Asset Pricing under uncertainty

We study the effect of parameter uncertainty on a stochastic diffusion model, in particular the impact on the pricing of contingent claims, using methods from the theory of Dirichlet forms. We apply these techniques to hedging procedures in order to compute the sensitivity of SDE trajectories with respect to parameter perturbations. We show that this analysis can justify endogenously the presence of a bid-ask spread on the option prices. We also prove that if the stochastic differential equation admits a closed form representation then the sensitivities have closed form representations. We examine the case of log-normal diffusion and we show that this framework leads to a smiled implied volatility surface coherent with historical data.Comment: arXiv admin note: substantial text overlap with arXiv:1001.520

On the properties of level spacings for decomposable systems

In this paper we show that the quantum theory of chaos, based on the statistical theory of energy spectra, presents inconsistencies difficult to overcome. In classical mechanics a system described by an hamiltonian $H = H_1 + H_2$ (decomposable) cannot be ergodic, because there are always two dependent integrals of motion besides the constant of energy. In quantum mechanics we prove the existence of decomposable systems \linebreak $H^q = H^q_1 + H^q_2$ whose spacing distribution agrees with the Wigner law and we show that in general the spacing distribution of $H^q$ is not the Poisson law, even if it has often the same qualitative behaviour. We have found that the spacings of $H^q$ are among the solutions of a well defined class of homogeneous linear systems. We have obtained an explicit formula for the bases of the kernels of these systems, and a chain of inequalities which the coefficients of a generic linear combination of the basis vectors must satisfy so that the elements of a particular solution will be all positive, i.e. can be considered a set of spacings.Comment: LateX, 13 page

Experts, Conflicts of Interest, and the Controversial Role of Reputation

This paper studies the impact of reputation on the reporting strategy of experts that face conflicts of interest. The framework we propose applies to different settings involv- ing decision makers that rely on experts for making informed decisions, such as financial analysts and goverment agencies. We show that reputation has a non-monotonic effect on the degree of information revelation. In general, truthful revelation is more likely to occur when there is more uncertainty on an expert's ability. Furthermore, above a certain threshold, an increase in reputation always makes truthful revelation more difficult to achieve. Our results shed light on the relationship between the institutional features of the reporting environment and informational efficiency.

Alpha-CIR Model with Branching Processes in Sovereign Interest Rate Modelling

We introduce a class of interest rate models, called the $\alpha$-CIR model, which gives a natural extension of the standard CIR model by adopting the $\alpha$-stable L{\'e}vy process and preserving the branching property. This model allows to describe in a unified and parsimonious way several recent observations on the sovereign bond market such as the persistency of low interest rate together with the presence of large jumps at local extent. We emphasize on a general integral representation of the model by using random fields, with which we establish the link to the CBI processes and the affine models. Finally we analyze the jump behaviors and in particular the large jumps, and we provide numerical illustrations

Uncertainty and the politics of employment protection

This paper investigates the social preferences over labor market exibility, in a general equilibrium model of dynamic labor demand. We demonstrate that how the economy responds to productivity shocks depends on the power of labor to extract rents and on the status quo level of the firing cost. In particular, we show that when the firing cost is initially relatively low, a transition to a rigid labor market is favored by all the employed workers with idiosyncratic productivity below some threshold value. Conversely, when the status quo level of the firing cost is relatively high, the preservation of a rigid labor market is favored by the employed with intermediate productivity, whereas all other workers favor more exibility. A more volatile environment, and a lower rate of productivity growth, i.e., "bad times," increase the political support for more labor market rigidity only where labor appropriates of relatively large rents. The coming of better economic conditions not necessarily favors the demise of high firing costs in rigid high-rents economies, because "good times" cut down the support for flexibility among the least productive employed workers. The model described provides some new insights on the comparative dynamics of labor market institutions in the U.S. and in Europe over the last few decades, shedding some new light both on the reasons for the original build-up of "Eurosclerosis," and for its relative persistence until the present day

Non-linear Quantization of Integrable Classical Systems

It is demonstrated that the so-called "unavoidable quantum anomalies" can be avoided in the farmework of a special non-linear quantization scheme. A simple example is discussed in detail.Comment: LaTeX, 14 p