Profiles of the European Working Groups

In addition to the EURO conferences and the European Journal of Operational Research, the third major justification so far for the very existence of EURO as an association is the European Working Groups (EWGs).Based upon the booklet, “Report on the EURO Working Groups”, produced in 1981 by EURO in cooperation with European Institute for Advanced Studies in Management, the present paper comprises profiles of 10 EWGs. To stimulate interest in the existing groups and possible also in the establishment of new groups, the “Charter of the European Working Groups” is provided in extenso in the concluding section.     

Assessing the comparative spatial disadvantage (CSD) of regions in the European Union using non-radial data envelopment analysis methods

In this paper we propose non-radial data envelopment analysis models for assessing the comparative spatial disadvantage (CSD) of the Level II regions of the European Union (EU). CSD is considered as a relatively new element of spatial efficiency which seeks to enhance the spectrum of the current methods used for assessing spatial inequality and dispersion. The paper also proposes a goal programming formulation for assessing “production” function coefficients of the social cohesion among the regions of the EU assuming elimination of the levels of comparative disadvantage.     

Analysis of the third European survey on working conditions with composite indicators

A composite indicator Working conditions for comparing European countries is constructed from data of the Third European Survey on Working Conditions. The main findings are as follows: (a) European countries differ with respect to working conditions statistically more significantly than with respect to earnings; it implies a quite accurate discrimination threshold in ranking countries with respect to working conditions, (b) working conditions and earnings positively correlate over the whole of Europe but correlate little within single countries; it indicates at the prevailing role of national determinants over professional or social specificities as contributing to the average working conditions, and (c) earnings play no essential role in subjective estimations, including job satisfaction, which mainly depends on working conditions; consequently, more attention should be paid to improving the latter.     

Teachers’ views on effective mathematics teaching: commentaries from a European perspective

The previous papers of this issue discuss the views teachers from the United States, Australia, Hong Kong SAR, and Mainland China have on effective mathematics teaching and learning. Similarities and differences are found and a differentiation from West to East can be worked out in the order of the regions as listed above. The picture of teachers’ views can, however, be differentiated when they are looked at from a European perspective. On the basis of the analysis of two comparative studies on teaching cultures in three European countries and a questioning of teachers, this commentary therefore locates France, Germany, and England within this framework so that the East–West-contrast is distinguished in more detail.     

Voting power in the European Union enlargement

The Shapley–Shubik power index in a voting situation depends on the number of orderings in which each player is pivotal. The Banzhaf power index depends on the number of ways in which each voter can effect a swing. If there are n players in a voting situation, then the function which measures the worst case running time for computing these indices is in O(n2ⁿ). We present a combinatorial method based in generating functions to compute these power indices efficiently in weighted double or triple majority games and we study the time complexity of the algorithms. Moreover, we calculate these power indices for the countries in the Council of Ministers of the European Union under the new decision rules prescribed by the Treaty of Nice.     

Trends and New Approaches in European Operational Research

During the last ten years some remarkable changes and developments have occurred in European Operational Research-developments which do not justify the pessimism about the status and the future chances for O.R. which has been put forward by a number of authors in the recent past. A short summary of the history, an evaluation of the present status and some remarks concerning the future of European O.R. are presented from a continental point of view.     

ATLANTIS: techno-economic model of the European electricity sector

Since the nuclear accident in Fukushima the European electricity economy has been in transition. The ongoing shut down of nuclear power plants and the widespread installation of wind power and photovoltaic generation capacities, especially in Germany, has led to a high share of intermittent renewable electricity production. This high amount of generation with very little variable cost has led to a significant decline of the prices at the European energy exchange. This has meant that many thermal power plants are no longer able to work economically and have already been shut down, although they would be needed in times of high demands and as backup capacities. Therefore, a redesign of the European electricity market is needed and in order to find out the right characteristics and effects of such a redesign pre-investigations based on simulation models are reasonable. This paper introduces ATLANTIS, which is a simulation model of the European electricity economy and covers technical as well as economic and environmental issues and allows the calculation of different scenarios up to 2050 and even beyond regarding the specific characteristics of the electricity economy. After a comprehensive introduction of the model some example applications and an outlook are presented.     

Modeling dependence structure among European markets and among Asian-Pacific markets: a regime switching regular vine copula approach

This paper investigates the structure of dependence among twelve European markets and among twelve Asian-Pacific markets. The dynamic of the dependence structure is described by a two-state regime switching model. The dependence structure during a bull phase is modelled by the Gaussian copula, while dependence during a bear phase is modelled by the regular vine copula. We analyze the regular vine structure in the second regime precisely. We perform a simplification procedure using a likelihood-ratio test and discuss the substitution of general regular vines by canonical vines or drawable vines. The analysis confirms the two-state nature of financial markets in addition to asymmetric and heavy-tailed dependences. Additionally, the European market has proven to be more strongly connected than the Asian-Pacific market, and European dependences are deeper in terms of conditional dependences. The results can be used by international investors by taking into account differences of both analyzed regions. Additionally, the analysis may help with the crisis prediction. The shift time to the market phase describing crisis times occurs significantly before the crisis itself.     

