Non-Linear Asset Valuation on Markets with Frictions

This paper provides a non-linear pricing rule for the valuation of assets on financial markets with intermediaries.The non-linearity arises from the fact that dealers charge a price for their intermediation between buyer and seller. The pricing rule we propose is an alternative for the wellknown no-arbitrage pricing on markets without frictions.The price of an asset equals the signed Choquet integral of its discounted payo with respect to a concave signed capacity.We show that this pricing rule is consistent with equilibrium. Furthermore, equilibria are shown to satisfy a notion of constrained Pareto optimality.game theory;duopoly

Non-Linear Asset Valuation on Markets with Frictions

This paper provides a non-linear pricing rule for the valuation of assets on financial markets with intermediaries.The non-linearity arises from the fact that dealers charge a price for their intermediation between buyer and seller. The pricing rule we propose is an alternative for the wellknown no-arbitrage pricing on markets without frictions.The price of an asset equals the signed Choquet integral of its discounted payo with respect to a concave signed capacity.We show that this pricing rule is consistent with equilibrium. Furthermore, equilibria are shown to satisfy a notion of constrained Pareto optimality.

Robust Solutions of Optimization Problems Affected by Uncertain Probabilities

In this paper we focus on robust linear optimization problems with uncertainty regions defined by ø-divergences (for example, chi-squared, Hellinger, Kullback-Leibler). We show how uncertainty regions based on ø-divergences arise in a natural way as confidence sets if the uncertain parameters contain elements of a probability vector. Such problems frequently occur in, for example, optimization problems in inventory control or finance that involve terms containing moments of random variables, expected utility, etc. We show that the robust counterpart of a linear optimization problem with ø-divergence uncertainty is tractable for most of the choices of ø typically considered in the literature. We extend the results to problems that are nonlinear in the optimization variables. Several applications, including an asset pricing example and a numerical multi-item newsvendor example, illustrate the relevance of the proposed approach.robust optimization;ø-divergence;goodness-of-fit statistics

Asset Markets and Investment Decisions

In an incomplete asset market, firms assign values to investment plans by projecting their payoffs on the span of the payoffs of marketed assets; equivalently, firms employ the Capital Asset Pricing Model. This is a criterion that does not require firms to possess information, such as the marginal valuation of revenue across date -- events by shareholders, which is not observable; rather, it is based on information revealed by the prices and payoffs of marketed assets. Under standard assumptions, competitive equilibria exist. But, competitive equilibrium allocations need not satisfy a condition of constrained Pareto optimality that recognizes the incompleteness of the asset market; and, even in the absence of nominal assets, competitive equilibrium allocations are generically indeterminate -- they are determinate if firm consider the commodity payoffs of shares.Assets, profit, investment

Can climate policy enhance sustainability?

Implementing an effective climate policy is one of the main challenges for the future. Curbing greenhouse gas emissions can prevent future irreversible impacts of climate change. Climate policy is therefore crucial for present and future generations. Nonetheless, one may wonder whether future economic and social development could be harmed by climate policy. This paper addresses this question by examining recent developments in international climate policy and considering different levels of cooperation that may arise in light of the outcomes of the Conference of the Parties held in Doha. The paper analyses how various climate policy scenarios would enhance sustainability and whether there is a trade-off between climate policy and economic development and social cohesion. This is done by using a new comprehensive indicator, the FEEM Sustainability Index (FEEM SI), which aggregates several economic, social, and environmental indicators. The FEEM SI is built into a recursive-dynamic computable general equilibrium model of the world economy, thus offering the possibility of projecting all indicators into the future and of delivering a perspective assessment of sustainability under different future climate policy scenarios. We find that the environmental component of sustainability improves at the regional and world level thanks to the implementation of climate policies. Overall sustainability increases in all scenarios since the economic and social components are affected negatively yet marginally. This analysis does not include explicitly climate change damages and this may lead to underestimating the benefits of policy actions. If the USA, Canada, Japan and Russia did not contribute to mitigating emissions, sustainability in these countries would decrease and the overall effectiveness of climate policy in enhancing global sustainability would be offset

On the effects of the degree of discretion in reporting managerial performance

We consider a principal-agent setting in which a manager’s compensation depends on a noisy performance signal, and the manager is granted the right to choose an (accounting) method to determine the value of the performance signal. We study the effect of the degree of such reporting discretion, measured by the number of acceptable methods, on the optimal contract, the expected cost of compensation, and the manager’s expected utility. We find that a minimal degree of discretion may be necessary for successful contracting. We also find that while an increase in reporting discretion never harms the manager, the effect on the expected cost of compensation is more subtle. We identify three main effects of increased reporting discretion and characterize the conditions under which the aggregate of these three effects will lead to a higher or lower cost of compensation. Finally, we find that when reporting discretion induces costly effort on the part of the manager, the optimal degree of discretion can be higher than when it is costless

Optimal Reinsurance with One Insurer and Multiple Reinsurers

In this paper, we consider a one-period optimal reinsurance design model with n reinsurers and an insurer. For very general preferences of the insurer, we obtain that there exists a very intuitive pricing formula for all reinsurers that use a distortion premium principle. The insurer determines its optimal risk that it wants to reinsure via this pricing formula. This risk it wants to reinsure is then shared by the reinsurers via tranching. The optimal ceded loss functions among multiple reinsurers are derived explicitly under the additional assumptions that the insurer’s preferences are given by an inverse-S shaped distortion risk measure and that the reinsurer’s premium principles are some functions of the Conditional Value-at-Risk. We also demonstrate that under some prescribed conditions, it is never optimal for the insurer to cede its risk to more than two reinsurers