A game theoretic approach to option valuation under Markovian regime-switching models

In this paper, we consider a game theoretic approach to option valuation under Markovian regime-switching models, namely, a Markovian regime-switching geometric Brownian motion (GBM) and a Markovian regime-switching jump-diffusion model. In particular, we consider a stochastic differential game with two players, namely, the representative agent and the market. The representative agent has a power utility function and the market is a “fictitious” player of the game. We also explore and strengthen the connection between an equivalent martingale measure for option valuation selected by an equilibrium state of the stochastic differential game and that arising from a regime switching version of the Esscher transform. When the stock price process is governed by a Markovian regime-switching GBM, the pricing measures chosen by the two approaches coincide. When the stock price process is governed by a Markovian regime-switching jump-diffusion model, we identify the condition under which the pricing measures selected by the two approaches are identical.     

Sharing costs in highways: A game theoretic approach

This paper introduces a new class of games, highway games, which arise from situations where there is a common resource that agents will jointly use. That resource is an ordered set of several indivisible sections, where each section has an associated fixed cost and each agent requires some consecutive sections. We present an easy formula to calculate the Shapley value, and we present an efficient procedure to calculate the nucleolus for this class of games.     

A DEA game model approach to supply chain efficiency

Data envelopment analysis (DEA) is a useful method to evaluate the relative efficiency of peer decision making units (DMUs). Based upon the definitions of supply chain efficiency, we investigate the efficiency game between two supply chain members. It is shown that there exist numerous Nash equilibriums efficiency plans for the supplier and the manufacturer with respect to their efficiency functions. A bargaining model is then proposed to analyze the supplier and manufacturer's decision process and to determine the best efficiency plan strategy. DEA efficiency for supply chain operations is studied for the central control and the decentralized control cases. The current study is illustrated with a numerical example.     

A game theoretic approach to coordinate pricing and vertical co-op advertising in manufacturer-retailer supply chains

Vertical cooperative (co-op) advertising is a marketing strategy in which the retailer runs local advertising and the manufacturer pays for a portion of its entire costs. This paper considers vertical co-op advertising along with pricing decisions in a supply chain; this consists of one manufacturer and one retailer where demand is influenced by both price and advertisement. Four game-theoretic models are established in order to study the effect of supply chain power balance on the optimal decisions of supply chain members. Comparisons and insights are developed. These embrace three non-cooperative games including Nash, Stackelberg-manufacturer and Stackelberg-retailer, and one cooperative game. In the latter case, both the manufacturer and the retailer reach the highest profit level; subsequently, the feasibility of bargaining game is discussed in a bid to determine a scheme to share the extra joint profit.     

A fuzzy theoretic approach to simulation metamodeling

In this paper, we explore the potential application of fuzzy linear regression in developing simulation metamodels. It should be noted that the basic construct for simulation metamodels involves uncertainties and ambiguities that may be better addressed through fuzzy linear regression application. The solution techniques employed by fuzzy linear regression are very familiar, and the generation of fuzzy outputs may offer a wide range of solution space to the decision maker, thereby reducing the risk of making an incorrect economic decision. A numerical example is presented to show how a possibility distribution is used to capture the vagueness in a dependent variable for a regression metamodel.     

Heterogeneous surface-to-air missile defense battery location: a game theoretic approach

In the context of an air defense missile-and-interceptor engagement, a challenge for the defender is that surface-to-air missile batteries often must be located to protect high-value targets dispersed over a vast area, subject to which an attacker may observe the disposition of batteries and subsequently develop and implement an attack plan. To model this scenario, we formulate a two-player, extensive form, three-stage, perfect information, zero-sum game that accounts for, respectively, a defender’s location of batteries, an attacker’s launch of missiles against targets, and a defender’s assignment of interceptor missiles from batteries to incoming attacker missiles. The resulting trilevel math programming formulation cannot be solved via direct optimization, and it is not suitable to solve via full enumeration for realistically-sized instances. We instead adapt the game tree search technique Double Oracle, within which we embed either of two alternative heuristics to solve an important subproblem for the attacker. We test and compare these solution methods to solve a designed set of 52 instances having parametric variations, from which we derive insights regarding the nature of the underlying problem. Enhancing the solution methods with alternative initialization strategies, our superlative methodology attains the optimal solution for over 75% of the instances tested and solutions within 3% of optimal, on average, for the remaining 25% of the instances, and it is promising for realistically-sized instances, scaling well with regard to computational effort.     

