multi product newsboy problem with limited capacity and outsourcing this paper considers a multi product newsboy system that produces multiple products for fulfilling independently uncertain demands which share the same production capacity to deal with possible shortage of limited capacity productions can be outsourced we consider two outsourcing strategies zero lead time outsourcing and nonzero lead time outsourcing the structural properties and solution procedures for the profit maximization models are developed numerical results are provided for obtaining some managerial insights

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

the intertemporal relation between the u s and japanese stock markets this paper finds a high correlation between the open to close returns for u s stocks in the previous trading day and the japanese equity market performance in the current period in contrast the japanese market has only a small impact on the u s return in the current period high correlations among open to close returns are a violation of the efflcient market hypothesis however in trading simulations the excess profits in japan vanish when transactions costs and transfer taxes are included the two largest stock markets in the world in terms of capitalization volume and shares listed are the tokyo stock exchange tse and the new york stock exchange nyse because tokyo is 14 hours ahead of new york there is an eight and one half hour difference between the close of the tse and open of the nyse since there is no overlap between the two markets traders or technical analysts may look to the tse as a predictor of market movement on the nyse and or examine changes on the nyse as indicators of tse performance as shown in figure 1 the tse opens at 7 00 p m eastern standard time est and closes at 1 00 a m est 1 the nyse opens at 11 30 p m japanese time 9 30 a m est and closes at 5 00 a m japanese time 4 00 p m est thus there is no common time interval in which both markets are open high correlations between the respective open to close returns are a violation of the efficient market hypothesis because public information about the performance in one market could be used to profitably trade in another market if the markets are efficient information about the open to close performance in one market for example the u s return in period t 1 will be fully reflected in the open price of the other market japan in period t for example since new information flows randomly into the market subsequent price changes should be random and the open to close returns in japan will be uncorrelated with the u s returns thus the u s performance should affect the open price in japan and the correlation between the open to close returns of the two markets will be zero early research on the synchronization among stock prices across countries grubel 1968 levy and sarnat 1970 agmon 1972 ripley 1973 lessard

instant option betas an investor considering the addition of options to his investment portfolio must consider the effect an option will have on portfolio risk the eta of an option at any point in time can be calculated from the beta of its underlying stock and the option s risk elasticity a measure of the percentage change in the value of the option for a small percentage change in the value of the underlying stock an option s beta will change in a predictable fashion with changes in the underlying stock s price and variance rate the option s exercise price and time to expiration and the risk free interest rate a call option s beta will decrease with increasing stock price and exercise price and increase with an increasing risk free rate its sensitivity to variance and time to expiration will depend on the stock price to exercise price ratio nomograms provide a quick and easy way to estimate option betas from these readily observable underlying parameters option betas will also change often drastically with the passage of time graphs indicate that in general call betas will increase as time to expiration increases the ultimate impact will depend however on the parameters of the contract and on changes in the underlying stock s price

a mixed integer model of bidding strategies for outsourcing an emerging phenomenon in the management of information systems is outsourcing outsourcing is the contracting of various system management functions by user firms to vendors this paper focuses on the outsourcing bidding process pertinent to the selection of one contractor by a user firm the paper explores bidding situations where the vendors have different levels of expertise and cost structures truth revealing mechanisms that induce the vendors to bid competitively in line with their costs are utilized and a mixed integer programming model is presented the model allows the user firm to obtain the optimal expected contract cost some interesting conclusions emerge from the analysis of representative examples used in the paper first the results clearly show that truth revealing strategies always result in lower contract costs for the user firm than if the user firm were to follow the straightforward strategy of always choosing the lowest bid second the user firm can reduce contract costs by deploying a discriminatory selection policy vis a vis the different vendors third subsidies need to be given in order to ensure truth revealing behavior of the vendors thus the qualitative interpretations of the model parallel bidding behavior practices observed in the real world

swimming upstream floating downstream comparing women s relative wage progress in the united states and denmark applying a new decomposition method to u s psid and danish longitudinal sample data the authors compare how u s and danish gender wage gaps developed between 1983 and 1995 in denmark they find the wage gap widened because the worsening in women s relative returns to observable human capital attributes as well as in their ranking relative to men in unobserv able productive attributes more than offset their wage gains from improved observable qualifications relative to men s in the united states in contrast the gender convergence in qualifications offset adverse influences including in creasing wage dispersion throughout the labor market to result in a narrowing of the gap the largest increase in the gap in denmark was experienced by women in the top earnings decile and the largest decline in the gap in the united states affected those at the top and in the middle of the distribution

systematic risk and the price structure of individual equity options this study demonstrates the impact of systematic risk on the prices of individual equity options the option prices are characterized by the level and slope of implied volatility curves and the systematic risk is measured as the proportion of systematic variance in the total variance using daily option quotes on the s and p 100 index and its 30 largest component stocks we show that after controlling for the underlying asset s total risk a higher amount of systematic risk leads to a higher level of implied volatility and a steeper slope of the implied volatility curve thus systematic risk proportion can help differentiate the price structure across individual equity options the author 2008 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

implied volatility functions empirical tests derman and kani 1994 dupire 1994 and rubinstein 1994 hypothesize that asset return volatility is a deterministic function of asset price and time and develop a deterministic volatility function dvf option valuation model that has the potential of fitting the observed cross section of option prices exactly using s p 500 options from june 1988 through december 1993 we examine the predictive and hedging performance of the dvf option valuation model and find it is no better than an ad hoc procedure that merely smooths black scholes 1973 implied volatilities across exercise prices and times to expiration

