We analyse the incentive impact of bank capital regulation in a model with endogenous capital, assuming regulators randomly audit banks and require undercapitalised banks either to bear the fixed cost of new issue or to liquidate. Forward looking banks with sufficient franchise value maintain a...

Bank risk-taking and capitalisation is studied in a continuous time model with a closed form solution, assuming uncertain cash flow, random regulatory audit, and a constraint on equity issue. Capital reserves are built up towards a desired level as an insurance against the threat of liquidation....

We correct the analysis of the model of time to build in Majd and Pindyck (1987 Journal of Financial Economics 18, 7-27) for the omission of an essential optimality condition. Our analysis reveals an additional insight: long times to build reduce the effects of increased project value volatility...

The technical uncertainty associated with the cost to completion of an Ramp;D project, whilst idiosyncratic, is also inherently unhedgeable. We extend existing real options models of Ramp;D investment to incorporate the cost of bearing this unhedgeable risk and find it decreases risk-averse...

This paper uses asymptotic analysis to derive optimal hedging strategies for option portfolios hedged using an imperfectly correlated hedging asset with small fixed and/or proportional transaction costs, obtaining explicit formulae in special cases. This is of use when it is impractical to hedge...

In this paper we model the value of a firm based on its current earnings and cash balances. The value is modelled on the assumption that earnings follow a mean-reverting process. The effect of advertising on earnings is modelled, and the condition for optimal advertising derived. The value of...

We derive a nonlinear parabolic partial differential equation for the value of portfolios of options in the presence of proportional transaction costs. This assumes a Leland world of transacting after each time interval, which is of fixed length. The equation reduces to the modified variance...