An envelopment-analysis approach to measuring the managerial efficiency of banks

The dramatic rise in bank failures over the last decade has led to a search for leading indicators so that costly bailouts might be avoided. While the quality of a bank's management is generally acknowledged to be a key contributor to institutional collapse, it is usually excluded from early warning models for lack of a metric. This paper presents a new approach for quantifying a bank's managerial efficiency, using a data-envelopment-analysis model that combines multiple inputs and outputs to compute a scalar measure of efficiency and quality. An analysis of 930 banks over a five-year period shows significant differences in management-quality scores between surviving and failing institutions. These differences are detectable long before failure occurs and increase as the failure date approaches. Hence this new metric provides an important, yet previously missing, modelling element for the early identification of troubled banks.     

A graph theoretic approach to matrix inversion by partitioning

LetM be a square matrix whose entries are in some field. Our object is to find a permutation matrixP such thatPM P ^–1 is completely reduced, i.e., is partitioned in block triangular form, so that all submatrices below its diagonal are 0 and all diagonal submatrices are square and irreducible. LetA be the binary (0, 1) matrix obtained fromM by preserving the 0's ofM and replacing the nonzero entries ofM by 1's. ThenA may be regarded as the adjacency matrix of a directed graphD. CallD strongly connected orstrong if any two points ofD are mutually reachable by directed paths. Astrong component ofD is a maximal strong subgraph. Thecondensation D ^* ofD is that digraph whose points are the strong components ofD and whose lines are induced by those ofD. By known methods, we constructD ^* from the digraph,D whose adjacency matrixA was obtained from the original matrixM. LetA ^* be the adjacency matrix ofD ^*. It is easy to show that there exists a permutation matrixQ such thatQA ^* Q ^–1 is an upper triangular matrix. The determination of an appropriate permutation matrixP from this matrixQ is straightforward.This was an informal talk at the International Symposium on Matrix Computation sponsored by SIAM and held in Gatlinburg, Tennessee, April 24–28, 1961 and was an invited address at the SIAM meeting in Stillwater, Oklahoma on August 31, 1961     

A probabilistic approach to some of Euler's number theoretic identities

Probabilistic proofs and interpretations are given for the -binomial theorem, -binomial series, two of Euler's fundamental partition identities, and for -analogs of product expansions for the Riemann zeta and Euler phi functions. The underlying processes involve Bernoulli trials with variable probabilities. Also presented are several variations on the classical derangement problem inherent in the distributions considered.

     

A fuzzy soft set theoretic approach to decision making problems

The problem of decision making in an imprecise environment has found paramount importance in recent years. A novel method of object recognition from an imprecise multiobserver data has been presented here. The method involves construction of a Comparison Table from a fuzzy soft set in a parametric sense for decision making.     

Knowledge sharing in communities of practice: A game theoretic analysis

This research applies game theory to analyze the incentives of knowledge-sharing activities in various types of communities of practice (COPs), characterized by individual profiles and decision structures. Indeed, individual decision making results in the under-provision of knowledge; however, the benefit of knowledge sharing may be raised by IT investment and suitable incentive mechanisms we study here. In general conditions, improving communication and collaboration technologies should be prior to developing data mining technologies. However, when the number of community members is sufficiently small and the heterogeneity of the expected value of knowledge among community members is sufficiently large, developing data mining technologies should be considered more important than the other if most community members are low-type ones. On the other hand, based on a screening technique, we find that the benefit of knowledge sharing in the incomplete information setting can be the same as that in the complete information setting if the cost of more efficient community member is smaller than that of less efficient one.     

