The Pricing of Default-Free Mortgages

In this paperwe examine the household's option to prepay or call a standard fixed-rate mortgage. Results based on simulation indicate that the value of this option is sensitive to the expected path of interest rates, the variation around that path, risk aversion and refinancing costs. Unfortunately, efforts to estimate the interest rate process (by us and by previous authors) have met with only limited success, and uncertainty exists regarding the degree of risk aversion and the magnitude of refinancing costs.Thus we conclude that the application of contingent-claims methodology to options on bonds is conceptually more difficult and operationally less reliable than is the analogous application to options on stocks.Despite these reservations concerning the use of our model as a technique for absolute valuation, preliminary findings on the effects of changes in mortgage contract design on the value of the prepayment option are encouraging. For example, our estimate of the relative values of the call options on 30- and 15-year mortgages and on level-payment and graduated-payment mortgages appear to be reasonably robust with respect to specifications of the interestrate process and the other parameters.These findings suggest that our model may be of considerable use within the context of relative or comparative valuation.

Pricing Rate Caps on Default-Free Adjustable-Rate Mortgages

A model is developed and utilized in this paper to value a life of loan interest rate cap on an ARM that reprices monthly. The value of the cap is seen to depend importantly on both the slope of the term structure and the variance of the one month rate. However, the cap value is not sensitive to the source of the slope of the term structure -- what precise combination of interest rate expectations and risk aversion determined the slope. This insensitivity is fortunate because of the great difficulty of knowing at any point in time why the term structure is what it is. Given the variation in the slope of the term structure and the variance of the one month rate that occurred over the 1979-84 period, the addition to the coupon rate on a one-month ARM that lenders should have charged for a 5 percent life of loan cap has ranged from 5 to 40 basis points.

On the Determinants of the Value of Call Options on Default-Free Bonds

Models of interest-dependent claims that imply similar term structures and levels of interest rate volatility also produce similar estimates of bond option values. This result is established for simple option forms with known closed-form solutions as well as for more complex options that require numerical methods for evaluation. The finding is confirmed for a wide range of economic conditions, and it is robust with respect to the number and nature of factors that generate interest-rate movements.

The 'Risk-Adjusted' Price-Concentration Relationship in Banking

Price-concentration studies in banking typically find a significant and negative relationship between consumer deposit rates (i.e., prices) and market concentration. This relationship implies that highly concentrated banking markets are "bad" for depositors. It also provides support for the Structure-Conduct-Performance hypothesis and rejects the Efficient-Structure hypothesis. However, these studies have focused almost exclusively on supply-side control variables and have neglected demand-side variables when estimating the reduced form price-concentration relationship. For example, previous studies have not included in their analysis bank-specific risk variables as measures of cross-sectional derived deposit demand. The authors find that when bank-specific risk variables are included in the analysis the magnitude of the relationship between deposit rates and market concentration decreases by over 50 percent. They offer an explanation for these results based on the correlation between a bank’s risk profile and the structure of the market in which it operates. These results suggest that it may be necessary to reconsider the well-established assumption that higher market concentration necessarily leads to anticompetitive deposit pricing behavior by commercial banks. This finding has direct implications for the antitrust evaluations of bank merger and acquisition proposals by regulatory agencies. And, in a more general sense, these results suggest that any Structure-Conduct-Performance-based study that does not explicitly consider the possibility of very different risk profiles of the firms analyzed may indeed miss a very important set of explanatory variables. And, thus, the results from those studies may be spurious

Predictive Genes in Adjacent Normal Tissue Are Preferentially Altered by sCNV during Tumorigenesis in Liver Cancer and May Rate Limiting

Background: In hepatocellular carcinoma (HCC) genes predictive of survival have been found in both adjacent normal (AN) and tumor (TU) tissues. The relationships between these two sets of predictive genes and the general process of tumorigenesis and disease progression remains unclear. Methodology/Principal Findings: Here we have investigated HCC tumorigenesis by comparing gene expression, DNA copy number variation and survival using ~250 AN and TU samples representing, respectively, the pre-cancer state, and the result of tumorigenesis. Genes that participate in tumorigenesis were defined using a gene-gene correlation meta-analysis procedure that compared AN versus TU tissues. Genes predictive of survival in AN (AN-survival genes) were found to be enriched in the differential gene-gene correlation gene set indicating that they directly participate in the process of tumorigenesis. Additionally the AN-survival genes were mostly not predictive after tumorigenesis in TU tissue and this transition was associated with and could largely be explained by the effect of somatic DNA copy number variation (sCNV) in cis and in trans. The data was consistent with the variance of AN-survival genes being rate-limiting steps in tumorigenesis and this was confirmed using a treatment that promotes HCC tumorigenesis that selectively altered AN-survival genes and genes differentially correlated between AN and TU. Conclusions/Significance: This suggests that the process of tumor evolution involves rate-limiting steps related to the background from which the tumor evolved where these were frequently predictive of clinical outcome. Additionally treatments that alter the likelihood of tumorigenesis occurring may act by altering AN-survival genes, suggesting that the process can be manipulated. Further sCNV explains a substantial fraction of tumor specific expression and may therefore be a causal driver of tumor evolution in HCC and perhaps many solid tumor types. © 2011 Lamb et al.published_or_final_versio

Do Gender Quotas Pass the Test? Evidence from Academic Evaluations in Italy

This papers studies how the presence of women in academic committees affects the chances of success of male and female candidates. We use evidence from Italy, where candidates to Full and Associate Professor positions are required to qualify in a nation-wide evaluation known as Abilitazione Scientifica Nazionale. This evaluation was conducted between 2012 and 2014 in 184 academic disciplines and it attracted around 70,000 applications. In each field, committee members were selected from the pool of professors that had volunteered for the task using a random lottery. We estimate the causal effect of committees' gender composition on candidates' chances of success exploiting the existence of this system of random assignment. In a five-member committee, each additional female evaluator decreases by 2 percentage points the success rate of female candidates relative to male candidates. Information from 274,000 individual evaluation reports shows that, in mixed-gender committees, male and female evaluators are equally biased against female candidates, suggesting that the presence of women in the committee affects the voting behavior of male evaluators

The promise and peril of chemical probes

Chemical probes are powerful reagents with increasing impacts on biomedical research. However, probes of poor quality or that are used incorrectly generate misleading results. To help address these shortcomings, we will create a community-driven wiki resource to improve quality and convey current best practice

Deception and Self-Deception

Why are people so often overconfident? We conduct an experiment to test the hypothesis that people become overconfident to more effectively persuade or deceive others. After performing a cognitively challenging task, half of our subjects are informed that they can earn money by convincing others of their superior performance. The privately elicited beliefs of informed subjects are significantly more confident than the beliefs of subjects in the control condition. By generating exogenous variation in confidence with a noisy performance signal, we are also able to show that higher confidence indeed makes subjects more persuasive in the subsequent face-to-face interactions