a new approach to measuring financial contagion this article proposes a new approach to evaluate contagion in financial markets our measure of contagion captures the coincidence of extreme return shocks across countries within a region and across regions we characterize the extent of contagion its economic significance and its determinants using a multinomial logistic regression model applying our approach to daily returns of emerging markets during the 1990s we find that contagion is predictable and depends on regional interest rates exchange rate changes and conditional stock return volatility evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed

returns synchronization and daily correlation dynamics between international stock markets the use of close to close returns underestimates returns correlation because international stock markets have different trading hours with the availability of 16 00 london time stock market series we find dynamics of daily correlation and covariance estimated using two non synchroneity adjustment procedures to be substantially different from their synchronous counterparts conditional correlation may have different signs depending on the model and data type used other findings include volatility spillover from the us to the uk and france and a reverse spillover which is not documented before also unlike previous findings we found the increase in daily correlation is prominent only under extremely adverse conditions when a large negative return has been registered

differences in beliefs and currency risk premiums this paper studies the importance of heterogeneous beliefs for the dynamics of asset prices we focus on currency markets where the absence of short selling constraints allows us to perform sharper tests of theoretical predictions using a unique data set with detailed information on foreign exchange forecasts we construct an empirical proxy for differences in beliefs we show that this proxy has a strong effect on the implied volatility of currency options beyond the volatility of macroeconomic fundamentals we document that differences in beliefs impact also on the shape of the implied volatility smile on the volatility risk premiums and on future currency returns

the impact of outsourcing on the transaction costs and boundaries of manufacturing abstract this paper discusses the concept of outsourcing along with an account of the economic benefits that are achieved by reconfiguring the organization and reducing the transaction costs of providing products and services with the practice of outsourcing experiencing exceptional growth this paper examines the corresponding change decline in uk manufacturing as an economic activity and considers how the economic benefits of outsourcing alter the contribution that an organization makes to a sector s gross domestic product to assess this issue an input output methodology for measuring economic restructuring in uk manufacturing is presented

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

dynamic stock market covariances in the eurozone abstract this paper examines the short term dynamics macroeconomic sensitivities and longer term trends in the variances and covariances of national equity market index daily returns for eleven countries in the euro currency zone we modify colacito engle and ghysel s mixed data sampling dynamic conditional correlation garch model to include a new scalar measure for the degree of correlatedness in time varying correlation matrices we also explore the robustness of the findings with a less model dependent realized covariance estimator we find a secular trend toward higher correlation during our sample period and significant linkages between macroeconomic and market wide variables and dynamic correlation one notable finding is that average correlation between these markets is lower when their average gdp growth rate is lower or when more of them have negative gdp growth

covariance breakdowns and connectedness of crude oil futures markets with non synchronous data this article identifies the breakdowns in the covariance of three benchmark crude oil futures markets wti brent and dubai and investigates the changes of market connectedness across the breakdow

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

trends in the gender earnings differential in urban china 1988 2004 this paper analyzes changes in the gender earnings gap in urban china over the period 1988 2004 using urban household survey data the mean female male earnings ratio declined from 86 3 to 76 2

have the gipsi settled down breaks and multivariate stochastic volatility models for and not against the european financial integration we investigate the integration of the european peripheral financial markets with germany france and the uk using a combination of tests for structural breaks and return correlations derived from several multivariate stochastic volatility models our findings suggest that financial integration intensified in anticipation of the euro further strengthened by the emu inception and amplified in response to the 2007 2008 financial crisis hence no evidence is found of decoupling of the equity markets in more troubled european countries from the core interestingly the uk despite staying outside the emu is not worse integrated with the gipsi than germany or france 2013 elsevier b v

price and volatility spillovers in scandinavian stock markets abstract new evidence is provided on price and volatility spillovers among the danish norwegian swedish and finnish stock markets the impact of good news market advances and bad news market retreats is described by a multivariate exponential generalized autoregressive conditionally heteroskedastic egarch model volatility transmission is asymmetric spillovers being more pronounced for bad than good news significant price and volatility spillovers exist but they are few in number

