project based mechanisms for emissions reductions balancing trade offs with baselines project based mechanisms for emissions reductions credits like the clean development mechanism pose important challenges for policy design because of several inherent characteristics participation is voluntary so it will not occur without sufficient credits evaluating reductions requires assigning an emissions baseline for a counterfactual that cannot be measured some investments have both economic and environmental benefits and might occur anyway uncertainty surrounds both emissions and investment returns and parties to the project are likely to have more information than the certifying authority the certifying agent is limited in its ability to design a contract that would reveal investment intentions as a result rules for benchmarking emissions may be systematically biased to overallocate and they also risk creating inefficient investment incentives this paper evaluates in a situation with asymmetric information the efficacy of the main baseline rules currently under consideration historical emissions an average industry emissions standard and expected emissions

the impact of climate targets on future steel production an analysis based on a global energy system model this paper addresses how a global climate target may influence iron and steel production technology deployment and scrap use a global energy system model etsap tiam was used and a scrap availability assessment model saam was developed to analyse the relation between steel demand recycling and the availability of scrap and their implications for steel production technology choices steel production using recycled materials has a continuous growth and is likely to be a major route for steel production in the long run however as the global average of in use steel stock increases up to the current average stock of the industrialised economies global steel demand keeps growing and stagnates only after 2050 due to high steel demand levels and scarcity of scrap more than 50 of the steel production in 2050 will still have to come from virgin materials hydrogen based steel production could become a major technology option for production from virgin materials particularly in a scenario where carbon capture and storage ccs is not available imposing a binding climate target will shift the crude steel price to approximately 500 usd per tonne in the year 2050 provided that ccs is available however the increased prices are induced by co2 prices rather than inflated production costs it is concluded that a global climate target is not likely to influence the use of scrap whereas it shall have an impact on the price of scrap finally the results indicate that energy efficiency improvements of current processes will only be sufficient to meet the climate target in combination with ccs new innovative techniques with lower climate impact will be vital for mitigating climate change

intraday technical trading in the foreign exchange market this paper examines the out of sample performance of intraday technical trading strategies selected using two methodologies a genetic program and an optimized linear forecasting model when realistic transaction costs and trading hours are taken into account we find no evidence of excess returns to the trading rules derived with either methodology thus our results are consistent with market efficiency we do however find that the trading rules discover some remarkably stable patterns in the data

answering the skeptics yes standard volatility models do provide accurate forecasts a voluminous literature has emerged for modeling the temporal dependencies in financial market volatility using arch and stochastic volatility models while most of these studies have documented highly significant in sample parameter estimates and pronounced intertemporal volatility persistence traditional ex post forecast evaluation criteria suggest that the models provide seemingly poor volatility forecasts contrary to this contention we show that volatility models produce strikingly accurate interdaily forecasts for the latent volatility factor that would be of interest in most financial applications new methods for improved ex post interdaily volatility measurements based on high frequency intradaily data are also discussed

the information content of security prices a second look abstract beaver lambert and morse 1980 employ a regression of percentage change in prices on percentage change in earnings in which data are grouped by the dependent variable reverse regression offers a more intuitive and direct way to assess the information content of security prices the objective of beaver et al while grouping is asymptotically equivalent reverse regression is a more efficient way of examining the incremental explanatory power of lagged values of percentage change in price with respect to accounting earnings

information in prices about future earnings abstract stock return over a period reflects the market s revision in expectation of future earnings accounting earnings over the same period however have limited ability to reflect such revised expectations therefore returns anticipate earnings changes and the earnings response coefficient from a regression of returns on contemporaneous earnings changes is biased toward zero we reduce this bias by including leading period returns in price earnings regressions the resulting estimated earnings response coefficient magnitudes suggest that the capital market on average views earnings changes to be largely permanent this is consistent with the random walk time series property of annual earnings

