Valuation and parities for exchange options

Valuation and parity formulas for both European-style and American-style exchange options are presented in a general financial model allowing for jumps, possibility of default and "bubbles" in asset prices. The formulas are given via expectations of auxiliary probabilities using the change-of-numeraire technique. Extensive discussion is provided regarding the way that folklore results such as Merton's no-early-exercise theorem and traditional parity relations have to be altered in this more versatile framework.Comment: 19 page

Weak and strong no-arbitrage conditions for continuous financial markets

We propose a unified analysis of a whole spectrum of no-arbitrage conditions for finan- cial market models based on continuous semimartingales. In particular, we focus on no-arbitrage conditions weaker than the classical notions of No Arbitrage opportunity (NA) and No Free Lunch with Vanishing Risk (NFLVR). We provide a complete characterization of the considered no-arbitrage conditions, linking their validity to the characteristics of the discounted asset price process and to the existence and the properties of (weak) martingale deflators, and review classical as well as recent results

Topics in Stochastic Control with Applications to Finance.

This thesis is devoted to PDE characterization for stochastic control problems when the classical methodology of dynamic programming does not work. Under the framework of viscosity solutions, a dynamic programming principle (DPP) serves as the tool to associate a (nonlinear) PDE to a stochastic control problem. Unfortunately, a DPP is in general difficult to prove, and may fail to be true in some cases. In this thesis, we investigate three different scenarios where classical dynamic programming does not work. The first one is quantile hedging in the presence of arbitrage, the second one is robust growth-optimal trading, and the third one is a stochastic differential game of control and stopping. In each of the cases, we develop new methods to circumvent the lack of a classical DPP.PhDApplied and Interdisciplinary MathematicsUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/99933/1/jayhuang_1.pd

Strict local martingale deflators and valuing American call-type options

We solve the problem of valuing and optimal exercise of American calltype options in markets which do not necessarily admit an equivalent local martingale measure. This resolves an open question proposed by Karatzas and Fernholz (Handbook of Numerical Analysis, vol. 15, pp. 89–167, Elsevier, Amsterdam, 2009)

The Structured Hedging of Financial Value: With Applications to Foreign Exchange Risk Management

The objective of the thesis is to develop a structured financial hedging framework that is empirically implementable and consistent with a corporate finance perspective. Value at risk provides a suitable framework for this purpose. The aversion implied in the value at risk and its generalised theory arises from a firm's concerns about contingent financial distress costs, which can be considered as the payoff of a put option written by stockholders of firms in favour of third parties. This enables the development of a hedging framework to explore how a firm's welfare might be enhanced by replacing natural exposures with hedged outcomes. An ideal hedging decision is to maximise the financial value in good times at minimal cost in terms of the generalised value at risk penalty function. In an efficient market, a fully hedged policy using forwards is generally the optimal decision, while alternatives should be taken into account where markets are not efficient. In such cases, the underlying empirical methodology should be able to detect inefficiencies and feed into the objective functions for maximising firm value. The empirical implementation is explored with a variety of econometric methodologies. These include the development of new semi-parametric or nonparametric techniques based upon wavelet analysis, as well as an incomplete forecasting algorithm. Such methods have been preferred to classical linear and stationary models, because they have broader application in an inefficient market where information is technically fuzzy and financial data may exhibit non-linearity or non-stationarity. Further decision dimensions concern exposure duration or path risk, in which individuals' perspectives of risk is time-dependent and linked to the evolution of value at risk through time. The proposed approaches find their main application in foreign exchange risk management, a topic of considerable importance and sensitivity in New Zealand. A statistically well-adapted hedge object for an exporter such as the dairy industry is the corporate terms of trade, which balances up output and expense prices as a single index related to the net profit margin. Further applications are to strategic fund management where the objective is to derive optimal foreign exchange forwards based hedges

China's New Sources of Economic Growth: Vol. 1. Reform, Resources and Climate Change

China’s change to a new model of growth, now called the ‘new normal’, was always going to be hard. Events over the past year show how hard it is. The attempts to moderate the extremes of high investment and low consumption, the correction of overcapacity in the heavy industries that were the mainstays of the old model of growth, the hauling in of the immense debt hangover from the fiscal and monetary expansion that pulled China out of the Great Crash of 2008 would all have been hard at any time. They are harder when changes in economic policy and structure coincide with stagnation in global trade and rising protectionist sentiment in developed countries, extraordinarily rapid demographic change and recognition of the urgency of easing the environmental damage from the old model. China’s economy has slowed and there are worries that the authorities will not be able to contain the slowdown within preferred limits. This year’s Update explores the challenge of the slowdown in growth and the change in economic structure. Leading experts on China’s economy and environment review change within China’s new model of growth, and its interaction with ageing, environmental pressure, new patterns of urbanisation, and debt problems at different levels of government. It illuminates some new developments in China’s economy, including the transformational potential of internet banking, and the dynamics of financial market instability. China’s economic development since 1978 is full of exciting change, and this year’s China Update is again the way to know it as it is happenin

