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1 – 10 of over 10000Kim Hin David Ho and Shea Jean Tay
The purpose of this paper is to examine the risk neutral and non-risk neutral pricing of Singapore Real Estate Investment Trusts (S-REITs) via comparing the average of the…
Abstract
Purpose
The purpose of this paper is to examine the risk neutral and non-risk neutral pricing of Singapore Real Estate Investment Trusts (S-REITs) via comparing the average of the individual ratios (of deviation between expected and observed closing price/observed closing price) with the ratio (of standard deviation/mean) for closing prices via the binomial options pricing tree model.
Design/methodology/approach
If the ratio (of standard deviation/mean) ratio > the ratio (of deviation between expected and observed closing price/observed closing price), then the deviation of closing prices from the expected risk neutral prices is not significant and that the S-REIT is consistent with risk neutral pricing. If the ratio (of deviation between expected and observed closing price/observed closing price) is greater, then the S-REIT is not consistent with risk neutral pricing.
Findings
Capitacommercial Trust (CCT), Capitamall Trust (CMT) and Keppel Real Estate Investment Trust (REIT) have large positive differences between the two ratios (39.86, 30.79 and 18.96 percent, respectively), implying that these S-REITs are not trading at risk neutral pricing. Suntec REIT has a small positive difference of 2.35 percent between both ratios, implying that it is trading at risk neutral pricing. Ascendas REIT has the largest negative difference between the two ratios at −4.24 percent, to be followed by Mapletree Logistics Trust at −0.44 percent. Both S-REITs are trading at risk neutral pricing. The analysis shows that CCT, CMT and Keppel REIT exhibit risk averse pricing.
Research limitations/implications
Results are consistent with prudential asset allocation for viable S-REIT portfolio investing but that not all these S-REITs exhibit strong market efficiency in their pricing.
Practical implications
Pricing may be risk neutral over a certain period but investor sentiments, fear of risks and speculative activities could affect an S-REIT’s risk neutrality.
Social implications
With enhanced risk diversification activities, the S-REITs should attain risk neutral pricing.
Originality/value
Virtually no research of this nature has been undertaken for S-REITS.
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Arun Kumar Misra, Molla Ramizur Rahman and Aviral Kumar Tiwari
This paper has used account-level data of corporate and retail borrowers, assessed their credit risk through the risk-neutral principle and examined its implication on loan pricing…
Abstract
Purpose
This paper has used account-level data of corporate and retail borrowers, assessed their credit risk through the risk-neutral principle and examined its implication on loan pricing.
Design/methodology/approach
It derives the capital charge and credit risk-premium for expected and unexpected losses through a risk-neutral approach. It estimates the risk-adjusted return on capital as the pricing principle for loans. Using GMM regression, the article has assessed the determinants of risk-based pricing.
Findings
It has been found that risk-premium is not reflected in the current loan pricing policy as per Basel II norms. However, the GMM estimation on RAROC can price risk premium and probability of default, LGD, risk weight, bank beta and capital adequacy, which are the prime determinants of loan pricing. The average RAROC for retail loans is more than that of corporate loans despite the same level of risk capital requirement for both categories of loans. The robustness tests indicate that the RAROC method of loan pricing and its determinants are consistent against the time and type of borrowers.
Research limitations/implications
The RAROC method of pricing effectively assesses the inherent risk associated with loans. Though the empirical findings are confined to the sample bank, the model can be used for any bank implementing the Basel principle of risk and capital assessments.
Practical implications
The article has developed and validated the model for estimating RAROC, as per Basel II guidelines, for loan pricing that any bank can use.
Social implications
It has developed the risk-based loan pricing model for retail and corporate borrowers. It has significant practical utility for banks to manage their risk, reduce their losses and productively utilise the public deposits for societal developments.
Originality/value
The article empirically validated the risk-neutral pricing principle using a unique 1,520 retail and corporate borrowers dataset.
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Lixin Wu and Chonhong Li
The purpose of this paper is to provide a framework of replication pricing of derivatives and identify funding valuation adjustment (FVA) and credit valuation adjustments (CVA) as…
Abstract
Purpose
The purpose of this paper is to provide a framework of replication pricing of derivatives and identify funding valuation adjustment (FVA) and credit valuation adjustments (CVA) as price components.
