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Article
Publication date: 8 February 2021

Nikolai Dokuchaev

This paper aims to investigate possibility of statistical detection of market completeness for continuous time diffusion stock market models.

Abstract

Purpose

This paper aims to investigate possibility of statistical detection of market completeness for continuous time diffusion stock market models.

Design/methodology/approach

The paper uses theory of forecasting to find criteria of predictability of market parameters such as volatilities and the appreciation rates.

Findings

It is known that the market completeness is not a robust property: small random deviations of the coefficients convert a complete market model into an incomplete one. The paper shows that market incompleteness is also non-robust: for any incomplete market from a wide class of models, there exists a complete market model with arbitrarily close paths of the stock prices and the market parameters.

Originality/value

The paper results lead to a counterintuitive conclusion that the incomplete markets are indistinguishable in the terms of the market statistics.

Details

Studies in Economics and Finance, vol. 38 no. 1
Type: Research Article
ISSN: 1086-7376

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Book part
Publication date: 20 June 2003

Mark C Berger, Dan A Black, Amitabh Chandra and Frank A Scott

In the spirit of Polachek (1975) and the later work of Becker (1985) on the role of specialization within the family, we examine the relationship between fringe benefits…

Abstract

In the spirit of Polachek (1975) and the later work of Becker (1985) on the role of specialization within the family, we examine the relationship between fringe benefits and the division of labor within a married household. The provision of fringe benefits is complicated by their non-additive nature within the household, as well as IRS regulations that stipulate that they be offered in a non-discriminatory manner in order to maintain their tax-exempt status. We model family decisions within a framework in which one spouse specializes in childcare and as a result experiences a reduction in market productive capacity. Our model predicts that the forces toward specialization become stronger as the number of children increase, so that the spouse specializing in childcare will have some combination of lower wages, hours worked, and fringe benefits. We demonstrate that to the extent that labor markets are incomplete, the family is less likely to obtain health insurance from the employer of the spouse that specializes in childcare. Using data from the April 1993 CPS we find evidence consistent with our model.

Details

Worker Well-Being and Public Policy
Type: Book
ISBN: 978-1-84950-213-9

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Article
Publication date: 1 November 2002

Rachel Smith and Alan J. Bush

The debate over how services should be advertised and communicated has raged on for decades. Much of the early work on services emphasized the use of tangible cues and was…

Abstract

The debate over how services should be advertised and communicated has raged on for decades. Much of the early work on services emphasized the use of tangible cues and was primarily issue and/or profession specific. There are no real communication guidelines that encompass all service marketers. This paper looks at how consumers use information in a purchase situation to establish communication guidelines for service providers. Marketers know consumers rarely have full information in a buying situation and have devised communication strategies accordingly. Services in particular offer less information than traditional consumer goods because of services inherent distinguishing characteristics, e.g. intangibility, non‐standardization and concurrent production and consumption. Integrating both conceptual and empirical work this paper uses a framework of incomplete information to examine commonly practiced communication methods of advertising, signaling, personal sources and relationship marketing. Using the two‐dimensional framework advanced in this paper, 16 communication guidelines for service providers are presented.

Details

Journal of Services Marketing, vol. 16 no. 6
Type: Research Article
ISSN: 0887-6045

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Article
Publication date: 9 December 2019

Thomas O’Brien

The purpose of this paper is to offer a “how to” guide for applying Merton’s (1987) valuation adjustment for incomplete information, which depends on market

Abstract

Purpose

The purpose of this paper is to offer a “how to” guide for applying Merton’s (1987) valuation adjustment for incomplete information, which depends on market capitalization, idiosyncratic risk and extent of investor ownership.

Design/methodology/approach

The paper illustrates Bodnaruk and Ostberg’s (2009) formula for Merton’s adjustment, and presents some example empirical estimates of the adjustment for some US stocks.

