Shareholders of a Regional Bell Operating Company (RBOC) tend to live in the area which it serves, and an RBOC's customers tend to hold its shares rather than other RBOCs' equity. The geographic bias of the RBOC investors is closely related to the general tendency of households' portfolios to be concentrated, of employees' tendency to own their employers' stocks in their retirement accounts, and to the home country bias in the international arena.
Most of the market microstructure literature focuses on the liquidity of individual securities, whereas much of the asset pricing literature examines the association between systematic risk and return. We document the presence of a systematic, time-varying component of liquidity. At the moment, neither the inventory nor the asymmetric information-based approach to liquidity explains the systematic, time-varying component of liquidity.
In this chapter, we provide a detailed survey of simulation methods applied to numerical pricing of European, and, more recently, American options. Since European methods option prices can be calculated as expected values, it is natural to use Monte Carlo for computing them. However, this can often be quite slow, and this chapter reviews and compares different methods used to improve the efficiency of Monte Carlo methods.
I survey and assess the development of continuous-time methods in finance during the last 30 years. The subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing, term structure theory, asset pricing, and optimal consumption and portfolio choices. During the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance.
The valuation of debt and equity, reorganization boundaries, and firm's optimal dividend policies are studied in a framework where we model strategic interactions between debt holders and equity holders in a game-theoretic setting which can accommodate varying bargaining powers to the two claimants. Two formulations of reorganization are presented: debt-equity swaps and strategic debt service resulting from negotiated debt service reductions. We study the effects of bond covenants on payout policies and distinguish liquidity-induced defaults from strategic defaults.
This paper empirically compares a variety of firm-value-based models of contingent claims. We formulate a general model which nests versions of the models introduced by Merton, 1974; Leland, 1994 and Anderson and Sundaresan, 1996, and Mella-Barral and Perraudin (1997). We estimate these using aggregate time series data for the US corporate bond market, monthly, from August 1970 through December 1996. We find that models fit reasonably well, indicating that variations of leverage and asset volatility account for much of the time-series variations of observed corporate yields.
This paper compares the performance of standard-cost with negotiated transfer pricing under asymmetric information. Negotiated transfer pricing generally achieves higher expected contribution margins, as this method tends to be more efficient in aggregating private information into a single transfer price. Standard-cost transfer pricing confers more bargaining power to the supplier and therefore generates better incentives for this division to undertake specific investments. The opposite holds for buyer investments.
Rapid comprehensive change in the physical pattern of a city is a minor revolution — as is the transformation of 42nd Street and Times Square. Two decades ago the agenda for change posed two big questions: Is it possible for cities to reshape what the market is likely to deliver in an area? Is large-scale redevelopment even a plausible political objective, especially when aggressive actions such as condemnation are deemed a necessary part of the strategy?
We provide a simple binomial framework to value American-style derivatives subject to trading restrictions. The optimal investment of liquid wealth is solved simultaneously with the early exercise decision of the nontraded derivative. No-short-sales constraints on the underlying asset manifest themselves in the form of an implicit dividend yield in the risk-neutralized process for the underlying asset. One consequence is that American call options may be optimally exercised prior to maturity even when the underlying asset pays no dividends.