Design/methodology/approach
The authors propose the notion of bilateral replication pricing. In the absence of funding cost, it reduces to unilateral replication pricing. The absence of funding costs, it introduces bid–ask spreads.
Findings
The valuation of CVA can be separated from that of FVA, so-called split up. There may be interdependence between FVA and the derivatives value, which then requires a recursive procedure for their numerical solution.
Research limitations/implications
The authors have assume deterministic interest rates, constant CDS rates and loss rates for the CDS. The authors have also not dealt with re-hypothecation risks.
Practical implications
The results of this paper allow user to identify CVA and FVA, and mark to market their derivatives trades according to the recent market standards.
Originality/value
For the first time, a line between the risk-neutral pricing measure and the funding risk premiums is drawn. Also, the notion of bilateral replication pricing extends the unilateral replication pricing.
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Ashkan Hafezalkotob, Reza Mahmoudi, Elham Hajisami and Hui Ming Wee
Nowadays, uncertainty in market demand poses considerable risk to the retailers that supply the market. On the other hand, the risk-averse behaviors of retailers toward risk may…
Abstract
Purpose
Nowadays, uncertainty in market demand poses considerable risk to the retailers that supply the market. On the other hand, the risk-averse behaviors of retailers toward risk may have evolved over time. Considering a supply chain including a manufacturer and a population of retailers, the authors intend to investigate how the population of retailers tends to evolve toward risk-averse behavior. Moreover, this study aims to evaluate the effects of wholesale-retail price of manufacturer on evolutionary stable strategy (ESS) of the retailers.
Design/methodology/approach
Due to market uncertainty, a supply chain with a population of risk-averse and risk-neutral retailers was investigated. The wholesale pricing strategy is determined by a manufacturer acting as a leader, while retailers who make order quantity decisions act as followers. An integrated Cournot duopoly equilibrium and evolutionary game theory (EGT) approach has been used to model this situation.
Findings
A numerical real-world case study using Iran Khodro Company is analyzed by applying the proposed EGT approach. The study provides managerial insights to the manufacturer as well as retailers in developing their strategies. Results showed that risk behavior of retailers significantly affects optimal wholesale/retail price, profits and ESS. In the long term, the retailers tend to have a risk-neutral behavior to gain more profit. In the short term, if a retailer choses risk-averse strategy, in the long term, it will change its strategy to obtain more profit and remain in the competitive market.
Originality/value
The contributions in this research are fourfold. First, ESS concept to investigate the risk-averse or risk-neutral attitudes of the retailers was used. Second, the uncertain risk behavior of the competing retailers was considered. Third, the effect of varying wholesale pricing was investigated. Fourth, the equilibrium wholesale and retail prices have been obtained by considering uncertainty demand and risk.
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I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models have to…
Abstract
I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models have to fit financial time series and at the same time provide powerful tools to test hypotheses formulated in the light of financial theories, and to generate positive economic value, as measured by risk-adjusted performances, in dynamic asset allocation applications. The chapter also reviews the role of Markov switching dynamics in modern asset pricing models in which the no-arbitrage principle is used to characterize the properties of the fundamental pricing measure in the presence of regimes.
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This paper investigates changes in risk-neutral distribution derived from Taiwan stockindex options under different market conditions. The purpose of this paper is to explore…
Abstract
Purpose
This paper investigates changes in risk-neutral distribution derived from Taiwan stockindex options under different market conditions. The purpose of this paper is to explore whether individual investor sentiment significantly influences the Taiwan option prices.
Design/methodology/approach
The authors adopt the optimization method to estimate the risk-neutral distribution from the Taiwan stock index options and use the t-test to examine the difference in risk-neutral skewness, kurtosis, and confidence interval between the pre-crisis and crisis periods. This paper tests the impact of individual investor sentiment on risk-neutral skewness and confidence interval in two sub-periods.
Findings
The authors find that errors in individual investors’ expectations significantly influence the Taiwan stock index option prices.
Research limitations/implications
The data concerning the sentiment of speculative institutional investors are incomplete for the Taiwan option market. Therefore, this paper focusses on the analysis of individual investor sentiment. Further research can study the impact of institutional investor sentiment in emerging markets.
Social implications
The previous literature has suggested that option prices reflect information before the information is revealed in stock prices. Therefore, an important implication is to analyze the information quality revealed in option prices by studying whether the changes in option prices are due to investor sentiment or non-sentiment-related components.
