper we ask the following question if trading is continuous and frictionless what classes of stochastic processes may be chosen to describe prices which also admit equilibrium attention will be restricted to processes whose sample paths are continuous the most frequently employed continuous processes are diffusions all intimately related to brownian motion among the characteristics of such processes is that their sample paths display unbounded variation variation to be defined rigorously in sec iii represents the cumulative upward and downward displacement of the function in question this property makes the asthe continuous time model in finance makes assumptions both about the characteristics of the market absence of frictions continuous trading opportunities and so forth and about the stochastic process that governs prices usually these assumptions are introduced as if they were independent that is as if the characteristics of the market did not constrain the choice of stochastic process in this paper we ask the following question if trading is continuous and frictionless what classes of stochastic process may be chosen that also admit equilibrium we restrict our attention to processes whose sample paths are continuous our conclusion is given by the title of the paper

self selection and the earnings of immigrants this paper analyzes the way in which the earnings of the immigrant population may be expected to differ from the earnings of the native population because of the endogeneity of the decision to migrate the empirical study shows that differences in the u s earnings of immigrants with the same measured skills but from different home countries are attributable to variations in political and economic conditions in the countries of origin at the time of migration excerpt

striking for a bargain between two completely informed agents this paper models the wage contract negotiation procedure between a union and a firm as a sequential bargaining process in which the union must decide in each period whether or not to strike for the duration of that period we show that there exist subgame perfect equilibria in which the union engages in several periods of strikes prior to reaching a final agreement although both parties are completely rational and fully informed this has implications for other inefficient phenomena such as tariff wars debt negotiations and wars in general we characterize the set of equilibria show that strikes can occur in real time and discuss extensions of the model such as lockouts and the possibility of multiple recontracting opportunities copyright 1991 by american economic association

investment opportunities and corporate demand for lines of credit abstract the behavior of a risk neutral corporation in selection of a line of credit is modeled in a new framework where demand for credit lines by a firm arises from the stochastic arrival in continuous time of short lived opportunities to capture investment projects the firm needs speed and secrecy to capture projects before competitors the firm chooses a credit line that balances its up front commitment cost against the expected extra cost of borrowing in the spot market upon exhaustion of its credit line the firm s demanded credit line depends upon both relative pricing within the contract and the nature of the firm s growth opportunities interestingly while credit line demand is positively related to business growth prospects it is potentially negatively related to uncertainty in those prospects

the determination of fair profits for the property liability insurance firm although the property liability insurance industry has been subject to price regulation for many years surprisingly little research has been directed at producing valuation models of a property liability insurance firm although property liability price regulation has historically involved setting minimum prices to reduce the risk of insolvency some commissions have begun to move toward setting prices more in the spirit of public utility regulation 1 if in an effort to promote efficiency the working objective of such regulation requires the determination of prices that would prevail under competition then regulation must be founded on some model of the costs of regulated firms under competition with free entry prices just cover all economic costs including the opportunity costs of investment by suppliers of capital and a valuation model is required to explain how the market value of the firm and therefore the cost of capital reacts to changes in the prices it charges our objective in this chapter is to provide such a framework

return mobility and scientific productivity of researchers working abroad the role of home country linkages through an analysis of 497 foreign researchers in italy and portugal we verify the impact of home linkages on return mobility choices and scientific productivity we consider the presence of several different types of linkages of the researchers working abroad with their country of origin and control for the most relevant contextual factors age research area position in the host country etc the probability of return to their home country and scientific productivity in the host country are both higher for researchers that maintain home linkages we conclude that the presence of home linkages directly benefits both countries in addition to the indirect benefit of expanding the scientific networks policy implications and suggestions for further research are discussed c 2012 elsevier b v all rights reserved

the price response to s p 500 index additions and deletions evidence of asymmetry and a new explanation we study the price effects of changes to the s p 500 index and document an asymmetric price response there is a permanent increase in the price of added firms but no permanent decline for deleted firms these results are at odds with extant explanations of the effects of index changes that imply a symmetric price response to additions and deletions a possible explanation for asymmetric price effects arises from the changes in investor awareness results from our empirical tests support the thesis that changes in investor awareness contribute to the asymmetric price effects of s p 500 index additions and deletions the long held assumption that stocks have perfect substitutes and the perfect elasticity of demand that follows from it is central to modern finance theory if securities have almost perfectly elastic demand then any supply or demand shocks that are devoid of information should have no effect on the prevailing price early empirical research on whether price changes occur in the absence of new information focused on block trades equity issues and stock splits but was unable to exclude information effects around these events since there is no obvious reason to believe ex ante that index changes contain new information they constitute a natural framework for testing whether stocks have almost perfectly elastic or horizontal demand curves a stock s excess return around such changes could be consistent with a downward sloping demand curve with the advent of indexed mutual funds in 1976 and the public announcement of s p index changes in the same year there is much evidence that such announcements are accompanied by an increase in price for firms added to the index if stocks have a short term downward sloping demand curve the price should be momentarily affected by a demand shock due to indexing but that effect

panic and panacea brain drain and science and technology human capital policy abstract brain drain the diffusion of skilled human capital particularly scientific and technical human capital sthc from home to host country is of concern to many nations traditional brain drain control policies target the human capital embodied in a skilled individual based on a case study of brain drain panic in new zealand in 2000 this paper explores new stimulation brain drain policy approaches including building research excellence and exploiting the diaspora that take into account the situated and networked nature of sthc diaspora policies imply a reframing of national sthc no longer circumscribed by geographic boundaries but by national affiliation

