The valuation of employee stock options : how good is the standard?

This study contributes to the valuation of employee stock options (ESO) in two ways: First, a new pricing model is presented, admitting a major part of calculations to be solved in closed form. Designed with a focus on good replication of empirics, the model fits with publicly observable exercise characteristics better than earlier models. In particular, it is able to account for the correlation of the time of exercise and the stock price at exercise, suspected of being crucial for the option value. The impact of correlation is weak, however, whereas cancellations play a central role. The second contribution of this paper is an examination to what extent the ESO pricing method of SFAS 123 is subject to discretion of the accountant. Given my model were true, the SFAS price would be a good proxy. Yet, outside shareholders usually cannot observe one of the SFAS input parameters. On behalf of an example I show that there is wide latitude left to the accountant

The impact of downward rating momentum on credit portfolio risk

Rating downgrades are known to make subsequent downgrades more likely. We analyze the impact of this ?downward momentum? on credit portfolio risk. Using S&P ratings from 1996 to 2005, we estimate a transition matrix that is insensitive to and a second matrix that is sensitive to previous downgrades. We then derive differences between the insensitive portfolio Value-at-Risk (VaR) and the momentum-sensitive VaR. We find realistic scenarios where investors who rely on insensitive transition matrices underestimate the VaR by eight percent of the correct value. The result is relevant for risk managers and regulators since banks neglecting the downward rating momentum might hold insufficient capital. -- In der Analyse von Ratingänderungen spricht man von einem Ratingimpuls (rating momentum), wenn die Wahrscheinlichkeit zukünftiger Ratingänderungen und Ausfälle nicht nur vom aktuellen Rating, sondern auch von früheren Ratingänderungen abhängt. Für Herabstufungen ist ein Ratingimpuls vielfach empirisch belegt: Innerhalb einer Ratingklasse haben die Anleihen mit vorangegangenen Herabstufungen eine höhere Ausfallwahrscheinlichkeit und eine höhere Wahrscheinlichkeit, herabgestuft zu werden, als solche ohne vorangegangene Herabstufungen. Dieser Ratingimpuls hat einen Einfluss auf das Wertänderungsrisiko eines Anleihenportfolios: Vergleicht man zwei Portfolios mit gleicher Ratingzusammensetzung, von denen das erste einen hohen Anteil zuvor herabgestufter Anleihen hat und das zweite einen geringen, dann sind im ersten Portfolio mehr Ausfälle und Barwertverluste durch die Neubewertung nach Herabstufungen zu erwarten als im zweiten. Wir messen den Einfluss des Ratingimpulses auf das Kreditportfoliorisiko unter möglichst realistischen Annahmen. Mit Standard-and-Poor?s-Daten von 1996 bis 2005 schätzen wir zunächst eine Ratingmigrationsmatrix, die den Ratingimpuls berücksichtigt, und eine Matrix, die den Impuls ignoriert. Anschließend verwenden wir die Matrizen in einem Kreditportfoliomodell vom Typ CreditMetrics und berechnen Unterschiede zwischen dem Value-at-Risk (VaR) mit und ohne Berücksichtigung des Ratingimpulses, wobei wir ersteren als richtig ansehen. Wir nehmen dabei an, dass der Portfoliomanager das aktuelle Rating, aber nicht den Ratingimpuls beachtet, also rein zufällig einige zuvor herabgestufte Anleihen ausgewählt hat. Wir gewinnen damit ein Risikomaß für die Fehleinschätzung des VaR. Es zeigt sich, dass ohne Berücksichtigung des Ratingimpulses der VaR von 6,7 % den korrekten VaR mit Ratingimpuls im Mittel um 0,24 % des Portfoliovolumens (3,5 % des richtigen VaR) unterschätzt. Bedeutsamer sind aber die erheblichen Schwankungen: Unter normalen Bedingungen gibt es eine Wahrscheinlichkeit von 5 %, dass der VaR ohne Ratingimpuls den korrekten VaR um mehr als 0,59 % (8,1 % des richtigen VaR) unterschätzt; in einer ökonomischen Stress-Situation kann der Fehler leicht 1,8 % (6.8 % des richtigen VaR) betragen. Das Ergebnis ist relevant für Risikomanager und Bankenaufseher, denn Banken, die den Ratingimpuls vernachlässigen, halten möglicherweise nicht ausreichend Kapital vor.Rating drift,Downward momentum,Credit portfolio risk,Value-at-Risk