on welfare frameworks and catastrophic climate risks recent theoretical work in the economics of climate change has suggested that climate policy is highly sensitive to fat tailed risks of catastrophic outcomes weitzman 2009 68 such risks are suggested to be an inevitable consequence of scientific uncertainty about the effects of increased greenhouse gas concentrations on climate criticisms of this controversial result fall into three categories the first suggests that it may be irrelevant to cost benefit analysis of climate policy the second challenges the fat tails assumption and the third questions the behavior of the utility function assumed in the result this paper analyses these critiques and suggests that those in the first two categories have formal validity but that they apply only to the restricted setup of the original result which may be extended to address their concerns they are thus ultimately unconvincing critiques in the third category are shown to be robust however they open up new ethical and empirical challenges for climate economics that have thus far been neglected how should we value catastrophes as a society i demonstrate that applying results from social choice to this problem can lead to counterintuitive results in which society values catastrophes as infinitely bad even though each individual s utility function is bounded finally i suggest that the welfare functions traditionally used in climate economics are ill equipped to deal with climate catastrophes in which population size changes drawing on recent work in population ethics i propose an alternative welfare framework with normatively desirable properties which has the effect of dampening the contribution of catastrophes to welfare

the role of uncertainty and learning for the success of international climate agreements abstract transnational externalities e g transboundary pollution trade contagious diseases and terrorism warrant coordination and cooperation between governments but this proves often difficult one reason for the meager success is the public good character of many of these economic problems encouraging free riding another reason one might suspect is uncertainty surrounding most environmental problems and in particular climate change this provides often an excuse for remaining inactive paradoxically some recent papers have concluded just the opposite the veil of uncertainty can be conducive to the success of international environmental cooperation in this paper we explain why and under which conditions this can be true however we argue that those conditions are the exception rather than the rule most important we suggest a mechanism for those conditions where learning has a negative effect on the success of cooperation which removes this effect or even turns it into a positive effect our results apply beyond the specifics of climate change to similar problems where cooperation generates positive externalities

the american put option valued analytically an analytic solution to the american put problem is derived herein the hedge ratio and other derivatives of the solution are presented the formula derived implies an exact duplicating portfolio for the american put consisting of discount bonds and stock sold short the formula is extended to consider put options on stocks paying cash dividends a polynomial expression is developed for evaluating these formulae values and hedge ratios for puts on both dividend and nondividend paying stocks are calculated tabulated and compared with values derived by numerical integration and binomial approximation as with european options evaluating an analytic formula is more efficient than approximating the stock price process or the partial differential equation by binomial or finite difference methods finally applications of this american put solution are discussed

another look at the role of the industrial structure of markets for international diversification strategies abstract this paper re examines the extent to which gains from international diversification are due to differences in industrial structure across countries recent papers by roll 1992 journal of finance 47 3 42 and heston and rouwenhorst 1994 journal of financial economics 36 3 27 investigate this issue and find conflicting evidence using a new database the dow jones world stock index with coverage in 25 countries and over 66 industry classifications we decompose comprehensively both country and industrial sources of variation we confirm that little of the variation in country index returns can be explained by their industrial composition we also uncover differences in the proportion of variation in industry index returns that is captured by country and industry factors and discuss the implications for global diversification strategies

the risk premium that never was a fair value explanation of the volatility spread abstract we present a new framework to investigate the profitability of trading the volatility spread the upward bias on implied volatility as an estimator of future realized volatility the scheme incorporates the first four option implied moments in a growth optimal payoff that is statically replicated using a portfolio of options removing the upward bias on implied volatility worsens the likelihood score of risk neutral densities obtained from s p 500 index options when they are used as forecasts of the underlying index return distribution it also results in negative expected capital growth when they are used in a volatility arbitrage scheme our empirical finding is that the upward bias on implied volatility does not represent a long term return premium rather it is required to mitigate the large losses associated with tail events when trading volatility in options markets