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

bilateral trade with strategic gradual learning abstract we propose a model of bilateral trade in which private information about the quality of an asset can be acquired only gradually over time an asset is characterized by a vector of binary i i d attributes and its worth to a player is equal to a weighted sum of the attributes values where weights differ across players the seller is initially uninformed about the attributes values and each period he decides whether to make a price offer or to costlessly inspect an attribute s value the buyer does not know the attributes values but he may or may not observe which inspections were performed we consider both cases we study the seller s strategic scheduling of inspections and its effect on the realized gains from trade in equilibrium we identify the necessary and sufficient conditions under which the players can realize some gains from trade and all gains from trade

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

valuation of american call options on dividend paying stocks empirical tests abstract this paper examines the pricing performance of the valuation equation for american call options on stocks with known dividends and compares it with two suggested approximation methods the approximation obtained by substituting the stock price net of the present value of the escrowed dividends into the black scholes model is shown to induce spurious correlation between prediction error and 1 the standard deviation of stock return 2 the degree to which the option is in the money or out of the money 3 the probability of early exercise 4 the time to expiration of the option and 5 the dividend yield of the stock a new method of examining option market efficiency is developed and tested

ex ante incentive efficient trading mechanisms without the private valuation restriction abstract the private valuation assumption found in most trading mechanism design papers rules out markets whose valuation structure generates externalities between traders this paper characterizes the set of ex ante incentive efficient trading mechanisms for a large class of markets that do admit such externalities and for bilateral trade markets establishes the impossibility of a first best solution across a class of trading problems employing uniform priors and linear valuation structures this paper also compares levels of market efficiency for varying numbers of traders

exercise behavior valuation and the incentive effects of employee stock options abstract we use a large database on eso exercises to document characteristics of exercise behavior and calibrate a utility based model for measuring how differences in exercise behavior are manifested in option values and incentives option values and incentives computed from the model calibrations are compared to those computed from models used to value tradable options our analysis provides guidance to both academics and practitioners about how differences in exercise behavior and model choice affect measures of eso values and incentives and underscores the importance of gaining a thorough understanding of the underlying economic forces that affect the behavior of eso holders

valuation of insurers contingent capital with counterparty risk and price endogeneity this study develops a structural framework to value insurers contingent capital with counterparty risk cr and overcomes the problem of price endogeneity pe in the valuation model our results on the focal contingent capital instrument catastrophe equity put option cateput indicate that prices can be significantly overestimated without considering cr and be significantly underestimated without considering pe this study also examines how cateputs affect the buyer s probability of default pd our results show that buying a cateput lowers the pd for high risk insurers but not necessarily so for low risk insurers however without taking cr and pe into account one may significantly overestimate the credit enhancement provided by the cateputs

the valuation of multiple claim insurance contracts this paper provides a closed form solution for the value of a multiple claim insurance contract that is subject to a deductible amount and or an upper limit on claims the solution is a time integral of european option prices the model provides three important insights first systematic risk in insurance policies is altered in the presence of deductibles and maximum indemnity levels second idiosyncratic risk affects policy valuation and the required rates of return on underwriting portfolios finally contrary to traditional actuarial intuition changes in the risk free interest rate may either increase or reduce policy values

the expected utility of the doubling strategy it has been noted that a certain continuous time trading strategy termed the doubling strategy generates a positive net return on borrowed funds with probability one and within a finite period of time since the doubling strategy seems to represent a free lunch or arbitrage opportunity a variety of constraints to render it infeasible have been proposed in this paper we show that the doubling strategy generates infinite disutility for a large class of utility functions and we can think of no utility function for a risk averse agent which is a counterexample harrison and kreps 5 pointed out that a certain continuous time trading strategy in frictionless markets since termed the doubling strategy generates a positive net return on borrowed funds with probability one and within a finite period of time moreover the returns can be made arbitrarily large by increasing the initial amount borrowed thus the doubling strategy seems to represent a free lunch or arbitrage opportunity the theory of valuation of derivative assets also assumes continuous time trading in frictionless markets an assumption necessary to argue that the derivative asset can be perfectly hedged by the underlying asset and the risk free asset as in black and scholes 2 or equivalently that the returns on the derivative asset can be replicated by a self financing trading strategy see harrison and kreps 5 or harrision and pliska 6 in addition it must be assumed that the economy is free of arbitrage opportunities so that the continuously revised hedge portfolio earns the risk free rate or again equivalently that the value of the derivative asset is equal to the replicating strategy s initial portfolio consequently harrison kreps and others have viewed the existence of the doubling strategy and its apparent violation of the arbitrage free economy condition as a serious problem in contingent claims theory more generally the doubling strategy seems to suggest an inconsistency in standard sets of assumptions e g diffusion type asset prices frictionless continuous time markets and market efficiency when sufficiently complex trading strategies are permitted since the doubling strategy was introduced by harrison and kreps a number of constraints have been proposed to eliminate the doubling strategy without at the same time ruling out the other continuous time trading strategies essential to derivative asset pricing and continuous time portfolio theory bounds on portfolio positions kreps 9 a positive constraint on wealth dybvig 3 and margin requirements heath and jarrow 7 more generally dybvig and huang 4 show that a lower bound on wealth precludes other complex trading strategies

