The Space of Gravity: Spatial Filtering Estimation of a Gravity Model for Bilateral Trade

Bilateral trade flows traditionally have been analysed by means of the spatial interaction gravity model. Still, (auto)correlation of trade flows has only recently received attention in the literature. This paper takes up this thread of emerging literature, and shows that spatial filtering (SF) techniques can take into account the autocorrelation in trade flows. Furthermore, we show that the use of origin and destination specific spatial filters goes a long way in correcting for omitted variable bias in an otherwise standard empirical gravity equation. For a cross-section of bilateral trade flows, we compare an SF approach to two benchmark specifications that are consistent with theoretically derived gravity. The results are relevant for a number of reasons. First, we correct for autocorrelation in the residuals. Second, we suggest that the empirical gravity equation can still be considered in applied work, despite the theoretical arguments for its misspecification due to omitted multilateral resistance terms. Third, if we include SF variables, we can still resort to any desired estimator, such as OLS, Poisson or negative binomial regression. Finally, interpreting endogeneity bias as autocorrelation in regressor variables and residuals allows for a more general specification of the gravity equation than the relatively restricted theoretical gravity equation. In particular, we can include additional country-specific push and pull variables, besides GDP (e.g., land area, landlockedness, and per capita GDP). A final analysis provides autocorrelation diagnostics according to different candidate indicators

Incident-Specific Cyber Insurance

In the current market practice, many cyber insurance products offer a coverage bundle for losses arising from various types of incidents, such as data breaches and ransomware attacks, and the coverage for each incident type comes with a separate limit and deductible. Although this gives prospective cyber insurance buyers more flexibility in customizing the coverage and better manages the risk exposures of sellers, it complicates the decision-making process in determining the optimal amount of risks to retain and transfer for both parties. This paper aims to build an economic foundation for these incident-specific cyber insurance products with a focus on how incident-specific indemnities should be designed for achieving Pareto optimality for both the insurance seller and buyer. Real data on cyber incidents is used to illustrate the feasibility of this approach. Several implementation improvement methods for practicality are also discussed

Restoration of degraded grasslands, but not invasion by Prosopis juliflora, avoids trade-offs between climate change mitigation and other ecosystem services

Grassland degradation and the concomitant loss of soil organic carbon is widespread in tropical arid and semi-arid regions of the world. Afforestation of degraded grassland, sometimes by using invasive alien trees, has been put forward as a legitimate climate change mitigation strategy. However, even in cases where tree encroachment of degraded grasslands leads to increased soil organic carbon, it may come at a high cost since the restoration of grassland-characteristic biodiversity and ecosystem services will be blocked. We assessed how invasion by Prosopis juliflora and restoration of degraded grasslands in a semi-arid region in Baringo, Kenya affected soil organic carbon, biodiversity and fodder availability. Thirty years of grassland restoration replenished soil organic carbon to 1 m depth at a rate of 1.4% per year and restored herbaceous biomass to levels of pristine grasslands, while plant biodiversity remained low. Invasion of degraded grasslands by P. juliflora increased soil organic carbon primarily in the upper 30 cm and suppressed herbaceous vegetation. We argue that, in contrast to encroachment by invasive alien trees, restoration of grasslands in tropical semi-arid regions can both serve as a measure for climate change mitigation and help restore key ecosystem services important for pastoralists and agro-pastoralist communities

American-type basket option pricing: a simple two-dimensional partial differential equation

© 2019, © 2019 Informa UK Limited, trading as Taylor & Francis Group. We consider the pricing of American-type basket derivatives by numerically solving a partial differential equation (PDE). The curse of dimensionality inherent in basket derivative pricing is circumvented by using the theory of comonotonicity. We start with deriving a PDE for the European-type comonotonic basket derivative price, together with a unique self-financing hedging strategy. We show how to use the results for the comonotonic market to approximate American-type basket derivative prices for a basket with correlated stocks. Our methodology generates American basket option prices which are in line with the prices obtained via the standard Least-Square Monte-Carlo approach. Moreover, the numerical tests illustrate the performance of the proposed method in terms of computation time, and highlight some deficiencies of the standard LSM method.status: publishe

Affordable and adequate annuities with stable payouts: Fantasy or reality?

© 2019 Elsevier B.V. This paper introduces a class of unit-linked annuities that extends existing annuities by allowing portfolio shocks to be gradually absorbed into the annuity payouts. Consequently, our new class enables insurers to offer an affordable and adequate annuity with a stable payout stream. We show how to price and adequately hedge the annuity payouts in a general financial environment. In particular, our model accounts for various stylized facts of stock returns such as asymmetry and heavy-tailedness. Furthermore, the generality of our framework makes it possible to explore the impact of a parameter misspecification on the annuity price and the hedging performance.status: publishe

Index options : a model-free approach

This paper contains an overview and an extension of the theory on comonotonicity-based model-free upper bounds and super-replicating strategies for stock index options, as presented in Hobson et al. (2005) and Chen et al. (2008). Whereas these authors only consider index call options, here a unified approach for call and put options is presented. Considering a unified framework gives rise to an e¢ cient algorithm for calculating upper bounds and for determining the corresponding superhedging strategies for both cases. The unified framework also allows to extend several existing results, in particular on the optimality of the superhedging strategies. Several practical issues concerning the implementation of the results are discussed. In particular, a simplified algorithm is presented for the situation where for some of the constituent stock in the index there are no options available

The Space of Gravity: Spatially Filtered Estimation of a Gravity Model for Bilateral Trade

Bilateral trade flows traditionally have been analysed by means of the spatial interaction gravity model. Still, (auto)correlation of trade flows has only recently received attention in the literature. This paper takes up this thread of emerging literature, and shows that spatial filtering (SF) techniques can take into account the autocorrelation in trade flows. Furthermore, we show that the use of origin and destination specific spatial filters goes a long way in correcting for omitted variable bias in an otherwise standard empirical gravity equation. For a cross-section of bilateral trade flows, we compare an SF approach to two benchmark specifications that are consistent with theoretically derived gravity. The results are relevant for a number of reasons. First, we correct for autocorrelation in the residuals. Second, we suggest that the empirical gravity equation can still be considered in applied work, despite the theoretical arguments for its misspecification due to omitted multilateral resistance terms. Third, if we include SF variables, we can still resort to any desired estimator, such as OLS, Poisson or negative binomial regression. Finally, interpreting endogeneity bias as autocorrelation in regressor variables and residuals allows for a more general specification of the gravity equation than the relatively restricted theoretical gravity equation. In particular, we can include additional country-specific push and pull variables, besides GDP (e.g., land area, landlockedness, and per capita GDP). A final analysis provides autocorrelation diagnostics according to different candidate indicators