an improved least squares monte carlo valuation method based on heteroscedasticity longstaff schwartz s least squares monte carlo method is one of the most applied numerical methods for pricing american style derivatives we examine the algorithms regression step demonstrating that the ols regression is not the best linear unbiased estimator because of heteroscedasticity we prove the existence of heteroscedasticity for single asset and multi asset payoffs numerically and theoretically and propose weighted least squares mc valuation method to correct for it an extensive numerical study shows that the proposed method produces significantly smaller pricing bias than the longstaff schwartz method under several well known price dynamics an empirical pricing exercise using market data confirms the advantages of the improved method

pricing american style derivatives with european call options we present a new approach to pricing american style derivatives that is applicable to any markovian setting i e not limited to geometric brownian motion for which european call option prices are readily available by approximating the value function with an appropriately chosen interpolation function the pricing of an american style derivative with arbitrary payoff function is converted to the pricing of a portfolio of european call options leading to analytical expressions for those cases where analytical european call prices are available e g the merton jump diffusion process furthermore in many settings the approach yields upper and lower analytical bounds that provably converge to the true option price we provide computational results to illustrate the convergence and accuracy of the resulting estimators

the analytic valuation of american options no analytic solutions exists for the valuation of american options written on futures contracts and foreign currencies for which early exercise may be optimal this article formulates the american option valuation problem in economically and mathematically meaningful ways this enables us to derive valuation formulas for american options the properties associated with the optimal exercise boundary are examined and a numerical technique to implement the valuation formulas is presented article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the sensitivity of american options to suboptimal exercise strategies the value of american options depends on the exercise policy followed by option holders market frictions risk aversion or a misspecified model for example can result in suboptimal behavior we study the sensitivity of american options to suboptimal exercise strategies we show that this measure is given by the gamma of the american option at the optimal exercise boundary more precisely if b is the optimal exercise price but exercise is either brought forward when or delayed until a price b has been reached the cost of suboptimal exercise is given by b b b 2 where b denotes the american option gamma therefore the cost of suboptimal exercise is second order in the bias of the exercise policy and depends on gamma this result provides new insights on american options

what determines un approval of greenhouse gas emission reduction projects in developing countries an analysis of decision making on the cdm executive board the clean development mechanism cdm established by the kyoto protocol can generate substantial rents for project participants via the sale of certified emission reductions for this reason supposedly technical decisions about the approval of cdm methodologies and about the registration of projects may be driven by benefits to specific countries or interest groups our econometric analysis of data for about 250 methodologies and about 1000 projects discussed by the cdm executive board eb so far suggests that indeed along with formal quality criteria political economic variables determine the final eb decision

corporate earnings facts and fiction investors cone dence in the quality and integrity of corporate e nancial reports has been seriously shaken of late the ever increasing procession of headlines about fraudulent earnings ine ated asset values and understated liabilities reported by erstwhile leading companies the likes of enron tyco worldcom xerox and a host of lesser household names all audited by major accounting e rms suggests systematic dee ciencies in the accounting standards and governance systems that generate e nancial information of public companies not to mention in the regulatory systems overseeing them both aggregate data and cross sectional research cone rm the anecdotal evidence that the correspondence to reality of reported earnings deteriorated throughout the 1990s for example the gap between aggregate earnings and taxable corporate income which abstracts according to internal revenue service rules from most estimates and provisions often used to manipulate earnings has been continuously widening throughout the 1990s desai 2002 also increasing during the 1990s was the gap between earnings and the corporate proe ts reported in the national income and product accounts which are based on e rms taxable income adjusted for current values of inventory and depreciation while part of the difference between earnings and taxable income is probably due to increasing corporate sophistication of tax management manipulation of earnings played a major role in the widening gap lev and nissim 2002a firm specie c data corroborate the increasing vulnerability of earnings to manipulation the number of earnings restatements by public companies often in the wake of admitted reporting improprieties has skyrocketed in the last three to four years wu 2002 also the frequency of e rms beating analysts forecasts of

