Financial innovation, strategic real options and endogenous competition : theory and an application to Internet banking

Innovations in financial services continuously influence the scope of financial intermediation and the nature of competition between intermediaries. This paper examines the optimal exercise of strategic real options to invest in such an innovation, Internet banking technology, within a two-stage game, parameterized by the distribution of bank size and uncertainty over the profitability of investment, and empirically tests the results on a novel data set. Unlike traditional options, in which the distribution of the future value of the underlying asset is exogenous and the timing of exercise affects only the return to the option holder, the timing of the exercise of real options in a strategic context allows the option holder to manipulate the distribution of returns to all players. The value of the strategic investment option in our model, as a consequence, depends on both expected future profits as well as the variance of those profits. Expected profits to an entrant depend, in equilibrium, on its size, as measured by existing market share (concentration) or total assets, relative to its rivals. Conditional on the degree of uncertainty, larger banks should, as a consequence, exercise their options earlier than smaller banks, for purely strategic advantages, and act as market leaders in the provision of Internet banking services. Like ordinary options, however, the value of the strategic investment option to both large and small banks increases in uncertainty, implying that early exercise will be more likely the more information is available about potential demand. We test these hypotheses on investment in Internet banking services with data from a sample of 1,618 commercial banks in the tenth Federal Reserve District during 1999. Evidence indicates that relative bank size, as measured by either market share or asset size, positively influences the likelihood of entry into Internet banking, and trend-adjusted variation in income per person (a proxy for uncertainty of demand) negatively influences the likelihood of entry into Internet banking. In addition, market concentration of a bank's competitive rivals has a negative relationship with the likelihood of entering the market for Internet banking services. These relations are evident in both bivariate analysis and in multivariate logit regression analysis.Competition ; Internet ; Internet banking

Optimal monopoly investment and capacity utilization under random demand

Unique value-maximizing programs of irreversible capacity investment and capacity utilization are described and shown to exist under general conditions for monopolist exhibiting capital adjustment costs and serving random consumer demand for a nondurable good over an infinite horizon. Stationary properties of these programs are then fully characterized under the assumption of serially independent demand disturbances. Optimal monopoly behavior in this case includes acquisition of a constant and positive level of capacity, the maintenance of a positive expected value of excess capacity in each period, and an asymmetrical response of price to unanticipated fluctuations in consumer demand. Under a general form of Markovian demand, the effect of uncertainty on irreversible capacity investment is also described in terms of the discounted flow of expected revenue accruing to the marginal unit of existing capacity and the option value of deferring the acquisition of additional capital. The option value of deferring such acquisition, created by the irreversibility of capacity investment, is characterized directly in terms of the value function of the firm, and is then shown to be zero in a stationary equilibrium with serially independent demand disturbances. The response of investment to increase demand uncertainty depends, as a result, directly on the properties of the marginal revenue product of capital. A non-negative response of optimal capacity to increased uncertainty in market demand is demonstrated for a general class of aggregate consumer preferences.Industrial capacity

Precommitment and random exchange rates in symmetric duopoly: a new theory of multinational production

Recent volatility in real exchange rates has renewed interest in the nature of multinational firms. One increasingly common phenomenon involves the foreign sourcing of production, in which certain domestic firms choose to produce part or all of their product abroad and then export the commodity for domestic sale. Multinational production has been rationalized on the basis of inherent asymmetries between firms, such as the possession of certain firm-specific assets or differences between firms in their perceptions of foreign production costs, access to foreign subsidy programs, and the possibility of tariff preemption. Such behavior has also been rationalized in terms of corporate risk-aversion and a desire to hedge real exchange rate risk through the diversification of production locations. This paper presents an entirely novel explanation for the existence of multinational firms and the foreign sourcing of production. Rather than relying on exogenous asymmetries between firms or on assumptions about corporate aversion to risk, this explanation recognizes that exchange rate uncertainty may offer a purely strategic motive for symmetric and risk-neutral domestic oligopolists to precommit to foreign production in order to attain a position of industry leadership. This explanation is presented in the specific context of a two-period model of strategic foreign production by domestic duopolists. Strategically symmetric and risk-neutral firms are confronted by a unique source of uncertainty in the form of a randomly fluctuating exchange rate. Exchange rate uncertainty is resolved, for the purposes of current production decisions, between the two periods. Precommitted foreign production in the first period yields a leadership advantage relative to firms that do not precommit, but this decision must be evaluated against the value of the alternative of remaining flexible to adopt a production plan after the resolution of exchange rate uncertainty. A unique symmetric sequential equilibrium in mixed strategies is determined in this market, allowing a Stackelberg leader to endogenously emerge through a credible precommitment to the foreign sourcing of production.International business enterprises ; Foreign exchange rates

