A generalization of Hull and White formula and applications to option pricing approximation

By means of Malliavin Calculus we see that the classical Hull and White formulafor option pricing can be extended to the case where the noise driving thevolatility process is correlated with the noise driving the stock prices. Thisextension will allow us to construct option pricing approximation formulas.Numerical examples are presented.

On the relevance of modeling volatility for pricing purposes

This paper presents a two-factor (Vasicek-CIR) model of the term structure of interest rates and develops its pricing and empirical properties. We assume that default free discount bond prices are determined by the time to maturity and two factors, the long-term interest rate and the spread. Assuming a certain process for both factors, a general bond pricing equation is derived and a closed-form expression for bond prices is obtained. Empirical evidence of the model's performance in comparisson with a double Vasicek model is presented. The main conclusion is that the modeling of the volatility in the long-term rate process can help (in a large amount) to fit the observed data can improve - in a reasonable quantity - the prediction of the future movements in the medium- and long-term interest rates. However, for shorter maturities, it is shown that the pricing errors are, basically, negligible and it is not so clear which is the best model to be used.

Pharmaceutical generics, vertical product differentiation and public policy

This paper studies oligopolistic competition in off-patent pharmaceuticalmarkets using a vertical product differentiation model. This model canexplain the observation that countries with stronger regulations havesmaller generic market shares. It can also explain the differences inobserved regulatory regimes. Stronger regulation may be due to a higherproportion of production that is done by foreign firms. Finally, a closelyrelated model can account for the observed increase in prices by patentowners after entry of generic producers.

Regulação do sector farmacêutico em Cabo Verde: o desafio da criação de uma agência de regulação

O medicamento é uma tecnologia cuja importância é indiscutível seja para a saúde, como enquanto factor económico de crescimento e desenvolvimento. A sua regulação está fundamentada acrescidos os factores da sua essencialidade, da assimetria de informação, da cadeia de intermediários, dos interesses financeiros, dos requisitos para a demonstração de eficácia e segurança e as normas para promover a sua utilização eficiente. O Estado tem diversas abordagens possíveis para a regulação farmacêutica que implica sempre a existência de uma estrutura orgânica que assuma as atribuições de forma eficaz e eficiente. Este trabalho discute o modelo de regulação farmacêutica para as condições específicas de Cabo Verde usando como linhas de pesquisa (1) o enquadramento geral da prática de regulação a nível internacional, as recomendações da OMS e os países de referência no âmbito da Comunidade dos Países de Língua Oficial Portuguesa para procurar caracterizar esse processo, identificar as diferenças entre a regulação implementada em países mais desenvolvidos e os países em desenvolvimento e decidir se as agências de regulação podem ser vistas como uma transferência de tecnologia de gestão; (2) o modelo de institucionalização da regulação farmacêutica previsto para Cabo Verde e aquele que foi na prática implementado, com ênfase nas competências, estratégia de intervenção e constrangimentos, para por fim (3) proceder-se à elaboração de uma apreciação crítica, sob o pano de fundo da harmonização técnica e normativa, retomando as recomendações da OMS, a prática internacional neste contexto, corporizada pelos casos da experiência no Brasil e em Portugal e o modelo conceptualizado, relacionando as disparidades com os constrangimentos identificados. Feita a apreciação crítica propõe-se um novo modelo de regulação fazendo referência à revisão dos estatutos da autoridade reguladora e a alterações do figurino institucional.

Keeping up with the Joneses: An international asset pricing model

We derive an international asset pricing model that assumes local investorshave preferences of the type "keeping up with the Joneses." In aninternational setting investors compare their current wealth with that oftheir peers who live in the same country. In the process of inferring thecountry's average wealth, investors incorporate information from the domesticmarket portfolio. In equilibrium, this gives rise to a multifactor CAPMwhere, together with the world market price of risk, there existscountry-speciffic prices of risk associated with deviations from thecountry's average wealth level. The model performs signifficantly better, interms of explaining cross-section of returns, than the international CAPM.Moreover, the results are robust, both for conditional and unconditionaltests, to the inclusion of currency risk, macroeconomic sources of risk andthe Fama and French HML factor.