male white black wage gaps 1979 1994 a distributional analysis 1 introductionnumerous studies show that during the 1980s the mean white black wage gap among new entrant 0 10 years of potential experience males expanded 1 juhn murphy and pierce 1991 jmp attribute the mean gap s expansion to a widening of the overall u s wage distribution caused by a host of economy wide race neutral changes that led to labor demand shifts toward better educated and better skilled workers regardless of race because african americans tend to be at lower levels of the overall skill distribution the shifts adversely impacted african american men more than white men leading to an expansion in the mean wage gap to arrive at this conclusion jmp decompose the expansion in the mean new entrant wage gap into four components the first two components measure the wage gap s increase because of a widening in observable racial differences in measured characteristics and their prices for example educational attainment and the returns to education the third component captures the contribution of growing racial discrimination and widening differences in unmeasured skills to the wage gap s expansion this term s contribution is measured by the drop in the mean percentile rank of blacks in the white residual wage distribution the fourth component identifies the role of increases in the prices of unmeasured skills and is measured by the increase in the variance of the white residual wage distribution when applied to the march annual demographic files of the current population survey jmp find that from 1979 to 1987 increases in the price of unmeasured skills explain all of the new entrant mean wage gap s expansion indicating that factors that adversely impacted less skilled workers regardless of race are the primary cause of the wage gap s expansion in related work reardon 1997 uses a national sample of white and african american men from the 1980 and 1990 decennial censuses and shows that the mean racial wage gap s expansion is caused by increased variance in the distribution of residual wages generated by labor demand shifts toward high skilled whites and away from medium skilled whites and high skilled african american men the wage gap expands because high skilled african american men earn wages that are similar to those of whites in the middle and upper third of their wage distribution the labor demand shifts led to a stretching or increased variance in the wage distribution that favored high skilled whites relative to high skilled african americans and medium skilled whites this paper makes several contributions to the literature on racial wage gaps and the technical literature on wage decompositions first i examine whether jmp s 1991 results hold up when the analysis is disaggregated by experience and educational attainment this is an important extension for two reasons bound and freeman 1992 rodgers 1997a and others have found that the racial wage gap among high school graduates and particularly among college graduates expanded significantly after the late 1970s over the same time period the variance of wages within these educational categories increased second it is important to determine the extent to which racial inequality that was generated while a cohort was a new entrant persists as it ages the paper s technical innovation is the development of a distribution or skill specific decomposition that identifies whether the stretching of the white wage distribution uniformly contributes to an expansion in racial inequality at all skill levels or quantiles of the wage distribution or whether the contribution of the wage distribution s stretching is specific to a skill level for example does the increase in the price of unmeasured skills explain a greater portion of the increase in the racial wage gap between high skilled african americans and whites than it does between medium skilled african americans and whites

decomposing wage residuals unmeasured skill or statistical artifact the decomposition of wage residuals into standard deviation and percentile ranks can be misleading because the two measures are not necessarily independent with rising wage inequality the mean percentile rank of low wage groups will rise simply because more dispersed distributions have thicker tails this interpretation is consistent with the observed stability of gender and racial wage gaps in contrast the unmeasured skill interpretation of wage residuals would predict widening wage gaps in the face of rising wage inequality unless one posits an increase in the level of unobserved skill for women and blacks

the price of a smile hedging and spanning in option markets the volatility smile changed drastically around the crash of 1987 and new option pricing models have been proposed to accommodate that change deterministic volatility models allow for more flexible volatility surfaces but refrain from introducing additional risk factors thus options are still redundant securities alternatively stochastic models introduce additional risk factors and options are then needed for spanning of the pricing kernel we develop a statistical test based on this difference in spanning using daily s p 500 index options data from 1986 95 our tests suggest that both in and out of the money options are needed for spanning the findings are inconsistent with deterministic volatility models but are consistent with stochastic models that incorporate additional priced risk factors such as stochastic volatility interest rates or jumps article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a nonlinear factor analysis of s p 500 index option returns growing evidence suggests that extraordinary average returns may be obtained by trading equity index options and that at least part of this abnormal performance is attributable to volatility and jump risk premia this paper asks whether such priced risk factors are alone sufficient to explain these average returns to provide an answer in as general as possible a setting i estimate a flexible class of nonlinear models using all s p 500 index futures options traded between 1986 and 2000 the results show that priced factors contribute to these expected returns but are insufficient to explain their magnitudes particularly for short term out of the money puts in a recent paper c oval and shumway 2001 examine the returns on deltahedged option positions focusing on the at the money straddle and find average returns close to minus 3 per week since over short time horizons these positions are approximately invariant to movements in the underlying index coval and shumway argue that their capm betas should be near zero and their expected returns close to the risk free rate they conclude that large deviations from the capm are the norm which they suggest is evidence that some other systematic factor such as stochastic volatility might be priced by the market similar conclusions are made by jackwerth 2000 who finds risk adjusted profitability from selling puts and by bakshi and kapadia 2003 who find that the volatility risk premium contributes significantly to higher prices for calls and puts buraschi and jackwerth 2001 concur suggesting that more than one priced risk factor is necessary to explain option prices a less direct set of evidence is the now standard observation that the black scholes implied volatilities of equity index options are upward biased predictors of future realized volatility numerous studies such as fleming ostdiek and whaley 1995 and christensen and prabhala 1998 document that implied volatilities of short term at the money equity index options are on average several percentage points higher than the volatilities realized over the option s

throwing away a billion dollars the cost of suboptimal exercise strategies in the swaptions market abstract this paper studies the costs of applying single factor exercise strategies to american swap options when the term structure is actually driven by multiple factors using a multifactor string market model of the term structure we find that even when single factor models are recalibrated to match the market at every exercise date the exercise strategies they imply can be suboptimal based on estimates of notional amounts outstanding the total present value costs of following single factor strategies could be several billion dollars these results illustrate the importance of using well specified term structure models

unspanned stochastic volatility evidence from hedging interest rate derivatives most existing dynamic term structure models assume that interest rate derivatives are redundant securities and can be perfectly hedged using solely bonds we find that the quadratic term structure models have serious difficulties in hedging caps and cap straddles even though they capture bond yields well furthermore at the money straddle hedging errors are highly correlated with cap implied volatilities and can explain a large fraction of hedging errors of all caps and straddles across moneyness and maturities our results strongly suggest the existence of systematic unspanned factors related to stochastic volatility in interest rate derivatives markets