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

in honor of the nobel laureates robert c merton and myron s scholes a partial differential equation that changed the world the nobel prize was given to robert c merton and myron s scholes for discovering a new method for determining the value of an option this is known as the black merton scholes option pricing formula the purpose of this essay is to explain why the black merton scholes option pricing formula is so important to the finance profession the economics profession the financial industry and society at large this is done by studying the history of the formula s development the economic logic underlying the formula s derivation and the formula s ramifications for the various professions

price regulation in property liability insurance a contingent claims approach a discrete time option pricing model is used to derive the fair rate of return for the property liability insurance firm the rationale for the use of this model is that the financial claims of shareholders policyholders and tax authorities can be modeled as european options written on the income generated by the insurer s asset portfolio this portfolio consists mostly of traded financial assets and is therefore relatively easy to value by setting the value of the shareholders option equal to the initial surplus an implicit solution for the fair insurance price may be derived unlike previous insurance regulatory models this approach addresses the ruin probability of the insurer as well as nonlinear tax effects

an ex post valuation of the quality option implicit in the treasury bond futures contract abstract this paper develops three empirical estimates of the value of the quality delivery option implicit in the treasury bond futures contract a an ex ante value as given by the excess of forward price of the cheapest to deliver bond over its conversion factor times the futures price b an ex post value equal to the payoffs to a strategy of buying and holding a short futures long forward position at the start and delivering the cheapest bond at the expiration of futures contract and c another ex post value equal to the sum of payoffs to a continuous rollover strategy involving a short futures long forward position in the cheapest to deliver bonds three months prior to delivery the average values of the three estimates are 464 329 and 2 075 respectively the differences among the three estimates appear to be largely due to nonsynchronous spot futures data

the quality delivery option in treasury bond futures contracts this paper uses three methods to estimate quality option values for cbot treasury bond futures contracts it presents evidence regarding 1 payoffs from exercising this option at delivery 2 estimates from a t bond futures pricing model that incorporates this option and 3 estimates obtained from an exchange option pricing formula the results indicate that this option is worth considerably less than reported by kane and marcus 1986a for example payoffs obtained by switching from the bond cheapest to deliver three months prior to delivery to the one cheapest at time of delivery average less than 0 30 percentage points of par

forward contracts and futures contracts abstract this paper provides a detailed discussion of the similarities and differences between forward contracts and futures contracts under frictionless markets and continuous trading simple arbitrage arguments are invoked to value forward contracts to relate forward prices and spot prices and to relate forward prices and futures prices we also argue that forward prices need not equal futures prices unless default free interest rates are deterministic

cancellable insider trading plans an analysis of sec rule 10b5 1 rule 10b5 1 enables insiders to preplan future trades before becoming informed within a strategic rational expectations equilibrium framework i characterize an insider s unique optimal trading plan which balances portfolio diversification against exploitation of the rule s selective termination option because the rule reduces adverse selection and provides insurance against bad outcomes the rule generally improves welfare for both the insider who later becomes informed and uninformed outsiders provided there exists a sufficient degree of information asymmetry eliminating the rule s selective termination option results in an even greater welfare improvement under a large subset of parametric conditions received march 9 2018 editorial decision january 11 2019 by editor wei jiang

bookbuilding how informative is the order book we examine the institutional bids submitted under the bookbuilding procedure for a sample of international equity issues we find that information in bids which include a limit price especially those of large and frequent bidders affects the issue price oversubscription has a smaller but significant effect for ipos public information affects the issue price to the extent that it is reflected in the bids oversubscription and demand elasticity are positively correlated with the first day aftermarket return and demand elasticity is negatively correlated with aftermarket volatility our results support the view that bookbuilding is designed to extract information from investors

sequential bargaining with correlated values the paper analyzes an infinite horizon sequential bargaining game with one sided offers between a buyer and a seller when the buyer s valuation depends on the seller s the seller knows the value of the object and the buyer does not the influence of relative discount factors on the solution is studied it is shown for example that an impasse may result if the buyer offeror is too impatient relative to the seller the buyer makes a single take it or leave it offer