Variational Solutions of the Pricing PIDEs for European Options in Lévy Models

Abstract

One of the fundamental problems in financial mathematics is to develop efficient algorithms for pricing options in advanced models such as those driven by Lévy processes. Essentially there are three approaches in use. These are Monte Carlo, Fourier transform and partial integro-differential equation (PIDE)-based methods. We focus our attention here on the latter. There is a large arsenal of numerical methods for efficiently solving parabolic equations that arise in this context. Especially Galerkin and Galerkin-inspired methods have an impressive potential. In order to apply these methods, what is required is a formulation of the equation in the weak sense.

The contribution of this paper is therefore to analyse weak solutions of the Kolmogorov backward equations which are related to prices of European options in (time-inhomogeneous) Lévy models and to establish a precise link between the prices and the weak solutions of these equations. The resulting relation is a Feynman–Kac representation of the solution as a conditional expectation. Our special concern is to provide a framework that is able to cover both, the common types of European options and a wide range of advanced models in which these derivatives are priced.

An application to financial models requires in particular to admit pure jump processes such as generalized hyperbolic processes as well as unbounded domains of the equation. In order to deal at the same time with the typical pay-offs that can arise, the weak formulation of the equation is based on exponentially weighted Sobolev–Slobodeckii spaces. We provide a number of examples of models that are covered by this general framework. Examples of options for which such an analysis is required are calls, puts, digital and power options as well as basket options.     

Pricing vulnerable European options with stochastic default barriers

CF Lo and KC Ku Institute of Theoretical Physics and Department of Physics, The Chinese University of Hong Kong, Shatin, Hong Kong, China Email: cho-hoi_hui{at}hkma.gov.hk Received on 31 July 2006. Accepted on 15 March 2007. This paper develops a valuation model of European options incorporatinga stochastic default barrier, which extends a constant defaultbarrier proposed in the Hull–White model. The defaultbarrier is considered as an option writer's liability. Closed-formsolutions of vulnerable European option values based on themodel are derived to study the impact of the stochastic defaultbarriers on option values. The numerical results show that negativecorrelation between the firm values and the stochastic defaultbarriers of option writers gives material reductions in optionvalues where the options are written by firms with leverageratios corresponding to BBB or BB ratings.     

Stochastic equity volatility related to the leverage effect II: valuation of European equity options and warrants

We propose a general framework to assess the value of the financial claims issued by the firm, European equity options and warrantsin terms of the stock price. In our framework, the firm's asset is assumed to follow a standard stationary lognormal process with constant volatility. However, it is not the case for equity volatility. The stochastic nature of equity volatility is endogenous, and comes from the impact of a change in the value of the firm's assets on the financial leverage. In a previous paper we studied the stochastic process for equity volatility, and proposed analytic approximations for different capital structures. In this companion paper we derive analytic approximations for the value of European equity options and warrants for a firm financed by equity, debt and warrants. We first present the basic model, which is an extension of the Black-Scholes model, to value corporate securities either as a function of the stock price, or as a function of the firm's total assets. Since stock prices are observable, then for practical purposes, traders prefer to use the stock as the underlying instrument, we concentrate on valuation models in terms of the stock price. Second, we derive an exact solution for the valuation in terms of the stock price of (i) a European call option on the stock of a levered firm, i.e. a European compound call option on the total assets of the firm, (ii) an equity warrant for an all-equity firm, and (iii) an equity warrant for a firm financed by equity and debt. Unfortunately, to compute these solutions we need to specify the function of the stock price in terms of the firm's assets value. In general we are unable to specify this expression, but we propose tight bounds for the value of these options which can be easily computed as a function of the stock price. Our results provide useful extensions of the Black-Scholes model.     

A new analytical approximation for European puts with stochastic volatility

In this paper, we apply singular perturbation techniques to price European puts with a stochastic volatility model, and derive a simple and elegant analytical formula as an approximation for the value of European put options. In contrast to the existing Heston’s semi-analytical formula, this approximation has the following unique feature: the latter only involves the standard normal distribution function, which is as fast and easy to implement as the Black–Scholes formula; whereas the former requires the evaluation of a logarithm with a complex argument during the involved Fourier inverse transform, which may sometimes result in numerical instability. Various numerical experiments suggest that our new formula can achieve a high order of accuracy for a large class of option derivatives with relatively short tenor.     