do investors follow the herd in option markets we investigate the previously unexplored herding behaviour of investors in option markets by examining equity option contracts traded in the us between 1996 and 2012 we document strong herding effects in option trading activity that are conditional on a set of systematic factors related to periods of market stress more specifically we find that option investors tend to herd during periods of high market volatility risk on dates of macroeconomic announcements during the financial crisis of 2008 when a large number of market option positions is either opened or closed and during periods of a large average dispersion of analysts forecasts

pricing foreign currency options under stochastic interest rates abstract in this paper we build a general framework to price contingent claims on foreign currencies using the heath et al 1987 model of the term structure closed form solutions are obtained for european options on currencies and currency futures assuming that the volatility functions determining the term structure are deterministic as such this paper provides an example of a bond price process for both the domestic and foreign economies consistent with grabbe s 1983 formulation of the same problem

the crash of ʼ87 was it expected the evidence from options markets transactions prices of s p 500 futures options over 1985 1987 are examined for evidence of expectations prior to october 1987 of an impending stock market crash first it is shown that out of the money puts became unusually expensive during the year preceding the crash second a model is derived for pricing american options on jump diffusion processes with systematic jump risk the jump diffusion parameters implicit in options prices indicate that a crash was expected and that implicit distributions were negatively skewed during october 1986 to august 1987 both approaches indicate no strong crash fears during the 2 months immediately preceding the crash attempts to explain what caused the stock market crashes around the world in october 1987 have suffered from the paucity of major economic developments occurring around that time that could have triggered the crashes shifting expectations regarding monetary policy foreign investors fears of a dollar decline increasing riskiness of assets none of these appeared major enough if present at all to explain the magnitude of the crashes and although portfolio insurance strategies could conceivably magnify the effects of a jump in fundamentals the initiating jump in fundamentals appears to be lacking

systemic risk and international portfolio choice returns on international equities are characterized by jumps moreover these jumps tend to occur at the same time across countries leading to systemic risk we capture these stylized facts using a multivariate system ofjump diffusion processes where the arrival of jumps is simultaneous across assets we then determine an investor s optimal portfolio for this model of returns systemic risk has two effects one it reduces the gains from diversification and two it penalizes investors for holding levered positions we find that the loss resulting from diminished diversification is small while that from holding very highly levered positions is large returns on international equities are characterized by jumps 1 moreover these jumps tend to occur at the same time across countries implying that conditional correlations between international equity returns tend to be higher in periods of high market volatility or following large downside moves 2 our objective in

international transmission of stock market movements this paper investigates the international transmission mechanism of stock market movements by estimating a nine market vector autoregression var system using simulated responses of the estimated var system we i locate all the main channels of interactions among national stock markets and ii trace out the dynamic responses of one market to innovations in another generally speaking a substantial amount of multi lateral interaction is detected among national stock markets innovations in the u s are rapidly transmitted to other markets in a clearly recognizable fashion whereas no single foreign market can significantly explain the u s market movements also the dynamic response pattern is found to be generally consistent with the notion of informationally efficient international stock markets

do bonds span the fixed income markets theory and evidence for unspanned stochastic volatility most term structure models assume bond markets are complete that is that all fixed income derivatives can be perfectly replicated using solely bonds however we find that in practice swap rates have limited explanatory power for returns on at the money straddles portfolios mainly exposed to volatility risk we term this empirical feature unspanned stochastic volatility usv while usv can be captured within an hjm framework we demonstrate that bivariate models cannot exhibit usv we determine necessary and sufficient conditions for trivariate markov affine systems to exhibit usv for such usv models bonds alone may not be sufficient to identify all parameters rather derivatives are needed

long term global market correlations the correlation structure of the world equity markets varied considerably over the past 150 years and was high during periods of economic integration we decompose diversification benefits into two parts one component due to variation in the average correlation across markets and a another component due to the variation in the investment opportunity set from this we infer that periods of globalization have both benefits and drawbacks for international investors globalization expands the opportunity set but as a result the benefits from diversification rely increasingly on investment in emerging markets

understanding index option returns this paper studies the returns from investing in index options previous research documents significant average option returns large capm alphas and high sharpe ratios and concludes that put options are mispriced we propose an alternative approach to evaluate the significance of option returns and obtain different conclusions instead of using these statistical metrics we compare historical option returns to those generated by commonly used option pricing models we find that the most puzzling finding in the existing literature the large returns to writing out of themoney puts is not even inconsistent with the black scholes model moreover simple stochastic volatility models with no risk premia generate put returns across all strikes that are not inconsistent with the observed data at the money straddle returns are more challenging to understand and we find that these returns are not inconsistent with explanations such as jump risk premia peso problems and estimation risk

the impact of international trade on wages since the early 1980s the us economy has experienced a growing wage differential high skilled workers have claimed an increasing share of available income while low skilled workers have seen an absolute decline in real wages how and why this disparity has arisen is a matter of ongoing debate among policymakers and economists two competing theories have emerged to explain this phenomenon one focusing on international trade and labour market globalization as the driving force behind the devaluation of low skill jobs and the other focusing on the role of technological change as a catalyst for the escalation of high skill wages this collection brings together innovative new ideas and data sources in order to provide more satisfying alternatives to the trade versus technology debate and to assess directly the specific impact of international trade on us wages this volume offers a thorough appraisal of the wage distribution predicament examining the continued effects of technology and globalization on the labour market