the equilibrium valuation of risky discrete cash flows in continuous time this paper values a contingent claim to discrete stochastic cash flows generated by a poisson arrival process with a randomly varying intensity parameter in the most general case both the size and the arrival intensity of cash flows may correlate wih state variables in a continuous time economy assuming the conditions of an intertemporal capital aset pricing model solutions for the value of the contingent claim can be found using various techniques the paper suggests immediate applications to the valuation of insurance contracts the decision to build a firm with unknown future investment opportunities and the pricing of mortgage backed securities

fair insurance guaranty premia in the presence of risk based capital regulations stochastic interest rate and catastrophe risk abstract a multiperiod model is developed to measure the costs posed to the guaranty fund in a setting that incorporates risk based capital regulations interest rate risk and the possibility of catastrophic losses the guaranty contract is modeled as a put option on the asset of the insurance company with a stochastic strike price and an uncertain maturity the impacts of the key factors of this model are examined numerically and shown to make material differences in the costs to the guaranty fund

bargaining with endogenous information two ex ante identically informed agents play a double auction over the division of a trading surplus with endogenous information and common values this paper shows that if information acquisition is not observable three types of inefficiencies can arise if the information cost is in an intermediate range no pure strategy equilibrium with trade exists although the agents maintain symmetric information if the information cost is low any trading equilibrium exhibits costly information acquisition if the agents face asymmetric information cost the akerlof s lemons problem arises as a self fulfilling equilibrium and only partial trade occurs

strategic delay in bargaining this paper analyses a bargaining model with incomplete information in which the time between offers is an endogenous strategic variable we find equilibria involving a delay to agreement that is due to the use of strategic time delay by bargainers to signal their relative strength under some specifications of the parameters delay is present in the unique sequential equilibrium whose beliefs satisfy one intuitive restriction this delay does not vanish as the minimal time between offers becomes small

international scientist mobility and the locus of knowledge and technology transfer abstract despite the growing interest of scholars and policymakers to better understand the determinants for researchers in public science to transfer knowledge and technology to firms little is known how temporary international mobility of scientists affects both their propensity to engage in knowledge and technology transfer ktt as well as the locus of such transfer based on a sample of more than 950 german academics from science and engineering faculties we investigate how the duration and the frequency of scientists visits at research institutions outside their home country affect ktt activities we find that most mobile scientists engage in ktt to firms both in the host and in their home country suggesting that ktt activities to firms abroad do not substitute or crowd out but complement ktt to firms in the home country we further find that the longer research visits abroad are the higher the likelihood that scientists engage in ktt to firms again both in the host and the home country however the more frequently scientists visit institutions abroad the more likely they are to engage in ktt to firms only in their home country our results therefore provide evidence for the benefits of brain circulation the article contributes to the growing strand of the literature on scientist mobility and on the determinants of industry science linkages at the individual level

research upon return the effect of international mobility on scientific ties production and impact abstract highly skilled return migrants contribute to the establishment of ties between the home and host systems this paper studies how the professional ties which argentinean researchers built up during the time spent in foreign research systems influence their collaboration patterns and their research outputs upon return it confirms the expectation that having foreign work experience helps to explain the propensity to co publish internationally and it also shows that researchers collaborate to a higher degree with their former host system another central finding is that foreign work experience has a positive effect on the propensity to publish in journals with a high impact factor additionally a large share of this type of research is published without international co authorship we therefore do no not find evidence of a lack of publication autonomy in the case of argentinean returnees

large traders hidden arbitrage and complete markets abstract this paper studies hidden arbitrage opportunities in markets where large traders affect the price process and where the market is complete in the classical sense the arbitrage opportunities are hidden because they occur on a small set of times typically of lebesgue measure zero these arbitrage opportunities occur naturally in markets where a large trader supports the price of some asset or commodity for example corporate stock repurchase plans government interest rate or foreign currency intervention and price support by investment banks in ipos we also illustrate immediate arbitrage opportunities generated by usual market activity at specific points in time for example the issuance date of an ipo or the inclusion date of a new stock in the s p 500 index

strategic delay in bargaining with two sided uncertainty the role of strategic delay is analyzed in an infinite horizon alternating offer model of bargaining a buyer and seller are engaged in the trade of a single object both bargainers have private information about their own preferences and are impatient in that delaying agreement is costly an equilibrium is constructed in which the bargainers signal the strength of their bargaining positions by delaying prior to making an offer a bargainer expecting large gains from trade is more impatient than one expecting small gains and hence makes concessions earlier on trade occurs whever gains from trade exist but due to the private information only after costly delay panmunjom korea upi the american general and the north korean general glared at each other across the table and the only sound was the wind howling across the barren hills outside their hut maj gen james b knapp negotiator for the united nations command unc was waiting for maj gen ri choonsun of the democratic people s republic of north korea to propose a recess they sat there arms folded for 42 hours not a word finally gen ri got up walked out and drove away evening bulletin philadelphia 11 april 1969

