Pascal Botteron, Marc Chesney, Rajna Gibson-Asner, Analyzing firms' strategic investment decisions in a real options' framework, Journal of international financial markets, institutions & money, Vol. 13 (5), 2003. (Journal Article)
Within the context of investment under uncertainty, the real options literature has led to models that capture primarily the time to wait flexibility of monopolistic corporations' investment decision. In this paper, we propose an approach which relies on barrier options to model production and/or sales delocalization flexibility for multinational enterprises making decisions under exchange rate uncertainty. We then extend the model by introducing game theoretic considerations to show how the information set and the competitive structure of the market may lead firms to act strategically and exercise their delocalization options preemptively at an endogenously fixed exchange rate barrier. |
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Thorsten Hens, Jean-Jacques Herings, Arkadi Predtetchinskii, Limits to Arbitrage when Market Participation Is Restricted, In: Working paper series / Institute for Empirical Research in Economics, No. No. 176, 2003. (Working Paper)
There is an extensive literature claiming that it is often di*cultnto make use of arbitrage opportunities in *nancial markets. Thisnpaper provides a new reason why existing arbitrage opportunitiesnmight not be seized. We consider a world with short-lived securities,nno short-selling constraints and no transaction costs. We show thatnto exploit all existing arbitrage opportunities, traders should paynattention to all *nancial markets simultaneously. It gives a generalnresult stating that failure to do so will leave some arbitrage oppor-ntunies unexploited with probability one. |
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Thorsten Hens, Bodo Vogt, Money and Reciprocity, In: Working paper series / Institute for Empirical Research in Economics, No. No. 138, 2003. (Working Paper)
Based on an experimental analysis of a simple monetary economy we argue that a monetarynsystem is more stable than one would expect from individual rationality. We show thatnpositive reciprocity stabilizes the monetary system, provided every participant considers thenfeedbacks of his choice to the stationary equilibrium. If however the participants do not playnstationary strategies and some participants notoriously refuse to accept money then due tonnegative reciprocity their behavior will eventually induce a break down of the monetarynsystem. |
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Carmen Tanner, Sybille Wölfing Kast, Promoting sustainable consumption: Determinants of green purchases by Swiss consumers Promoting Sustainable Consumption, Psychology & Marketing, Vol. 20 (10), 2003. (Journal Article)
Given that overconsumption in industrial countries is a main cause of environmental degradation, a shift toward more sustainable consumption patterns is required. This study attempts to uncover personal and contextual barriers to consumers' purchases of green food and to strengthen knowledge about fostering green purchases. Survey data are used to examine the influence of distinct categories of personal factors (such as attitudes, personal norms, perceived behavior barriers, knowledge) and contextual factors (such as socioeconomic characteristics, living conditions, and store characteristics) on green purchases of Swiss consumers. Results from regression analysis suggest that green food purchases are facilitated by positive attitudes of consumers toward (a) environmental protection, (b) fair trade, (c) local products, and (d) availability of action-related knowledge. In turn, green behavior is negatively associated with (e) perceived time barriers and (f) frequency of shopping in supermarkets. Surprisingly, green purchases are not significantly related to moral thinking, monetary barriers, or the socioeconomic characteristics of the consumers. Implications for policy makers and for companies and marketers engaged in the promotion and commercialization of green products are discussed. |
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Alexander Wagner, The efficiency of tradable permit markets: A few comments, In: 4th International Energy Symposium, London, 2003-10-01. (Conference or Workshop Paper published in Proceedings)
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Igor V Evstigneev, Thorsten Hens, Klaus Reiner Schenk-Hoppé, Evolutionary Stable Stock Markets, In: Working paper series / Institute for Empirical Research in Economics, No. No. 170, 2003. (Working Paper)
This paper shows that a stock market is evolutionary stable if andnonly if stocks are evaluated by expected relative dividends. Any othernmarket can be invaded by portfolio rules that will gain market wealthnand hence change the valuation. In the model the valuation of assetsnis given by the wealth average of the portfolio rules in the market. Thenwealth dynamics is modelled as a random dynamical system. Necessary and sufficient conditions are derived for the evolutionary stabilitynof portfolio rules when (relative) dividend payoffs form a stationarynMarkov process. These local stability conditions lead to a unique evolutionary stable strategy according to which assets are evaluated bynexpected relative dividends. |
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Thorsten Hens, Stefan Reimann, Bodo Vogt, Competitive Nash Equilibria and Two Period Fund Separation, In: Working paper series / Institute for Empirical Research in Economics, No. No. 172, 2003. (Working Paper)
