This article studies equilibrium asset pricing when agents face nonnegative wealth constraints. In the presence of these constraints it is shown that options on the market portfolio are nonredundant securities and the economy's pricing kernel is a function of both the market portfolio and the nonredundant options. This implies that the options should be useful for explaining risky asset returns. To test the theory, a model is derived in which the expected excess return on any risky asset is linearly related (via a collection of betas) to the expected excess return on the market portfolio and to the expected excess returns on the nonredundant options. The empirical results indicate that the returns on traded index options are relevant for explaining the returns on risky asset portfolios. Copyright 2004, Oxford University Press.

https://www.jstor.org/stable/info/1262673

Options Trading and the CAPM

A distinguishing feature of contracted production is that the contractual terms must be agreed upon before the product exists. If the specified product is the result of an innovative and complex process, uncertainties as to its production cost estimates can be enormous. This renders the traditional cost-plus-fixed-fee and fixed-price contractual arrangements increasingly untenable. An alternative contractual arrangement that is currently gaining greater acceptance is the fixed-price-incentive contract, which may be as simple as a linear cost-sharing formula or as complex as a state-contingent reward penalty structure. The problem from the viewpoint of the contractee (principal) is to identify the optimal incentive structure in order to minimize his expected cost; the incentive affects the contractor (agent) through his risk aversion and his propensity for “moral hazard”, due to the co-insurance effect of cost-sharing incentives. Taking as premise the contractee's risk-neutrality, the problem is formulated as a constrained optimization problem, with the constraint arising from the returns to each of the parties to the contract. It is thereby demonstrated that the currently popular linear incentive mechanism is ineffective from the viewpoint of the contractee before the introduction of the problem of moral hazard. We then show that, the problem can be segregated into independent components of the contractor's risk aversion and his propensity for moral hazard. Having established this, we proceed to examine the incentive form as related to the “monitoring mechanism” instituted by the contractor during the performance of the contract. Acceptance of the conclusions necessitates that the contracting parties can interpret their objective as the maximization of the ratio of their expected profits to target profits, which is demonstrated as being equivalent to the minimization of the certainty equivalent of costs.

Financial incentives for cost control under moral hazard

The need to share or pool risk is an important economic determinant of cooperation among firms, but the economic theory of risk pooling has been clouded by an error made in a seminal paper in the 1960s. Even into this decade, writers on risk and insurance have asserted that the market mechanism cannot bring a risk pool to an economically efficient outcome, concluding therefore that the risk pool must be analyzed as an n-person cooperative game. This paper describes clearly the economic structure of a risk pool and shows how the market mechanism can function to solve the organizational problem of a risk pool. This analysis reveals a twin interpretation of risk pooling, both as a competitive market and as a centrally administered cooperative organization. One significant feature of organized risk pooling is that the centralized solution is not incentive compatible, meaning that self-interested participants could misrepresent their attitude toward risk and skew the allocation of risk in their favor. However, there are economic conditions that mitigate the incentive incompatibility and tend to restore efficiency to the centralized pooling solution.

The Organizational Economics of Risk Pooling

This study provides the development of a procedure for defining a model to calculate Underwriting Risk in Solvency II. For doing this, the data from a multi-risk portfolio, adjusted to the best statistical distribution, has been applied a Monte Carlo simulation for testing the proposed model. Afterwards, solvency capital of the deterministic approach for the previous legislation is compared against the result of applying the standard formula QIS4. Results show that the necessary capital in solvency to support underwriting risk depends on the portfolio they are based on, and, therefore, correctly measures risk.

/pdf/medicion-del-riesgo-de-suscripcion-mediante-modelos-internos-2blq6wzese.pdf

Medición del riesgo de suscripción mediante modelos internos en Solvencia II

Decision making in pest management is a challenging task. While pest dynamics are often quite uncertain, such decisions are often based on tenuous assumptions of certainty (economic injury levels and marginal utility approximations). To overcome such assumptions and adequately consider uncertainty, we apply decision analysis to evaluate management strategies used by farmers in the Colombian Caribbean against the boll weevil (BW). We represent the decision to protect the crop using partial budget analysis. This allows us to capture key properties of BW control strategies, while accounting for uncertainty about pest infestation pressure, control effectiveness and cotton yield and price. Our results indicate that proactive pest management is more efficient than reactive control given the current BW infestation pressure. However, farmers may prefer the reactive strategy, since they have experienced seasons with low infestation pressure where no insecticide applications were required. The proactive strategy, in contrast, requires scheduled pesticide applications in all years. Results show that in seasons with high infestation pressure the expected revenues of the reactive strategy tend to decrease, mainly because more spray applications are required when fields are heavily infested by the weevil. Value of information analysis revealed that uncertainties related to the start of the infestation, loss damage rate and attainable yield have the greatest influence on the decision recommendation for crop protection. Narrowing these key knowledge gaps may offer additional clarity on the performance of the current management strategies and provide guidance for the development of strategies to reduce insecticide use. This is particularly important for the promotion of the proactive strategy, which, under the current infestation pressure, has potential to reduce insecticide use. While economic injury levels can only be applied to responsive measures, our approach of partial budget analysis under uncertainty allows us to assess and compare both responsive and preventive measures in the same methodological framework. This framework can be extended to non-pesticide control measures.

