Pablo Koch Medina, Sandro Merino, Mathematical Finance and Probability, Birkhäuser Verlag, Basel, 2003. (Book/Research Monograph)
The objective of this book is to give a self-contained presentation to the theory underlying the valuation of derivative financial instruments, which is becoming a standard part of the toolbox of professionals in the financial industry. Although a complete derivation of the Black-Scholes option pricing formula is given, the focus is on finite-time models. Not going for the greatest possible level of generality is greatly rewarded by a greater insight into the underlying economic ideas, putting the reader in an excellent position to proceed to the more general continuous-time theory.
The material will be accessible to students and practitioners having a working knowledge of linear algebra and calculus. All additional material is developed from the very beginning as needed. In particular, the book also offers an introduction to modern probability theory, albeit mostly within the context of finite sample spaces. The style of presentation will appeal to financial economics students seeking an elementary but rigorous introduction to the subject; mathematics and physics students looking for an opportunity to become acquainted with this modern applied topic; and mathematicians, physicists or quantitatively inclined economists working in the financial industry. |
|
Niels Jungbluth, Carmen Tanner, Evidence for the coincidence effect in environmental judgments: Why isn't it easy to correctly identify environmentally friendly food products?, Journal of Experimental Psychology: Applied, Vol. 9 (1), 2003. (Journal Article)
The coincidence effect-a phenomenon known in similarity research-suggests that people assign extra weight to features that 2 items have in common. The role of this effect in 2 kinds of environmental judgments about food products is investigated. Task 1 ("How environmentally friendly is a particular food product compared with a reference?") provided some evidence for the coincidence hypothesis. However, Task 2 ("How much more or less environmentally harmful is a food product compared with a standard?") showed anticoincidence. People's subjective evaluations were examined in regard to how they matched or deviated from objective measures of harmful environmental consequences related to food products. Coincidence and anticoincidence help to explain when and why subjective and objective evaluations may diverge. |
|
Carmen Tanner, Steps to Transdisciplinary Sustainability Research, Human Ecology Review, Vol. 10 (2), 2003. (Journal Article)
|
|
Stefano Battiston, Gérard Weisbuch, Eric Bonabeau, Decision spread in the corporate board network, Advances in Complex Systems, Vol. 6 (4), 2003. (Journal Article)
The boards of large corporations sharing some of their directors are connected in complex networks. Boards are responsible for corporations' long-term strategy and are often involved in decisions about a common topic related to the belief in economical growth or recession. We are interested in understanding under which conditions a large majority of boards making the same decision can emerge in the network. We present a model where board directors are engaged in a decision-making dynamics based on "herd behavior." Boards influence each other through shared directors. We find that imitation of colleagues and opinion bias due to the interlock do not trigger an avalanche of identical decisions over the board network, whereas the information about interlocked boards' decisions does. There is no need to invoke global public information, nor external driving forces. This model provides a simple endogenous mechanism to explain the fact that boards of the largest corporations of a country can, in the span of a few months, make the same decisions about general topics. |
|
Steven Ongena, David C Smith, Dag Michalsen, Firms and their distressed banks: lessons from the Norwegian banking crisis, Journal of Financial Economics, Vol. 67 (1), 2003. (Journal Article)
We use the near-collapse of the Norwegian banking system during the period 1988–1991 to measure the impact of bank distress announcements on the stock prices of firms maintaining a relationship with a distressed bank. Although banks experienced large and permanent downward revisions in their equity value during the event period, firms maintaining relationships with these banks faced only small and temporary changes, on average, in stock price. Firms with access to unused liquid bank funds and firms that issued equity just prior to the crisis experience relatively high abnormal returns. Overall, the aggregate impact of bank distress appears small. |
