In this paper we explore the computation and simulation of stochastic overlapping generation (OLG) models. To do so we compute all Markovian equilibria adopting a recently developed numerical algorithm. Among the models we studied, the indeterminacy in deterministic OLG model results in many different equilibrium paths corresponding to the initial condition that all asymptotically converge to the same steady state. The uncertainty introduces indeterminacy with infnite dimension due to the existence of numerous selections of transition and policy functions from the equilibrium set. Each selection correspondences a sequential competitive equilibrium that may present excessive volatile movements in asset price. It is possible to construct a continuum of recursive equilibrium. However our numerical simulations suggest that it is problematic to look at recursive equilibrium in which the volatility of asset price is solely determined by the distribution of the shock.
We analyze the implications of entrepreneurial spawning for a variety of firm characteristics such as size, focus, profitability, and innovativeness. We examine the dynamics of spawning over time. Our model accounts for much of the empirical evidence relating to the relation between spawning and firm characteristics. Firms that have higher patent quality spawn more, as do firms that have higher knowhow. Older firms spawn less, they are more diversified and less profitable. Spawning frequency, focus, and profitability are positively related where spawning is driven by the value of organizational fit; they are negatively related with firm size.
Empirical research has shown that people tend to overweight small probabilities and underweight large probabilities when valuing risky prospects, but little is known about factors influencing the shape of the probability weighting curve. Based on a laboratory experiment with monetary incentives, we demonstrate that pre-existing good mood is significantly associated with women’s probability weights: Women in a better than normal mood tend to weight probabilities relatively more optimistically. Many men, however, seem to be immunized against effects of incidental mood by applying a mechanical decision criterion such as maximization of expected value.
Modern corporations use complex debt instruments and pursue acquisitions. In orderto analyze the properties of some of these contracts in the event of an acquisition, thispaper considers a company that has an incumbent capital structure, comprising one of five practically important structured debt contracts. An opportunity for an acquisition comes along that was not ex-ante contractible. The equityholder decides on the financing of this expansion by trading off tax advantages of debt against costs of bankruptcy. The modelyields a number of insights for structured debt and acquisitions, four of which are as follows: First, a seniority clause offers the bondholder protection from agency, but it also decreases the equityholder’s incentives to finance the acquisition. Second, embedded call options are valuable even if interest rates are constant, because they allow the equityholder to issue a new bond at fair value. Third, bankruptcy remoteness is valuable, if assets are very risky. Fourth, convertible bonds are vulnerable to agency and the conversion option bears the same incentive problem as a seniority clause. These properties explains, for example, the otherwise puzzling practice of companies buying out convertible bond holders prior to anacquisition.
We present a new and general technique for obtaining closed-form expansions for prices of options in the Heston model, in terms of Black–Scholes prices and Black–Scholes Greeks up to arbitrary order. We then apply the technique to solve, in detail, the cases for the second-order and third-order expansions. In particular, such expansions show how the convexity in volatility, measured by the Black–Scholes volga, and the sensitivity of delta with respect to volatility, measured by the Black–Scholes vanna, impact option prices in the Heston model. The general method for obtaining the expansion rests on the construction of a set of new probability measures, equivalent to the original pricing measure, and which retain the affine structure of the Heston volatility diffusion. Finally, we extend the method to the pricing of forward-starting options in the Heston model.
