A SIMULATION APPROACH TO THE VALUATION OF CAPITAL BUDGETING PROJECTS INCORPORATING A DEFER OPTION

Techniques applied to determine the value of derivatives have been recently exported in the field of investment valuation. This paper aims to provide some light to the use of a new technique in the investment valuation literature, aiming to take into account the value of flexibility. This technique, designed by Longstaff and Schwartz, combines Monte Carlo simulation and the Ordinary Least Squares in order to value American-style derivatives with different specifications. We show that this method can easily be incorporated to value capital budgeting projects in the framework of the real options theory and provides coherent results from an economic point of view. We do this by estimating the value of several cases of an investment project that incorporates an option to defer the initial investment or layout through time. We estimate these values by using the Ox programming language. Algunas técnicas aplicadas para determinar el valor de derivados han sidorecientemente exportadas en el campo de la valoración de inversiones. Este trabajo tienecomo objetivo clarificar el uso de una nueva técnica dentro de la literatura de valoraciónde inversiones, teniendo en cuenta el valor de flexibilidad. Esta técnica, diseñada porLongstaff y Schwartz, combina la simulación de Monte Carlo y los Mínimos CuadradosOrdinarios con el objetivo de valorar derivados de tipo americano con distintasespecificaciones. En este trabajo demostramos que este método puede ser fácilmenteincorporado para valorar proyectos de inversión en el marco de la teoría de opcionesreales y muestra resultados coherentes desde el punto de vista económico. Lo hacemosestimando el valor de distintos casos de un proyecto de inversión que incorpora unaopción de posponer la inversión inicial en el tiempo. Estimamos estos valores usando ellenguaje de programación Ox.Least Squares Monte Carlo, opción de espera, movimiento geométrico Browniano, proyecto de inversión. Least Squares Monte Carlo, defer option, geometric Brownian motion, investment project.

A multiobjective approach using consistent rate curves to the calibration of a Gaussian Heath-Jarrow-Morton model

In this paper we propose an alternate calibration algorithm, by using a consistent family of yield curves, that fits a Gaussian Heath-Jarrow-Morton model jointly to the implied volatilities of caps and zero-coupon bond prices. The algorithm is capable for finding several Pareto optimal points as is expected for a general nonlinear multicriteria optimization problem. The calibration approach is evaluated in terms of in-sample data fitting as well as stability of parameter estimates. Furthermore, the efficiency is tested against a non-consistent traditional method by using simulated and US market data.HJM models, consistent forward rate curves, multiobjective calibration

MODEL REDUCTION METHODS IN OPTION PRICING

In this work we introduce the Proper Orthogonal Decomposition (POD)approach to the valuation of contingent claims for one–dimensional price models.First, we present the POD in the context of an abstract Hilbert space and we givean application for the numerical pricing of Double Barrier Options. In a finitedimension setting, we show the model reduction method for Finite Differenceschemes of implicit type. In particular, we construct the reduced version of theCrank–Nicolson scheme and some numerical examples are given.Model Reduction, Proper Orthogonal Decomposition, Finite Difference Schemes, Crank–Nicolson Scheme.

Los productos financieros : de la teoría a la práctica

El objetivo de estas notas es el de mostrar, mediante un ejemplo concreto, cómo la matemática puede emplearse para la resolución de problemas de la vida cotidiana relacionados con las ofertas de las Entidades Bancarias

An ordinal multi-criteria decision-making procedure in the context of uniform qualitative scales

Producción CientíficaIn this contribution, we propose a multi-criteria decision-making procedure that has been devised in a purely ordinal way. Agents evaluate the alternatives regarding several criteria by assigning one or two consecutive terms of a uniform ordered qualitative scale to each alternative in each criterion. Weights assigned to criteria are managed through replications of the corresponding ratings, and alternatives are ranked according to the medians of their ratings after the replications

The Political geography of government formation: Why regional parties join coalitions

Political parties differ in the geographic distribution of their support. This article argues that a regionalized distribution of a party's votes facilitates its participation in government, because it produces a tendency to prioritize demands for locally targeted goods that are more conducive to the negotiation of reciprocal logrolling agreements with potential partners. Using a measure based on the Gini coefficient, I empirically evaluate the extent to which the geographic concentration of votes plays a role in the formation of governments, taking Spanish local elections from 1987 to 2011 as a test bed. With around 500 formation opportunities and 20,000 potential governments, multinomial choice models are estimated (conditional and mixed logits) and a very sizable effect is documented: A one-standard deviation increase in the electoral geographic concentration of the members of a potential government almost doubles the likelihood of its formation. These findings are relevant for students of government formation, regional parties, and political geography

Portfolio allocation under decentralization

Decentralization shapes the way policy authority is shared between the national and regional levels and that, I argue, will have consequences for government formation. In particular, I contend that the allocation of portfolios in regional coalition governments will be affected by the degree of decentralization of each policy. To analyze this relationship I exploit the cross-time, cross-regional, and cross-policy variation of the process of competence devolution to the Spanish Autonomous Communities between 1980 and 2010. I find that, as expected, an increase in the competences managed by the region in a given policy jurisdiction makes the related portfolio more attractive to all coalition parties, although the effect seems to be particularly significant in economically strong and fast-track regions

Parties getting impatient: Time out of office and portfolio allocation in coalition governments

This article argues that long periods out of office make parties impatient and more willing to make concessions over portfolio allocation in exchange for participation in a coalition cabinet. Two hypotheses are analysed: on the one hand, being in opposition for a long time should put parties at a disadvantage when bargaining over office payoffs. On the other, this effect should not apply to the formateur party, since formation offers are based on the receivers' impatience. The empirical results largely support these expectations. Additional evidence of the causality of the main effect is obtained through the use of matching techniques based on the propensity score