a continuous time equilibrium model of forward prices and futures prices in a multigood economy abstract this paper is a theoretical investigation of equilibrium forward and futures prices we construct a rational expectations model in continuous time of a multigood identical consumer economy with constant stochastic returns to scale production using this model we find three main results first we find formulas for equilibrium forward futures discount bond commodity bond and commodity option prices second we show that a futures price is actually a forward price for the delivery of a random number of units of a good the random number is the return earned from continuous reinvestment in instantaneously riskless bonds until maturity of the futures contract third we find and interpret conditions under which normal backwardation or contango is found in forward or futures prices these conditions reflect the usefulness of forward and futures contracts as consumption hedges

valuing executive stock options with endogenous departure abstract executive stock options differ from exchange traded options because of vesting and portability restrictions executive departure from the firm forces early exercise reducing the value of executive options current methodology calculates the option value by multiplying the black scholes option price by the departure probability this ignores the possibility that executive departure is less likely when stock price is high and thus is correlated with the stock price we show that this correlation implies a substantial increase in option values a similar situation occurs in performance based option packages where the actual number of options granted depends on stock performance

industry or academia basic or applied career choices and earnings trajectories of scientists we extend life cycle models of human capital investments by incorporating matching theory to examine the sorting pattern of heterogeneous scientists into different career trajectories we link differences in physical capital investments and complementarities between basic and applied scientists across industry and academic settings to individual differences in scientist ability and preferences to predict an equilibrium matching of scientists to careers and to their earnings evolution our empirical analysis using the national science foundation s scientists and engineers statistical data system database is consistent with theoretical predictions of i sorting by ability into basic versus applied science among academic scientists but not among industry scientists and ii sorting by higher taste for nonmonetary returns into academia over industry the evolution of an earnings profile is consistent with these sorting patterns the earnings trajectories of basic and applied scientists are distinct from each other in academia but are similar in industry this paper was accepted by lee fleming entrepreneurship and innovation

toward a strategic foundation for rational expectations equilibrium a step toward a strategic foundation for rational expectations equilibrium is taken by considering a double auction with n buyers and m sellers with interdependent values and affiliated private information if there are sufficiently many buyers and sellers and their bids are restricted to a sufficiently fine discrete set of prices then generically there is an equilibrium in nondecreasing bidding functions that is arbitrarily close to the unique fully revealing rational expectations equilibrium of the limit market with unrestricted bids and a continuum of agents in particular the large double auction equilibrium is almost efficient and almost fully aggregates the agents information

the delivery option on forward contracts a comment livingston contends that short futures long cash traders can eliminate the potential costs of the quality option through use of a dynamic trading strategy it is proposed here that if this is possible then futures prices will never reach a stable equilibrium alternatively if livingston s argument is flawed then no risk free arbitrage opportunities are likely to be available to either short cash long futures or long cash short futures traders under such conditions futures prices will reach an equilibrium when the expected return and risk of each type position are equally attractive

difference systems in financial futures markets many financial futures markets allow substitutions for the par grade of security at delivery substitutes are deliverable at premiums or discounts differences in commodities parlance to the futures price the rule that establishes these differences is called a difference system this paper characterizes financial futures market equilibrium with yield based difference systems and investigates particular systems in use the major finding is that currently used difference systems effectively limit deliverable supply in the futures markets and lead to futures prices which understate the cash market price of the par security in order to increase deliverable supply many financial futures markets allow the delivery of a variety of grades issues of securities in fulfillment of a financial futures contract the par grade of security on which the futures contract is based is deliverable at the futures price various other grades of securities are deliverable at premiums or discounts to the futures price in commodities parlance these premiums and discounts are called differences and the rule that establishes the set of premiums and discounts is called a difference system see hoffman 2 chapter xv for an excellent discussion of difference systems in commodity futures contracts there are two types of difference systems currently in use in financial futures markets both are based on security yields the first is called variable rate or yield maintenance pricing under this system nonpar securities are deliverable at the futures price times a factor which is the price of the delivered security relative to the par security where both are discounted by the yield of the par security selling at the futures price the second is called fixed rate or factor pricing under this system nonpar securities are deliverable at the futures price times a factor which is the price of the delivered security relative to the par security where both are discounted at the yield of the par security selling at par this paper first characterizes financial futures market equilibrium with yieldbased difference systems and then investigates theoretically and empirically the particular characteristics of factor pricing and yield maintenance pricing the major finding is that currently used differences systems produce financial futures prices which systematically understate the spot market price of the par security vice president chicago mercantile exchange this research was conducted while the author was economist financial studies section board of governors of the federal reserve system the opinions in this paper are those of the author and do not necessarily reflect the opinions of the board