corporate capital expenditure decisions and the market value of the firm abstract this paper is an event time study of the common stock prices of a sample of 658 corporations around the dates on which they publicly announced their future capital expenditure plans for industrial firms announcements of increases decreases in planned capital expenditures are associated with significant positive negative excess stock returns for public utility firm neither increases nor decreases in planned capital expenditures are associated with significant excess stock returns we interpret the evidence as being consistent with the hypothesis that managers seek to maximize the market value of the firm in making their corporate capital expenditure decisions

the association between accounting earnings and security returns for large and small firms abstract the differential information hypothesis advanced by atiase 1980 states that information production and dissemination by private parties for the purpose of identifying mispriced securities is an increasing function of firm size this study examines two corollaries of that hypothesis first security prices of large firms anticipate accounting earnings earlier than security prices of small firms second for a given level of unexpected earnings the cumulative abnormal returns of small firms exceed those of large firms the results are generally consistent with atiase s hypothesis

designing climate mitigation policy this us paper provides an exhaustive review of critical issues in the design of climate mitigation policy by pulling together key findings and controversies from diverse literatures on mitigation costs damage valuation policy instrument choice technological innovation and international climate policy the authors begin with the broadest issue of how high assessments suggest the near and medium term price on greenhouse gases would need to be both under cost effective stabilization of global climate and under net benefit maximization or pigouvian emissions pricing the remainder of the paper focuses on the appropriate scope of regulation issues in policy instrument choice complementary technology policy and international policy architectures

international coordination on climate policies given the current trend in global emissions the latest round of climate change negotiations at the durban meeting of december 2011 for the adoption of a comprehensive global treaty on climate change mitigation as soon as possible and no later than 2015 and to come into force in 2020 has hardly shown the results one would have hoped for even for the most optimistic it remains unclear whether one can expect a successful negotiating outcome by 2015 there are inherent difficulties associated with climate change negotiations ranging from which countries should bear most responsibility for a given emission reduction target to the assessment of a globally efficient time path for pricing harmful greenhouse gas emissions ghgs these difficulties become even more complex and challenging under the pervasive uncertainty of climate science and the uncertainty about the feedback loop between climate change damages and economic growth during the past decades the environmental economics literature has provided important insights regarding the design of environmental fiscal policies and treaties but there is a host of issues that remain relatively unexplored for instance we know little about the cooperative solution for carbon and trade policies when climate change affects the productive possibilities of countries in this context it is also not obvious whether observed policies could be improved upon in such a way that all countries gain in welfare it remains also unclear what the carbon extraction path should be in the absence of a comprehensive treaty such as for example if environmental policy is unilaterally chosen subject to an agreed ceiling in global temperature though carbon pricing instruments like carbon taxes cap and trade and hybrids have been well studied not much is known about their properties in the presence of offset schemes such as the clean development mechanism more work is also required to understand the strategic implications of the uncertainty surrounding climate change and how this affects for example the choice of climate change strategy precautionary or wait and see how uncertainty impacts the propensity of countries to sign a climate treaty and the extent to which the possibility of a climate catastrophe fosters or hinders cooperation understanding political economy issues is also vital in tackling climate change because efficient climate policies stand little chance of being successfully negotiated and implemented if they do not receive the support of the electorate the papers in the special issue of the journal of environmental economics and management are precisely devoted to this broad research agenda

internal corporate restructuring abstract firms that alter their divisional configurations on average increase shareholder wealth gains appear to come from information about investment opportunities and increases in efficiency performance before the restructurings suggests poorly organized firms are motivated by market pressures to change their organizations change also occurs in healthy firms as part of the growth process restructuring often occurs where there is no evidence of takeover threats while stock prices increase around the restructurings there is a contemporaneous decline in earnings due to increased expenses these findings appear inconsistent with the contention that the market pressures managers into focusing on short run earnings

earnings as an explanatory variable for returns in this paper we investigate whether the level of earnings divided by price at the beginning of the stock return period is relevant for evaluating earnings returns associations the primary model motivating this research relies on the idea that book value owners equity and market value are both stock variables indicating the wealth of the firm s equity holders the related flow variables after adjusting for dividends are respectively earnings divided by price at the beginning of the return period a p 1 and market returns it then follows that earnings divided by beginning of period price should be associated with stock returns although models based on a relation between market value and book value are used occasionally in the accounting research literature see for example landsman 1986 harris and ohlson 1987 and barth