|
Alexandre Ziegler, Darrell Duffie, Liquidation Risk, Financial Analysts Journal, Vol. 59 (3), 2003. (Journal Article)
Turmoil in financial markets is often accompanied by a significant decrease in market liquidity. Here, we investigate how such key risk measures as likelihood of insolvency, value at risk, and expected tail loss respond to bid-ask spreads that are likely to widen just when positions must be liquidated to maintain capital ratios. Our results show that this sort of illiquidity causes significant increases in risk measures, especially with fat-tailed returns. A potential strategy that a financial institution may adopt to address this problem is to sell illiquid assets first while keeping a "cushion" of cash and liquid assets for a "rainy day." Our analysis demonstrates that, although such a strategy increases expected transaction costs, it may significantly decrease tail losses and the probability of insolvency. In light of our results, we recommend that financial institutions carefully examine their strategies for liquidation during periods of severe stress. |
|
Alexandre Ziegler, Incomplete Information and Heterogeneous Beliefs in Continuous-time Finance, Springer Verlag, Heidelberg, 2003. (Book/Research Monograph)
|
|
Markus Leippold, Fabio Trojani, Market Risk: A Primer, In: Risk and Risky Management, National Centre of Competence in Research, Zürich, p. 36 - 39, 2003. (Book Chapter)
|
|
Markus Leippold, Barbara Doebeli, Paolo Vanini, From Operational Risk to Operational Excellence, In: Advances in operational risk management : firm-wide issues for financial institutions, RISK Publications, London, p. 239 - 252, 2003. (Book Chapter)
|
|
Felix Kübler, Karl Schmedders, Stationary equilibria in asset-pricing models with incomplete markets and collateral, Econometrica, Vol. 71 (6), 2003. (Journal Article)
We consider an infinite-horizon exchange economy with incomplete markets and collateral constraints. As in the two-period model of Geanakoplos and Zame (2002), households can default on their liabilities at any time, and financial securities are only traded if the promises associated with these securities are backed by collateral. We examine an economy with a single perishable consumption good, where the only collateral available consists of productive assets. In this model, competitive equilibria always exist and we show that, under the assumption that all exogenous variables follow a Markov chain, there also exist stationary equilibria. These equilibria can be characterized by a mapping from the exogenous shock and the current distribution of financial wealth to prices and portfolio choices. We develop an algorithm to approximate this mapping numerically and discuss ways to implement the algorithm in practice. A computational example demonstrates the performance of the algorithm and shows some quantitative features of equilibria in a model with collateral and default. |
|
Marc Paolella, K Carstensen, On Median Unbiased Inference for First Order Autoregressive Models, In: Contributions to Modern Econometrics: From Data Analysis to Economic Policy, Kluwer Academic Publishers, New York, p. 23 - 38, 2003. (Book Chapter)
|
|
Marc Paolella, Stefan Mittnik, Prediciton of Financial Downside-Risk with Heavy-Tailed Conditional Distributions, In: Handbook of Heavy-Tailed Distributions in Finance, Elsevier North–Holland, Amsterdam, p. 387 - 403, 2003. (Book Chapter)
|
|
Marc Paolella, Computing moments of ratios of quadratic forms in normal variables, Computational Statistics & Data Analysis, Vol. 42 (3), 2003. (Journal Article)
The accuracy and speed of numerical methods for computing the moments of a ratio of quadratic forms in normal variables is examined, with particular application to the sample autocorrelation function. Methods based on a saddlepoint approximation are demonstrated to be not only superior to existing approximations, but are numerically reliable and virtually as accurate as the method suitable for exact computations, while taking only a fraction of the time to compute. The new method also maintains its accuracy for time series models near the nonstationary border, which is of significant interest for unit-root inference and also a case for which first-order mean and variance approximations break down. As a wide variety of test statistics and their power functions arising in econometric models are expressible in the general form considered, the method should prove very useful for data analysis and model building. |