the pricing effects of interfirm cash tender offers the tools provided by option pricing theory are used to examine the wealth effects of interfirm cash tender offers the analysis provides evidence consistent with the synergy theory of corporate takeovers and has implications concerning the economic effects of regulations of cash tender offers the analysis further suggests that the market prices information uncertainty in a manner not captured by the standard capital asset pricing model the study introduces a technique for unbundling the prices of a primary asset and a contingent claim when only the prices of the combination are observed academics the business community and government regulators have focused considerable attention on corporate takeovers in this paper we extend the literature on takeovers in two ways first we utilize the tools provided by optionpricing theory to examine the wealth effects of interfirm cash tender offers this analysis provides some new evidence on the possible motivations for corporate takeovers second we examine the pricing of a target firm s common stock following an interfirm cash tender offer this examination suggests that the market prices information uncertainty in a manner not captured by the standard capital asset pricing model capm in addition to providing evidence on tender offers and asset pricing the study also introduces a technique for unbundling the prices of a primary asset and a contingent claim when only the prices of the combination are observed this technique has the potential to be used in other applications previous researchers have documented substantial wealth gains for target

option prices implied price processes and stochastic volatility this paper characterizes all continuous price processes that are consistent with current option prices this extends derman and kani 1994 dupire 1994 1997 and rubinstein 1994 who only consider processes with deterministic volatility our characterization implies a volatility forecast that does not require a specific model only current option prices we show how arbitrary volatility processes can be adjusted to fit current option prices exactly just as interest rate processes can be adjusted to fit bond prices exactly the procedure works with many volatility models is fast to calibrate and can price exotic options efficiently using familiar lattice techniques

evolution in dynamic linkages across daily national stock indexes abstract this article investigates how dynamic linkages among the daily rates of return of eight national stock indexes have evolved since 1972 a dynamic simultaneous equations model is estimated to describe the contemporaneous and lead lag relationships across national equity markets over three different years 1972 1980 and 1987 results reveal growing market interdependence within the same geographical region over time while there are many significant intermarket relationships within the same 24 hour period there are few significant lagged responses across markets beyond 24 hours this suggests a high degree of international market efficiency furthermore japan s market influence has been growing to rival that of the usa

asymmetric spillover effects between the shanghai and hong kong stock markets evidence from quantile lagged regression abstractthis article surveys the asymmetric spillover effects between the mainland china based shanghai composite index sci and the hong kong based hang seng index hsi using a quantile lagged regression model compared to previous studies this article based on data before and after the 2008 global financial crisis presents a more detailed analysis as we investigate the spillovers in terms of returns volatilities and exchange rates between the renminbi rmb and the hong kong dollar hkd throughout the entire conditional return distribution including the central quantiles which are closely related to the normal circumstances and the extreme quantiles which correspond to the bear and bull markets first we find that the return spillovers from its lagged returns or from the other index not only vary across time but also depend on stock state second while return volatility may boost the stock market in a bull market it accelerates the decline in a bear market third the depreciation of the

structure and performance global interdependence of stock markets around the crash of october 1987 using a new data source on share price indices this paper finds no evidence that the substantial variations in the reactions to the crash of october 1987 across countries are related to the structure of markets however trading halts and capital controls on residents may have moderated the speed of declines in some markets the paper also examines one measure of interlinkages between markets the trading of foreign stocks on domestic markets and finds this to be closely related to interdependence between markets

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

offshore outsourcing decision making a policy maker s perspective this research aims at finding the best governing policy for offshore outsourcing of business activities we use analytical network process a multicriteria decision making methodology to create the evaluation framework from the perspective of decision makers stakeholders and influence groups four policy options are evaluated with respect to approximately 50 economic political technological and other factors the model provides both long term and short term views of the outsourcing issue concerned to all parties the all inclusive approach helps policy makers to decide on the best policy and has the potential to ease tension between proponents and opponents of offshore outsourcing

optimal option portfolio strategies deepening the puzzle of index option mispricing traditional methods of asset allocation such as mean variance optimization are not adequate for option portfolios because the distribution of returns is non normal and the short sample of option returns available makes it difficult to estimate their distribution we propose a method to optimize a portfolio of european options held to maturity with a myopic objective function that overcomes these limitations in an out of sample exercise incorporating realistic transaction costs the portfolio strategy delivers a sharpe ratio of 0 82 with positive skewness this performance is mostly obtained by exploiting mispricing between options and not by loading on jump or volatility risk premia

dynamic information spillovers in intraregionally focused spot and forward currency markets abstract this paper proposes an intraregionally focused tri currency modeling framework to investigate dynamic information spillovers across spot and forward exchange rate markets in frontier and emerging country currencies for both price levels and volatilities empirical estimates of structural parameters were obtained using an mgarch mskst model that incorporated the term structure of non deliverable forward ndf and deliverable forward df markets the dominance of regional currencies and the influence of differing forward contract maturities 1 3 6 and 12 months the currencies for nine countries were grouped into three regions northeast asia china korea and taiwan south southeast asia india indonesia and philippines and latin america brazil chile and columbia the currency for each selected country was evaluated within the regionally determined tri currency system we found that ndf markets play a dominant role over df markets with regard to price discovery during periods of tranquility during periods of crisis both ndf and df markets exhibit a more balanced impact on currency market price discovery mechanisms in addition distinct differences were observed across regions currencies in northeast asia were shown to be affected by the chinese renminbi during periods of crisis and the indian rupee could be regarded as the dominant currency in south southeast asia no robust results were obtained with regard to the dominance of currencies in latin america finally our results also suggest important distinctions between the effect of various instrument maturities on ndf and df market returns with df returns being more responsive to longer maturities 6 months and 12 months during tranquil periods ndf returns are more responsive to shorter maturities but during crisis periods this effect is diminished

