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The price of a safe asset reflects not only the expected discounted future cash flows but also future service flows, since retrading allows partial insurance of idiosyncratic risk in an incomplete markets setting. This lowers the issuers' interest burden. As idiosyncratic risk rises during recessions, so does the value of the service flows bestowing the safe asset with a negative β. The resulting exorbitant privilege resolves government debt valuation puzzles and allows the government to run a permanent (primary) deficit without ever paying back its debt, but the government faces a debt Laffer curve. [ABSTRACT FROM AUTHOR]

We provide conditions for the feasibility of robust Pareto-improving (RPI) policies when markets are incomplete and the interest rate is below the growth rate. We allow for arbitrary heterogeneity in preferences and income risk and a wedge between the return to capital and bonds. An RPI improves risk sharing and can induce a more efficient level of capital. Elasticities of aggregate savings to changes in interest rates are the crucial ingredients to the feasibility of RPIs. Government debt may complement rather than substitute for capital in an RPI. Our analysis emphasizes the welfare-improving qualities of government bonds versus explicit redistribution. (JEL D52, E43, E62, H20, H63) [ABSTRACT FROM AUTHOR]

In this paper, we explore the connection between a single index model under the real-world probability measure and martingale pricing via minimal relative entropy or Esscher transform, within the context of a one-period market model, possibly incomplete, with multiple risky assets and a single risk-free asset. The minimal relative entropy martingale measure and the Esscher martingale measure coincide in such a market, provided they both exist. From their Radon–Nikodym derivative, we derive a portfolio of risky assets in a natural way, termed portfolio G. Our analysis shows that pricing using the Esscher or minimal relative entropy martingale measure is equivalent to a single index model (SIM) incorporating portfolio G. In the special case of elliptical returns, portfolio G coincides with the classical tangency portfolio. Furthermore, in the case of jointly normal returns, Esscher or minimal relative entropy martingale measure pricing is equivalent to CAPM pricing. [ABSTRACT FROM AUTHOR]

We investigate the stability of the Epstein–Zin problem with respect to small distortions in the dynamics of the traded securities. We work in incomplete market model settings, where our parametrization of perturbations allows for joint distortions in returns and volatility of the risky assets and the interest rate. Considering empirically the most relevant specifications of risk aversion and elasticity of intertemporal substitution, we provide a condition that guarantees the convexity of the domain of the underlying problem and results in the existence and uniqueness of a solution to it. Then, we prove the convergence of the optimal consumption streams, the associated wealth processes, the indirect utility processes, and the value functions in the limit when the model perturbations vanish. [ABSTRACT FROM AUTHOR]

Income interventions with pro-poor targeting is a common fiscal policy around the world. However their distributional effects on consumption and savings are not well understood. Motivated by the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), we use longitudinal data on income and consumption of Indian households to estimate distributional effects of such interventions in a model with endogenous consumption and savings distribution, where households face uninsured income risks. In the model, a standard scheme of interventions that consistently targets low-income cohorts, has small distributional impacts on targeted and non-targeted cohorts alike. In contrast, a fiscally-equivalent scheme that changes the expected income profile of the targeted households in the same initial cohort irrespective of their future incomes, generates larger effects by changing income mobility for both the targeted and non-targeted cohorts. This mobility-based channel generates consumption responses even though the magnitude of the shock is lesser for the initially targeted cohort, as it more than offsets the effect from permanent income shock. Quantitatively, such an intervention in the order of 0.6 percent of output, approximating the Indian scenario, increases consumption share of the targeted cohort by nearly 2.5 percent, five times as large as the effect of standard interventions. The distributional effects are similar to those arising from a counterfactual policy of universal basic income. [ABSTRACT FROM AUTHOR]

We consider the operation of a non-financial corporation and present a novel risk-management framework that supports the joint optimization of the firm's operational and financial decisions. Specifically, we study the problem of maximizing the firm's operating profits when these profits depend on movements in the financial markets, and where the decision maker—the firm's manager—is risk averse. Critically, our framework (i) imposes risk aversion through a generic class of risk constraints, and (ii) considers explicitly the differences that can exist between the shareholders' and manager's beliefs about future market risks. Together, these aspects allow us to remove speculation so that financial instruments can only be used for hedging purposes. We analyze our problem in an incomplete financial market setting and consider different informational assumptions. Within this framework, we characterize the optimal financial hedging strategy so that the problem reduces to a constrained maximization over operational policies. Our results show how financial hedging can be effectively used to expand the set of admissible operating policies, and identify conditions under which the risk constraint can be completely ignored when solving for an optimal operating policy. We illustrate our methodology in the context of an exporter firm which faces exchange rate risk in trading. [ABSTRACT FROM AUTHOR]