A decomposition formula for option prices in the Heston model and applications to option pricing approximation

By means of classical Itô's calculus we decompose option prices asthe sum of the classical Black-Scholes formula with volatility parameterequal to the root-mean-square future average volatility plus a term dueby correlation and a term due to the volatility of the volatility. Thisdecomposition allows us to develop first and second-order approximationformulas for option prices and implied volatilities in the Heston volatilityframework, as well as to study their accuracy. Numerical examples aregiven.

A simple access pricing rule to achieve the Ramsey outcome for interconnected networks

This paper considers a general and informationally efficient approach to determine the optimal access pricing rule for interconnected networks. It shows that there exists a simple rule that achieves the Ramsey outcome as the unique equilibrium when networks compete in linear prices without network-based price discrimination. The approach is informationally efficient in the sense that the regulator is required to know only the marginal cost structure, i.e. the marginal cost of making and terminating a call. The approach is general in that access prices can depend not only on the marginal costs but also on the retail prices, which can be observed by consumers and therefore by the regulator as well. In particular, I consider the set of linear access pricing rules which includes any fixed access price, the Efficient Component Pricing Rule (ECPR) and the Modified ECPR as special cases. I show that in this set, there is a unique rule that implements the Ramsey outcome as the unique equilibrium independently of the underlying demand conditions.

Asset pricing implications of benchmarking: A two-factor CAPM

In this paper we consider the equilibrium effects of an institutionalinvestor whose performance is benchmarked to an index. In a partialequilibrium setting, the objective of the institutional investor is modeledas the maximization of expected utility (an increasing and concave function,in order to accommodate risk aversion) of final wealth minus a benchmark.In equilibrium this optimal strategy gives rise to the two-beta CAPM inBrennan (1993): together with the market beta a new risk-factor (that wecall active management risk) is brought into the analysis. This new betais deffined as the normalized (to the benchmark's variance) covariancebetween the asset excess return and the excess return of the market overthe benchmark index. Different to Brennan, the empirical test supports themodel's predictions. The cross-section return on the active management riskis positive and signifficant especially after 1990, when institutionalinvestors have become the representative agent of the market.

Asset pricing with idiosyncratic risk and overlapping generations

A number of existing studies have concluded that risk sharing allocations supported by competitive, incomplete markets equilibria are quantitatively close to first-best. Equilibrium asset prices in these models have been difficult to distinguish from those associated with a complete markets model, the counterfactual features of which have been widely documented. This paper asks if life cycle considerations, in conjunction with persistent idiosyncratic shocks which become more volatile during aggregate downturns, can reconcile the quantitative properties of the competitive asset pricing framework with those of observed asset returns. We begin by arguing that data from the Panel Study on Income Dynamics support the plausibility of such a shock process. Our estimates suggest a high degree of persistence as well as a substantial increase in idiosyncratic conditional volatility coincident with periods of low growth in U.S. GNP. When these factors are incorporated in a stationary overlapping generations framework, the implications for the returns on risky assets are substantial. Plausible parameterizations of our economy are able to generate Sharpe ratios which match those observed in U.S. data. Our economy cannot, however, account for the level of variability of stock returns, owing in large part to the specification of its production technology.

A theory of reference-dependent behavior

Extensive field and experimental evidence in a variety of environments show that behavior depends on a reference point. This paper provides an axiomatic characterization of this dependence. We proceed by imposing gradually more structure on both choice correspondences and preference relations, requiring increasingly higher levels of rationality, and freeing the decision-maker from certain types of inconsistencies. The appropriate degree of behavioral structure will depend on the phenomenon that is to be modeled. Lastly, we provide two applications of our work: one to model the status-quo bias, and another to model addictive behavior.

On the robustness of least-squares Monte Carlo (LSM) for pricing American derivatives

This paper analyses the robustness of Least-Squares Monte Carlo, a techniquerecently proposed by Longstaff and Schwartz (2001) for pricing Americanoptions. This method is based on least-squares regressions in which theexplanatory variables are certain polynomial functions. We analyze theimpact of different basis functions on option prices. Numerical resultsfor American put options provide evidence that a) this approach is veryrobust to the choice of different alternative polynomials and b) few basisfunctions are required. However, these conclusions are not reached whenanalyzing more complex derivatives.

