Ramsey Waits: A Computational Study on General Equilibrium Pricing of Derivative Securities

This paper analyses the accuracy of replicating portfolio methods in predicting asset prices. In a two-period, general equilibrium model with incomplete financial markets and heterogeneous agents, a computational study is conducted under various distributional assumptions. We focus on the price of a call option on an underlying risky asset. There is evidence that the value of the (approximate) replicating portfolio is a good approximation for the general equilibrium price for CRRA preferences, but not for CARA preferences. Furthermore, there is strong evidence that the introduction of the call option reduces market incompleteness and that the price of the underlying asset is unchanged. There is, however, inconclusive evidence on whether the availability of the option increases agents' welfare.Asset pricing, general equilibrium, incomplete markets

Ramsey Waits: A Theory of Non-Exclusive Real Options with First-Mover Advantages

This paper analyses the exercise decision of non-exclusive real options in a two-player setting. A general model of non-exclusive real options, allowing the underlying asset to follow any strong Markov process is developed, thus extending the existing literature, which is mainly based on one-dimensional geometric Brownian motion. For games with a first-mover advantage it is proved that an equilibrium with the rent-equalisation property exists. As an example, a duopoly where two firms can adopt a new technology, whose profitability follows a two-dimensional, correlated geometric Brownian motion is studied.Timing games, real options, rent equalisation, technology adoption

Evolution of Conjectures in Cournot Oligopoly

This paper considers a dynamic market where a fixed number of firms engages in Cournot oligopoly.  Firms choose the output level based on their assessment of the competitors' reaction to their output choice.  This is parameterized using an approach reminiscent of conjectural variations.  On a second level firms adapt their conjectural variation by imitating the most successful firm.  Simulations suggest that in the long-run the Walrasian, Cournot-Nash and cartel equilibria survive.  The theory of nearly-complete decomposability is used to show that the Walrasian equilibrium is approximately the only stochastically stable state.

Equilibria in Continuous Time Preemption Games with Markovian Payoffs

This paper studies timing games in continuous time where payoffs are stochastic and strongly Markovian. The main interest is in characterizing equilibria where players preempt each other along almost every sample path. It is found that the existence of such preemption equilibria depends crucially on whether there is a coordination mechanism that allows for rent equalization or not, and whether the stochastic payoffs admit upward jumps. Through numerical examples it is argued that the possibility of such coordination improves social welfare and that the welfare loss due to preemption decreases in uncertainty.Timing Games, Real Options, Preemption

Valuing Voluntary Disclosure using a Real Options Approach

This paper outlines a real options approach to valuing those announcements which are made by firms outside their legal requirements. From the firm's perspective, information is disclosed only if the manager of the firm is sufficiently certain that the market response to the announcement will have a positive impact on the value of the firm. When debt financing is possible it is found that the manager adopts a more transparent disclosure policy, thus violating the Modigliani-Miller theorem on irrelevance of capital structure on firm value.Voluntary Disclosure, Real Options, Modigliani-Miller Theorem.

Minimum Cost Spanning Tree Games and Spillover Stability

This paper discusses minimum cost spanning tree games and argues that the standard approach of using a transferable utility game to come up with a fair allocation of the total costs has some flaws. A new model of spillover games is presented, in which each agent's decision whether or not to cooperate is properly taken into account.minimum cost spanning tree problems, transferable utility games, spillovers

On the Firm’s Option Values of Short-Time Work Policies

We analyse the short-time work (STW) regulations that several OECD countries introduced after the 2007 financial crisis. We view these measures as a collection of real options and study the dynamic effect of STW on the endogenous liquidation decision of the firm. While STW delays a firm’s liquidation, it is not necessarily welfare enhancing. Moreover, it turns out that firms use STW too long. We show (numerically) that providers of capital benefit more than employees from STW. Benefits for employees can even be negative. A typical Nordic policy performs better than a typical Anglo-Saxon policy for all stakeholders

Is gold a Sometime Safe Haven or an Always Hedge for Equity Investors? A Markov-Switching CAPM Approach for US and UK Stock Indices

This paper re-examines gold's role as a tool for investors to manage their portfolio risk. We begin by assessing gold's average relationship to an investor's diversified equity portfolio by applying the basic Capital Asset Pricing Model (CAPM) to UK and US equity indices. Next, we apply a Markov-switching CAPM to assess whether two distinct states exist between gold's relationship with the Market Portfolio. This approach allows the data to determine if two separate states exist and, if so, whether one state matches the definition of a Safe Haven from the literature. Using this new approach, we find that gold is consistently a Hedge, but that no distinct Safe Haven state exists between gold and UK or US stock markets