We derive a Clark-Ocone-Haussmann (COH) type formula under a change of measure for L 1 -canonical additive processes, providing a tool for representing financial derivatives under a risk-neutral probability measure. COH formulas are fundamental in stochastic analysis, providing explicit martingale representations of random variables in terms of their Malliavin derivatives. In mathematical finance, the COH formula under a change of measure is crucial for representing financial derivatives under a risk-neutral probability measure. To prove our main results, we use the Malliavin-Skorohod calculus in L 0 and L 1 for additive processes, as developed by Di Nunno and Vives (2017). An application of our results is solving the local risk minimization (LRM) problem in financial markets driven by pure jump additive processes. LRM, a prominent hedging approach in incomplete markets, seeks strategies that minimize the conditional variance of the hedging error. By applying our COH formula, we obtain explicit expressions for locally risk-minimizing hedging strategies in terms of Malliavin derivatives under the market model underlying the additive process. These formulas provide practical tools for managing risks in financial market price fluctuations with L 1 -additive processes. [ABSTRACT FROM AUTHOR]

A derivative is a financial asset whose future payoff is a function of underlying assets. Pricing a financial derivative involves setting up a market model, finding a martingale ("fair game") probability measure for the model from the existing asset prices, and using that probability measure to price the derivative. When the number of underlying assets and/or the number of market outcomes in the model is large, pricing can be computationally demanding. In this work, we first formulate the pricing problem in a linear algebra setting, including the realistic setting of incomplete markets where derivatives do not have a unique price. We show that the problem can be solved with a variety of quantum techniques such as quantum linear programming and the quantum linear systems algorithm. While in previous works the martingale measure is assumed to be given, here it is extracted from market variables akin to bootstrapping, a common practice among financial institutions. We discuss the quantum zero-sum game algorithm and the quantum simplex algorithm as viable subroutines. For quantum linear systems solvers, we formalize a new market assumption milder than market completeness, which allows the potential for large speedups. Towards prototype use cases, we conduct numerical experiments motivated by the Black–Scholes–Merton model. [ABSTRACT FROM AUTHOR]

This research is devoted to studying a geometric Brownian motion with drift switching driven by a 2 χ 2 Markov chain. A discrete-time multiplicative approximation scheme was developed, and its convergence in Skorokhod topology to the continuous-time geometric Brownian motion with switching has been proved. Furthermore, in a financial market where the discounted asset price follows a geometric Brownian motion with drift switching, market incompleteness was established, and multiple equivalent martingale measures were constructed. [ABSTRACT FROM AUTHOR]

Copyright of International Journal of Disciplines Economics & Administrative Scienves Studies is the property of International Journal of Disciplines in Economics & Administrative Sciences Studies and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

We study the currency risk premium and the forward premium bias in a two‐country New Keynesian model with production, no physical capital, and recursive utility. Monetary policy follows an interest rate feedback rule and exogenous total factor productivity (TFP) growth follows a long‐run risk process with stochastic volatility, which we estimate from data. With cross‐country heterogeneity in TFP and monetary policy, reasonable currency risk premia emerge under complete and incomplete markets but the forward premium bias is trivial. We diagnose the challenge faced by this fairly standard production model to explain the forward premium bias. [ABSTRACT FROM AUTHOR]

Due to its unique flavor, extremely high nutritional value, and health functions, Aronia has great development and utilization prospects. To fill the gap of incomplete market research in the Aronia industry in China and promote the development of the Chinese Aronia industry, this article retrieved Aronia-related companies through Tianyan Data. Results showed that the number of market entities engaged in the Aronia industry in China had been increasing year by year in the past 20 years, reaching growth peaks in 2016 and 2018, respectively. From the perspective of spatial distribution, Liaoning (32.89%), Jilin (18.86%), and Shandong (16.23%) were its main operating regions. Most enterprises (55%) had a registered capital of less than 5 million yuan, with a minority of Aronia enterprises owning trademarks (26.64%) and patents (10.48%). Until 2022, a total of 178 Aronia enterprises in China were in a state of survival and normal operation, with 50 being cancelled, revoked, rescinded, and dissolved. Currently, the main problems faced by the industry included a relatively single variety and cultivation mode, a low level of product deep processing, and insufficient brand recognition and effectiveness. At present, the domestic Aronia industry in China is still in its infancy. It is necessary to call on enterprises to integrate planting, processing, and sales, enrich product categories, develop new products, build leading enterprises, and improve the establishment of related industries. [ABSTRACT FROM AUTHOR]