anticipatory sorting and gender segregation in temporary employment we examine the roots of gender segregation in the screening process by using a longitudinal data set of candidates considered for temporary projects at a staffing firm and following their progress through the hiring pipeline theories invoked to explain gender segregation across jobs traditionally rely on firm specific human capital and expectations of future commitment to explain this phenomenon these do not apply in this setting yet we find that the staffing firm is more likely to shortlist women for low paid projects and less likely to do so for high paid ones these effects are due to women being considered for different projects than men and associated at least partially to the level of competition within vacancies although client companies also exhibit some gender sorting behavior in the later steps of the hiring process they are more likely to prefer women and less likely to sort them into lower paid projects our findings are consistent with anticipatory gender sorting mechanisms by which first screeners generate segregation when narrowing down the pool of candidates for later decision makers we discuss the implications of this case for theories of gender stratification and workplace inequality especially in mediated labor markets this paper was accepted by jesper sorensen organizations

competition for talent country and organizational level effects in the internationalization of european higher education institutions this paper analyzes the competition for skilled human resources between european higher education institutions hei through a multi level model predicting their ability to attract foreign researchers predictions of the model are tested on a dataset on internationalization of 601 heis in 8 european countries we show that 1 the model is able to explain a large proportion of the variance in the levels of internationalization of academic staff between heis 2 country factors are more important than heis characteristics in driving internationalization 3 research oriented heis in attractive countries have a larger share of international staff whereas this happens only to a limited extent with similar heis in low attractive countries 4 the association of research orientation with internationalization is mediated by the hei s international network these results have relevant implications for hei s hiring strategies as well as for national policies concerning careers and the mobility of researchers we suggest that policies should be tailored to structural conditions of heis and countries whereas imitating the approaches of highly attractive places might be damaging less attractive countries should rather focus on training and career opportunities for young national researchers as well as on instruments to keep linkages with national expatriates

option pricing and implicit volatilities abstract this paper demonstrates that black scholes implied volatilities can be used to value options in many situations where the assumptions of the black scholes model are violated including i alternative stock processes ii stochastic interest rates and iii market frictions given its computational simplicity this procedure provides an attractive alternative to the more complex models with a direct estimation procedure

50th anniversary article option pricing valuation models and applications this paper surveys the literature on option pricing from its origins to the present an extensive review of valuation methods for european and american style claims is provided applications to complex securities and numerical methods are surveyed emphasis is placed on recent trends and developments in methodology and modeling

upstairs market for principal and agency trades analysis of adverse information and price effects this paper directly tests the hypothesis that upstairs intermediation lowers adverse selection cost we find upstairs market makers effectively screen out information motivated orders and execute large liquidity motivated orders at a lower cost than the downstairs market upstairs markets do not cannibalize or free ride off the downstairs market in one quarter of the trades the upstairs market offers price improvement over the limit orders available in the consolidated limit order book trades are more likely to be executed upstairs at times when liquidity is lower in the downstairs market

the funding for a defined benefit db pension plan based on the fair valuation of the plan s insolvency risk this study provides a contingent claims valuation approach model to value a sponsor s claim on a salary related defined benefit db pension plan the model is further developed to numerically estimate a suggested optimal contribution cost that allows the sponsor to fairly bear the risk of the plan s insolvency the results demonstrate that the traditional actuarial valuation underestimates the cost of pension benefits and that the normal contribution cost is not enough for the sponsor to fairly charge the value of bearing the plan s insolvency

an empirical analysis of implicit delivery options in the treasury bond futures contract abstract assuming perfect frictionless and efficient markets this paper develops a framework to estimate the composite value of the quality wild card and end of month options implicit in the t bond futures contract the value of delivery options is shown to be the excess of forward price of the cheapest bond over its conversion factor times the exercise price of futures contract empirical results indicate that the option values over the last quarter of the nearby contract are on average less than 0 5 percent of the mean futures price which is substantially lower than the value reported by previous studies further scrutiny reveals that although the empirical estimates are contaminated by non synchronous bond data they are consistent with certain known theoretical properties of option values

the stop loss start gain paradox and option valuation a new decomposition into intrinsic and time value the downside risk in a leveraged stock position can be eliminated by using stop loss orders the upside potential of such a position can be captured using contingent buy orders the terminal payoff to this stop loss start gain strategy is identical to that of a call option but the strategy costs less initially this article resolves this paradox by showing that the strategy is not self financing for continuous stock price processes of unbounded variation the resolution of the paradox leads to a new decomposition of an option s price into its intrinsic and time value when stock price follows geometric brownian motion this decomposition is proven to be mathematically equivalent to the black scholes 1973 formula article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

bargaining under incomplete information this paper presents and analyzes a bargaining model of bilateral monopoly under uncertainty under the bargaining rule proposed the buyer and the seller each submit sealed offers that determine whether the good in question is sold and the transfer price the nash equilibrium solution of this bargaining game implies an offer strategy of each party that is monotonic in its own reservation price and depends on its assessment of the opponent s reservation price issues of relative bargaining advantage and efficiency are examined for a number of special cases finally we discuss the appropriateness of the nash solution concept

