Optimal Risk Adoption: A Real Options Approach

This study develops a real options approach for analyzing the optimal risk adoption policy in an environment where the adoption means a switch from one stochastic flow representation into another. We establish that increased volatility needs not decelerate investment, as predicted by the standard literature on real options, once the underlying volatility of the state is made endogenous. We prove that for a decision maker with a convex (concave) objective function, increased post-adoption volatility increases (decreases) the expected cumulative present value of the post-adoption profit flow, which consequently decreases (increases) the option value of waiting and, therefore, accelerates (decelerates) current investment.

The impact of stock option incentives on investment and firm value

This paper analyzes the relations among firm-level stock option portfolio incentives, investment, and firm value based on a sample of Finnish firms during the time period 1987 – 2000. Utilizing exact and complete information regarding stock option portfolio characteristics, we find some evidence that firm investment is increasing in the incentives to increase stock price (delta) and risk (vega). Furthermore, we find strong evidence of a positive relation between both incentive effects and firm value (Tobin’s Q). In contrast, when we allow for stock option incentives, investment, and firm value to be simultaneously determined, we find no evidence that investment is increasing in incentives. However, even after controlling for endogeneity, we find that both incentive effects arising from stock option compensation display a positive and significant effect on firm value. Finally, in contradiction to earlier findings, we observe that neither Tobin’s Q nor investment drives incentives.

Electrocardiographic parameters of ventricular repolarization : modifiers and the prognostic value

Electric activity of the heart consists of repeated cardiomyocyte depolarizations and repolarizations. Abnormalities in repolarization predispose to ventricular arrhythmias. In body surface electrocardiogram, ventricular repolarization generates the T wave. Several electrocardiographic measures have been developed both for clinical and research purposes to detect repolarization abnormalities. The study aim was to investigate modifiers of ventricular repolarization with the focus on the relationship of the left ventricular mass, antihypertensive drugs, and common gene variants, to electrocardiographic repolarization parameters. The prognostic value of repolarization parameters was also assessed. The study subjects originated from a population of more than 200 middle-aged hypertensive men attending the GENRES hypertension study, and from an epidemiological survey, the Health 2000 Study, including more than 6000 participants. Ventricular repolarization was analysed from digital standard 12-lead resting electrocardiograms with two QT-interval based repolarization parameters (QT interval, T-wave peak to T-wave end interval) and with a set of four T-wave morphology parameters. The results showed that in hypertensive men, a linear change in repolarization parameters is present even in the normal range of left ventricular mass, and that even mild left ventricular hypertrophy is associated with potentially adverse electrocardiographic repolarization changes. In addition, treatments with losartan, bisoprolol, amlodipine, and hydrochlorothiazide have divergent short-term effects on repolarization parameters in hypertensive men. Analyses of the general population sample showed that single nucleotide polymorphisms in KCNH2, KCNE1, and NOS1AP genes are associated with changes in QT-interval based repolarization parameters but not consistently with T-wave morphology parameters. T-wave morphology parameters, but not QT interval or T-wave peak to T-wave end interval, provided independent prognostic information on mortality. The prognostic value was specifically related to cardiovascular mortality. The results indicate that, in hypertension, altered ventricular repolarization is already present in mild left ventricular mass increase, and that commonly used antihypertensive drugs may relatively rapidly and treatment-specifically modify electrocardiographic repolarization parameters. Common variants in cardiac ion channel genes and NOS1AP gene may also modify repolarization-related arrhythmia vulnerability. In the general population, T-wave morphology parameters may be useful in the risk assessment of cardiovascular mortality.

Risk-sensitive optimal control for Markov decision processes with monotone cost

The existence of an optimal feedback law is established for the risk-sensitive optimal control problem with denumerable state space. The main assumptions imposed are irreducibility and a near monotonicity condition on the one-step cost function. A solution can be found constructively using either value iteration or policy iteration under suitable conditions on initial feedback law.

Zero-Sum Risk-Sensitive Stochastic Differential Games

We study zero-sum risk-sensitive stochastic differential games on the infinite horizon with discounted and ergodic payoff criteria. Under certain assumptions, we establish the existence of values and saddle-point equilibria. We obtain our results by studying the corresponding Hamilton-Jacobi-Isaacs equations. Finally, we show that the value of the ergodic payoff criterion is a constant multiple of the maximal eigenvalue of the generators of the associated nonlinear semigroups.

