47 research outputs found
Portfolio Optimization wehn Risk Factors are Conditionally Varying and Heavy Tailed
No full textAssumptions about the dynamic and distributional behavior of risk factors are crucial for the construction of optimal portfolios and for risk assessment. Although asset returns are generally characterized by conditionally varying volatilities and fat tails, the normal distribution with constant variance continues to be the standard framework in portfolio management. Here we propose a practical approach to portfolio selection. It takes both the conditionally varying volatility and the fat-tailedness of risk factors explicitly into account, while retaining analytical tractability and ease of implementation. An application to a portfolio of nine German DAX stocks illustrates that the model is strongly favored by the data and that it is practically implementable.Multivariate Stable Distribution, Index Model, Portfolio Optimization, Value-at-Risk, Model Adequacy
Switching costs, experience goods and dynamic price competition
No full textDynamic price competition, Experience goods, Markov-perfect equilibrium, Switching costs, C73, D21, D43, L13, L14, L15,
Dynamic Price Competition with Persistent Consumer Tastes
No full textThe dynamic price competition in a horizontally differentiated duopoly when consumers value previous market shares is analyzed. The conditions for the existence of stable Markov-Perfect Equilibrium(MPE) in linear strategies are established. When they exist, the optimal pricing policies suggest that a firm with a higher previous market share charges a higher price, all else equal. It is possible to observe pricing below cost for some periods. In the steady state, the MPE leads to a more competitive outcome (lower prices) than the case where there is no persistence in consumer tastes. The model can produce outcomes where the steady state is reached very slowly which provides an alternative explanation for slow emergence of competition when entrants face an established incumbent: It may be due to persistence in consumer tastes.
Welfare Improving Product Bans
No full textAbstract We formulate a model of vertical differentiation to evaluate the welfare effects of removing a low quality product from the market. The mechanism through which a welfare improvement might arise is simple: Once the low quality low cost alternative is banned, entry into the high quality segment becomes more likely. This in turn may lead to a significant reduction in the price of the high quality product. We find that such a ban might improve aggregate welfare when consumers value the higher quality more, the marginal cost of producing high quality is lower, the price of low quality is higher, and the price sensitivity for high quality is not too high. JEL classification: L1, L11, L50, D4
Exclusive dealing with network effects
No full textThis paper explores the ability of an incumbent to use introductory offers to dominate a market in the face of a more efficient rival when network effects rather than scale economies are present. Both in the case of one-sided and two-sided markets, for introductory offers to be profitable when consumers can multihome, they need to be discriminatory and exclusive. In this setting, exclusivity as opposed to just commitment to purchase is critical -- consumers must commit not to purchase from the rival in the future in order that introductory offers can work. The use of such contracts is anticompetitive and inefficient but does not necessarily result in complete foreclosure.Exclusive deals Networks Foreclosure Two-sided markets