asymmetric volatility transmission in international stock markets abstract the transmission mechanism of price and volatility spillovers across the new york tokyo and london stock markets is investigated the asymmetric impact of good news market advances and bad news market declines on volatility transmission is described by an extended multivariate exponential generalized autoregressive conditionally heteroskedastic egarch model using daily open to close returns we find strong evidence that volatility spillovers in a given market are much more pronounced when the news arriving from the last market to trade is bad a before and after october 1987 crash analysis reveals that the linkages and interactions among the three markets have increased substantially in the post crash era suggesting that national markets have grown more interdependent

women in transition changes in gender wage differentials in eastern europe and the former soviet union under state socialism women fared relatively well in the labor market female male wage differentials were similar to those in the west and female labor force participation rates were among the h

the future of operations management an outlook and analysis abstract managing operations in both manufacturing and service organizations have evolved tremendously over the years with the change in market requirements the market has become global thereby compelling enterprise operations to keep up the application of information technology information systems it is and outsourcing in managing operations have significantly altered the landscape of operations management om strategies techniques and technologies consciousness towards environmental and safety also urges companies to examine their om approach and manufacturing from various perspectives recently energy cost and protection against terrorism have changed the portfolio of enterprise operations and therefore the approach to om now it is time to revisit the om principles curriculum and training at the institution of higher learning and industries moreover manufacturing has become more of a service activity indicating significant service om including project management the profile of service industries has also changed in view of the emergence of globalization outsourcing and it coupled with the rapid economic growth of emerging economies such as brazil russia india and china bric in fact services account for approximately 80 of the us gross domestic product gdp this is also a growing figure of the gdps of other countries over the world again service om needs to be revisited in the context of the abovementioned paradigm shifts in considering the significance of the above mentioned changes in the market and society as a whole an attempt is made to study the evolution of om and subsequently to develop a framework for new om strategies and tactics that will support the competitiveness of organizations within the next 10 20 years

misspecification and the pricing and hedging of long term foreign currency options abstract this study examines the effects of stochastic volatility upon the pricing and hedging of long term foreign currency options the traditional method of pricing such options uses a constant volatility option model with an implicit volatility derived from a short term traded option we show that the traditional method leads to small pricing errors for short and medium term options but does a poor job in pricing long term options the traditional method also does a poor job for all maturities in determining the derivatives of the option s value with respect to the exchange rate delta and the volatility vega the errors in calculating these derivatives which are used in forming the replicating portfolio lead to large and costly errors in error hedging

dynamics of international integration of government securities markets abstract this paper investigates the dynamics of international government bond market integration in six of the g7 economies over two decades leading up to the global crisis it examines whether such integration had been significant the extent to which integration at the short and long end of the yield curve differed the nature of such integration and the extent of the decoupling of the long rates from short rates these issues are investigated using the rigorous smooth transition copula garch model framework the results show that integration at the long end of the yield curve had been increasing had become pronounced and was significantly greater than at the short end decoupling between the short and long end of the yield curve was notable with important implications for the efficacy of monetary policy in the period before the crisis

a simulation study of it outsourcing in the credit card business the use of monte carlo simulation for evaluation of financial risk of an information technology project selection decision is described a major thai bank considered the opportunity to expand credit card operations through information technology it alternatives considered were in house development and outsourcing there were many strategic reasons for the initiative however there were also many risks associated with the proposal a monte carlo simulation spreadsheet model was used to model risk parameters and to analyze key performance variables of financial performance key output variables were the number of cardholders expected project net present value net profit and expected return on investment the spreadsheet model made entry of model elements transparent and monte carlo simulation provided clear visual display of the financial output variables the bank used this information in its decision to outsource its credit card operations

volatility risk and the value premium evidence from the french stock market this paper documents that systematic volatility risk is an important factor that drives the value premium observed in the french stock market using returns on at the money straddles written on the cac 40 index as a proxy for systematic volatility risk i document significant differences between volatility factor loadings of value and growth stocks furthermore when markets are classified into expected booms and recessions volatility factor loadings are also time varying when expected market risk premium is above its average i e during expected recessions value stocks are seen riskier than their growth counterparts this implies in bad times investors shift their preferences away from value firms instead they use growth stocks as hedges against deteriorations in their wealth during those times the findings are in line with the predictions of rational asset pricing theory and support a flight to quality explanation

volatility spillovers and macroeconomic announcements evidence from crude oil markets the paper applies an event study methodologyaims to investigate the macroeconomic announcements effects on standard poor s500 and oil prices our results provide evidence for a significant impact of the us macroeconomic news on oil prices this impact is split into two components namely the direct effect common response and indirect effect volatility transmission altogether our results show that the volatility transmission is bidirectional not only a significant volatility transmission from the oil market to the us stock market is revealed but also a high volatility transmission is recorded from the oil market to the stock market especially after the release of consumption indicators

