A closed-form pricing formula for European options in an illiquid asset market

This article addresses the problem of pricing European options when the underlying asset is not perfectly liquid.A liquidity discounting factor as a function of market-wide liquidity governed by a mean-reverting stochastic process and the sensitivity of the underlying price to market-wide liquidity is firstly introduced,so that the impact of liquidity on the underlying asset can be captured by the option pricing model.The characteristic function is analytically worked out using the Feynman–Kac theorem and a closed-form pricing formula for European options is successfully derived thereafter.Through numerical experiments,the accuracy of the newly derived formula is verified,and the significance of incorporating liquidity risk into option pricing is demonstrated.

China's Optimal Industrial Structure:Theoretical Model and Econometric Estimation

With analysis of producer's and factor supplier's dual optimization motives,this paper developed an optimal nominal output growth rate model that can conduct quantified estimation.Result of estimation of China's optimal industrial structure between1992 and 2009 indicates that optimal nominal output growth rate model has successfully quantified the impact of major events occurring in the process of China's economic operation on the level of deviation between actual industrial structure and optimal industrial structure.Quantitative indicators involved in this model can provide industrial policy instruments for the Chinese government in developing and adjusting industrial structure targets,optimizing resource allocation and advancing industrial structure optimization and upgrade.

An assessment of Charter airline benefits for Port Elizabeth and the Eastern Cape

Tourism is becoming a vital component for economic development in South Africa. The income generated by the tourism industry is about 6% of the GDP, which is significant but still falls short of the goal set by the White Paper on Tourism in 2000. In the light of South Africa hosting the 2010 Football World Cup, it is important to identify ways of sustainable tourism development that would continue to increase the benefits to the economy long after the event＇s over. The main objective of the research was to explore an idea for increasing the level of tourist income generated in the Port Elizabeth （Eastern Cape） area. The idea was researched by means of conducting a cost-benefit analysis of two tourist related projects. These projects would introduce Charter airline services between Europe and Port Elizabeth. A second objective was to identify constraints on the project or market failures which would prevent their implementation. The economic theory behind the operation of an airline showed that lease costs and aeroplane operating costs are the two most important factors determine Charter airline＇s profitability. In order to offset these costs, airlines must achieve high passenger load factors. Charter airlines have the advantage over scheduled airlines, in that they will only fly if a minimum level of people has pre-booked seats. Two aeroplanes were chosen for comparison purpose： an Airbus A 340-300 and a Boeing 767-300ER. The private benefits calculated were based on load factors between 80 and 95 percent for ticket prices of USD 667 and USD 773. In addition, to private costs and benefits, social benefits were also estimated in the form of additional secondary revenue generated. With the introduction of net social benefits, both projects become profitable. A 50 percent substitution of revenue generated by the Charter tourists reduces the profits for the both projects drastically. A project based on a Boeing 767-300ER is the most efficient project as it has the highest NPV and BCR values. A reduction in the lease cost of the Airbus 340-300 could make projects based on it more competitive. A few constraints on the establishment of a Charter airline operator based in Port Elizabeth are： the lack of adequate runway for the landing of the long-haul carriers and the need of a larger liberalisation of the aviation policy by eliminating protectionism. The cost benefit analysis undertaken in this research does not take into account social costs and benefits to the economy of establishing a Charter airline based in Port Elizabeth, such as an employment, infrastructure development and poverty alleviation. Nevertheless the analysis does suggest that there are strong private and social benefits warranting the establishment of an airline business between Europe and Port Elizabeth. The economic benefits of the tourism industry and its link to airline travel are outlined in section 3. It is shown that the growth of the airline industry is a major component and contributor to tourism growth.

Convergence of Markov decision processes with constraints and state-action dependent discount factors

This paper is concerned with the convergence of a sequence of discrete-time Markov decision processes(DTMDPs)with constraints,state-action dependent discount factors,and possibly unbounded costs.Using the convex analytic approach under mild conditions,we prove that the optimal values and optimal policies of the original DTMDPs converge to those of the"limit"one.Furthermore,we show that any countablestate DTMDP can be approximated by a sequence of finite-state DTMDPs,which are constructed using the truncation technique.Finally,we illustrate the approximation by solving a controlled queueing system numerically,and give the corresponding error bound of the approximation.

First passage Markov decision processes with constraints and varying discount factors

This paper focuses on the constrained optimality problem （COP） of first passage discrete-time Markov decision processes （DTMDPs） in denumerable state and compact Borel action spaces with multi-constraints, state-dependent discount factors, and possibly unbounded costs. By means of the properties of a so-called occupation measure of a policy, we show that the constrained optimality problem is equivalent to an （infinite-dimensional） linear programming on the set of occupation measures with some constraints, and thus prove the existence of an optimal policy under suitable conditions. Furthermore, using the equivalence between the constrained optimality problem and the linear programming, we obtain an exact form of an optimal policy for the case of finite states and actions. Finally, as an example, a controlled queueing system is given to illustrate our results.

Fault Detection Based on FIR Filters with Variable Discount Factors for Industrial Robot Drive Systems

To enhance dynamic tracking performance and anti-disturbance capacity of finite impulse response(FIR) filters, variable discount factors are introduced to the recursive least squares(RLS) algorithm. By employing improved FIR filters to conduct modelling of industrial robot drive systems, dynamic characteristics of the target systems are identified. Then the fault detection for a target system can be utilized by analyzing the coefficients of the FIR filter. Finally, an application of the fault detection scheme to a kind of brushless DC motor drive system is described. Compared with reference methods, the proposed scheme achieves effective fault detection and performs better in dynamic tracking and robustness according to the final simulation results.

Quasi-variable Discount Rates and Market Volatility: An Empirical Study

This paper proposes an assumption of quasi-variable discount rates to explain the excess volatility puzzle of stock market. Under the assumption, the ARMAX model is derived based on the CCAPM model and CRRA utility function to describe the linear relationship between the discount rate and the consumption growth rate. We conducted empirical research on this model using historical data of the US stock market. The results confirm a significantly negative relationship between consumption growth rate and discount rate. Subsequently, the results of Monte Carlo simulation show that given the risk preference coefficient and dividend sequence, the rational expectations price fluctuation obtained under the assumption of quasivariable discount rate is the largest.

A Closed Form Characterization of the Stationary Outcome in Multilateral Bargaining

In this paper we consider infinite horizon multilateral bargaining with al- ternate offers. We prove that there exists only one stationary subgame perfect equilib- rium outcome and it corresponds to the unique invariant measure of a column stochas- tic matrix. We characterize this stationary subgame perfect equilibrium outcome in a closed form, and also extend the approach to the multilateral bargaining with random moves.

An average-value-at-risk criterion for Markov decision processes with unbounded costs

We study the Markov decision processes under the average-value-at-risk criterion.The state space and the action space are Borel spaces,the costs are admitted to be unbounded from above,and the discount factors are state-action dependent.Under suitable conditions,we establish the existence of optimal deterministic stationary policies.Furthermore,we apply our main results to a cash-balance model.