Firms can benefit from inaccurate market beliefs

A supplier sells to a retailer who serves a market with uncertain demand. Before the season starts, the retailer preorders from the supplier, who stocks to satisfy at least the preorder. After the actual demand is realized, the retailer can place an at-once order, which is satisfied up to stock availability. Market demand, as perceived by a firm, can differ from what it actually is. We find that a firm can benefit from holding an inaccurate market belief.     

Limit theorems for the pre-averaged Hayashi–Yoshida estimator with random sampling

We will focus on estimating the integrated covariance of two diffusion processes observed in a nonsynchronous manner. The observation data is contaminated by some noise, which possibly depends on the time and the latent diffusion processes, while the sampling times also possibly depend on the observed processes. In a high-frequency setting, we consider a modified version of the pre-averaged Hayashi–Yoshida estimator, and we show that such a kind of estimator has the consistency and the asymptotic mixed normality, and attains the optimal rate of convergence.     

On hedging in finite security markets

A market is considered where trading can take place only at discrete time points, the trading frequency cannot grow without bound, and the number of states of nature is finite. The main objectives of the paper are to show that the market can be completed also with highly correlated risky assets, and to describe an efficient algorithm to compute a self-financing hedging strategy. The algorithm consists off-line of a backwards recursion and on-line of the solution, in each period, of a system of linear equations; it is a consequence of a proof where, using a well-known mathematical property, it is shown that uniqueness of the martingale measure implies completeness also in our setting. The significance of ‘multistate’ models versus the familiar binomial model is discussed and it is shown how the evolution of prices of the (correlated) risky assets can be chosen so that a given probability measure is already the unique equivalent martingale measure.     

Is the US stock market becoming weakly efficient over time? Evidence from 80-year-long data

We propose a degree of market efficiency in terms of entropy concepts. The relative efficiency for the US stock market varies over time from 1929 to 2012, with a slight decline in the past 10 years.     

Real-World Forward Rate Dynamics With Affine Realizations

We investigate the existence of affine realizations for Lévy driven interest rate term structure models under the real-world probability measure, which so far has only been studied under an assumed risk-neutral probability measure. For models driven by Wiener processes, all results obtained under the risk-neutral approach concerning the existence of affine realizations are transferred to the general case. A similar result holds true for models driven by compound Poisson processes with finite jump size distributions. However, in the presence of jumps with infinite activity we obtain severe restrictions on the structure of the market price of risk; typically, it must even be constant.     

Amalgamation of partitions from multiple segmentation bases: A comparison of non-model-based and model-based methods

The segmentation of customers on multiple bases is a pervasive problem in marketing research. For example, segmentation service providers partition customers using a variety of demographic and psychographic characteristics, as well as an array of consumption attributes such as brand loyalty, switching behavior, and product/service satisfaction. Unfortunately, the partitions obtained from multiple bases are often not in good agreement with one another, making effective segmentation a difficult managerial task. Therefore, the construction of segments using multiple independent bases often results in a need to establish a partition that represents an amalgamation or consensus of the individual partitions. In this paper, we compare three methods for finding a consensus partition. The first two methods are deterministic, do not use a statistical model in the development of the consensus partition, and are representative of methods used in commercial settings, whereas the third method is based on finite mixture modeling. In a large-scale simulation experiment the finite mixture model yielded better average recovery of holdout (validation) partitions than its non-model-based competitors. This result calls for important changes in the current practice of segmentation service providers that group customers for a variety of managerial goals related to the design and marketing of products and services.     

A trading mechanism contingent on several indices

We introduce a trading mechanism where the execution of an order on a security can be made contingent on the relation between the clearing price of the security and the clearing price of one or several indices. A mechanism similar to ours, but limited to only one index, was implemented on the Tel Aviv Stock Exchange. We argue that it is in some cases crucial to make the execution of an order contingent on several indices. Our mechanism consists of a particular implementation of a double-sided multi-unit combinatorial auction with substitutes (or DMCS auction), which we introduced in an earlier article.     

Topological properties of stock market networks: The case of Brazil

This paper investigates the topological properties of the Brazilian stock market networks. We build the minimum spanning tree, which is based on the concept of ultrametricity, using the correlation matrix for a variety of stocks of different sectors. Our results suggest that stocks tend to cluster by sector. We employ a dynamic approach using complex network measures and find that the relative importance of different sectors within the network varies. The financial, energy and material sectors are the most important within the network.