where ricardo and mill rebut and confirm arguments of mainstream economists supporting globalization most noneconomists are fearful when an emerging china or india helped by their still low real wage rates outsourcing and miracle export led developments cause layoffs from good american jobs this is a hot issue now and in the coming decade it will not go away prominent and competent mainstream economists enter into the debate to educate and correct warm hearted protestors who are against globalization here is a fair paraphrase of the argumentation that has been used recently by alan greenspan jagdish bhagwati gregory mankiw douglas irwin and economists john or jane doe spread widely throughout academia yes good jobs may be lost here in the short run but still total u s net national product must by the economic laws of comparative advantage be raised in the long run and in china too the gains of the winners from free trade properly measured work out to exceed the losses of the losers this is not by mysterious fuzzy magic but rather comes from a sharing of the trade induced rise in total global vectors of the goods and services that people in a democracy want never forget to tally the real gains of consumers alongside admitted possible losses of some producers in this working out of what schumpeter called creative capitalist destruction correct economic law recognizes that some american groups can be hurt by dynamic free trade but correct economic law vindicates the word creative destruction by its proof sic that the gains of the american winners are big enough to more than compensate the losers

performance measures and metrics in outsourcing decisions a review for research and applications outsourcing an operations strategy that influences the performance of a supply chain has become an important component of global operations management an effective global sourcing strategy helps companies to manage the flow of parts and finished products in meeting the needs of overseas and domestic markets outsourcing reduces the cost of assets facilitates core competencies to reduce production costs leads to strategic flexibility and reduces administrative and overhead costs some of the reasons why companies are against outsourcing include integration challenges sacrificing their competitive base opportunistic behaviour rising transaction and coordination costs limited innovation and higher procurement costs despite these shortcomings outsourcing will continue to play an important role in enhancing organizational competitiveness therefore an attempt has been made to review the literature on outsourcing with particular reference to performance measures and metrics pmms used in arriving at outsourcing decisions the main objective of this paper is to present a taxonomy classification of pmms in outsourcing decisions at the pre outsourcing during outsourcing and post outsourcing stages also based on the literature review and analysis an attempt is made to determine a list of specific tools and techniques for pmms in outsourcing finally the limitations of the paper and future research directions are presented

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

the week end effect in common stock returns the international evidence this paper examines the daily stock market returns for four foreign countries we find a so called week end effect in each country in addition the lowest mean returns for the japanese and australian stock markets occur on tuesday the remainder of the paper answers four questions are seasonal patterns in foreign stock markets independent of those previously reported in the u s do japan and australia exhibit a seasonal one day out of phase due to different time zones do settlement procedures across countries bias week end effects does the seasonal pattern in foreign exchange offset the week end effect in stocks for americans investing overseas some of the most anomalous empirical findings in finance are associated with the sample distributions of daily common stock returns cross 1 french 2 gibbons and hess 3 and keim and stambaugh 4 have documented that the average return on friday is abnormally high and the average return on monday is abnormally low to our knowledge this so called day of the week effect or week end effect has yet to be explained because this anomaly has been reported primarily for u s stock returns it is appropriate to investigate whether similar results occur for other countries positive findings would strongly support the proposition that the weekly seasonal effect is a general world wide phenomenon rather than the result of a special type of institutional arrangement in the u s to shed more light on this proposition our paper examines stock market returns in the u k japan canada and australia since we find a week end effect in each country we can examine a set of interesting questions for example are these seasonals independent of the previously reported seasonal in the u s due to different time zones do far eastern countries exhibit a seasonal one day out of phase do different settlement procedures across countries influence weekend effects does the seasonal in foreign exchange fluctuations see mcfarland pettit and sung 7 and levi 6 offset the week end effect in stock market returns for americans investing overseas

a methodology for assessing model risk and its application to the implied volatility function model we propose a methodology for assessing model risk and apply it to the implied volatility function ivf model this is a popular model among traders for valuing exotic options our research is different from other tests of the ivf model in that we reflect the traders practice of using the model for the relative pricing of exotic and plain vanilla options at one point in time we find little evidence of model risk when the ivf model is used to price and hedge compound options however there is significant model risk when it is used to price and hedge some barrier options

the world price of jump and volatility risk abstract we study international integration of markets for jump and volatility risk using index option data for the main global markets to explain the cross section of expected option returns we focus on return based multi factor models for each market separately we provide evidence that volatility and jump risk are priced risk factors there is little evidence however of global unconditional pricing of these risks we show that uk and us option markets have become increasingly interrelated and using conditional pricing models generates some evidence of international pricing finally the benefits of diversifying jump and volatility risk internationally are substantial but declining

explaining black white wage convergence 1940 1950 during the 1940s racial differences in wages narrowed at an unusually rapid pace using a decomposition technique different from that of previous studies the author shows that wage compression be

valuing futures and options on volatility abstract this paper presents simple closed form expressions for volatility futures and option prices and examines their implications for the characteristics of these securities we show that the properties of these volatility derivatives are fundamentally different from those of conventional option and futures contracts this analysis also provides insights into the role that volatility derivatives may play in managing and hedging volatility risk in financial markets