We suggest a simple asset market model in which we analyze competitive and strategic behaviornsimultaneously. If for competitive behavior two-fund separation holds across periods then itnalso holds for strategic behavior. In this case the relative prices of the assets do not dependnon whether agents behave strategically or competitively. Those agents acting strategically willnhowever invest less in the common mutual fund. Constant relative risk aversion and absencenof aggregate risk are shown to be two alternative sufficient conditions for two-period fundnseparation. With derivatives further strategic aspects arise and strategic behavior is distinctnfrom competitive behavior even for those utility functions leading to two-fund separation. |
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Marc Chesney, Pauline Barrieu, Optimal Timing to Adopt Environmental Policy in a Strategic Framework, Environmental Modeling & Assessment, Vol. 8 (3), 2003. (Journal Article)
In this paper, the problem of optimal timing, when to adopt an environmental policy in a strategic framework is considered. Using real options theory and some basic tools of game theory, we show that, under certain assumptions, a country behaving strategically should wait longer before adopting such a policy than if it behaves unstrategically or within a larger entity. Such a postponed decision is sub-optimal as regards to the environment protection. |
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Kjell G. Nyborg, Ilya A Strebulaev, Multiple Unit Auctions and Short Squeezes, Review of Financial Studies, Vol. 17 (2), 2003. (Journal Article)
This article develops a theory of multiunit auctions where short squeezes can occur in the secondary market. Both uniform and discriminatory auctions are studied and bidders can submit multiple bids. We show that bidders with short and long preauction positions have different valuations in an otherwise common value setting. Discriminatory auctions lead to more short squeezing and higher revenue than uniform auctions, ceteris paribus. Asymptotically, as the auction size approaches infinity, the two formats lead to equivalent outcomes. Shorts employ more aggressive equilibrium bidding strategies. Most longs strategically choose to be passive. Free riding on a squeeze by small, long players has no impact on these results, but affects revenue in discriminatory auctions. |
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Alexandre Ziegler, Edward P Lazear, The Dominance of Retail Stores, In: NBER, Cambridge, No. 9795, 2003. (Working Paper)
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Alexandre Ziegler, Fred Henneberger, Aussenhandel und Auslandsproduktion im Dienstleistungssektor: Theorie und Empirie der Beschäftigungseffekte für die schweizerische Tourismusbranche, Swiss Journal of Economics and Statistics = Schweizerische Zeitschrift für Volkswirtschaft und Statistik, Vol. 139 (4), 2003. (Journal Article)
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Andrea Baranzini, Marc Chesney, Jacques Morisset, The impact of possible climate catastrophes on global warming policy, Energy Policy, Vol. 31 (8), 2003. (Journal Article)
Recent studies on global warming have introduced the inherent uncertainties associated with the costs and benefits of climate policies and have often shown that abatement policies are likely to be less aggressive or postponed in comparison to those resulting from traditional cost–benefit analyses (CBA). Yet, those studies have failed to include the possibility of sudden climate catastrophes. The aim of this paper is to account simultaneously for possible continuous and discrete damages resulting from global warming, and to analyse their implications on the optimal path of abatement policies. Our approach is related to the new literature on investment under uncertainty, and relies on some recent developments of the real option in which we incorporated negative jumps (climate catastrophes) in the stochastic process corresponding to the net benefits associated with the abatement policies. The impacts of continuous and discrete climatic risks can therefore be considered separately. Our numerical applications lead to two main conclusions: (i) gradual, continuous uncertainty in the global warming process is likely to delay the adoption of abatement policies as found in previous studies, with respect to the standard CBA; however (ii) the possibility of climate catastrophes accelerates the implementation of these policies as their net discounted benefits increase significantly. |
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Haim Levy, Enrico De Giorgi, Thorsten Hens, Two Paradigms and Nobel Prizes in Economics: A Contradiction or Coexistence?, In: Working paper series / Institute for Empirical Research in Economics, No. No. 161, 2003. (Working Paper)
Markowitz and Sharpe won the Nobel Prize in Economics more than a decade ago for thendevelopment of Mean-Variance analysis and the Capital Asset Pricing Model (CAPM). In the yearn2002, Kahneman won the Nobel Prize in Economics for the development of Prospect Theory. Cannthese two apparently contradictory paradigms coexist?nIn deriving the CAPM, Sharpe, Lintner and Mossin assume expected utility (EU)nmaximization following the approach proposed by Markowitz, normal distributions and risknaversion. Kahneman & Tversky suggest Prospect Theory (PT) and Cumulative Prospect Theoryn(CPT) as an alternative paradigm to EU theory. They show that investors distort probabilities,nmake decisions based on change of wealth, exhibit loss aversion and maximize the expectation ofnan S-shaped value function which contains a risk-seeking segment. Employing change of wealthnrather than total wealth contradicts EU theory. The subjective distortion of probabilities violatesnthe CAPM assumptions of normality and homogeneous expectations, and the S-shaped valuenfunction violates the risk aversion assumption. We prove in this paper that although CPT (and PT)nis in conflict to EUT, and violates some of the CAPM's underlying assumptions, the securitynmarket line theorem (SMLT) of the CAPM is intact in the CPT framework. |