uncertainty learning and heterogeneity in international environmental agreements this paper concerns the formation of international environmental agreements under uncertainty about environmental damage with different models of learning complete learning partial learning or no learning the results of the existing literature are generally pessimistic the possibility of either complete or partial learning generally reduces the level of global welfare that can be achieved from forming an iea relative to no learning that literature regards uncertainty as a parameter common to all countries so that countries are identical ex ante as well as ex post in this paper we extend the literature to the case where there is no correlation between damage costs across countries each country is uncertain about a particular parameter in our case the benefit cost ratio drawn from a common distribution but ex post each country s realized parameter value is independently drawn consequently while countries remain identical ex ante they may be heterogeneous ex post we show that this change reinforces the negative conclusions about the effects of partial learning on international environmental agreements but under certain conditions moderates the negative conclusions about the effects of complete learning

trading rule profits in european currency spot cross rates abstract the moving average ma trading rule is applied to six european spot cross rates jy bp dm bp jy dm sf dm sf bp and jy sf to see if opportunities for profitable trading exist the results suggest that ma trading rules are marginally profitable only for the jy dm and the jy sf cross rates while trading rules are not profitable for the other four cross rates bootstrapping and out of sample tests provide similar results examination of subsamples characterized by central bank intervention do not produce different results computation of box pierce statistics adjusted for heteroscedasticity show that daily returns for all six cross rates are serially uncorrelated overall the results suggests that cross rates are sufficiently transparent to eliminate ma trading rule profit

tight bounds on american option prices in contrast to the constant exercise boundary assumed by broadie and detemple 1996 broadie m detemple j 1996 american option valuation new bounds approximations and comparison of existing methods review of financial studies 9 1211 1250 we use an exponential function to approximate the early exercise boundary then we obtain lower bounds for american option prices and the optimal exercise boundary which improve the bounds of broadie and detemple 1996 with the tight lower bound for the optimal exercise boundary we further derive a tight upper bound for the american option price using the early exercise premium integral of kim 1990 kim i j 1990 the analytic valuation of american options review of financial studies 3 547 572 the numerical results show that our lower and upper bounds are very tight and can improve the pricing errors of the lower bound and upper bound of broadie and detemple 1996 by 83 0 and 87 5 respectively the tightness of our upper bounds is comparable to some best accurate efficient methods in the literature for pricing american options moreover the results also indicate that the hedge ratios deltas and gammas of our bounds are close to the accurate values of american options

estimates of the costs of kyoto marrakesh versus the mckibbin wilcoxen blueprint in this paper we update our earlier estimates of the cost of the kyoto protocol using the g cubed model taking into account the new sink allowances from recent negotiations as well as allowing for multiple gases and new land clearing estimates we then compare the protocol to an alternative policy outlined in mckibbin et al brookings policy brief no 17 june the brookings institution washington 1997 climate change policy after kyoto a blueprint for a realistic approach the brookings institution washington 2002a j econom perspect 16 2 2002b 107 that does not impose rigid emissions targets we focus particular attention on the sensitivity of compliance costs under each policy to unexpected changes in future economic conditions to illustrate the issue we evaluate the policies under two plausible alternative assumptions about a single aspect of the future world economy the rate of productivity growth in russia we find that moderate growth in russia would raise the cost of the kyoto protocol by as much as 50 percent but would have little effect on the cost of the alternative policy we conclude that the kyoto protocol is inherently unstable because unexpected future events could raise compliance costs substantially and place enormous pressure on governments to abrogate the agreement the alternative policy would be far more stable because it does not subject future governments to adverse shocks in compliance costs

