248 research outputs found
Are Options on Index Futures Profitable for Risk Averse Investors? Empirical Evidence
No full textAmerican call and put options on the S&P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2007) over 1983-2006 are identified as potentially profitable investment opportunities. Call bid prices more frequently violate their upper bound than put bid prices do, while evidence of underpriced calls and puts over this period is scant. In out-of-sample tests, the inclusion of short positions in such overpriced calls, puts, and, particularly, straddles in the market portfolio is shown to increase the expected utility of any risk averse investor and also increase the Sharpe ratio, net of transaction costs and bid-ask spreads. The results are strongly supportive of mispricing. (JEL G11, G13, G14)
An International Duopoly Model Under Exchange Rate Uncertainty
No full textAn international duopoly model under exchange rate uncertainty
The implications of exchange rate uncertainty for the strategic interactions of a Cournot duopoly, which consists of an international firm and its local competitor in a foreign market, are explored in a framework where production decisions are made ex ante, while exports are determined after the exchange rate becomes known. The analysis highlights the effects arising from the ex post variability of sales earnings in the foreign market on the firms production levels, corporate profitablity, and risk exposure. These real and financial effects, associated with the endogenous quantity and price uncertainty generated by the exchange rate distribution, occur even under assumptions of risk neutrality, but are also essentially related to the asymmetry between the two firms, as represented by the greater marketing flexibility of the international corporation. More specifically, the exchange rate uncertainty changes fundamentally the nature of the game-theoretic solutions which emerge, given that the import penetration facing the local firm leads it to behave like an ex ante Stackelberg leader when it formulates its output decision. Since the exchange risk exposure of both the firms is a non-linear function of the exchange rate, it can not be completely eliminated by forward exchange covering. Finally, by indicating scenarios where the priee volatility in the duopoly market is less than that of the exchange rate, the analysis also offers the general insight that models with imperfect competition can provide an explanation for certain divergences from purchasing power parity.an International Duopoly Model Under Exchange Rate Uncertainty
Les implications de l'incertitude du taux de change sur les stratégies d'un duopole de Cournot, constitué d'une firme internationale et de son concurrent sur un marché local étranger, sont examinées dans un cadre où les décisions de production sont réalisées ex-ante tandis que les décisions d'exportation et de vente sont déterminées lorsque le taux de change est connu. L'analyse met en évidence les effets de la variabilité ex-post des gains tirés des ventes réalisées à l'étranger sur les niveaux ex-ante de production des entreprises, leur profit et leur exposition au risque. Ces effets réels et financiers, associés à l'incertitude sur les prix et les quantités générée par la distribution du taux de change, surviennent même sous l'hypothèse de neutralité au risque et sont essentiellement liés à l'asymétrie entre les deux firmes, représentée par la plus grande flexibilité des décisions de la firme internationale.
Plus spécifiquement, l'incertitude sur les taux de change modifie fondamentalement la nature des solutions de jeux puisque la pénétration des importations à laquelle est confrontée la firme locale la conduit à se comporter comme un leader de Stackelberg ex-ante quand elle forme sa décision de production. Puisque l'exposition au risque de change de chacune des firmes est une fonction non linéaire du taux de change, il ne peut être complètement éliminé par une couverture à terme.
Enfin, en exprimant des scénarios où la volatilité des prix dans la situation de duopole est inférieure à celle des taux de change, l'étude montre aussi que les modèles de concurrence imparfaite peuvent expliquer certaines divergences par rapport à la parité des pouvoirs d'achat.Owen Robert F., Perrakis Stylianos. An International Duopoly Model Under Exchange Rate Uncertainty. In: Revue économique, volume 39, n°5, 1988. pp. 1035-1060
Financial Structure and Market Equilibrium in a Vertically Differentiated Industry
No full textThis paper examines the effects of uncertainty and the choice of financial structure in a vertically differentiated duopoly. In the market model consumers are located along a continuum of taste parameters and prefer unanimously higher to lower qualities when quality prices are set at average variable cost. In such a model only two firms can survive with a positive market share. We introduce uncertainty in demand by varying the range of the consumer taste parameter and consider a simultaneous game of sequential choices of quality, financial structure and product price, with varying order of decision-making and revelation of information. We consider both restricted and free entry. It is shown that financial structure affects market equilibrium, which is also heavily dependent on the order of choice of structure and quality, as well as on whether uncertainty exists in the lower or the upper limit of the taste parameter. In all cases leverage increases the lower quality and in most cases it also increases the lower quality price. There are also welfare implications, with the use of leverage when it is optimal improving both total and consumer surplus.Vertical differentiation; uncertainty; financial structure; leverage; quality; sequential choice
Transferable Emissions Permits
No full textThis paper introduces the rationale of transferable emissions permits as an instrument in pollution control policies and the applicability of this instrument. Then the issues in implementation of emissions permits system are discussed. The experience of
Option Pricing: Real and Risk-Neutral Distributions
No full textThe central premise of the Black and Scholes [Black, F., Scholes, M. (1973). The pricing of options and corporate liabilities. Journal of Political Economy 81, 637–659] and Merton [Merton, R. (1973). Theory of rational option pricing. Bell Journal of Economics and Management Science 4, 141–184] option pricing theory is that there exists a self-financing dynamic trading policy of the stock and risk free accounts that renders the market dynamically complete. This requires that the market be complete and perfect. In this essay, we are concerned with cases in which dynamic trading breaks down either because the market is incomplete or because it is imperfect due to the presence of trading costs, or both. Market incompleteness renders the risk-neutral probability measure non unique and allows us to determine the option price only within a range. Recognition of trading costs requires a refinement in the definition and usage of the concept of a risk-neutral probability measure. Under these market conditions, a replicating dynamic trading policy does not exist. Nevertheless, we are able to impose restrictions on the pricing kernel and derive testable restrictions on the prices of options.We illustrate the theory in a series of market setups, beginning with the single period model, the two-period model and, finally, the general multiperiod model, with or without transaction costs.We also review related empirical results that document widespread violations of these restrictions.Option; Pricing
Mispricing of S&P 500 Index Options
No full textWidespread violations of stochastic dominance by one-month S&P 500 index call options over 1986-2006 imply that a trader can improve expected utility by engaging in a zero-net-cost trade net of transaction costs and bid-ask spread. Although pre-crash option prices conform to the Black-Scholes-Merton model reasonably well, they are incorrectly priced if the distribution of the index return is estimated from time-series data. Substantial violations by post-crash OTM calls contradict the notion that the problem primarily lies with the left-hand tail of the index return distribution and that the smile is too steep. The decrease in violations over the post-crash period 1988-1995 is followed by a substantial increase over 1997-2006 which may be due to the lower quality of the data but, in any case, does not provide evidence that the options market is becoming more rational over time.
Are options on index futures profitable for risk-averse investors? : Empirical evidence
No full textAmerican options on the S&P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2009) from 1983 to 2006 are identified as potentially profitable trades. Call bid prices more frequently violate their upper bound than put bid prices do, while violations of the lower bounds by ask prices are infrequent. In out-of-sample tests of stochastic dominance, the writing of options that violate the upper bound increases the expected utility of any risk-averse investor holding the market and cash, net of transaction costs and bid-ask spreads. The results are economically significant and robust.publishe
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