CellML + [CMISS | OpenCMISS]

A brief introduction and comparison to the usage of CellML models in CMISS and OpenCMISS

Workspaces, exposures, and multiscale modelling

Here I present technical details on the software package PMR2, which is the software running the CellML and Physiome Project model repositories. In particular, the use of mercurial repositories to define workspaces for collaborative model development, creating modular hierarchies of embedded workspaces, and defining exposures as a means to provide permanent links to specific revisions of model workspaces. I also briefly mention the use of OpenCMISS to link CellML models into large scale, spatially distributed field modeling and simulation

Insurance Cycles, Spanning and Regulation

This paper offers a novel explanation of the financial underwriting cycle in the property-liability insurance industry. By doing so it resolves that significant anomaly in asset pricing theory posed by cycles in the efficient pricing of insurance coverage. In contrast to the reliance on a variety of institutional or capital market failures underlying all previous explanations of this cycle, we directly augment the complete-markets environment of traditional asset-pricing models through the presence of a single source of risk that cannot be fully hedged through existing financial markets. We realistically interpret this source of risk as unforecastable noise in the implementation of insurance regulations. Cycles in the value of underwriting insurance coverage can arise in this simple variant of a standard complete-markets pricing model owing to the effect of such regulatory risk. We offer a sufficient condition for a stable cycle to endogenously exist in market equilibrium and illustrate this condition in the context of a representative insurance firm and a regulator pursuing a countercyclical policy with noisy implementation. Interestingly, while insurance pricing is efficient in the absence of the regulator, cyclic pricing and underwriting profitability can be induced by a countercyclical regulator policy designed to stabilize the very cycle it creates

Extending libSedML to support CellML models

libSedML is a collection of libraries and tools developed in support of the Simulation Experiment Markup Language ("SED-ML":http://sed-ml.org/). "libSedML":http://libsedml.sourceforge.net/ is implemented in C# and provides libraries for processing SED-ML documents and for running the numerical simulations required for the encoded simulation experiment(s). SED-ML supports models encoded in any encoding format, although predominantly expected to be an XML based encoding. To date, however, libSedML has only supported performing simulations using models encoded in the Systems Biology Markup Language ("SBML":http://sbml.org/). The presented project looked at using the "CellML API":http://cellml.org/tools/api to extend libSedML to support simulations using models encoded in CellML.

Using the CellML API, command line utility programs were written (in C++) which performed the functions required by libSedML in order to perform numerical simulations of CellML models. Namely, this involved performing the described simulation with the given CellML model and producing the simulation results in a text file. libSedML was then extended to use these command line utilities as required in the performance of the described simulation experiment. A CellML model specific simulation wizard was also added to libSedML

Supporting End-Users\u27 Non-Consistent Views for Decision Support Applications

Database views typically are maintained to be consistent with the database at a specific point in time. There are applications, however, where users may prefer or require views which are not consistent with the database. Supporting non-consistent views provides better information for end-users in a decision support environment such as data warehousing. This paper examines thecharacteristics of non-consistent views and investigates their management

The "Unfriending" Problem: The Consequences of Homophily in Friendship Retention for Causal Estimates of Social Influence

An increasing number of scholars are using longitudinal social network data to try to obtain estimates of peer or social influence effects. These data may provide additional statistical leverage, but they can introduce new inferential problems. In particular, while the confounding effects of homophily in friendship formation are widely appreciated, homophily in friendship retention may also confound causal estimates of social influence in longitudinal network data. We provide evidence for this claim in a Monte Carlo analysis of the statistical model used by Christakis, Fowler, and their colleagues in numerous articles estimating "contagion" effects in social networks. Our results indicate that homophily in friendship retention induces significant upward bias and decreased coverage levels in the Christakis and Fowler model if there is non-negligible friendship attrition over time.Comment: 26 pages, 4 figure