central bank intervention and trading rule profits in foreign exchange markets abstract moving average trading rules are utilized in both futures and spot foreign currency markets to show that significant positive profits can be earned in four of five currencies examined the results are consistent for both in sample and forward simulation tests regression results demonstrate that central bank intervention is strongly associated with the profitability of trading returns for the three major currencies dm yen and pound and partially explains returns for the sf and cd consistent with conjectures in previous studies that news concerning intervention tends to be revealed over weekends we find that moving average trading rule returns are significantly positive on fridays and mondays and not significantly different from zero in the middle of the week

earnings management to avoid earnings decreases and losses this paper provides evidence that firms manage reported earnings to avoid earnings decreases and losses specifically in cross sectional distributions of earnings changes and earnings we lind unusually low frequencies of small decreases in earnings and small losscs and unusually high frequencies of small increases in earnings and small positive income we find evidence that two components of earnings cash flow from operations and changes in working capital are used to achieve increases in earnings we present two theories based on stakeholder use of information processing heuristics and prospect theory about the motivation for avoidance of earnings decreases and losses

climate and international trade policies when emissions affect production possibilities abstract in this paper we develop a model of international trade and climate change in which emission discharges arising from production have a feedback effect on national production sectors by impacting upon effective factor endowments with this context the objectives are first to provide a general characterization of pareto efficient climate and trade policies and second to examine the possibility starting from non pareto efficient equilibria for pareto improving environmental policies we provide conditions under which several particular reforms of carbon taxes are welfare improving

asymmetric stationarity in national stock market indices an mtar analysis a procedure is developed using a momentum threshold autoregressive model and asymmetric stationarity tests designed to identify periods of asymmetric stationary divergences from nonstationary paths in time series and is applied to major national stock indices the results reveal the existence of asymmetric stationary periods in each of these indices these results suggest an explanation for the counterintuitive positive forecasting results of technical traders for various time periods we explore this possibility further by using a representative moving average technical trading strategy and find significantly different results higher returns when information from the procedure is incorporated into a trading rule

strategic climate policy with offsets and incomplete abatement carbon taxes versus cap and trade abstract this paper provides a first analysis of a policy bloc of fossil fuel importers which implements an optimal climate policy faces a non policy fringe of other fuel importers and an exporter bloc and purchases offset from the fringe we compare a carbon tax and a cap and trade scheme for the policy bloc in either case accompanied by an efficient offset mechanism for reducing emissions in the fringe the policy bloc is shown to prefer a tax over a cap since only a tax reduces the fuel export price and by more when the policy bloc is larger offsets are also more favorable to the policy bloc under a tax than under a cap the optimal offset price under a carbon tax is below the tax rate while under a cap and free quota trading the offset price must equal the quota price the domestic carbon and offset prices are both higher under a tax than under a cap when the policy bloc is small when the policy bloc is larger the offset price can be higher under a cap fringe countries gain by mitigation in the policy bloc more under a carbon tax since the fuel import price is lower

vix derivatives hedging and vol of vol risk we study the empirical hedging performance of alternative vix option pricing models recent advances in the literature find evidence of asymmetric volatility of volatility similar to the leverage effect in equity markets stochastic mean reversion and jumps using such findings in our model framework we show that while sophisticated models have superior pricing performance and can explain a range of stylized facts in the vix derivatives market their hedging performance is inferior to a simple black model hedge we also study the empirical performance of regime dependent hedge ratio adjustments commonly applied in equity markets

an improved method for pricing and hedging long dated american options abstract the majority of quasi analytic pricing methods for american options are efficient near maturity but are prone to larger errors when time to maturity increases we introduce a new methodology to increase the accuracy of almost any existing quasi analytic approach in pricing long maturity american options the new methodology called the extension method relies on an approximation of the optimal exercise price near the beginning of the contract combined with existing pricing approaches so that the maturity range for which small errors are attainable is extended our method retains the quasi analytic nature of the methods it improves generic quasi analytic formulae for the price of an american put as well as for its hedging parameter are derived our scenarios based numerical study indicates that our method considerably improves both the pricing and the hedging performance of a number of established approaches for a wide range of maturities the superiority of this approach is illustrated with real financial data by considering s p 100 tm leaps options traded from january 2008 to may 2015

