Knowledge that Transforms

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An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

In this paper, we examine the pricing of European call options on stocks that have variance rates that change randomly. We study continuous time diffusion processes for the stock return and the standard deviation parameter, and we find that one must use the stock and two options to form a riskless hedge. The riskless hedge does not lead to a unique option pricing function because the random standard deviation is not a traded security. One must appeal to an equilibrium asset pricing model to derive a unique option pricing function. In general, the option price depends on the risk premium associated with the random standard deviation. We find that the problem can be simplified by assuming that volatility risk can be diversified away and that changes in volatility are uncorrelated with the stock return. The resulting solution is an integral of the Black-Scholes formula and the distribution function for the variance of the stock price. We show that accurate option prices can be computed via Monte Carlo simulations and we apply the model to a set of actual prices.

This paper focuses on the role cognitive scripts, a unique type of knowledge schema, play in generating purposive behaviors in organizations. Three separate but complementary areas of research (Scheme Theory, Control Theory, and Goal Setting Theory) clarify the processes that link script-type structures to purposeful behavior. Finally, implications and extensions of this comprehensive framework based on previously identified content, structure, and process issues are considered.

In this paper a theorem is developed giving necessary and sufficient conditions for the uniqueness of homogeneous product Cournot equilibria. The result appears to be the strongest to date and the first to involve both necessity and sufficiency. The theorem states than an equilibrium is unique if and only if the determinant of the Jacobian of marginal profits for firms producing positive output is positive at all equilibria. The result applies to the case where profit functions are twice differentiable and pseudoconcave, industry output can be bounded, the above Jacobian is non-singular at equilibria, and marginal profits are strictly negative for non-producing firms. The proof uses fixed point index theory from differential topology.

The author uses an equilibrium model of job matchings with a Nash wage equation to derive the response of wages and unemployment to productivity shock. By endogenizing labor's threat point, he shows that wages absorb fully permanent shocks but only partially temporary shocks. Hence, unemployment responds to perceived temporary shocks but not to permanent shocks. Copyright 1987 by The Review of Economic Studies Limited.