Dynamic Asset Allocation With Event Risk

Major events often trigger abrupt changes in stock prices and volatility. We study the implications of jumps in prices and volatility on investment strategies. Using the event-risk framework of Duffie, Pan, and Singleton (2000), we provide analytical solutions to the optimal portfolio problem. Event risk dramatically affects the optimal strategy. An investor facing event risk is less willing to take leveraged or short positions. The investor acts as if some portion of his wealth may become illiquid and the optimal strategy blends both dynamic and buy-and-hold strategies. Jumps in prices and volatility both have important effects.

Reliability of rank order in sampled networks

In complex scale-free networks, ranking the individual nodes based upon their importance has useful applications, such as the identification of hubs for epidemic control, or bottlenecks for controlling traffic congestion. However, in most real situations, only limited sub-structures of entire networks are available, and therefore the reliability of the order relationships in sampled networks requires investigation. With a set of randomly sampled nodes from the underlying original networks, we rank individual nodes by three centrality measures: degree, betweenness, and closeness. The higher-ranking nodes from the sampled networks provide a relatively better characterisation of their ranks in the original networks than the lower-ranking nodes. A closeness-based order relationship is more reliable than any other quantity, due to the global nature of the closeness measure. In addition, we show that if access to hubs is limited during the sampling process, an increase in the sampling fraction can in fact decrease the sampling accuracy. Finally, an estimation method for assessing sampling accuracy is suggested

The Information of Option Volume for Future Stock Prices

We present strong evidence that option trading volume contains information about future stock price movements. Taking advantage of a unique dataset from the Chicago Board Options Exchange, we construct put-call ratios from option volume initiated by buyers to open new positions. On a risk-adjusted basis, stocks with low put-call ratios outperform stocks with high put-call ratios by more than 40 basis points on the next day and more than 1% over the next week. Partitioning our option signals into components that are publicly and non-publicly observable, we find that the economic source of this predictability is non-public information possessed by option traders rather than market inefficiency. We also find greater predictability from option signals for stocks with higher concentrations of informed traders and from option contracts with greater leverage.

Macroscopic Kinetic Effect of Cell-to-Cell Variation in Biochemical Reactions

Genetically identical cells under the same environmental conditions can show strong variations in protein copy numbers due to inherently stochastic events in individual cells. We here develop a theoretical framework to address how variations in enzyme abundance affect the collective kinetics of metabolic reactions observed within a population of cells. Kinetic parameters measured at the cell population level are shown to be systematically deviated from those of single cells, even within populations of homogeneous parameters. Because of these considerations, Michaelis-Menten kinetics can even be inappropriate to apply at the population level. Our findings elucidate a novel origin of discrepancy between in vivo and in vitro kinetics, and offer potential utility for analysis of single-cell metabolomic data

Interpreting Recent Changes in the Credit Spreads of Japanese Banks

This paper examines the recent period of relatively low credit spreads in Japan, with particular emphasis on the marketfs assessments of the credit risks of large Japanese banks implicit in the prices of credit derivatives. We extract the market-price implied likelihood of a credit event in the future, and explore the nature of the default risk premiums underlying recent changes in bank bond and credit derivatives prices. We document substantial increases in the gjump-at- defaulth default risk premiums for the large Japanese banks examined during the early part of 2006. These patterns in risk premiums are related to the recent patterns in market indicators of global event risk, local equity market volatility, and an estimate of the duration of the Bank of Japanfs zero interest rate policy.Default risk premium; Credit default swap; Japanese banks; Zero interest rate policy; Event risk