Merchants need not fear platform entry because that can raise merchants' profits by resolving quality uncertainty for consumers. Merchants are wary of a platform's competitive entry reducing sales and margins. Profit-maximizing platforms seek to provide credible quality information to gain consumer trust and confidence. Can a platform enter so that resulting multisender prices alleviate consumers' uncertainty by signaling quality? Can merchants also benefit from platform entry? We provide answers by analyzing strategic platform and merchant pricing under quality uncertainty. A modeling innovation is a leader-follower framework for platform-merchant competition. Consumers resolve uncertainty using both platform and merchant prices. Using what we label perfect Bayes-consistent beliefs, we identify perfect Bayesian equilibrium that satisfies the intuitive criterion, and also out-of-equilibrium beliefs that are unprejudiced. A substantive finding is that platform entry can raise merchant profits when the quality is high by moving the equilibrium from pooling to separating, and supporting higher prices. Another strategic consequence of platform entry could be a separating equilibrium with incomplete market coverage due to price distortion moving to one of complete market coverage due to seller competition. Indeed, conditions exist in our model for an equilibrium outcome identical to complete information. Finally, facing entry cost, a platform may choose to enter only with high quality but quality revelation remains price dependent and not based on mere entry. History: Yuxin Chen served as the senior editor for this article. Funding: Y. Qiu was supported by the Natural Science Foundation of China [Grant 71902142] toward completion of this paper. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mksc.2021.0227. [ABSTRACT FROM AUTHOR]

Copyright of Balkan & Near Eastern Journal of Social Sciences (BNEJSS) is the property of Balkan & Near Eastern Journal of Social Sciences (BNEJSS) and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Concepts are introduced and applied for analyzing and selecting arbitrage portfolios in the face of uncertainty about initial positions and risk preferences. A stochastic arbitrage opportunity is defined as a zero-cost investment portfolio that enhances every feasible host portfolio for all admissible utility functions. The alternative to the existence of such investment opportunities is the existence of a solution to a dual system of asset pricing restrictions based on a class of stochastic discount factors. Feasible approaches to numerical optimization and statistical inference are discussed. Empirical results suggest that equity factor investing is appealing for all risk-averse stock investors with a wide range of initial position and sufficiently low transactions costs by mixing multiple factor portfolios with high after-cost appraisal ratios, low mutual correlation, and negative exposures to the relevant host portfolios. These findings weaken the case for risk-based explanations for the profitability of factor investing. This paper was accepted by Kay Giesecke, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4892. [ABSTRACT FROM AUTHOR]

This paper sets up a small open new Keynesian economy model with constrained households and incomplete markets to address the driving forces of business cycles in Korea. It shows that there exists a substantial fraction of constrained households who cannot have access to financial market. Furthermore, the estimated model reveals that a TANK model is better than a RANK model in explaining business cycles in Korea. The effect of domestic productivity shock on Korean economy has dominated in the variations of output, while the contribution of the foreign productivity shock to the variations of output and inflation has increased after the Asian financial crisis. The monetary policy shock has dominated the variation of inflation at short and medium horizons. [ABSTRACT FROM AUTHOR]

Implementing reverse logistics in the construction industry is considered a crucial method to achieve a circular economy. Despite a wealth of research focusing on improving reverse logistics systems, businesses still encounter challenges during the implementation process. Therefore, this study conducted a systematic literature review utilizing bibliometric methods to analyze 623 articles on reverse logistics in the construction industry published on Web of Science from 1995 to 2023. Additionally, a comprehensive review of 56 high-quality literature on obstacles to implementing reverse logistics in the construction industry and optimizing reverse supply chains was conducted. This review uncovered the current status and challenges of implementing reverse logistics in the construction industry and proposed potential solutions to address these issues. The main findings of this study include: (1) increasing academic interest in construction waste reverse logistics, with Chinese scholars leading the way and publications predominantly in environmental and construction journals, with limited coverage in logistics journals; (2) the primary obstacles to implementing reverse logistics in the construction industry lie in supply chain management, such as lacking deconstruction designs, incomplete recycling markets, difficulties in evaluating the quality of secondary materials, and insufficient supply chain integration; (3) proposing a framework for a construction industry reverse logistics supply chain ecosystem, aiming to establish a platform to facilitate online collection of construction waste, online transactions of secondary materials, end-to-end monitoring, and data analytics for consultation. [ABSTRACT FROM AUTHOR]

This paper demonstrates the benefits, from an expected utility perspective, of including a derivative into the universe of tradeable assets under the affine GARCH model proposed by Heston and Nandi (Rev Financ Stud 13(3):585–625, 2000. https://doi.org/10.1093/rfs/13.3.585). For this purpose, we first introduce a Power Option into the market, derive its value and moment generating function thanks to the affine GARCH structure. We then expand on the results presented by Escobar-Anel et al. (Oper Res Perspect 9:100216, 2022) by solving for the optimal investment allocations into the stock, a cash account and the option. We show that investors who are able to include a derivative indeed outperform those who only invest into the stock and the bank account. In this spirit, investors who fail to include, even a low level of exposure to the derivative, could see up to 7% annual wealth-equivalent losses. This confirms findings in continuous-time models dating to Liu and Pan (J Financ Econ 69(3):401–430, 2003). An empirical analysis on the S &P500 confirms the superiority in terms of Sharpe ratio, and maximum drawdown of portfolios with options, in-sample and out-of-sample. [ABSTRACT FROM AUTHOR]

Classical indifference valuation, a widely studied approach in incomplete markets, uses critically the a priori knowledge of the characteristics (arrival, maturity, payoff structure) of the projects in consideration. This assumption, however, may not accommodate realistic scenarios in which projects, not initially anticipated, arrive at later times. To accommodate this, we employ forward indifference valuation criteria, which by construction are flexible enough to adapt to such "non-anticipated" cases while yielding time-consistent indifference prices. We consider and analyze in detail two representative cases: valuation adjustments due to incoming non-anticipated project and the relative forward indifference valuation of new projects in relation to existing ones. [ABSTRACT FROM AUTHOR]

We present and solve an optimal asset allocation problem under a weighted limited expected loss (WLEL) constraint. This formulation encompasses the risk management problem with a limited expected loss (LEL) constraint as a specialized instance and offers a pertinent internal risk management instrument for firms. We observe that a WLEL constraint makes the optimizing investor pursue less volatile payoffs than the unconstrained Merton solution. Compared to the LEL-constrained problem with the same weighted default threshold, the WLEL optimal terminal wealth displays a less dispersed distribution with a smaller variance, suggesting a more secure risk management framework. Conducting a comprehensive equilibrium analysis in the presence of a WLEL risk manager, we validate the relatively conservative investment approach undertaken by the WLEL manager. Subsequently, we expand our findings to encompass broader incomplete market settings, wherein the uniqueness of the equivalent local martingale measure is not assured. [ABSTRACT FROM AUTHOR]

We show how a heterogeneous agent New Keynesian (HANK) model with incomplete markets and portfolio choice can be estimated in state space using a Bayesian approach. To render estimation feasible, the structure of the economy can be exploited and the dimensionality of the model automatically reduced based on the Bayesian priors. We apply this approach to analyze how much inequality matters for the business cycle and vice versa. Even when the model is estimated on aggregate data alone and with a set of shocks and frictions designed to match aggregate data, it broadly reproduces observed US inequality dynamics. (JEL D31, D52, E12, E32, E52, E62) [ABSTRACT FROM AUTHOR]

The effectiveness of the stock market agents with complete information and incomplete information on market trends, prices and demand for stocks and the effect of employees' behavior on the lack of information on employees with complete information (mass behavior survey) have been investigated in this research. For this purpose, by providing a researcher made questionnaire in relation to the stock exchange, using the statistical inference, the analysis of the results of the research has been done and the validity of the presented relationships has been investigated using analytical hieratical approach (AHP). Because in this article, the impact of information on traders' behavior. The 30 of traders have been selected as a sampling sample for Iran Koodro's and Pars Petro-chemical shares in the period of 2022. According to the current questionnaire and its results and practical observations, it can be concluded that transactions with sufficient information on prices are more effective than transactions with full information. Consequently, companies with incomplete information are more successful in the short run. [ABSTRACT FROM AUTHOR]

We construct a model where, at each time instance, risky securities can only take a limited number of values and the equity-linked policy sold by the insurer to policyholders pays benefits linked to these securities. Since the number of states in the model exceeds the number of securities in the (incomplete) market, the martingale measure is not unique, posing a problem in pricing insurance instruments. In this framework, we consider how a super-replicating strategy violates the assumption of absence of arbitrage, yet simultaneously allows the insurance company to fully hedge against financial risk. Since the super-replicating strategy, when considered alone, would be too costly for any rational insured person, through the definition of the safety loading, we demonstrate how the insurer can still hedge against financial risk, albeit at the expense of increasing its exposure to demographic risk. This approach does not aim to show how the pricing of the index-linked policy can actually be performed but rather highlights how risk theory-based approaches (via the definition of the profit and loss random variable) enable the management of the trade-off between financial risk and demographic risk. [ABSTRACT FROM AUTHOR]

We study the response of the optimal investment problem to small changes of the stock price dynamics. Starting with a multidimensional semimartingale setting of an incomplete market, we suppose that the perturbation process is also a general semimartingale. We obtain second-order expansions of the value functions, first-order corrections to the optimisers, and provide the adjustments to the optimal control that match the objective function up to the second order. We also give a characterisation in terms of the risk-tolerance wealth process, if it exists, by reducing the problem to the Kunita–Watanabe decomposition under a change of measure and numéraire. Finally, we illustrate the results by examples of base models that allow closed-form solutions, but where this structure is lost under perturbations of the model where our results allow an approximate solution. [ABSTRACT FROM AUTHOR]

This paper studies a stochastic utility maximisation game under relative performance concerns in finite- and infinite-agent settings, where a continuum of agents interact through a graphon (see definition below). We consider an incomplete market model in which agents have CARA utilities, and we obtain characterisations of Nash equilibria in both the finite-agent and graphon paradigms. Under modest assumptions on the denseness of the interaction graph among the agents, we establish convergence results for the Nash equilibria and optimal utilities of the finite-player problem to the infinite-player problem. This result is achieved as an application of a general backward propagation of chaos type result for systems of interacting forward–backward stochastic differential equations, where the interaction is heterogeneous and through the control processes, and the generator is of quadratic growth. In addition, characterising the solution of the graphon game gives rise to a novel form of infinite-dimensional forward–backward stochastic differential equation of McKean–Vlasov type, for which we provide well-posedness results. An interesting consequence of our result is the computation of the competition indifference capital, i.e., the capital making an investor indifferent between whether or not to compete. [ABSTRACT FROM AUTHOR]

Using Russian longitudinal data for 1994–2018, we document a secular decline in consumption and income inequality. Although within‐cohort inequality is also declining, the life‐cycle inequality profiles of income and consumption are surprisingly flat. A calibrated life‐cycle model with incomplete markets, high initial variance of the persistent income component, and moderately persistent income shocks is consistent with nearly flat life‐cycle inequality profiles and the puzzlingly large insurance role of assets found in the Russian data. This is in contrast to the standard calibrations that fail to match the life‐cycle inequality profiles and the panel‐data evidence on consumption insurance. [ABSTRACT FROM AUTHOR]

The effect of demand uncertainty reduction (DUR) on supply chain management has received tremendous attention. From a financial perspective, studying the impact of DUR is equally significant. This study explores the relationship between DUR and private equity (PE) financing in retail enterprises within a supply chain, which comprises a dominant supplier and a subordinate retailer. This article establishes decision models for a retailer backed by PE under three market demand conditions: range, mean, and range with mean. The study further investigates the impact of partial demand uncertainty reduction (PDUR) on the retailer and PE through comparative analysis of these scenarios. To address incomplete market demand information during the decision-making process, the study employs the minimax regret criterion to construct and solve the model. An intriguing finding of this study is that contrary to intuition, PDUR not only fails to promote PE but also reduces the retailer's willingness to finance and decreases the asset size for both the retailer and PE. In addition, the better the growth potential for the retail enterprise, the more severe the negative impact brought about by PDUR. Moreover, the impact of PDUR on supplier and supply chain performance is two-fold. PDUR based on range information has a negative impact on the expected profit of the supplier and the supply chain, while PDUR based on mean information has a positive impact on their expected profit. [ABSTRACT FROM AUTHOR]

The paper considers the statistical concept of causality in continuous time, which is based on Granger's definition of causality. We give necessary and sufficient conditions, in terms of statistical causality, for the preservation of the strong property of predictable representation for stopped martingales when filtration is decreased. This concept of causality is also connected to the preservation of the strong property of predictable representation under a change in measure. In addition, we give conditions, in terms of statistical causality, for martingales to have strong and weak properties of predictable representation. The results are applied to the problem of pricing claims in incomplete financial markets. [ABSTRACT FROM AUTHOR]

This paper uses a heterogeneous‐agent overlapping‐generations model to examine the fiscal and distributional consequences of introducing a means test in US Social Security. I find that a means test, that is, conditioning benefit payments on a household's earnings or assets, leads to a higher implicit tax on old‐age resources, but has desirable distributional effects. A 75% cut in the benefits to households with earnings of more than 200% of the median leads to a 2.3% reduction in the overall size of Social Security, but has almost no effect on average dollar benefits. In contrast, a fiscally comparable payroll tax cut leads to an across‐the‐board decline of 2% in the average dollar benefits, despite an increase in capital and labor. A fiscally comparable delay in the benefit eligibility age increases benefits for all, but negatively affects capital and labor. Finally, an asset‐based means test causes a decline of 1% in the average dollar benefits, but has a large negative effect on capital and the accidental bequests left behind by deceased households. [ABSTRACT FROM AUTHOR]

This paper studies the pricing of derivatives in an arbitrage-free but incomplete market. We provide a new theorem and an economic-based approach for studying this issue using information reduction to identify a unique equivalent martingale measure for the pricing of derivatives. This new martingale measure, called the uplifted martingale measure, implies that non-hedged risks are non-priced. Our approach contrasts two distinct markets - the original and a fictitious - each associated with a different filtration, and employs the first and second fundamental theorems of asset pricing in both of these markets. [ABSTRACT FROM AUTHOR]

We introduce and analyze a class of forward performance criteria in incomplete markets in the presence of model ambiguity. Incompleteness stems from general investment constraints, while model uncertainty is represented by a convex and compact set of plausible model parameter processes. Following the max-min criteria in traditional (backward) robust control, we formulate similar criteria for the robust forward performance processes and focus on the rich class of time-monotone processes. We provide a novel PDE characterization and a semi-explicit saddle-point construction of the robust forward performance criteria and their optimal policies. Furthermore, we present additional results within the class of homothetic constant relative risk aversion (CRRA) processes. Within this class, we investigate the relationship between forward performance processes on wealth and those on consumption, establishing an interesting dominance through time. [ABSTRACT FROM AUTHOR]

When externalities are present, is the inclusion of the affected stakeholders in the firm's decision process a better solution than the shareholder governance? This paper argues that the internalization of the externality hinges on the available information and the market strategy used by the firm rather than its governance structure. In the absence of income effects (i.e., if preferences are quasi-linear), a market for "customer rights" reveals all the necessary information about the surplus of a homogeneous consumer population. In that case, a Coase-type equivalence obtains: whether the firm uses the information in the interest of its shareholders or all its stakeholders, the outcome in each case is an efficient allocation. With income effects, the market for customer rights may fail. Still, if appropriate information can be obtained, efficiency can be achieved under both governance structures (or neither). [ABSTRACT FROM AUTHOR]

The object of the investigation is a model of the incomplete financial market. It includes a bank deposit with a known interest rate and basic risky securities. The instant interest rate and volatility are governed by a hidden market regime, represented by some finite-state Markov jump process. The paper presents a solution to two problems. The first one consists of the characterization of the derivatives based on the existing market securities, which are valid to complete the considered market. It is determined that for the market completion, it is sufficient to add the number of derivatives equal to the number of possible market regimes. A generalization of the classic Black–Scholes equation, describing the evolution of the fair derivative price, is obtained along with the structure of a self-financing portfolio, replicating an arbitrary contingent claim in the market. The second problem consists of the online estimation of the market regime, given the observations of both the underlying and derivative prices. The available observations are either a combination of the time-discretized risky security prices or some high-frequency multivariate point processes associated with these prices. The paper presents the numerical algorithms of the market regime tracking for both observation types. The comparative numerical experiments illustrate the high quality of the proposed estimates. [ABSTRACT FROM AUTHOR]

I propose a theoretical model of a debt contract between a sovereign and its international lenders that determines the optimal debt maturity structure and related costs. It is shaped by two financial frictions: limited liability (the country cannot guarantee that it will not dilute its obligations or default on them) and market incompleteness. In equilibrium, debt dilution constrains the amount of long-term debt issuance. I use this framework to evaluate the impact of two policy interventions: the possibility of sovereign debt restructuring with private creditors and international official lending in the event of exclusion from the international capital markets. The possibility of restructuring after default stimulates long-term debt issuance; however, in equilibrium, those tools are unable to loosen the constraint on long-term debt issuance. Consistently with the empirical literature, I find that even when these policy options are available, the country tends to issue mainly short-term debt. [ABSTRACT FROM AUTHOR]

We analyze how market power by traders on local agricultural spot markets affects investment in crop quality by smallholders in a context with "imperfect institutions"—without third-party contract enforcement and with incomplete input markets. Farmers and traders can engage in relational contracting where the promise of future rents supports current cooperation. We analyze informal contracting under the shadow of side selling by the farmer and ask how changes in the competitiveness of local markets affect flows of inputs in relational contracts. When local markets become more competitive, fewer farmers are included in relational contracting with traders, and farmers who remain in such relationships receive less support from traders. We document empirical evidence from local wheat markets in Ethiopia that is consistent with the theory. [ABSTRACT FROM AUTHOR]

We demonstrate that, in China, firm investment efficiency gains are associated with the use of short‐term debt, especially its trade credit component. During the 2009–2010 economic stimulus plan, such effects were heightened and generally remained persistent in the 2011–2013 poststimulus period. Our findings support the view that the rollover pressure of short‐maturity debt and the information advantage of supply chain financing are both effective mechanisms for enhancing firm governance in an environment more susceptible to financial market incompleteness. Consequently, the enormous credit boost during the stimulus plan was more efficiently invested when channelled through firms' supply chains. [ABSTRACT FROM AUTHOR]

Variable annuities (VAs) and other long-term equity-linked insurance products are typically difficult to hedge in the incomplete markets. A state-dependent fee tied with market volatility for VAs is designed to contribute the risk-sharing mechanism between policyholders and insurers. Different from prior research, we discuss several aspects on a fair valuation, fee-rate determination and hedging with volatility-dependent fees from the perspective of a VA hedger. A method of efficient hedging strategy as a benchmark compared to other strategies is developed in the stochastic volatility setting. We illustrate this method in guaranteed minimum maturity benefits (GMMBs), but it is also applicable to other equity-linked insurance contracts. [ABSTRACT FROM AUTHOR]

We use supervised machine learning to approximate the expectations typically contained in the optimality conditions of an economic model in the spirit of the parameterized expectations algorithm (PEA) with stochastic simulation. When the set of state variables is generated by a stochastic simulation, it is likely to suffer from multicollinearity. We show that a neural network‐based expectations algorithm can deal efficiently with multicollinearity by extending the optimal debt management problem studied by Faraglia, Marcet, Oikonomou, and Scott (2019) to four maturities. We find that the optimal policy prescribes an active role for the newly added medium‐term maturities, enabling the planner to raise financial income without increasing its total borrowing in response to expenditure shocks. Through this mechanism, the government effectively subsidizes the private sector during recessions. [ABSTRACT FROM AUTHOR]

This article rests on establishing a unique standpoint that life insurance products (unlike other financial assets) are purchased for protection, not as an investment for return. This aims at identifying the most suitable theoretical framework to study the life insurance market and to suggest appropriate tools of analysis. Economic and financial theories starting from neo-classical economics, going up to behavioural economics (BE) have been studied visà-vis life insurance markets. A distinction has been drawn between BE and behavioural finance (BF). Accordingly, neo-classical economics, standard theory of finance and BF have been found to be inappropriate to understand life insurance as a market. The main theoretical edifice of BE, with a blend of transactioncost approach and information theoretic approach, is argued to be the right theoretical framework to study the life insurance market, given the idiosyncrasies involved. A novel attempt has been made to create a ‘construct’ to depict how the BE framework is most relevant. It is hypothesised that bounded rationality is adversely influenced by emotions, search costs, intermediaries and socio-psychological influences, to embed behavioural biases and heuristics into life insurance purchase decisions. Combinedly, this leads to demand and supply distortions that create an incomplete market. To test this framework, it has been suggested that Heuristic z-test; Murthy’s Index of Rank Dominance (MIrd & MRird); and logistic regression, be harnessed. These tools would help in measuring market inefficiency and underperformance. Policymakers, the regulator, insurers and buyers alike would benefit from a better understanding of the market. [ABSTRACT FROM AUTHOR]

A methodology is presented to estimate the solution states for a non-linear price problem, a model for pricing options with a hedging strategy in the Föllmer-Schweizer sense is defined. The problem is to determine the price of a contingent claim, that is a contract, that pays of an amount at time t in a incomplete market, that is not possible to replicate a payoff by a controlled portfolio of the basic securities. Two algorithms are presented to estimate the solution of the presented problem, the nested sequential Monte Carlo (NSMC) and space-time particle filter (STPF) are defined from sequences of probability distributions. The methodology is validated to use real data from option Asian, the states in real-time are estimated, that is proposed on the basis of the price model. The efficiency of the forecasts of the model is compared. Finally, one goodness-of-fit measure to validate the performance of the model are used, obtaining insignificant estimation error. [ABSTRACT FROM AUTHOR]

We consider a portfolio optimisation problem for a utility-maximising investor who faces convex constraints on his portfolio allocation in Heston's stochastic volatility model. We apply existing duality methods to obtain a closed-form expression for the optimal portfolio allocation. In doing so, we observe that allocation constraints impact the optimal constrained portfolio allocation in a fundamentally different way in Heston's stochastic volatility model than in the Black Scholes model. In particular, the optimal constrained portfolio may be different from the naive 'capped' portfolio, which caps off the optimal unconstrained portfolio at the boundaries of the constraints. Despite this difference, we illustrate by way of a numerical analysis that in most realistic scenarios the capped portfolio leads to slim annual wealth equivalent losses compared to the optimal constrained portfolio. During a financial crisis, however, a capped solution might lead to compelling annual wealth equivalent losses. [ABSTRACT FROM AUTHOR]

We study insider trading in a jump-binomial model of the financial market that is based on a marked binomial process and that serves as a suitable alternative to some classical trinomial models. Our investigations focus on the two main questions: measuring the advantage of the insider's additional information and stating a closed form for her hedging strategy. Our approach is based on the results of enlargement of filtration in a discrete-time setting stated by Blanchet-Scalliet and Jeanblanc (in: From probability to finance, Springer, Berlin, 2020) and on a stochastic analysis for marked binomial processes developed in the companion paper (Halconruy in Electron J Probab 27:1–39, 2022). Our work provides in a discrete-time and an incomplete market setting the analogues of some results of Amendinger et al. (Stoch Process Appl 89(1):101–116, 2000; Finance Stoch 7(1):29–46, 2003), Imkeller et al. (1998, 2006) and extends in an insider framework some utility maximization results stated in Delbaen and Schachermayer (The mathematics of arbitrage, Springer, Berlin, 2006) and in Runggaldier et al. (in: Seminar on stochastic analysis, random fields and applications III, Springer, Berlin, 2002). [ABSTRACT FROM AUTHOR]

The paper studies asset pricing for stochastic discrete time stock market models. The possibility of statistical evaluation of the market completeness is investigated. It is known that the market completeness is not a robust property: small random deviations of the coefficients convert a complete market model into a incomplete one. The paper investigates if market incompleteness is robust. It is found that market incompleteness is a non-robust property as well. This is demonstrated for a basic single stock stochastic market model. This implies that, for any incomplete market from a wide class of discrete time models, there exists a complete market model with arbitrarily close stock prices. This means that incomplete markets are indistinguishable from the complete markets in the terms of market statistics. [ABSTRACT FROM AUTHOR]

Models of optimal retirement should reflect market incompleteness in reality caused by disability risk. In this paper, we develop an analytic approach for optimal retirement models with disability risk. More precisely, we provide an analytically tractable characterization of total wealth that is the sum of financial wealth and the present value of future income. We then provide analytic properties of the retirement wealth threshold. Finally, we derive the analytical optimal consumption and portfolio choice with retirement and disability risk. • We develop an analytic incomplete-market approach for optimal retirement models with disability risk. • Analytically tractable optimal strategies are provided. • Various mathematical and economic properties of optimal strategies are obtained. [ABSTRACT FROM AUTHOR]