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Haim Levy, Enrico De Giorgi, Thorsten Hens, Prospect Theory and the CAPM: A contradiction or coexistence?, In: Working paper series / Institute for Empirical Research in Economics, No. No. 157, 2003. (Working Paper)
Under the assumption of normally distributed returns, we analyzenwhether the Cumulative Prospect Theory of Tversky and Kahneman (1992)nis consistent with the Capital Asset Pricing Model. We find that in everynfinancial market equilibrium the Security Market Line Theorem holds.nHowever, under the specific functional form suggested by Tversky andnKahneman (1992) financial market equilibria do not exist. We suggest annalternative functional form that is consistent with both, the experimentalnresults of Tversky and Kahneman and also with the existence of equilibria. |
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Stefano Battiston, Eric Bonabeu, Gérard Weisbuch, Decision making dynamics in corporate boards, Physica A: Statistical Mechanics and its Applications, Vol. 322, 2003. (Journal Article)
Members of boards of directors of large corporations who also serve together on an outside board, form the so-called interlock graph of the board and are assumed to have a strong influence on each others’ opinion. We here study how the size and the topology of the interlock graph affect the probability that the board approves a strategy proposed by the Chief Executive Officer. We propose a measure of the impact of the interlock on the decision making, which is found to be a good predictor of the decision dynamics outcome. We present two models of decision making dynamics, and we apply them to the data of the boards of the largest US corporations in 1999. |
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Friedrich Schneider, Alexander Wagner, Tradable Permits - Ten Key Design Issues, CESifo Forum, 2003. (Journal Article)
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Markus Leippold, Liuren Wu, Design and Estimation of Quadratic Term Structure Models, Review of Finance, Vol. 7 (1), 2003. (Journal Article)
We consider the design and estimation of quadratic term structure models. We start with a list of stylized facts on interest rates and interest rate derivatives, classified into three layers: (1) general statistical properties, (2) forecasting relations, and (3) conditional dynamics. We then investigate the implications of each layer of property on model design and strive to establish a mapping between evidence and model structures. We calibrate a two-factor model that approximates these three layers of properties well, and show that a flexible specification for the market price of risk is important in capturing the stylized evidence in forecasting relations while factor interactions are indispensable in generating the hump-shaped dynamics of bond yields. |
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Allen N Berger, Qinglei Dai, Steven Ongena, David C Smith, To what extent will the banking industry be globalized? A study of bank nationality and reach in 20 European nations, Journal of Banking and Finance, Vol. 27 (3), 2003. (Journal Article)
We model two dimensions of bank globalization – bank nationality (a bank from the firm’s host nation, its home nation, or a third nation) and bank reach (a global, regional, or local bank) using a two-stage nested multinomial logit model. Our data set includes over 2000 foreign affiliates of multinational corporations operating in 20 European nations and over 250 banks that serve them. We find that these firms frequently use host nation banks for cash management services, and that bank reach may be strongly influenced by this choice of bank nationality. Our results suggest limits to the degree of future bank globalization. |
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Alexander Wagner, Understanding exchange rate policy announcements: A political economy approach, Journal of public and international affairs, Vol. 14 (1), 2003. (Journal Article)
The stability of the international financial system depends on the consistency of announcements, beliefs, and actions by countries and international organizations like the IMF. This article considers the first element in this trinity and analyzes the incentives of a rational policy maker to announce a fixed or flexible exchange rate regime. In a cross-sectional analysis for the 1990s, I find that countries with a non-functioning legal system, a low degree of the rule of law, high expropriation risk, low infrastructure quality and similar characteristics are more ikely to announce fixed exchange rates. This result is consistent with a theoretical argument about announcing a fixed regime as a signal of “goodness” to the international community. |
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Robert N Stavins, Alexander Wagner, Gernot Wagner, Interpreting sustainability in economic terms: Dynamic efficiency plus intergenerational equity, Economics Letters, Vol. 79 (3), 2003. (Journal Article)
Economists have confined the concept of "sustainability" to intertemporal distributional equity.We propose a broader definition, combining dynamic efficiency and intergenerational equity, and relate it to two concepts from neoclassical economics: potential Pareto-improvements and inter-personal compensation. |
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