A stackelberg game approach to distributed spectrum management

We consider a cognitive radio system with one primary (licensed) user and multiple secondary (unlicensed) users. Given the interference temperature constraint, the secondary users compete for the available spectrum to fulfill their own communication need. Borrowing the concept of price from market theory, we develop a decentralized Stackelberg game formulation for power allocation. In this scheme, the primary user (leader) announces prices for the available tones such that a system utility is maximized. Using the announced prices, secondary users (followers) compete for the available bandwidth to maximize their own utilities. We show that this Stackelberg game is polynomial time solvable under certain channel conditions. When the individual power constraints of secondary users are inactive (due to strict interference temperature constraint), the proposed distributed power control method is decomposable across the tones and unlike normal water-filling it respects the interference temperature constraints of the primary user. When individual power constraints are active, we propose a distributed approach that solves the problem under an aggregate interference temperature constraint. Moreover, we propose a dual decomposition based power control method and show that it solves the Stackelberg game asymptotically when the number of tones becomes large.     

Graph theoretic approach to parallel gene assembly

We study parallel complexity of signed graphs motivated by the highly complex genetic recombination processes in ciliates. The molecular gene assembly operations have been modeled by operations of signed graphs, i.e., graphs where the vertices have a sign + or −. In the optimization problem for signed graphs one wishes to find the parallel complexity by which the graphs can be reduced to the empty graph. We relate parallel complexity to matchings in graphs for some natural graph classes, especially bipartite graphs. It is shown, for instance, that a bipartite graph G has parallel complexity one if and only if G has a unique perfect matching. We also formulate some open problems of this research topic.     

A game theoretic model for two types of customers competing for service

Two types of customers arrive at a single server station and demand service. If a customer finds the server busy upon arrival (or retrial) he immediately departs and conducts a retrial after an exponential period of time and persists this way until he gets served. Both types of customers face linear costs for waiting and conducting retrials and wish to find optimal retrial rates which will minimize these costs. This problem is analysed as a two-person nonzero sum game. Both noncooperative strategies are studied.     

A game theoretical model of DEA efficiency

Motivated by the inherent competitive nature of the DEA efficiency assessment process, some effort has been made to relate DEA models to game theory. Game theory is considered not only a more natural source of representing competitive situations, but also beneficial in revealing additional insights into practical efficiency analysis. Past studies are limited to connecting efficiency games to some particular versions of DEA models. The generalised DEA model considered in this study unifies various important DEA models and presents a basic formulation for the DEA family. By introducing a generalised convex cone constrained efficiency game model in assembling the generalised DEA model, a rigorous connection between game theory and the DEA family is established. We prove the existence of optimal strategies in the generalised efficiency game. We show the equivalence between game efficiency and DEA efficiency. We also provide convex programming models for determination of the optimal strategies of the proposed games, and show that the game efficiency unit corresponds to the non-dominated solution in its corresponding multi-objective programming problem. Our study largely extends the latest developments in this area. The significance of such an extension is for research and applications of both game theory and DEA.     

Mean theoretic approach to the grand Furuta inequality

Very recently, Furuta obtained the grand Furuta inequality which is a parameteric formula interpolating the Furuta inequality and the Ando-Hiai inequality as follows : If and is invertible, then for each ,

is a decreasing function of both and for all and . In this note, we employ a mean theoretic approach to the grand Furuta inequality. Consequently we propose a basic inequality, by which we present a simple proof of the grand Furuta inequality.

     

A non-radial DEA approach to measuring environmental performance

Data envelopment analysis (DEA) has gained great popularity in environmental performance measurement because it can provide a synthetic standardized environmental performance index when pollutants are suitably incorporated into the traditional DEA framework. Past studies about the application of DEA to environmental performance measurement often follow the concept of radial efficiency measures. In this paper, we present a non-radial DEA approach to measuring environmental performance, which consists of a non-radial DEA-based model for multilateral environmental performance comparisons and a non-radial Malmquist environmental performance index for modeling the change of environmental performance over time. A case study of OECD countries using the proposed non-radial DEA approach is also presented. It is found that the environmental performance of OECD countries as a whole has been improved from 1995 to 1997.