Findings

The adjustment estimates are material for many example stocks, particularly volatile stocks with a low percentage of shares held by institutional funds. However, the adjustment estimates are modest for many other stocks, including some smaller cap. stocks.

Research limitations/implications

Measuring the model’s inputs requires using some judgment, particularly regarding the investor ownership variable. The paper will hopefully help stimulate useful empirical research on adjustment estimates and on best practices for applying the model.

Practical implications

The paper may encourage more use of the incomplete-information adjustment in practice, which should lead to improved discount rate estimates in valuation analyses.

Originality/value

No other “bridge the gap” coverage of the incomplete-information adjustment is available in textbooks or the applied literature.

Details

Managerial Finance, vol. 46 no. 1
Type: Research Article
ISSN: 0307-4358

Keywords

Content available
Article
Publication date: 29 February 2016

Bong-Chan Kho and Jin-Woo Kim

The option pricing model of Black and Scholes (1973) shows that an option contract is redundant in a complete market as it can be completely replicated by its underlying…

Abstract

The option pricing model of Black and Scholes (1973) shows that an option contract is redundant in a complete market as it can be completely replicated by its underlying assets and risk free assets. However, in a real world of incomplete markets, many studies have shown that option contracts are not redundant and can affect prices and trade volume of underlying assets as they contribute to the market completeness. Thus, this paper examines whether this holds for ELWs (Equity-Linked Warrants) in Korean stock market, which are well known to have the same function as option contracts. To do this, we analyze the effects of ELW listings on underlying stocks’ prices, trade volume, and volatilities, and test whether ELWs contribute to market completeness. Using the daily trading data of 5,799 ELWs on individual stocks from December 2005 to September 2011, we find that underlying stocks show significantly positive cumulative abnormal returns (CAARs) and abnormal trade volume after ELW listing dates, implying that the ELW listing affects significantly positive effects on prices and trade volume of underlying stocks. The volatility of underlying stocks is significantly decreasing after the ELW listing. The systematic risk measured as beta, however, does not change over the event window. This result indicates that the decrease in volatility of underlying stocks comes from the decrease of unsystematic risks, and the correlations between returns of market index and underlying stocks are increasing after the ELW listing. The result that ELW listing can have significant effects on the underlying market implies that current stock market is incomplete, and thus, it is natural to ask whether ELWs can contribute to market completeness. Using the method suggested by Buraschi and Jackwerth (2001), we examine whether ELWs are necessary to replicate the pricing kernel used in asset pricing. We select risk-free asset, underlying stock and ELW as reference assets to replicate the pricing kernel, and find that the pricing kernel cannot be replicated completely without ELWs. This result implies that ELWs are not redundant financial assets and are necessary to increase the market completeness in Korean stock market.

Details

Journal of Derivatives and Quantitative Studies, vol. 24 no. 1
Type: Research Article
ISSN: 2713-6647

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Article
Publication date: 4 June 2010

Li Weian, Li Xiaoyi and Li Jianbiao

The purpose of this paper is to focus on the characteristics, efficiencies and interaction of many alternative market governance modes, by the approach of comparative…

Abstract

Purpose

The purpose of this paper is to focus on the characteristics, efficiencies and interaction of many alternative market governance modes, by the approach of comparative institutional experimentation.

Design/methodology/approach

First, a highly simplified model of market economy is developed, which is embedded in a three‐layer governance structure. Then the model is transplanted into laboratory experimentation, so the characteristics and efficiencies of different governance modes can be identified by observing the subjects' behaviors under them.

Findings

The experimental results show that the market with governance structure based on rule is more efficient than the market with governance only based on long relation and based on preference or belief, and the dynamic improvement of governance based on rule has a destructive effect on the governance based on relation and governance based on preference or belief.

Originality/value

These results have profound implications for the development or enhancement of market institutions in transition or developing countries.

