Optimal Martingales and American Option Pricing

Pricing American options is an interesting research topic since there is no analytical solution to value these derivatives. Different numerical methods have been proposed in the literature with some, if not all, either limited to a specific payoff or not applicable to multidimensional cases. Applications of Monte Carlo methods to price American options is a relatively new area that started with Longstaff and Schwartz (2001). Since then, few variations of that methodology have been proposed. The general conclusion is that Monte Carlo estimators tend to underestimate the true option price. The present paper follows Glasserman and Yu (2004b) and proposes a novel Monte Carlo approach, based on designing "optimal martingales" to determine stopping times. We show that our martingale approach can also be used to compute the dual as described in Rogers (2002).

Local Currency Pricing, Foreign Monetary Shocks and Exchange Rate Policy

The implications of local currency pricing (LCP) for monetary regime choice are analysed for a country facing foreign monetary shocks. In this analysis expenditure switching is potentially welfare reducing. This contrasts with the existing LCP literature, which focuses on productivity shocks and thus analyses a world where expenditure switching is welfare enhancing. This paper shows that, when home and foreign producers follow LCP, expenditure switching is absent and a floating rate is preferred by the home country. But when only home producers follow LCP, expenditure switching is present and a fixed rate can be welfare enhancing for the home country.

Non-cooperative incentives to share knowledge in competitive environments

In this paper we study a model where non-cooperative agents may exchange knowledge in a competitive environment. As a potential factor that could induce the knowledge disclosure between humans we consider the timing of the moves of players. We develop a simple model of a multistage game in which there are only three players and competition takes place only within two stages. Players can share their private knowledge with their opponents and the knowledge is modelled as in uencing their marginal cost of e¤ort. We identify two main mechanisms that work towards knowledge disclosure. One of them is that before the actual competition starts, the stronger player of the rst stage of a game may have desire to share his knowledge with the "observer", be- cause this reduces the valuation of the prize of the weaker player of that stage and as a result his e¤ort level and probability of winning in a ght. Another mechanism is that the "observer" may have sometimes desire to share knowledge with the weaker player of the rst stage, because in this way, by increasing his probability of winning in that stage, he decreases the probability of winning of the stronger player. As a result, in the second stage the "observer" may have greater chances to meet the weaker player rather than the stronger one. Keywords: knowledge sharing, strategic knowledge disclosure, multistage contest game, non-cooperative games

Competitive Altruism, Mentalizing and Signalling

The human tendency to cooperate with nonkin even in short-run relationships remains a puzzle. Recently it has been hypothesized that altruism may be a byproduct of “mentalizing”, the process of understanding and predicting the mental states of others. Another idea is based on sexual selection: altruism is a costly signal of good genes. The paper shows that these two arguments are stronger when combined in that altruists who can mentalize have a greater advantage over non-altruists when they can signal their type, even though these signals are costly. Further, once such an equilibrium is established, altruists will not be supplanted by mutants who have similar mentalizing abilities but who lack altruism.

Microstructure Order Flow: Statistical and Economic Evaluation of Nonlinear Forecasts

In this paper we propose a novel empirical extension of the standard market microstructure order flow model. The main idea is that heterogeneity of beliefs in the foreign exchange market can cause model instability and such instability has not been fully accounted for in the existing empirical literature. We investigate this issue using two di¤erent data sets and focusing on out- of-sample forecasts. Forecasting power is measured using standard statistical tests and, additionally, using an alternative approach based on measuring the economic value of forecasts after building a portfolio of assets. We nd there is a substantial economic value on conditioning on the proposed models.

A Nonlinear Panel Unit Root Test under Cross Section Dependence

We propose a nonlinear heterogeneous panel unit root test for testing the null hypothesis of unit-roots processes against the alternative that allows a proportion of units to be generated by globally stationary ESTAR processes and a remaining non-zero proportion to be generated by unit root processes. The proposed test is simple to implement and accommodates cross sectional dependence. We show that the distribution of the test statistic is free of nuisance parameters as (N, T) −! 1. Monte Carlo simulation shows that our test holds correct size and under the hypothesis that data are generated by globally stationary ESTAR processes has a better power than the recent test proposed in Pesaran [2007]. Various applications are provided.

Spatial Interactions in Hedonic Pricing Models: The Urban Housing Market of Aveiro, Portugal

Spatial heterogeneity, spatial dependence and spatial scale constitute key features of spatial analysis of housing markets. However, the common practice of modelling spatial dependence as being generated by spatial interactions through a known spatial weights matrix is often not satisfactory. While existing estimators of spatial weights matrices are based on repeat sales or panel data, this paper takes this approach to a cross-section setting. Specifically, based on an a priori definition of housing submarkets and the assumption of a multifactor model, we develop maximum likelihood methodology to estimate hedonic models that facilitate understanding of both spatial heterogeneity and spatial interactions. The methodology, based on statistical orthogonal factor analysis, is applied to the urban housing market of Aveiro, Portugal at two different spatial scales.

Experimental evidence of a sunk–cost paradox: a study of pricing behavior in Bertrand–Edgeworth duopoly

A well–known implication of microeconomic theory is that sunk costs should have no effect on decision making. We test this hypothesis with a human–subjects experiment. Students recruited from graduate business courses, with an average of over six years of work experience, played the role of firms in a repeated price–setting duopoly game in which both firms had identical capacity constraints and costs, including a sunk cost that varied across experimental sessions over six different values. We find, contrary to the prediction of microeconomic theory, that subjects’ pricing decisions show sizable differences across treatments. The effect of the sunk cost is non–monotonic: as it increases from low to medium levels, average prices decrease, but as it increases from medium to high levels, average prices increase. These effects are not apparent initially, but develop quickly and persist throughout the game. Cachon and Camerer’s (1996) loss avoidance is consistent with both effects, while cost–based pricing predicts only the latter effect, and is inconsistent with the former.