How do banks adjust their capital ratios? Evidence from Germany

We analyze the dynamics of banks' regulatory capital ratios. Using monthly data of regulatory capital ratios for a subset of large German banks, we estimate the target level and the adjustment speed of the capital ratio for each bank separately. We find evidence that, first, there exists a target level for a substantial percentage of banks; second, that private banks and banks with liquid assets are more likely to adjust their capital ratio tightly; and third, that banks compensate for low target capital ratios with low asset volatilities and high adjustment speeds. Fourth, banks with a target capital ratio seem to use an internal lower limit for their current ratios that is just above the regulatory minimum of 8%. --Regulatory bank capital,target capital ratio,partial adjustment,Ornstein-Uhlenbeck process

The cost of employee stock options . [This draft: November 13, 2003]

This paper determines the cost of employee stock options (ESOs) to shareholders. I present a pricing method that seeks to replicate the empirics of exercise and cancellation as good as possible. In a first step, an intensity-based pricing model of El Karoui and Martellini is adapted to the needs of ESOs. In a second step, I calibrate the model with a regression analysis of exercise rates from the empirical work of Heath, Huddart and Lang. The pricing model thus takes account for all effects captured in the regression. Separate regressions enableme to compare options for top executives with those for subordinates. I find no price differences. The model is also applied to test the precision of the fair value accounting method for ESOs, SFAS 123. Using my model as a reference, the SFAS method results in surprisingly accurate prices

Eindimensionale stochastische Differentialgleichungen ohne Drift mit zeitabhängigen Koeffizienten

The paper investigates weak solutions of one-dimensional stochastic differential equations without drift but time-dependent coefficients. As in the preceding literature, this is done by means of an equivalent equation for time-changed Wiener processes. One-to-one relations between the equations regarding existence and uniqueness are presented. A new existence theorem is proved by monotone approximation of pure solutions. Furthermore, extreme solutions are investigated, turning out as pure in general and interesting for the problem of uniqueness in law

Rapid Neutrophil Response Controls Fast-Replicating Intracellular Bacteria but Not Slow-Replicating Mycobacterium tuberculosis

Being one of the first cells to invade the site of infection, neutrophils play an important role in the control of various bacterial and viral infections. In the present work, the contribution of neutrophils to the control of infection with different intracellular bacteria was investigated. Mice were treated with the neutrophil-depleting monoclonal antibody RB6-8C5, and the time course of infection in treated and untreated mice was compared by using intracellular bacterial species and strains varying in virulence and replication rate. The results indicate that neutrophils are crucial for the control of fast-replicating intracellular bacteria, whereas early neutrophil effector mechanisms are dispensable for the control of the slow-replicating Mycobacterium tuberculosi

Das Verhalten der Aktienbetreuer und ihre Wirkung auf die Marktliquidität : eine experimentelle Studie

Im Rahmen eines Börsen-Großexperiments anlässlich der Fußball-WM 1998 untersuchen wir den Einfluss von Aktienbetreuern auf die Marktliquidität. Die Marktformen des kontinuierlichen Handels, eines Systems mit einem monopolistischen Aktienbetreuer und mit konkurrierenden Betreuern wurden durch einen Gruppenvergleich unterschiedlich betreuter Aktien analysiert. Die Liquidität wurde mit Hilfe des bid-ask-Spreads und der inversen Markttiefe gemessen, einer Kenngröße zur Charakterisierung der Preis-Mengen-Relation der Liquidität. Wir finden, dass die betreuten Märkte liquider sind als die unbetreuten, und die konkurrierende Betreuung mehr Liquidität generiert als die eines Monopolisten. Nach kursrelevanten Informationsereignissen kehrten die Spreads in den betreuten Märkten schneller zu ihrem normalen Niveau zurück. Durch Rekonstruktion der nichtanonymen Orderbücher konnte der direkte Einfluß der Betreuer auf die Liquidität von den Beiträgen der übrigen Marktteilnehmer separiert werden. Interessanterweise zeigt sich, dass nur ein Teil der Liquiditätsverbesserung mit den Orders der Betreuer erklärt werden kann. Demnach stünden die Liquiditätsbereitstellung durch Betreuer und die der anderen Marktteilnehmer nicht in einer konkurrierenden, sondern komplementären Beziehung zueinander