accounting earnings and top executive compensation abstract this paper investigates the role of accounting earnings in top executive compensation contracts it provides evidence in support of the hypothesis that earnings based incentives help shield executives from market wide factors in stock prices the paper demonstrates that earnings reflect firm specific changes in value but are less sensitive to market wide movements in equity values as a result the inclusion of earnings based performance measures in executive compensation contracts helps shield executives from fluctuations in firm value that are beyond their control the hypothesis is shown to explain cross sectional variation in the use of earnings based incentives

the fall of enron the financial reporting and disclosure problems at enron as well as the high market valuations for its stock raise troubling questions about the functioning of capital market intermediaries regulators and governance experts whose are supposed to ensure the effective functioning of the stock market this paper examines the functions of key capital market intermediaries and analyzes how their own governance and incentive problems may have contributed to enron s rise and fall we conclude by proposing system modifications to resolve the observed problems

association between accounting performance measures and stock prices a test of the life cycle hypothesis abstract this paper posits that stock market response to two accounting performance measures sales growth and capital investment is a function of firm life cycle stage firms are grouped into various life cycle portfolios using dividend payout sales growth and age as predicted the empirical results indicate a monotonic decline in the response coefficients of unexpected sales growth and unexpected capital investment from the growth to the stagnant stages additional analysis suggests that this relation is not driven by a firm size effect risk differences or measurement error in the proxies for performance measures

joint implementation strategic reactions and possible remedies this paper investigates the promising proposal of joint implementation ji to mitigate greenhouse gas emissions this was ultimately the only concrete outcome of the conference on climate change in berlin albeit restricted to a pilot phase the basic idea given the public s awareness of global warming sounds economically plausible the industrialized countries the only ones required to stabilize and lower carbon emissions can search for cheaper reductions of greenhouse gas emissions in developing countries and economies in transition however this proposal leads to strategic reactions by developing countries reinforced by the fact that this cheating coincides with the interest of the industrialized country in short this proposal will lead to cheating given asymmetric information and will thus produce largely faked reductions in emissions on the constructive side an efficient mechanism retaining the spirit of ji is derived which deters strategic reactions this differs from a usual principal agent problem through an additional hierarchical layer a global authority e g the conference of parties on climate change an industrialized country and a developing country the unavoidable loss that is even associated with an optimal scheme due to strategic behavioural reality the first best optimum is unattainable except at the top leads of course to much less glamorous predictions in emission reductions moreover the implicit subsidization scheme focuses and favours on already efficient partners

a hotelling model with a ceiling on the stock of pollution abstract environmental agreements such as the kyoto protocol aim to stabilize the amount of carbon in the atmosphere which is mainly caused by the burning of nonrenewable resources such as coal we characterize the solution to the textbook hotelling model when there is a ceiling on the stock of emissions we consider both increasing and decreasing demand for energy we show that when the ceiling is binding both the low cost nonrenewable resource and the high cost renewable resource may be used jointly a key implication is that if energy demand were to decline in the long run we may supplement energy supply through clean renewables to meet the environmental standard but then revert back to using only dirty fossil fuels in the future when the ceiling has become non binding that is the much heralded societal transition to clean energy resources may be short lived

the implication of missing the optimal exercise time of an american option the optimal exercise policy of an american option dictates when the option should be exercised in this paper we consider the implications of missing the optimal exercise time of an american option for the put option this means holding the option until it is deeper in the money when the optimal decision would have been to exercise instead we derive an upper bound on the maximum possible loss incurred by such an option holder this upper bound requires no knowledge of the optimal exercise policy or true price function this upper bound is a function of only the option holder s exercise strategy and the intrinsic value of the option we show that this result holds true for both put and call options under a variety of market models ranging from the simple black scholes model to complex stochastic volatility jump diffusion models numerical illustrations of this result are provided we then use this result to study numerically how the cost of delaying exercise varies across market models and call and put options we also use this result as a tool to numerically investigate the relation between an option holder s risk preference levels and the maximum possible loss he may incur when adopting a target payoff policy that is a function of his risk preference level