Competitive ability not kinship affects growth of Arabidopsis thaliana accessions.

In many organisms, individuals behave more altruistically towards relatives than towards unrelated individuals. Here, we conducted a study to determine if the performance of Arabidopsis thaliana is influenced by whether individuals are in competition with kin or non-kin. We selected seven pairs of genetically distinct accessions that originated from local populations throughout Europe. We measured the biomass of one focal plant surrounded by six kin or non-kin neighbours in in vitro growth experiments and counted the number of siliques produced per pot by one focal plant surrounded by four kin or non-kin neighbours. The biomass and number of siliques of a focal plant were not affected by the relatedness of the neighbour. Depending on the accession, a plant performed better or worse in a pure stand than when surrounded by non-kin plants. In addition, whole-genome microarray analyses revealed that there were no genes differentially expressed between kin and non-kin conditions. In conclusion, our study does not provide any evidence for a differential response to kin vs non-kin in A. thaliana. Rather, the outcome of the interaction between kin and non-kin seems to depend on the strength of the competitive abilities of the accessions.

Efficient Competition through Cheap Talk: Competing Auctions and Competitive Search without Ex Ante Price

We consider a frictional two-sided matching market in which one side uses public cheap talk announcements so as to attract the other side. We show that if the first-price auction is adopted as the trading protocol, then cheap talk can be perfectly informative, and the resulting market outcome is efficient, constrained only by search frictions. We also show that the performance of an alternative trading protocol in the cheap-talk environment depends on the level of price dispersion generated by the protocol: If a trading protocol compresses (spreads) the distribution of prices relative to the first-price auction, then an efficient fully revealing equilibrium always (never) exists. Our results identify the settings in which cheap talk can serve as an efficient competitive instrument, in the sense that the central insights from the literature on competing auctions and competitive search continue to hold unaltered even without ex ante price commitment.

The rise and fall of piecework–timework wage differentials: market volatility, labor heterogeneity, and output pricing

Based on detailed payroll data of blue collar male and female labor in Britain’s engineering and metal working industrial sectors between the mid-1920s and mid-1960s, we provide empirical evidence in respect of several central themes in the piecework-timework wage literature. The period covers part of the heyday of pieceworking as well as the start of its post-war decline. We show the importance of relative piece rate flexibility during the Great Depression as well as during the build up to WWII and during the war itself. We account for the very significant decline in the differentials after the war. Labor market topics include piecework pay in respect of compensating differentials, labor heterogeneity, and the transaction costs of pricing piecework output.

The Inflation Bias under Calvo and Rotemberg Pricing.

New Keynesian models rely heavily on two workhorse models of nominal inertia - price contracts of random duration (Calvo, 1983) and price adjustment costs (Rotemberg, 1982) - to generate a meaningful role for monetary policy. These alternative descriptions of price stickiness are often used interchangeably since, to a first order of approximation they imply an isomorphic Phillips curve and, if the steady-state is efficient, identical objectives for the policy maker and as a result in an LQ framework, the same policy conclusions. In this paper we compute time-consistent optimal monetary policy in bench-mark New Keynesian models containing each form of price stickiness. Using global solution techniques we find that the inflation bias problem under Calvo contracts is significantly greater than under Rotemberg pricing, despite the fact that the former typically significant exhibits far greater welfare costs of inflation. The rates of inflation observed under this policy are non-trivial and suggest that the model can comfortably generate the rates of inflation at which the problematic issues highlighted in the trend inflation literature emerge, as well as the movements in trend inflation emphasized in empirical studies of the evolution of inflation. Finally, we consider the response to cost push shocks across both models and find these can also be significantly different. The choice of which form of nominal inertia to adopt is not innocuous.

Meeting technologies and optimal trading mechanisms in competitive search markets

In a market in which sellers compete by posting mechanisms, we study how the properties of the meeting technology affect the mechanism that sellers select. In general, sellers have incentive to use mechanisms that are socially efficient. In our environment, sellers achieve this by posting an auction with a reserve price equal to their own valuation, along with a transfer that is paid by (or to) all buyers with whom the seller meets. However, we define a novel condition on meeting technologies, which we call “invariance,” and show that the transfer is equal to zero if and only if the meeting technology satisfies this condition.

Bertrand and the long run

We propose a new model of simultaneous price competition, based on firms offering personalized prices to consumers. In a market for a homogeneous good and decreasing returns, the unique equilibrium leads to a uniform price equal to the marginal cost of each firm, at their share of the market clearing quantity. Using this result for the short-run competition, we then investigate the long-run investment decisions of the firms. While there is underinvestment, the overall outcome is more competitive than the Cournot model competition. Moreover, as the number of firms grows we approach the competitive long-run outcome.

ATP-competitive inhibitors of mTOR: new perspectives in the treatment of renal cell carcinoma.

Targeting mTOR (mammalian target of rapamycin) is an effective approach in the treatment of advanced RCC (renal cell carcinoma). Rapamycin-like drugs (rapalogues) have shown clinical activities and have been approved for the treatment of RCC. Recently, with the development of ATP-competitive inhibitors of mTOR, therapies targeting mTOR have entered a new era. Here, we discuss the biological relevance of blocking mTOR in RCC and review the mechanisms of action of rapalogues in RCC. We also advance some perspectives on the use of ATP-competitive inhibitors of mTOR in RCC.