Zero-sum risk-sensitive stochastic games on a countable state space

Infinite horizon discounted-cost and ergodic-cost risk-sensitive zero-sum stochastic games for controlled Markov chains with countably many states are analyzed. Upper and lower values for these games are established. The existence of value and saddle-point equilibria in the class of Markov strategies is proved for the discounted-cost game. The existence of value and saddle-point equilibria in the class of stationary strategies is proved under the uniform ergodicity condition for the ergodic-cost game. The value of the ergodic-cost game happens to be the product of the inverse of the risk-sensitivity factor and the logarithm of the common Perron-Frobenius eigenvalue of the associated controlled nonlinear kernels. (C) 2013 Elsevier B.V. All rights reserved.

Risk-sensitive control of continuous time Markov chains

We study risk-sensitive control of continuous time Markov chains taking values in discrete state space. We study both finite and infinite horizon problems. In the finite horizon problem we characterize the value function via Hamilton Jacobi Bellman equation and obtain an optimal Markov control. We do the same for infinite horizon discounted cost case. In the infinite horizon average cost case we establish the existence of an optimal stationary control under certain Lyapunov condition. We also develop a policy iteration algorithm for finding an optimal control.

Making risk minimization tolerant to label noise

In many applications, the training data, from which one needs to learn a classifier, is corrupted with label noise. Many standard algorithms such as SVM perform poorly in the presence of label noise. In this paper we investigate the robustness of risk minimization to label noise. We prove a sufficient condition on a loss function for the risk minimization under that loss to be tolerant to uniform label noise. We show that the 0-1 loss, sigmoid loss, ramp loss and probit loss satisfy this condition though none of the standard convex loss functions satisfy it. We also prove that, by choosing a sufficiently large value of a parameter in the loss function, the sigmoid loss, ramp loss and probit loss can be made tolerant to nonuniform label noise also if we can assume the classes to be separable under noise-free data distribution. Through extensive empirical studies, we show that risk minimization under the 0-1 loss, the sigmoid loss and the ramp loss has much better robustness to label noise when compared to the SVM algorithm. (C) 2015 Elsevier B.V. All rights reserved.

Option-Implied Preferences Adjustments and Risk-Neutral Density Forecasts

The main objective of this paper is to analyse the value of information contained in prices of options on the IBEX 35 index at the Spanish Stock Exchange Market. The forward looking information is extracted using implied risk-neutral density functions estimated by a mixture of two-lognormals and three alternative risk-adjustments: the classic power and exponential utility functions and a habit-based specification that allows for a counter-cyclical variation of risk aversion. Our results show that at four-week horizon we can reject the hypothesis that between October 1996 and March 2000 the risk-neutral densities provide accurate predictions of the distributions of future realisations of the IBEX 35 index at a four-week horizon. When forecasting through risk-adjusted densities the performance of this period is statistically improved and we no longer reject that hypothesis. All risk-adjusted densities generate similar forecasting statistics. Then, at least for a horizon of four-weeks, the actual risk adjustment does not seem to be the issue. By contrast, at the one-week horizon risk-adjusted densities do not improve the forecasting ability of the risk-neutral counterparts.

Markov Switching Risk Premium and the term structure of interest rates. Empirical evidence from US post-war interest rates

This paper considers the basic present value model of interest rates under rational expectations with two additional features. First, following McCallum (1994), the model assumes a policy reaction function where changes in the short-term interest rate are determined by the long-short spread. Second, the short-term interest rate and the risk premium processes are characterized by a Markov regime-switching model. Using US post-war interest rate data, this paper finds evidence that a two-regime switching model fits the data better than the basic model. The estimation results also show the presence of two alternative states displaying quite different features.

Structural Design under Seismic Risk Using Multiple Performance Objectives

Structural design is a decision-making process in which a wide spectrum of requirements, expectations, and concerns needs to be properly addressed. Engineering design criteria are considered together with societal and client preferences, and most of these design objectives are affected by the uncertainties surrounding a design. Therefore, realistic design frameworks must be able to handle multiple performance objectives and incorporate uncertainties from numerous sources into the process.

In this study, a multi-criteria based design framework for structural design under seismic risk is explored. The emphasis is on reliability-based performance objectives and their interaction with economic objectives. The framework has analysis, evaluation, and revision stages. In the probabilistic response analysis, seismic loading uncertainties as well as modeling uncertainties are incorporated. For evaluation, two approaches are suggested: one based on preference aggregation and the other based on socio-economics. Both implementations of the general framework are illustrated with simple but informative design examples to explore the basic features of the framework.