/pdf/profitability-of-farm-scale-management-strategies-against-149ba4027m.pdf

Profitability of farm-scale management strategies against the boll weevil in the tropics: case study from the Colombian Caribbean

which cash is to be invested. The number of competing decisions in each of these decision classes being large, the total number of sets of decisions tends to be very large. Each set would generate a separate insurance and investment portfolio ; a corporate portfolio. The financial outcomes for each corporate portfolio can be represented by a probability distribution or by a cumulative probability distribution of policyowners' surplus at a defined future date. Were this very large number of distributions specified (a formidable managerial problem in itself), established methods for identifying the probability of ruin for each corporate portfolio could be employed and those distributions that indicate intolerably high probabilities of ruin eliminated from further consideration.1 The manager would then have a smaller but still difficult problem ; that of deciding which remaining distribution, and thus, set of decisions, is optimal for the company. Optimum choice demands specification of optimization criteria. This paper addresses the problem of specifying appropriate criteria. It will be argued that Stochastic Dominance (SD) criteria are superior or more efficient, in many cases, than those derived from traditional models. The case in favour of SD rests on

/pdf/stochastic-dominance-an-application-to-the-insurance-af41ygx4q0.pdf

Stochastic Dominance: An Application to the Insurance Portfolio Decision

This paper extends the notion of individual certainty equivalent to group certainty equivalent, in order to derive sharing rules that ensure unanimity on project rankings within a syndicate. A constrained maximization problem is set up with optimal project-specific sharing rules as the solution. It is shown that the group certainty equivalent construct allows for experimental derivation of a syndicate's preference function from a procedure parallel to that presently employed for deriving preference functions of individuals. The analysis potentially has a role in examining the nature of optimal compensation systems (sharing rules) for closely held (non-traded) corporations and partnerships.

On syndicate sharing rules for unanimous project rankings

Handle everyday research tasks with reliable, citation-backed results

Your personal Research Agent to handle research tasks with citation-backed results

Popular Tasks used by Researchers

How can I help with your research?

Meet SciSpace

Get more enhanced response by uploading the PDFs you want me to reference.

No relevant PDFs in your library

SciSpace is the AI research assistant for academics. Run systematic literature reviews on 280M+ papers, and write papers with cited sources. Trusted by 1M+ students, PhDs & researchers.

SciSpace | AI for Research

Analyze PDFs

Code & Manuscripts

Funding & Grants

Literature & Patents

Medical & Clinical Data

Systematic Review

Visualize & Present

Web & Data

Build a Google Scholar-like website for your research.

Build a website

Create charts and images for your research

Create a Chart

Write a paper for submission to a journal

Draft a manuscript

Patent Search

Design eye-catching scientific posters in minutes.

Scientific Poster Generation

Systematic Literature Review

One task is running at the moment. Your messages will be shown right after.

Drag and drop or click here to browse

Loved by <highlight>1 million+</highlight> researchers

Extract a list of specific topics and their sources from unstructured text

Topics

Compare and analyze relevant papers that matches with your search

Papers

Get insights from PDFs and bookmarked papers from your library

My library

Recent searches

Try searching for:

Catch AI-generated content in scholarly and non-scholarly content

{ai} Detector

Ai Writer

Get PDF Summaries, highlighted text explanations 

Chat with PDF

Effortlessly create in-text citations and bibliographies in APA and 2,500 other formats

Citation generator

Get explanations, summaries, and answers on academic papers

Ease up your research workflow with {scispace}'s cohort of exciting AI tools

Elevate your academic writing skills and convey your ideas the way you want

Paraphraser

Explore our range of reading and writing tools

Your file is being prepared and should be ready in a few minutes. If it's a large file, it might take a bit longer. You can close this window, and we'll email you the file when it's done.

You have reached a maximum limit of <strong>{limit}</strong> columns in the table. Remove at least <strong>1</strong> column to add or create another one.

Devinder K. Gandhi

Author Tools

Chat about Author

Papers

Stochastic Dominance: An Application to the Insurance Portfolio Decision

On syndicate sharing rules for unanimous project rankings