Originality/value
Most of the studies in the literature have focussed on the US option market, and their applicability may vary across different microstructures. This paper shows that the influence of individual investor sentiment in an emerging market is different from that in the US market.
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Baabak Ashuri, Jian Lu and Hamed Kashani
This paper aims to present a financial valuation framework based on the real options theory to evaluate investments in toll road projects delivered under the two‐phase development…
Abstract
Purpose
This paper aims to present a financial valuation framework based on the real options theory to evaluate investments in toll road projects delivered under the two‐phase development plan.
Design/methodology/approach
The approach is based on applying the real options theory to evaluate investments in toll road projects. In particular, the risk‐neutral valuation method is used for pricing flexibility embedded in the two‐phase development plan. Risk‐neutral binomial lattice is used to model traffic uncertainty and to find the optimal time for the toll road expansion. Probabilistic life cycle cost and revenue analysis is conducted to characterize the investor's financial risk profile and determine the flexibility value of the expansion option.
Findings
The flexible, two‐phase development plan can improve the investor's financial risk profile in the toll road project through limiting the downside risk of overinvestment (i.e. decreasing the probability of investment loss) and increasing the expected investment value in a highway project.
Social implications
Private and public sectors can benefit from this valuation framework and use tax dollars and users' fees effectively through avoiding overinvestment in toll road projects.
Originality/value
The framework consists of several integrated features, which distinguish it from existing investment valuation models. The risk‐neutral valuation method for pricing flexibility embedded in the two‐phase development plan is applied. This real options framework is capable of characterizing traffic boundary, at which it is optimal for the investor to expand the toll road. Further, this framework provides the likelihood distribution of when the investor may expand the toll road.
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Kishor Kumar Guru‐Gharana, Matiur Rahman and Satyanarayana Parayitam
This paper aims at theoretical exploration of price and quantity setting behaviors of a monopolist encountering uncertain product demand within the mean‐risk frameworks. In the…
Abstract
Purpose
This paper aims at theoretical exploration of price and quantity setting behaviors of a monopolist encountering uncertain product demand within the mean‐risk frameworks. In the microeconomic literature, the relationships between price and quantity have been traditionally studied using the expected utility approach. This paper moves away from the traditional assumptions and compares various types of risk‐return approaches and explains why most of the monopoly firms follow pricing strategy instead of quantity setting strategy.
Design/methodology/approach
Price setting behavior and quantity setting behavior monopoly firms were examined with endogenous target value and comparative statics were used.
Findings
Comparison of various approaches reveals that risk‐averse customers might decrease purchases because of the price uncertainty or shift to other suppliers, which may explain why monopoly firms prefer their power over price setting rather than quantity setting.
Research limitations/implications
The present study has introduced some testable propositions by comparing different behavioral models of price and quantity setting behaviors of a monopolist facing uncertain product demand.
Practical implications
This study contributes to understanding of firm's behavior in the face of uncertainty.
Originality/value
The conceptual nature of the paper makes the paper original in its contribution to the existing literature of the theory of firm.
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Guanghua Cao, Andrew H. Chen and Zhangxin Chen
A variety of equity-linked insurance contracts such as variable annuities (VA) and equity-indexed annuities (EIA) have gained their attractiveness in the past decade because of…
Abstract
A variety of equity-linked insurance contracts such as variable annuities (VA) and equity-indexed annuities (EIA) have gained their attractiveness in the past decade because of the bullish equity market and low interest rates. Due to the complexity of their inherent nature, pricing and risk management of these products are quantitatively challenging and therefore have become sources of concern to many insurance companies. From a financial engineer's perspective, the options in VA and those embedded in EIA can be modeled as puts and calls, respectively, and enable the use of numerical option pricing techniques. Additionally, values of VA and EIA move in opposite directions in response to changes in the underlying equity value. Therefore, for insurers who offer both businesses, there are natural offsets or diversification benefits in terms of economic capital (EC) usage. In this chapter, we consider two specific products: the guaranteed minimal account benefit (GMAB) and the point-to-point (PTP) EIA contract, which belong to the VA and EIA classes respectively. Taking into account mortality risk and suboptimal dynamic lapse behavior, we build a framework that quantifies the value of each product and the natural hedging benefits based on risk-neutral option pricing theory. With Monte Carlo simulation and finite difference methods being implemented, an optimum product mixture of those two contracts is achieved that deploys capital the most efficiently.