nontraded asset valuation with portfolio constraints a binomial approach we provide a simple binomial framework to value american style derivatives subject to trading restrictions the optimal investment of liquid wealth is solved simultaneously with the early exercise decision of the nontraded derivative noshort sales constraints on the underlying asset manifest themselves in the form of an implicit dividend yield in the risk neutralized process for the underlying asset one consequence is that american call options may be optimally exercised prior to maturity even when the underlying asset pays no dividends applications to executive stock options eso are presented it is shown that the value of an eso could be substantially lower than that computed using the black scholes model we also analyze nontraded payoffs based on a price that is imperfectly correlated with the price of a traded asset the economics of asset pricing when one or more of the assets in the opportunity set are either subject to trading restrictions or entirely nontraded is a matter of great interest viewed from a practical perspective we have several important examples of such assets that are subject to trading restrictions pensions which represent perhaps the most significant of assets held by individual households are subject to trading restrictions it is typically the case that assets in pensions are not available for immediate consumption borrowing against pension assets is subject to significant direct and indirect costs by way of taxes and early withdrawal penalties human capital is another example housing investment is also illiquid and subject to significant transaction costs together pensions human capital and housing constitute a substantial part of a typical household s assets the significance of such nontraded assets for risk premia has already been noted by bewley 1982 there are other circumstances where lack of unrestricted trading plays an important role executive compensation plans usually take the this article was presented at boston university we would like to thank the editor bernard dumas and two anonymous referees for very helpful comments we also thank nalin kulatilaka and seminar participants for useful suggestions ganlin chang fei guan and carlton osakwe provided valuable research assistance j detemple acknowledges support from the social sciences and humanities research

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

primes and scores an essay on market imperfections this paper investigates the reported relative mispricing of primes and scores to the underlying stock given transaction costs we establish arbitrage based bounds on prime and score prices we then develop a new nonparametric statistical technique to test whether prime and score prices violate these bounds we find that prime and score prices do exceed stock prices and often by a considerable amount we demonstrate that this increased value is most likely due to the score s ability to save on the costs of dynamic hedging we also show how short sale and trust size constraints impede the ability to arbitrage price disparities in an efficient market the price of a security reflects the value of its underlying assets it should not be possible therefore to create value simply by splitting a security into different parts since the underlying assets are unchanged the packaging of the cash flows should not matter the recent introduction of primes and scores suggests that this is not always the case by separating a security s cash flows into a dividend based component the prime and an appreciation or option based component the score developers of these securities have seemingly created two assets whose value separately exceeds that of the original stock since the prime and the score are based on the same underlying asset this raises a puzzling question about the actual efficiency of securities markets this paper investigates this anomaly by examining whether primies and scores are actuauy mispriced and if so why given the costs of transacting in the prime score and stock we establish bounds on prime and score prices that are consistent with no arbitrage opportunities we then develop a new nonparametric statistical technique to test whether prime and score prices violate these bounds this nonparametric procedure is designed both to confront the measurement error problems plaguing the literature i e nonobservable bid ask prices and nonsimultaneous prices see phillips and smith 1980 bhattacharya 1983 and bookstaber 1981 and to avoid the estimation of round trip transaction costs commissions we find the surprising result that prime and score prices exceed the price of the underlying stock often by a considerable amount using time series data we de monstrate that significant price differentials exist for each firm in our sample

an alternative approach to stochastic calculus for economic and financial models abstract application of the ito stochastic calculus to problems in economics and finance raises several modeling issues mcshane s canonical model and alternative stochastic calculus for handling these models resolves these issues in a satisfactory manner this paper explores the application of mcshane s approach to four areas empirical estimation and testing of stochastic models fischer s model of the demand for index bonds option pricing and optimal investment under price level uncertainty

numerical valuation of high dimensional multivariate european securities we consider the problem of pricing a contingent claim whose payoff depends on several sources of uncertainty using classical assumptions from the arbitrage pricing theory the theoretical price can be computed as the discounted expected value of future cash flows under the modified risk neutral information process although analytical solutions have been developed elsewhere for a few particular option pricing problems computing the arbitrage prices of securities under several sources of uncertainty is still an open problem in many instances in this paper we present efficient numerical techniques based upon monte carlo simulation for pricing european contingent claims depending on an arbitrary number of risk sources we introduce in particular the method of quadratic resampling qr a new powerful error reduction technique for monte carlo simulation quadratic resampling can be efficiently combined with classical variance reduction methods such as importance sampling our numerical experiments show th

bargaining with common values this paper examines a bargaining model with asymmetric information in which the private valuations of the two bargaining agents are correlated it shows that equilibria in such models typically exhibit a significant probability of a significant delay to agreement the paper characterizes the unique perfect bayesian equilibrium to the game in which an uninformed buyer makes offers to a privately informed seller it also shows by example that in this framework bargainers may rationally break off negotiations even in the presence of commonly known gains from trade