Dealing with uncertainty: a historical sociology of evaluation practices in UK life insurance, 1971-present

This dissertation examines the evolution of UK life insurance arrangements by investigating how the ways in which life insurers evaluate the economic worth of insurance contracts have changed since the early 1970s. It draws on a set of 44 oral-history interviews, supplemented by an extensive set of documents, to describe how, in addition to traditional forms of ‘diversifiable’ insurance risk, insurers have increasingly sought to quantify forms of ‘non-diversifiable’ risk such as financial market risk. The central question is how changes in insurers’ evaluation practices shaped and were shaped by broader developments in UK life insurance. In addressing this question, the dissertation combines insights from field-theoretical perspectives in ‘conventional’ economic sociology, the recent literature on the performativity of economics, the sociology of insurance and the sociology of scientific knowledge. Field theory is a useful tool for understanding how meso-level social orders emerge as a function of the strategic behaviour of actors in social domains such as markets. The assumption of ‘technological determinism’ prevalent in field-theoretical perspectives, however, conflicts with insights from the sociology of scientific knowledge and recent literature on the performativity of economics. This tension may be alleviated, I argue, by conceptualising both the market for life insurance and actuarial science as fields (a ‘market field’ and an ‘epistemic field’) and by investigating the interrelations between the two. In deploying this field-theoretical perspective, the dissertation finds, on the one hand, that developments in the market field may lead to new opportunities and challenges in the epistemic field. Particularly important in the epistemic field, for instance, was the ascendancy of modern finance theory’s no-arbitrage models as key exemplars for the modelling of insurance liabilities in actuarial science. However, only when the jurisdictional claims of the actuarial profession were threatened and when supervisors required insurers to evaluate their liabilities using techniques already used in banking did these models become dominant in the actuarial field. x On the other hand, I argue that the ways in which life insurers evaluate the economic worth of insurance contracts matters for what life insurance is and does. Evaluations of ‘value’ and ‘risk’ inform decision making about the distribution of financial surplus and risk across different groups of policyholders and shareholders, the types of products that life insurers choose to underwrite, and the way in which they invest their assets in capital markets. Since the 1970s, the emergence of novel evaluation practices has contributed to the individualisation of financial risk in insurance arrangements, a shift in insurers’ asset allocations from equities to fixed-income investments, and a declining willingness from insurers to underwrite traditional mortality-related risks. The business of life insurance, in other words, increasingly revolves around investment intermediation rather than protection. The findings of this dissertation draw attention to the politics of seemingly technical issues such as the discounting of future cash flows to present values. Overall, I suggest that the evolution of UK life insurance can be fully understood only by paying attention to tensions and conflicts in the epistemic field of actuarial science, attempts to influence the ‘rules of the game’ in the market field and the interrelations between the two

Reportable Creation: value, performance and risk measurement in financial reporting

Reporting on value or reporting value-relevant information unavoidably implies that estimates of future cash flows should be made. Consequently, uncertainty becomes an important factor in (external) financial reporting. For a long time, uncertainty was dealt with by substituting relevant but uncertain recognition and measurement with less relevant but more certain principles. In the past few years, fair value becomes more and more a leading principle in financial reporting and risk disclosures become more elaborate. Reportable creation analyses the historical development in recording events with financial relevance (bookkeeping) at one hand and in techniques for making future estimates, respectively quantifying uncertainty, at the other. It then structures the best practices of contemporary financial reporting in the financial REPorting concept (Record, Explain, Project). Finally, it attempts to bring value and risk recording under the discipline of accounting systems by developing the perpetual value recording method and the perpetual risk recording method

Firm’s Capital Structure Decisions: Theory and Empirical Evidence from Portuguese Banks

