Decision Making & Negotiations

In this paper we describe the challenges of Bayesian computation in Finance. We show that empirical asset pricing leads to a nonlinear non-Gaussian state space model for the evolutions of asset returns and derivative prices. Bayesian methods extract latent state variables and estimate parameters by calculating the posterior distributions of interest. We describe the use of direct estimation methods such as Markov chain Monte Carlo (MCMC) and sequential Monte Carlo (SMC) methods based on particle filtering (PF).

This article studies optimal mortgage design in a continuous-time setting with volatile and privately observable income, costly foreclosure, and a stochastic market interest rate. We show that the features of the optimal mortgage are consistent with an option adjustable-rate mortgage (option ARM). Under the optimal contract, the borrower is given discretion of how much to repay until his balance reaches a certain limit. The default rates and interest rate payment on the mortgage correlate positively with the market interest rate.

We present a broad-based, consumer-centric view of innovation — referred to as "perceived firm innovativeness" (PFI). PFI is conceptualized as the consumer's perception of an enduring firm capability that results in novel, creative, and impactful ideas and solutions. We develop and validate a PFI scale and show that PFI impacts consumer loyalty via two processing routes: a functional-cognitive route and an affective-experiential route.

We develop a methodology for the measurement of the parameters of cumulative prospect theory and time discounting models based on tools from the preference measurement literature. These parameters are typically elicited by presenting decision makers with a series of choices between hypothetical alternatives, gambles or delayed payments. We present a method for adaptively designing the sets of hypothetical choices presented to decision makers, and a method for estimating the preference function parameters which capture interdependence across decision makers as well as response error.

Suresh Sundaresan offers several insights on the development of financial markets in Asia and the Pacific. First, financial market development in the region should take account of the large number of households who are effectively unbanked, given the potential for positive feedback effects between financial markets, economic growth and stability. Second, there is a need for fundamental banking reforms of capital structures and liquidity sources to mitigate bankruptcy risks, as well as the cost to taxpayers of insolvency and bailouts.

Most studies of word-of-mouth (WOM) in marketing have concentrated either on aggregate outcomes (e.g., new product diffusion) or on the transmission process (i.e., "talking" or "sending" information). This paper instead focuses on the reception process at the individual level (i.e., "listening" to information), and addresses two questions: what makes people listen to WOM, and what are the drivers of the type and extent of WOM impact on recipients' brand attitudes and purchase intentions?

We document the market response to an unexpected announcement of proposed sales of government-owned shares in China. In contrast to the "privatization premium" found in earlier work, we find a negative effect of government ownership on returns at the announcement date and a symmetric positive effect in response to the announced cancellation of the government sell-off.