returns of claims on the upside and the viability of u shaped pricing kernels abstract when the pricing kernel is u shaped then expected returns of claims with payout on the upside are negative for strikes beyond a threshold determined by the slope of the u shaped kernel in its increasing region and have negative partial derivative with respect to strike in the increasing region of the kernel using returns of i s p 500 index calls ii calls on major international equity indexes iii digital calls iv upside variance contracts and v a theoretical construct that we denote as kernel call we find broad support for the implications of u shaped pricing kernels a possible theoretical reconciliation of our empirical findings is explored through a model that accommodates heterogeneity in beliefs about return outcomes and short selling

the gender gap in earnings an international comparison with european matched employer employee data this article examines the origin of the cross country heterogeneity of the gender wage gap in nine european countries using a unique harmonized international matched employer employee dataset our novel findings suggest that cross country differences in the intensity of female segregation into low paying workplaces is a relevant source of international differences in the size of the gap and that international disparities in the characteristics of wage structures are not very influential on the other hand the evidence is not fully conclusive with respect to the influence on the variations of the gap of different macroeconomic social and institutional country specific features considered previously in the literature

hedging demands in hedging contingent claims minimum variance hedging of a contingent claim in discrete time is suboptimal when the contingent claim is hedged for multiple periods and the objective is to maximize the expected utility of cumulative hedging errors this is because the hedging errors are not independent the difference between a minimum variance hedge and the optimal multiperiod hedge is called the hedging demand and depends on the hedger s preferences the characteristics of the contingent claim the trading frequency and horizon and most importantly the joint distribution of the contingent claim and the underlying security prices since modeling this joint distribution is empirically controversial i examine nonparametrically the economic importance of hedging demands in the case of hedging standard poor s 500 index options

outsourcing suppliers as downstream competitors biting the hand that feeds abstract in this paper we highlight an aspect of supplier opportunism in the outsourcing paradox that has largely been ignored by extant research the supplier as a direct competitor of the buyer firm in light of this paradox we offer a game theoretic framework in which we identify conditions under which firms could alleviate or mitigate this outsourcing problem our results show that apart from transaction costs firm level capabilities both ordinary and dynamic play important roles in determining the make only buy only or make and buy options a firm could exercise in countering the threat of the supplier as a potential competitor in the downstream marketplace

the euro and european financial market dependence a time varying copula model is used to investigate the impact of the introduction of the euro on the dependence between 17 european stock markets during the period 1994 2003 the model is implemented with a gjr garch ma t model for the marginal distributions and the gaussian copula for the joint distribution which allows capturing time varying non linear relationships the results show that within the euro area market dependence increased after the introduction of the common currency only for large equity markets such as in france germany italy the netherlands and spain structural break tests indicate that the increase in financial market dependence started around the beginning of 1998 when euro membership was determined and the relevant information was announced the uk and sweden but not other european countries outside the euro area are found to exhibit an increase in equity market co movement which is consistent with the interpretation that these countries may be expected to join the euro in the future

why do markets move together an investigation of u s japan stock return comovements this article explores the fundamental factors that affect cross country stock return correlations using transactions data from 1988 to 1992 we construct overnight and intraday returns for a portfolio of japanese stocks using their nyse traded american depository receipts adrs and a matched sample portfolio of u s stocks we find that u s macroeconomic announcements shocks to the yen dollar foreign exchange rate and treasury bill returns and industry effects have no measurable influence on u s and japanese return correlations however large shocks to broadbased market indices nikkei stock average and standard and poor s 500 stock index positively impact both the magnitude and persistence of the return correlations stock return cross country covariances play a key role in international finance changes in these covariances affect the volatility of portfolios and asset prices as these covariances increase one expects that a fewer domestic risks are internationally diversifiable so portfolio volatility increases b the risk premium on the world market portfolio increases 1 c the cost of capital increases for individual firms and d the domestic version of the capm becomes increasingly inadequate 2 despite the important economic consequences of changes in cross country covariances the determinants of the levels and dynamics of these covariances have been little studied from an academic

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

hedging volatility risk abstract volatility risk plays an important role in the management of portfolios of derivative assets as well as portfolios of basic assets this risk is currently managed by volatility swaps or futures however this risk could be managed more efficiently using options on volatility that were proposed in the past but were never introduced mainly due to the lack of a cost efficient tradable underlying asset the objective of this paper is to introduce a new volatility instrument an option on a straddle which can be used to hedge volatility risk the design and valuation of such an instrument are the basic ingredients of a successful financial product in order to value these options we combine the approaches of compound options and stochastic volatility our numerical results show that the straddle option is a powerful instrument to hedge volatility risk an additional benefit of such an innovation is that it will provide a direct estimate of the market price for volatility risk

modeling asymmetric comovements of asset returns existing time varying covariance models usually impose strong restrictions on how past shocks affect the forecasted covariance matrix in this article we compare the restrictions imposed by the four most popular multivariate garch models and introduce a set of robust conditional moment tests to detect misspecification we demonstrate that the choice of a multivariate volatility model can lead to substantially different conclusions in any application that involves forecasting dynamic covariance matrices like estimating the optimal hedge ratio or deriving the risk minimizing portfolio we therefore introduce a general model which nests these four models and their natural asymmetric extensions the new model is applied to study the dynamic relation between large and small firm returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies