Katsumasa Nishide

Using real options theory to a country’s environmental policy: considering the economic size and growth

The aim of this paper is to consider how the economic size and growth of a country affect its environmental policy under uncertainty in a real options framework. In contrast to the prior literature, this work explicitly takes into account the link between the development of an economy and the pollution state of the environment. Policy implementation is found to be determined by the levels of the economic size and the disutility of the pollution. We illustrate how to apply our method to the implementation of an environmental policy in an actual situation and show with numerical calculations that the optimal threshold is sensitive only to the subjective time preference, while the expected implementation time is affected by other parameters.

Leaders, Followers and Equity Risk Premiums in Booms and Busts

In this paper, we study an investment problem in which two asymmetric firms face competition and the regime characterizing economic conditions follows Markov switching. We derive the value functions and investment thresholds of a leader and a follower. One of the interesting results is that in contrast to the case of no regime switching, even if the current market size is small, both advantaged and disadvantaged firms have an incentive to become a leader in some parameter settings.

Insider Trading with Correlation between Liquidity Trading and a Public Signal

We analyse a Kyle-type continuous-time market model in which liquidity trading is correlated with a noisy public signal that is released continuously. We show that, in contrast to the previous literature, Kyles λ, the price sensitivity to the order flow, can even be non-monotonic, depending on the correlation structure. We also show that the introduction of an additional public signal does not necessarily improve the informational efficiency of the market, depending on the correlation.

Default Contagion and Systemic Risk in the Presence of Credit Default Swaps

We consider a situation in which general financial products such as options, CDS, and other derivatives, are traded to investigate the effect of cross-ownerships on market stability. We prove the existence and uniqueness of a clearing payment vector under the assumption of the fictitious default algorithm with financial covenants, which reflects technical defaults often observed in actual financial markets. Unlike other related studies, the sufficient condition for the existence involves not only the cross-ownership structure but also the risk exposures associated with the securities cross-held. Some numerical results are presented to show that stronger connectedness via CDSs leads to a more unstable market and higher systemic risk, especially with higher default costs.We consider a clearing system of an interbank market in the case cross-trading of credit default swaps among banks is present, and we investigate how the cross-trading affects _nancial

The Impact of Momentum Trading on the Market Price and Trades

AbstractThis paper theoretically analyzes a financial market with momentum trading in a market microstructure framework, and investigates how momentum trading affects the market price and trades. When momentum traders dominate the market, private information owned by rational traders may not be incorporated into the price, and a market bubble may occur. It is shown that the reliability of a firms public announcement such as an earnings forecast is a key factor to avert the market bubble.

Estimation of the Local Volatility of Discount Bonds Using Market Quotes for Coupon-Bond Options

AbstractThe key issue to price derivatives written on a coupon bond is the volatility structure, such as volatility smiles and skews, of the corresponding discount bonds, since the coupon bond is a portfolio of discount bonds. This paper proposes a method based on Dupire (1994) to estimate the local volatility of discount bonds when only the prices of coupon-bond options are observed in the market. Numerical examples show that our method can construct the local volatility structure of discount bonds that is consistent with the market data.