Contributions published at Department of Banking and Finance (Pablo Koch Medina)

This paper is aimed at characterizing excess demand functions around noncritical spot price systems in two-period exchange economies with incomplete markets and real assets.

This article reviews static and dynamic models of information aggregation in the literature. It highlights the key assumptions these models make, the results they obtain and the issues that still need to be explored to further our understanding of information aggregation in financial markets.

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In this paper we use the Cox, Ingersoll, and Ross (1985b) single-factor, term structure model and extend it to the pricing of American default-free bond puts. We provide a quasi-analytical formula for these option prices based on recently established mathematical results for Bessel bridges, coupled with the optimal stopping time method. We extend our results to another interest rate contingent claim and provide a quasi-analytical solution for American yield option prices which illustrates the flexibility of our framework.

The exponential of a scalar diffusion is considered. Point estimates of the diffusion coefficient can be obtained by considering proportional increments of different powers of the exponential. an investigation of the minimum variance estimator gives unique optimal power.

This article gives a preference-based characterization of subjective expected utility for the general equilibrium model with a finite number of states. The characterization follows Savage (1954) as closely as possible but has to abandon his axiom (P6), atomlessness of events, since this requires an infinite state space. To introduce continuity we replace (P6) with a continuity assumption on the set of consequences and assume the preferences are smooth. Then we apply Savage's sure-thing principle and his state-independence axiom to get an additively separable utility representation. Finally, to separate subjective probabilities from basic tastes, we apply a new axiom, which states that for each pair of states the marginal rate of substitution is constant along the certainty line.

The book is an introduction to abstract semi-linear evolution equations of parabolic type, with special emphasis on periodic problems. Throughout, it makes use of the theory of interpolation spaces rather than fractional power spaces. While the use of fractional power spaces involves a lot of technicalities, the use of interpolation spaces allows a much more elegant and complete treatment of semi-linear problems, particularly for non-autonomous equations. At the same time it brings more conceptual clarity. It is then shown how these abstract results can be applied to concrete reaction-diffusion equations and systems.

We use the modified Black-Scholes model and a random variance option pricing model tostudy prices of European currency options traded in Geneva. The options, which cannot be exercised early, include calls and puts on the dollar/Swiss franc exchange rate. In the empirical analysis, we examine the model fit and the biases with respect to the strike price, time to maturity, and volatility. There is some evidence of mispricing and there are small gains available by trading with the random variance model.

The economic literature on the demand for non-life insurance has mainly emphasized the influence of risk aversion. Under the assumption of decreasing absolute risk aversion, it has been shown that insurance should be an inferior good. Under the assumption of increasing relative risk aversion, it has been shown that the wealth elasticity of insurance should exceed one. These seemingly contradictory propositions are due to strong implicit assumptions about changes in the composition of wealth. The present paper proposes a more general model where the effects of risk aversion and of the composition of wealth are considered jointly. Necessary and sufficient conditions for a decrease in the willingness-to-insure are defined, and their implications for the interpretation of empirical results on insurance spending and risk-averse behavior are pointed out.