Doutoramento em Gestão IndustrialA dissertação analisa, teórica e empiricamente, a problemática das decisões (voluntárias) de estrutura de capital da empresa bancária, com o propósito depromover o alargamento do conhecimento sobre o comportamento das empresasquando definem e reajustam a sua estrutura de financiamento estratégico. Partindo da teoria geral da estrutura de capital, tipicamente associada com asempresas não-financeiras, desenvolve-se um quadro teórico de referência que suporta a formulação das hipóteses que se submetem a teste empírico.Este estudo foi desenvolvido com base na metodologia de survey por entrevista pessoal orientadapor questionário estruturado. A investigação dos determinantes das decisões de estrutura de capital incidiu sobre apopulação de os Presidentes (executivos) do Conselho de Administração de bancosPortugueses em funções no período compreendido entre 1989 e 1998. Os resultados obtidos sugerem que a tomada de decisão de estrutura de capital pelos responsáveis das equipas de gestão dos bancos portugueses, durante o período em análise, é consistente com alguns dos determinantes teóricos tipicamente associados com a escolha da relação capital próprio / endividamento das empresas não-financeiras, uma vez levadas em consideração as especificidades inerentes à suacondição de intermediário financeiro. A evidência empírica produzida dá suporte àshipóteses da fiscalidade ao nível dos bancos, dos conflitos de agência e degovernação e dos problemas de assimetria de informação como determinantesrelevantes na tomada de decisões de estrutura de capital dos bancos Portugueses no período 1989-1998. A dissertação está organizada como segue: No capítulo 1é introduzido e formuladoo problema da estrutura de capital ao nível da empresa. No capítulo 2 discute-se a teoria geral da estrutura de capital analisando os seus fundamentos teóricos e as suas principais proposições. Em seguida aborda-se a questão da estrutura de capital da empresa bancária desenvolvendo o quadroconceptual de suporte à elaboração do questionário utilizado no estudo empírico. O capítulo 4 contextualiza a selecção da amostra e dos dados bem como caracteriza odesempenho financeiro recente de uma amostra de bancos Portugueses. No capítulo5 abordam-se alguns dos problemas metodológicos e de método relacionados com ainvestigação empírica neste domínio. Descreve-se em seguida o desenho da investigação e apresentam-se e discutem-se os resultados obtidos no surveyrealizado. O capítulo 6 apresenta um sumário dos resultados, as conclusões dotrabalho e as pistas para investigação futura.The dissertation examines, at both the theoretical and empirical level, the problem ofthe banking firm’s capital structure (voluntary) decisions aiming at broadening ourunderstanding about firms’ behavior when deciding about their strategic financing. We build on the general theory of capital structure, typically associated with the non-financial firm, to develop a theoretical framework able to support the formulation oftestable hypotheses. Such hypotheses framed the theoretical underpinnings of theempirical inquiry instrument. To perform the empirical study of the determinants of such decisions, acomprehensive survey of Chief Executive Officers (CEOs) of Portuguese banks inoffice during the 1989-1998 period, was undertaken. The findings indicate that Portuguese banks’ capital structure decisions are consistent with a number of theoretical propositions typically associated with the debt-equity choice of non-financial firms once we account, among other factors, for theidiosyncrasy of their financial intermediary nature. Specifically, we provide empirical evidence supporting that taxation at the bank level, agency and governance conflictsand asymmetric information considerations are relevant factors influencing capitalstructure decision-making of Portuguese banks during the 1989-1998 time period. These results are consistent with the notion that the design of firm’s financial structuremay The dissertation is organized as follows: Chapter 1 introduces and formulates the capital structure problem at the firm level.Chapter 2 provides a comprehensive discussion of the general theory of capitalstructure. Chapter 3 discusses the capital structure problem at the banking firm levelproviding the basis for the development of the theoretical model that underlies thesurvey instrument. Chapter 4 contains a brief characterization of the recent financialperformance of a sample of Portuguese banks and describes sample selection anddata. Chapter 5 examines some methodological issues related to our empirical study,describes our survey design and reports the results of our survey. Chapter 6summarizes and concludes the dissertation

The history of banking technologies in the UK: patterns of technological investment decision-making and expertise

The central role of banking in the 2008 credit crisis has been the source of much controversy about the quality and robustness of decision-making in the Financial Services sector. This paper aims to surface the influence of the historical evolution of expertise in the banking sector, on such decisions and, in so doing, to underline that the decision-making activity is strongly linked to the views of dominant expert groups in the industry in each era. The paper proposes that Technological Investment Decision Making (TIDM), as viewed historically, has been highly contingent to both technological developments in banking and the subsequent developments in banking expertise that provides the pool for decision-makers in the industry.The paper adopts an historical perspective to illustrate that, counter to popular belief, TIDM is a socially constructed process rather than the outcome of any normative exercise. History demonstrates that there is no optimal method for TIDM with rigour and accuracy of execution determining successful outcomes. On the contrary, in each era, the "right way" to perform TIDM has always been underpinned by the standpoints and beliefs of specialised practitioners who dominated the UK banking industry and by the received wisdom of a community of expert professionals, administrators and think tanks, dictating "realities" on the state of the economy, the role of banks and the value of technologies