The first approach uses concepts similar to those found in multi-criteria decision theory, and directly combines reliability-based objectives with others. This approach is implemented in a single-stage design procedure. In the socio-economics based approach, a two-stage design procedure is recommended in which societal preferences are treated through reliability-based engineering performance measures, but emphasis is also given to economic objectives because these are especially important to the structural designer's client. A rational net asset value formulation including losses from uncertain future earthquakes is used to assess the economic performance of a design. A recently developed assembly-based vulnerability analysis is incorporated into the loss estimation.

The presented performance-based design framework allows investigation of various design issues and their impact on a structural design. It is a flexible one that readily allows incorporation of new methods and concepts in seismic hazard specification, structural analysis, and loss estimation.

Risk-sensitive optimal feedback control accounts for sensorimotor behavior under uncertainty.

Many aspects of human motor behavior can be understood using optimality principles such as optimal feedback control. However, these proposed optimal control models are risk-neutral; that is, they are indifferent to the variability of the movement cost. Here, we propose the use of a risk-sensitive optimal controller that incorporates movement cost variance either as an added cost (risk-averse controller) or as an added value (risk-seeking controller) to model human motor behavior in the face of uncertainty. We use a sensorimotor task to test the hypothesis that subjects are risk-sensitive. Subjects controlled a virtual ball undergoing Brownian motion towards a target. Subjects were required to minimize an explicit cost, in points, that was a combination of the final positional error of the ball and the integrated control cost. By testing subjects on different levels of Brownian motion noise and relative weighting of the position and control cost, we could distinguish between risk-sensitive and risk-neutral control. We show that subjects change their movement strategy pessimistically in the face of increased uncertainty in accord with the predictions of a risk-averse optimal controller. Our results suggest that risk-sensitivity is a fundamental attribute that needs to be incorporated into optimal feedback control models.

Risk-sensitive optimal feedback control accounts for sensorimotor behavior under uncertainty

Many aspects of human motor behavior can be understood using optimality principles such as optimal feedback control. However, these proposed optimal control models are risk-neutral; that is, they are indifferent to the variability of the movement cost. Here, we propose the use of a risk-sensitive optimal controller that incorporates movement cost variance either as an added cost (risk-averse controller) or as an added value (risk-seeking controller) to model human motor behavior in the face of uncertainty. We use a sensorimotor task to test the hypothesis that subjects are risk-sensitive. Subjects controlled a virtual ball undergoing Brownian motion towards a target. Subjects were required to minimize an explicit cost, in points, that was a combination of the final positional error of the ball and the integrated control cost. By testing subjects on different levels of Brownian motion noise and relative weighting of the position and control cost, we could distinguish between risk-sensitive and risk-neutral control. We show that subjects change their movement strategy pessimistically in the face of increased uncertainty in accord with the predictions of a risk-averse optimal controller. Our results suggest that risk-sensitivity is a fundamental attribute that needs to be incorporated into optimal feedback control models. © 2010 Nagengast et al.

Re-conceptualising value in the engineering design process: The value cycle map

Introducing a "Cheaper, Faster, Better" product in today's highly competitive market is a challenging target. Therefore, for organizations to improve their performance in this area, they need to adopt methods such as process modelling, risk mitigation and lean principles. Recently, several industries and researchers focused efforts on transferring the value orientation concept to other phases of the Product Life Cycle (PLC) such as Product Development (PD), after its evident success in manufacturing. In PD, value maximization, which is the main objective of lean theory, has been of particular interest as an improvement concept that can enhance process flow logistics and support decision-making. This paper presents an ongoing study of the current understanding of value thinking in PD (VPD) with a focus on value dimensions and implementation benefits. The purpose of this study is to consider the current state of knowledge regarding value thinking in PD, and to propose a definition of value and a framework for analyzing value delivery. The framework-named the Value Cycle Map (VCM)- intends to facilitate understanding of value and its delivery mechanism in the context of the PLC. We suggest the VCM could be used as a foundation for future research in value modelling and measurement in PD.

IS/IT resources and business value: Operationalization of an information oriented framework

Several studies have highlighted the importance of information and information quality in organisations and thus information is regarded as key determinant for the success and organisational performance. In this paper, we review selected contributions and introduce a model that shows how IS/IT resources and capabilities could be interlinked with IS/IT utilization, organizational performance and business value. Complementing other models and frameworks, we explicitly consider information from a management maturity, quality and risk perspective and show how the new framework can be operationalized with existing assessment approaches by using empirical data from four industrial case studies. © 2012 Springer-Verlag.