Details

Nankai Business Review International, vol. 1 no. 2
Type: Research Article
ISSN: 2040-8749

Keywords

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Book part
Publication date: 1 July 2015

Qiheng Han, Junqing Li and Jianbo Zhang

Based on an uncertainty model with an infinite horizon, this chapter analyzes how financial development and monetary policy in two countries can impact international trade…

Abstract

Based on an uncertainty model with an infinite horizon, this chapter analyzes how financial development and monetary policy in two countries can impact international trade and capital flows and influence individual behavior and welfare. Our study shows that differences in capital market development are the major contributing factors for trade imbalance and investment among countries. We also find that monetary policies are important factors affecting the trade balance, consumption, and investment. Countries with one-sided, pegging exchange rate policies tend to buy more bonds and enjoy larger trade surpluses. This effect is closely related to the level of capital market development: in these two countries, at higher stages of development, the effects of idiosyncratic monetary policy on imbalance are amplified.

Details

Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons
Type: Book
ISBN: 978-1-78441-779-6

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Book part
Publication date: 25 July 1997

Les Gulko

Abstract

Details

Applying Maximum Entropy to Econometric Problems
Type: Book
ISBN: 978-0-76230-187-4

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Article
Publication date: 12 December 2017

Hongquan Zhu and Lingling Jiang

Merton’s model of capital market equilibrium under incomplete information predicts that contemporaneous stock returns are positively related to investor recognition and…

Abstract

Purpose

Merton’s model of capital market equilibrium under incomplete information predicts that contemporaneous stock returns are positively related to investor recognition and that future stock returns are negatively related to investor recognition. The purpose of this paper is to empirically investigate whether Merton’s theory holds true for the Chinese stock market.

Design/methodology/approach

This paper proposes the degree of shareholder base growth (SBG) as a proxy for investor recognition and examines the relationship between investor recognition and stock returns through a univariate analysis and Fama-Macbeth cross-sectional regressions based on A-Share listed firms.

Findings

The results show that investor recognition is nonlinearly and positively related to contemporaneous stock returns and is negatively related to future stock returns in contrast to the conclusions of Merton’s theory. A long-short trading strategy that involves buying stocks with the lowest SBG rate and that sells stocks with the highest SBG rate will earn an average monthly return of 3.615 percent.

Research limitations/implications

Though Merton’s theory is not fully reflected in the Chinese stock market, investor recognition is considered an important risk factor in the Chinese stock market.

Originality/value

No works have yet investigated the validity of Merton’s “investor cognition hypothesis” in relation to the Chinese stock market. This paper strives to fill this gap.

Details

China Finance Review International, vol. 8 no. 2
Type: Research Article
ISSN: 2044-1398

Keywords

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Book part
Publication date: 17 September 2012

Cecilia Mercado, Guido Dedene, Edward Peters and Rik Maes

Our economies are rapidly evolving toward being primarily service-driven, with information and communication as fundamental drivers for the service deployment. Strategic…

Abstract

Our economies are rapidly evolving toward being primarily service-driven, with information and communication as fundamental drivers for the service deployment. Strategic choices are increasingly driven by other parameters than the traditional goods-driven industrial type of economies. In this paper, the major drivers for making strategic choices in a competitive service economy are examined. It is shown how the competition in services based on information and communication technology (ICT) is competence-based. Competition aims at bringing additional value through services, but may also deploy specific techniques to stop value from leaking in particular business processes. Value creation and prevention of value leaks cannot just rely on the traditional material-based techniques, which are grounded in the strong tangible nature of the traditional economies. Today ICT-based services involve creative combinations of technologies, resources, and assets to answer as well as anticipate the growing demand for flexible solutions that create sustained added value. In this paper, the particular role of imperfections in service systems is explored, extending the well-known theories of information imperfections. Imperfections are not always solved but are sometimes even maintained in favor of sustained competitive advantage. Various ways to realize service rent are discussed with extensive examples. The concluding part of the paper points to some crucial service configuration issues, including the need for a sufficient degree of corporate-wide standardized service components and interfaces to address the growing demand for agility in competence-driven markets.

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