Demand for pharmaceutical drugs: A choice modelling experiment

Despite the importance of supplier inducement and brand loyalty inthe drug purchasing process, little empirical evidence is to be foundwith regard to the influence that these factors exert on patients decisions. Under the new scenario of easier access to information,patients are becoming more demanding and even go as far asquestioning their physicians prescription. Furthermore, newregulation also encourages patients to adopt an active role in thedecision between brand-name and generic drugs. Using a statedpreference model based on a choice survey, I have found evidenceof how significant physicians prescription and pharmacists recommendation become throughout the drug purchase process and,to what extent, brand loyalty influences the final decision. Asfar as we are aware, this paper is the first to explicitlytake consumers preferences into account rather than focusingon the behavior of health professionals.

A retail benchmarking approach to efficient two-way access pricing

We study a retail benchmarking approach to determine access prices for interconnected networks. Instead of considering fixed access charges as in the existing literature, we study access pricing rules that determine the access price that network i pays to network j as a linear function of the marginal costs and the retail prices set by both networks. In the case of competition in linear prices, we show that there is a unique linear rule that implements the Ramsey outcome as the unique equilibrium, independently of the underlying demand conditions. In the case of competition in two-part tariffs, we consider a class of access pricing rules, similar to the optimal one under linear prices but based on average retail prices. We show that firms choose the variable price equal to the marginal cost under this class of rules. Therefore, the regulator (or the competition authority) can choose one among the rules to pursue additional objectives such as consumer surplus, network coverage or investment: for instance, we show that both static and dynamic e±ciency can be achieved at the same time.

The pricing of academic journals: A two-sided market perspective

More and more academic journals adopt an open-access policy, by which articlesare accessible free of charge, while publication costs are recovered through authorfees. We study the consequences of this open access policy on a journal s qualitystandard. If the journal s objective was to maximize social welfare, open accesswould be optimal as long as the positive externalities generated by its diffusionexceed the marginal cost of distribution. However, we show that if an open accessjournal has a different objective (such as maximizing readers payoffs, the impactof the journal or its profit), it tends to choose a quality standard below the sociallyefficient level.

Hesperiidae (Lepidoptera, Hesperioidea) from Ponta Grossa, Paraná, Brazil: 70 years of records with special reference to faunal composition of Vila Velha State Park

Hesperiidae (Lepidoptera, Hesperioidea) de Ponta Grossa, Paraná, Brazil: 70 anos de registros com especial referência à composição faunística do Parque Estadual de Vila Velha. O município de Ponta Grossa se destaca por apresentar originalmente uma paisagem peculiar onde capões isolados de Floresta Ombrófila Mista são interligados por grandes extensões de fitofisionomias estépicas, também denominadas campos. No entanto, ambos os ecossistemas atualmente se encontram altamente ameaçados pela ocupação humana, restando na região o Parque Estadual de Vila Velha, cuja composição florística tem sido recentemente relacionada com o bioma Cerrado. Poucos trabalhos são dedicados à caracterização da fauna dos campos e sua relação com outras fitofisionomias estépicas brasileiras, motivo que suscitou a realização deste estudo. Após reunir informações de coletas realizadas por mais de 70 anos, são listadas 225 espécies de Hesperiidae (Lepidoptera, Hesperioidea) presentes no município, entre elas 162 indicadoras de ambientes florestais e 53 de áreas abertas. O Parque Estadual de Vila Velha contribui para a conservação de 65% delas enquanto sua composição se mostra intimamente relacionada tanto aos Pampas como ao Cerrado, em detrimento de hábitats florestais. Tal relação é dada provavelmente pela localização geográfica de Vila Velha, visto que a similaridade da fauna de Hesperiidae se encontrou influenciada pelas distâncias geográficas das amostras no presente estudo. A flora de Vila Velha também deve afetar diretamente a composição observada de Hesperiidae, uma vez que uma grande parte de suas espécies são também encontradas em áreas de Cerrado. No entanto, estudos em ambientes campestres brasileiros ainda se fazem necessários, especialmente em enclaves de Cerrado no Paraná e em São Paulo, para que se adquira um melhor entendimento da dinâmica de suas comunidades.