uncertainty and delay in bargaining this paper investigates the relationship between uncertainty and delay of agreement in the one sided offer bargaining model with two sided uncertainty where the seller makes offers we construct a weak stationary equilibrium in which different types of the seller charge different prices in every period we completely characterize the separating equilibrium by three regularity conditions and show that the time interval between offers converges to zero the seller s initial price offer in a separating equilibrium converges with probability 1 to the lowest valuation of the buyer if and only if the gain from trading is common knowledge we have witnessed a proliferation of sequential bargaining models that with a few remarkable exceptions fudenberg and tirole 1983 cramton 1984 and chatterjee and samuelson 1987 are based on models with one sided uncertainty the importance of studying bargaining models with one sided uncertainty is that despite their highly special informational structure we can derive valuable insights into the role of uncertainty in the delay in reaching an agreement while keeping the computational exercise tractable however the assumption of one sided uncertainty essentially excludes the situation where the buyer s actual reservation value is lower than the seller s actual reservation value though they are still engaged in the bargaining process the primary objective of this paper is to investigate the role of uncertainty about the gain from trading in a sequential bargaining model with two sided incomplete information in the models with one sided incomplete information important studies fudenberg levine and tirole 1985 and gul sonnenschein and wilson 1986 are often based on weak stationary equilibria where the equilibrium strategy of each player only depends upon the posterior conjecture about the other player and the previous period s offer although the importance of two sided uncertainty and the weak stationary equilibrium is well recognized previous research on sequential bargaining models has not combined the two features within the same framework studies on the models under two sided uncertainty have not focused on weak stationary equilibria for example cramton 1984 computes a specific sequential equilibrium with interesting properties in which the equilibrium strategies of both players depend upon histories in a rather complex fashion on the other hand it is only in models under one sided uncertainty that the weak stationary equilibrium has been extensively studied this paper computes and analyzes the weak stationary equilibria in a model under two sided uncertainty in order to investigate the effect of uncertainty on the delay in agreement we will extend the results from previous studies of one sided uncertainty models the computation of the equilibrium in models with two sided uncertainty is generally very complicated furthermore we must identify a sensible outcome if more than one equilibrium exists in the model to simplify the analysis we choose a standard bargaining

the portable guarantee to exchange back an old defined benefit for a new defined contribution dc pension plan as a defined contribution dc pension plan is introduced to replace a defined benefit db pension plan the portability benefit from a dc pension plan costs the employees to bear the investment risk from managing the pension fund to protect the retirement income and maintain the portability benefit a guarantee to exchange back the old defined benefit is supposed to be demanded for the new dc plan s participants in the guarantee market in light of such a demand this article applies a claim terminating insurance pricing model to offer a contingent claims pricing model for a portable pension guarantee using the new labor pension plan of taiwan as an illustration a guaranteed dc pension will carry an extra cost of almost 50 up to over 100 of the plan s contributions over the participant s work life given the current mandatory minimum requirement of a contribution rate of 6

risk aversion and block exercise of executive stock options abstract it is well documented that executives granted stock options tend to exercise early and in a few large transactions or blocks standard risk neutral valuation models cannot explain these patterns and attempts to capture the exercise behavior of risk averse executives have been limited to the special case of one option this paper solves for the optimal exercise behavior for a risk averse executive who is granted multiple stock options we show that utility based models do not predict block exercise behavior rather the risk averse executive exercises stock options individually at a sequence of increasing price thresholds when in addition the executive faces frictions such as costly exercise he faces a trade off between exercising little and often to maximize return and exercising larger quantities on fewer occasions to minimize effort this generates realistic block exercise behavior and yields new predictions in particular executives should begin by exercising large blocks of options but the block sizes should become smaller over time our framework also allows us to study the impact of multiple exercise dates on estimates of the cost of options to the company we find that assuming the executive can only exercise on a single occasion underestimates the cost of the options compared with allowing for optimal exercise behavior

quality option profits switching option profits and variation margin costs an evaluation of their size and impact on treasury bond futures prices this paper provides empirical evidenee that the quality option in f bond futures is much less valuable than previously indicated in addition a dynamic trading strategy involving multiple switches of the cash bonds held in a long cash versus short futures position is shown to produce substantially greater profits than the single exercise of the quality op tion these findings suggest that the optimal management of long cash short futures positions is likely to involve dynamic trading strategies while passive strategies appear more appropriate for short cash long futures positions it is also shown that required variation margin payments are frequently large and may impact the profitability and risk of such positions to a greater extent than either of these options further evidenee is given indicating that observed t bond futures prices reflect an imputed value for the options and risks inherent in such positions

on the valuation of american call options on stocks with known dividends both the roll and the geske equations for the valuation of the american call option on a stock with known dividends are incorrectly specified this note presents the corrected valuation formula explains the misspecifications and provides a numerical example

optimal consumption choices for a large investor abstract this paper examines the optimal consumption and investment problem for a large investor whose portfolio choices affect the instantaneous expected returns on the traded assets alternatively our analysis can be interpreted in terms of an optimal growth problem with nonlinear technologies existence of optimal policies is established using martingale and duality techniques under general assumptions on the securities price process and the investor s preferences as an illustration of our characterization result explicit solutions are provided for specific examples involving an agent with logarithmic utilities and a generalized two factor version of the ccapm is derived the analogy of the consumption problem examined in this paper to the consumption problem with constraints on the portfolio choices is emphasized