plant closing decisions and the market value of the firm abstract we investigate the underlying causes and the announcement effects of plant closings the closing in our sample do not appear related to takeover activity instead they appear motivated by declining firm profitability firms announcing closings have lower earnings than market or industry medians earnings typically improve slightly after the announcement we find a negative stock market reaction to plant closing announcements

green lobbies and transboundary pollution in large open economies abstract we employ a common agency model of policy making to examine how green lobbies affect the determination of trade and environmental policies in two large countries that are linked by trade flows and transboundary pollution we show that the impact of green lobbying on environmental policy outcomes depends crucially on the prevailing trade regime cooperative or non cooperative on whether environmental agencies act in a unilateral or coordinated manner and on the size of the emission leakages and transboundary spillovers under free trade a unilateral increase in pollution taxes reduces domestic emissions at the cost of increased foreign emissions in this case if the emission leakages and the associated transboundary spillovers are large enough green lobbying can create a bias towards lower pollution taxes

is technical analysis in the foreign exchange market profitable a genetic programming approach using genetic programming techniques to find technical trading rules we find strong evidence of economically significant out of sample excess returns to those rules for each of six exchange rates over the period 1981 1995 further when the dollar deutsche mark rules are allowed to determine trades in the other markets there is significant improvement in performance in all cases except for the deutsche mark yen betas calculated for the returns according to various benchmark portfolios provide no evidence that the returns to these rules are compensation for bearing systematic risk bootstrapping results on the dollar deutsche mark indicate that the trading rules detect patterns in the data that are not captured by standard statistical models

multivariate fx models with jumps triangles quantos and implied correlation we propose an integrated model of the joint dynamics of fx rates and asset prices for the pricing of fx derivatives including quanto products the model is based on a multivariate construction for levy processes which proves to be analytically tractable the approach allows for simultaneous calibration to market volatility surfaces of currency triangles and also gives access to market consistent information on dependence between the relevant variables a successful joint calibration to real market data is presented for the particular case of the variance gamma process

additional evidence on bonus plans and income management abstract we extend healy 1985 by examining the relation between discretionary accruals and bonus plan bounds for a sample of 102 firms for the 1980 1990 period contrary to healy we find that when earnings before discretionary accruals fall below the lower bound managers select income increasing discretionary accruals and vice versa we believe that our results are more consistent with the income smoothing hypothesis than with healy s bonus hypothesis however mechanical selection bias in portfolio formation cannot be entirely ruled out as an alternative explanation for our results

on modeling and interpreting the economics of catastrophic climate change with climate change as prototype example this paper analyzes the implications of structural uncertainty for the economics of low probability high impact catastrophes even when updated by bayesian learning uncertain structural parameters induce a critical tail fattening of posterior predictive distributions such fattened tails have strong im plications for situations like climate change where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages this paper shows that the economic consequences of fat tailed structural uncertainty along with unsureness about high temperature damages can readily outweigh the effects of discounting in climate change policy analysis

robust pricing of the american put option a note on richardson extrapolation and the early exercise premium this paper presents a detailed analysis of the numerical implementation of the american put option decomposition into an equivalent european option plus an early exercise premium kim 1990 jacka 1991 carr et al 1992 it subsequently introduces a new algorithm based upon this decomposition and richardson extrapolation this new algorithm is based upon a the derivation of the correct order for the error term when applying richardson extrapolation which is used to control the error of the extrapolated prices b an innovative adjustment of kim s 1990 discrete time early exercise premium so that these premiums monotonically converge and therefore it is appropriate to use them in extrapolation and c the optimal exercise frontier can be quickly computed through newton s method permitting the efficient implementation of the decomposition formula in practice numerical experiments show that this new algorithm is accurate efficient easy to implement and competitive in comparison with other methods finally it can also be applied to other american exotic securities