幂型支付的欧式期权定价公式

在等价鞅测度框架下,讨论了(在到期时刻)期权处于实值状态时支付函数为幂型的股票欧式期权定价公式.这里我们假设无风险利率,股票预期收益率和股价波动率都是时间的确定性函数.本文结果不但包含了原始的Black-Scholes公式,而且可用于上封顶与下保底(幂型)欧式看涨期权的定价.     

Uniform Asymptotic Expansions for Pricing European Options

Starting with a stochastic volatility model, in which the volatility depends on a nonlinear function of a fast varying diffusion, and assuming the fast diffusion is mean reverting, the problem of pricing European options is considered in this paper. Uniform asymptotic expansions of the option price are obtained. The formal expansions are justified and the uniform error bounds are derived using outer and inner expansions of the option prices.     

System dynamics applications to European health care issues

Taking a European perspective, a review is made of some system dynamics models which address health care issues. Suggestions are made for the types of role which these models should take, bearing in mind the strategic orientation of system dynamics modelling. Examples are described of qualitative models where influence diagrams are the main analytical tool. Quantitative system dynamics models have a contribution to make in epidemiological studies and have been used to analyse the AIDS epidemic. A detailed example of one aspect of model formulation is given. This concerns the AIDS incubation time distribution and shows how real-world complications arising from virological staging and treatment effects are handled in a model of AIDS spread.     

Dynamic rating of European football teams

^** Formerly Knorr-Held. Email: held{at}stat.uni-muenchen.de In this paper we apply and extend recently proposed methodsfor the dynamic analysis of pairwise comparison data to Europeanfootball teams. Our statistical model is based on the cumulativelogistic link model with time-changing parameters for the strengthof each team. We jointly analyse the results from the five topEuropean leagues from 1996 to 2001 and all international matchesbetween teams from these leagues. We introduce weights for internationalmatches and also allow for a different size of the home teamadvantage in the different leagues. We suggest that the resultsfrom such an analysis may be taken as an alternative to theUEFA coefficient, which is currently used to determine the numberof teams from each league to take part in the European footballcontests.     

Operations research methods in political decisions: a case study on the European Parliament composition

In this paper, we show that operations research methods can be successfully applied to support decision-making in politics on the case study of the apportionment of seats in the European Parliament. The related political constraints and assumptions are quantitatively described and the optimization problem is formulated. On this basis, it is revealed that the current composition of the European Parliament as well as some intuitive propositions do not respect degressive proportionality as far as it was assumed. Nevertheless, our algorithm allows us to find better solutions, and among them, there is only one best allocation, which respects degressive proportionality as far as possible, according to the well known and often applied measures. Namely, over 9 thousands allocations consistent with the political requirement “nobody gains and nobody loses more than one” are referred to over 5.4 millions degressively proportional solutions, and only one allocation is revealed to be the best for all defined criteria under given populations of countries.     

欧式幂期权定价模型中参数及隐含波动率的统计特性

研究了欧式幂期权定价公式中价格的渐近无偏估计和隐含波动率估计的统计特性。利用Chaudhury M.M(1989)提出的研究欧式期极定价公式中渐近无偏估计的方法以及隐含波动率求解方法,研究了两种欧式幂型看涨期权定价公式(欧式看涨期权的价值定义分别为m ax(STα-X,0)和m ax(STα-Xa,0)中的隐含波动率的估计的统计特征、幂函数的幂指数选取以及两种幂函数期权定价公式的优劣。Monte-Carlo统计计算的模拟结果说明。幂期权定价公式中幂指数α取值应为α>0,而且欧式看涨期权的价值定义为m ax(STα-Xα,0)更为合理。     

Local risk minimization for vulnerable European contingent claims on nontradable assets under regime switching models

This article focuses on an optimal hedging problem of the vulnerable European contingent claims. The underlying asset of the vulnerable European contingent claims is assumed to be nontradable. The interest rate, the appreciation rate and the volatility of risky assets are modulated by a finite-state continuous-time Markov chain. By using the local risk minimization method, we obtain an explicit closed-form solution for the optimal hedging strategies of the vulnerable European contingent claims. Further, we consider a problem of hedging for a vulnerable European call option. Optimal hedging strategies are obtained. Finally, a numerical example for the optimal hedging strategies of the vulnerable European call option in a two-regime case is provided to illustrate the sensitivities of the hedging strategies.     

On European option pricing under partial information

We consider a European option pricing problem under a partial information market, i.e., only the security’s price can be observed, the rate of return and the noise source in the market cannot be observed. To make the problem tractable, we focus on gap option which is a generalized form of the classical European option. By using the stochastic analysis and filtering technique, we derive a Black-Scholes formula for gap option pricing with dividends under partial information. Finally, we apply filtering technique to solve a utility maximization problem under partial information through transforming the problem under partial information into the classical problem.