MODELING COMMON PROPERTY OWNERSHIP AS A DYNAMIC CONTRACT

Common property ownership is modeled as a joint wealth maximizing egalitarian share contract. Two-stage differential games are developed for various types of common property in order to examine the incentives inherent in common property regimes. Cases in which group members contract over just membership size and cases in which members contract over both group size and resource investment are considered. Envelope methods in optimal control theory are used to generate some comparative statics predictions about the value of the contracts which define property rights to a capital stock.     

Modelling and analysis of maintenance service contracts

When maintenance of an unreliable system is carried out by an external service agent, under a service contract, both the user and the service agent need to choose their decisions optimally to maximize their expected profits. The paper develops a game-theoretic framework for both parties to determine their optimal strategies.     

Pricing early exercise contracts in incomplete markets

We present a utility-based methodology for the valuation of early exercise contracts in incomplete markets. Incompleteness stems from nontraded assets on which the contracts are written. This methodology takes into account the individuals attitude towards risk and yields nonlinear pricing rules. The early exercise indifference prices solve a quasilinear variational inequality with an obstacle term. They are also shown to satisfy an optimal stopping problem with criterion given by their European indifference price counterpart. A class of numerical schemes are developed for the variational inequalities and a general approach for solving numerically nonlinear equations arising in incomplete markets is discussed.Accepted: May 2003, AMS Classification: 93E20, 60G40, 60J75The second author acknowledges partial support from NSF Grants DMS 0102909 and DMS 0091946.     

Analysis of supply contracts from a supplier's perspective

Hexin Wang and Khairy A. H. Kobbacy Centre for Operational Research and Applied Statistics, University of Salford, Salford, M5 4WT, UK Email: w.wang{at}salford.ac.uk Received on 9 May 2006. Accepted on 22 December 2006. Incentive structure and demand uncertainty may cause supplychains to operate at a low efficiency. Therefore, many supplycontracts are employed in practice to improve the performanceof supply chains, i.e. to benefit all members involved in thechain. Supply chain contracts provide mechanisms to change theincentive structures of the supply chain members so that theirdecisions can improve the supply chain efficiency, while alsoprotect their own interests. It is important to understand theimpacts of supply contracts and their differences from a supplier'sperspective, since it is often the supplier who initiates asupply contract. This paper reports on a comprehensive analysisof supply contracts from a supplier's perspective. Six commonlyused supply contracts are analysed and the contract parametersare optimized to maximize the supplier's expected profit withconsideration to improve the retailer's profit. This case hasnot been thoroughly investigated in literature to date. Therisk-sharing mechanism and the division of the increased profitbetween the retailer and supplier for some of the contractsare also investigated in detail.     

Pricing of full-service repair contracts

Full-service repair contracts are becoming increasingly popular, especially as an add-on to leasing contracts for technical investment products. This paper presents a model for pricing full-service repair contracts in the presence of risk-averse customers. The model identifies the optimal portfolio of full-service contracts and on-call service agreements to be offered by the service provider. The optimal full-service price is established, with failure arrivals being modeled as Poisson events and the cost of individual failures being stochastic. An existing on-call service business represents the price benchmark. The model is readily applicable for any service provider for small investment products such as special-purpose trucks or printing equipment.     

Representative Agent Pricing of Financial Assets Based on L��vy Processes with Normal Inverse Gaussian Marginals

The aim of the paper is to test the assumption of normal inverse Gaussian returns from speculative investments. We construct an asset pricing model where price processes are pure jump processes having associated returns with marginal distributions of this particular type. The resulting model is not complete, and we employ a partial equilibrium framework with a representative agent. The model is confronted with some stylized facts, like the equity premium puzzle, and the results seem promising.     

Future pricing through homogeneous semi‐Markov processes

An Erratum for this article has been published in Applied Stochastic Models in Business and Industry 2005; (in press) This paper presents a future pricing model based on the discrete time homogeneous semi‐Markov process (DTHSMP). The model is adapted to the real data of the Italian primary future stock index. After showing the pricing model, the DTHSMP solution is given. The solution of the semi‐Markov process gives, for each period of the considered horizon time, and for each starting state, the probability distribution of the future price. Copyright © 2005 John Wiley & Sons, Ltd.     

Pricing of long dated equity-linked life insurance contracts

This article adopts an approach to pricing of equity-linked life insurance contracts, which only requires the existence of the numéraire portfolio. An equity-linked life insurance contract is equivalent to a sum of the guaranteed amount and the value of an option on the equity index with some mortality risk attached. The numéraire portfolio equals the growth optimal portfolio and is used as numéraire or benchmark, where the real-world probability measure is taken as pricing measure. To obtain tractable solutions the short rate is modelled as a quadratic form of some Gaussian factor processes. Furthermore, the dynamics of the mortality rate is modelled as a threshold life table. The dynamics of the discounted equity market index or benchmark is modelled by a time transformed squared Bessel process. The equity-linked life insurance contracts are evaluated analytically.     

Evaluating the impact of average cost based contracts on the industrial sector in the European emission trading scheme

The inception of the emission trading scheme in Europe has contributed to power price increases. Energy intensive industries have reacted by arguing that this may affect their competitiveness and will induce them to leave Europe. Taking up a proposal of these industrial sectors, we explore the possible application of special contracts, where electricity is sold at average generation cost to mitigate the impact of CO₂ cost on power prices. The model supposes fixed generation capacities. We first consider a reference model representing a perfectly competitive market where all consumers (industries and the rest of the market) are price-takers and buy electricity at short-run marginal cost. We then change the market design by assuming that energy intensive industries pay power either at a regional or at a zonal average cost price. The analysis is conducted with simulation models applied to the Central Western European power market. The models are implemented in GAMS/PATH. This work has been financially supported by the Chair Lhoist Berghmans in Environmental Economics and Management and by the Italian project PRIN 2006, Generalized monotonicity: models and applications, whose national responsible is Prof. Elisabetta Allevi.