Slow breathing reduces sympathoexcitation in COPD

Neurohumoral activation has been shown to be present in hypoxic patients with chronic obstructive pulmonary disease (COPD). The aims of the present study were to investigate whether there is sympathetic activation in COPD patients in the absence of hypoxia and whether slow breathing has an impact on sympathoexcitation and baroreflex sensitivity. Efferent muscle sympathetic nerve activity, blood pressure, cardiac frequency and respiratory movements were continuously measured in 15 COPD patients and 15 healthy control subjects. Baroreflex sensitivity was analysed by autoregressive spectral analysis and the alpha-angle method. At baseline, sympathetic nerve activity was significantly elevated in COPD patients and baroreflex sensitivity was decreased (5.0+/-0.6 versus 8.9+/-0.8 ms.mmHg(-1)). Breathing at a rate of 6 breaths.min(-1) caused sympathetic activity to drop significantly in COPD patients (from 61.3+/-4.6 to 53.0+/-4.3 bursts per 100 heartbeats) but not in control subjects (39.2+/-3.2 versus 37.5+/-3.3 bursts per 100 heartbeats). In both groups, slow breathing significantly enhanced baroreflex sensitivity. In conclusion, sympathovagal imbalance is present in normoxic chronic obstructive pulmonary disease patients. The possibility of modifying these changes by slow breathing may help to better understand and influence this systemic disease

How did ocean warming affect Australian rainfall extremes during the 2010/2011 La Niña event?

Author Posting. © American Geophysical Union, 2015. This article is posted here by permission of American Geophysical Union for personal use, not for redistribution. The definitive version was published in Geophysical Research Letters 42 (2015): 9942–9951, doi:10.1002/2015GL065948.Extreme rainfall conditions in Australia during the 2010/2011 La Niña resulted in devastating floods claiming 35 lives, causing billions of dollars in damages, and far-reaching impacts on global climate, including a significant drop in global sea level and record terrestrial carbon uptake. Northeast Australian 2010/2011 rainfall was 84% above average, unusual even for a strong La Niña, and soil moisture conditions were unprecedented since 1950. Here we demonstrate that the warmer background state increased the likelihood of the extreme rainfall response. Using atmospheric general circulation model experiments with 2010/2011 ocean conditions with and without long-term warming, we identify the mechanisms that increase the likelihood of extreme rainfall: additional ocean warming enhanced onshore moisture transport onto Australia and ascent and precipitation over the northeast. Our results highlight the role of long-term ocean warming for modifying rain-producing atmospheric circulation conditions, increasing the likelihood of extreme precipitation for Australia during future La Niña events.Australian Research Council (ARC); ARC Centre of Excellence for Climate System Science; ARC Laureate Fellowship program; Penzance and John P. Chase Memorial Endowed Funds; Ocean Climate Change Institute at WHOI2016-05-1

Coupling carbon allocation with leaf and root phenology predicts tree-grass partitioning along a savanna rainfall gradient

The relative complexity of the mechanisms underlying savanna ecosystem dynamics, in comparison to other biomes such as temperate and tropical forests, challenges the representation of such dynamics in ecosystem and Earth system models. A realistic representation of processes governing carbon allocation and phenology for the two defining elements of savanna vegetation (namely trees and grasses) may be a key to understanding variations in tree–grass partitioning in time and space across the savanna biome worldwide. Here we present a new approach for modelling coupled phenology and carbon allocation, applied to competing tree and grass plant functional types. The approach accounts for a temporal shift between assimilation and growth, mediated by a labile carbohydrate store. This is combined with a method to maximize long-term net primary production (NPP) by optimally partitioning plant growth between fine roots and (leaves + stem). The computational efficiency of the analytic method used here allows it to be uniquely and readily applied at regional scale, as required, for example, within the framework of a global biogeochemical model. We demonstrate the approach by encoding it in a new simple carbon–water cycle model that we call HAVANA (Hydrology and Vegetation-dynamics Algorithm for Northern Australia), coupled to the existing POP (Population Orders Physiology) model for tree demography and disturbance-mediated heterogeneity. HAVANA-POP is calibrated using monthly remotely sensed fraction of absorbed photosynthetically active radiation (fPAR) and eddy-covariance-based estimates of carbon and water fluxes at five tower sites along the North Australian Tropical Transect (NATT), which is characterized by large gradients in rainfall and wildfire disturbance. The calibrated model replicates observed gradients of fPAR, tree leaf area index, basal area, and foliage projective cover along the NATT. The model behaviour emerges from complex feedbacks between the plant physiology and vegetation dynamics, mediated by shifting above- versus below-ground resources, and not from imposed hypotheses about the controls on tree–grass co-existence. Results support the hypothesis that resource limitation is a stronger determinant of tree cover than disturbance in Australian savannas.The contributions of V. Haverd and P. Briggs were made possible by the support of the Australian Climate Change Science Program. B. Smith acknowledges funding as an OCE Distinguished Visiting Scientist to the CSIRO Oceans & Atmosphere Flagship, Canberr