|
Thorsten Hens, Klaus Reiner Schenk-Hoppé, Markets Do Not Select For a Liquidity Preference as Behavior Towards Risk, In: Working paper series / Institute for Empirical Research in Economics, No. No. 139, 2002. (Working Paper)
Tobin (1958) has argued that in the face of potential capital losses on bonds it is nreasonable to hold cash as a means to transfer wealth over time. It is shown that this assertion cannot be sustained taking into account the evolution of wealth of cash holders versus non cash holders. Cash holders will be driven out of the market in the long run by traders who only use a (risky) long-lived asset to transfer wealth. |
|
Henri Loubergé, Stéphane Villeneuve, Marc Chesney, Long-term risk management of nuclear waste: a real options approach, Journal of Economic Dynamics and Control, Vol. 27 (1), 2002. (Journal Article)
In this paper, we investigate the optimal timing for deep geological disposal of nuclear waste. Our model is based on the real options approach to investment under uncertainty. In this context, the problem is similar to the optimal exercise policy for a perpetual American spread option. The potential usefulness of such a model for actual decision-making on a sensitive issue is illustrated by some numerical simulations. |
|
Thorsten Hens, Igor V Evstigneev, Klaus Reiner Schenk-Hoppé, Market selection of financial trading strategies: global stability, Mathematical Finance, Vol. 12 (4), 2002. (Journal Article)
In this paper we analyze the long‐run dynamics of the market selection process among simple trading strategies in an incomplete asset market with endogenous prices. We identify a unique surviving financial trading strategy. Investors following this strategy asymptotically gather total market wealth. This result generalizes findings by Blume and Easlcy (1992) to any complete or incomplete asset market. |
|
Thorsten Hens, Klaus Reiner Schenk-Hoppé, Martin Stalder, An Application of Evolutionary Finance to Firms Listed in the Swiss Market Index, In: Working paper series / Institute for Empirical Research in Economics, No. No. 128, 2002. (Working Paper)
This paper presents an application of evolutionary portfolio theory to stocks listed in the Swiss Market Index (SMI). We study numerically the long-run outcome of the competition of rebalancing rules for market shares in a stock market with actual dividends taken from firms listed in the SMI. Returns are endogenous because prices are determined by supply and demand stemming from the rebalancing rules. Our simulations show that in competition with rebalancing rules derived from Mean-Variance Optimization, Maximum Growth Theory and Behavioral Finance, the evolutionary portfolio rule discovered in Hens and Schenk-Hoppé (2001) will eventually hold total market wealth. According to this simple rule the portfolio weights should be proportional to the expected relative dividends of the assets. |
|
Thorsten Hens, Jörg Laitenberger, Andreas Löffler, Two remarks on the uniqueness of equilibria in the CAPM, Journal of Mathematical Economics, Vol. 37 (2), 2002. (Journal Article)
In the standard ‘capital asset pricing model’ (CAPM) with a riskless asset we give a sufficient condition for uniqueness. This condition is a joint restriction on the agents’ endowments and their preferences which is compatible with non-increasing absolute risk aversion and which is in particular satisfied with constant absolute risk aversion. Moreover, in the CAPM without a riskless asset we give an example for multiple equilibria even though all agents have constant absolute risk aversion. |
|
Thorsten Hens, Klaus Reiner Schenk-Hoppé, Bodo Vogt, On the Micro-foundations of Money: The Capitol Hill Baby-Sitting Co-op, In: Working paper series / Institute for Empirical Research in Economics, No. No. 108, 2002. (Working Paper)
We suggest a new micro-foundation of money in which markets are well-organized but consumers' preferences are stochastic. In this model, we solve for stationary equilibria and show that there is an optimum quantity of money. The rational solution of our model is compared with actual behavior in a laboratory experiment. It turns out that the experiment gives support to our theoretical results. |
|
Carmen Tanner, S Wölfing Kast, Von Antiökologen und Musterökologen: Optionen und Restriktionen des ökologischen Lebensmitteleinkaufs, In: Transdisziplinäre Forschung in Aktion : Optionen und Restriktionen nachhaltiger Ernährung : Themenband Schwerpunktprogramm Umwelt Schweiz, Hochschulverlag, ETH Zürich, Zürich, p. 53 - 102, 2002. (Book Chapter)
|
|