infonet-economy

In order to promote risky behavior, it is a common practice that casinos incentivize their customers through the provision of free financial means, i.e., free play. Thereby, casino operators try to exploit what is known as the house money effect. However, evidence from the field is scarce and prior research provides explanations that predict different behavioral outcomes. This…

In this paper we propose a closed-form pricing formula for European basket and spread options. Our approach is based on approximating the risk-neutral probability density function of the terminal value of the basket using a Gauss-Hermite series expansion around the Gaussian density. The new method is quite general as it can be applied for a basket with a large number of assets and…

This paper provides evidence on how the new international regulation on Global Systemically Important Banks (G-SIBs) impacts the market value of large banks. We analyze the stock price reactions for the 300 largest banks from 52 countries across 12 relevant regulatory announcement and designation events. We observe that the new regulation negatively affects the value of the newly…

The following paper proposes a portfolio performance measure to optimize, mostly bond asset portfolios usually held for regulatory purposes from a risk focused perspective. The measure is based on variations of the proximity measure introduced by the Random Forests framework, leading to a proximity based performance ratio. The proximities are modeled using a recursive conditional…

This paper examines potential impacts of banks' leverage on their incentives to manage their liquidity. We analyze a model where banks control their liquidity risk by managing their liquid asset positions. In the basic framework, a model with a single bank, where the possibility of selling long-term assets when in need of liquidity is not taken into account, we find that the…

This paper investigates the motives for financial complexity by focusing on a large market of investment products exclusively targeted to households. We develop a robust measure of complexity by performing a text analysis of the term sheets of 55,000 retail structured products issued in 17 European countries since 2002. We first find that the complexity of structured products has…

We analyze the impact of funding costs and margin requirements on index options traded on the CBOE. Assuming differential borrowing and lending rates, we derive no-arbitrage bounds for European options. We show that funding costs and the CBOE’s margin requirements lead to a price increase, which translates into skew and smile patterns for implied volatility curves even under constant…