intrinsic bubbles the case of stock prices several puzzling aspects of the behavior of united states stock prices may be explained by the presence of a specific type of rational bubble that depends exclusively on aggregate dividends the authors call bubbles of this type intrinsic bubbles because they derive all of their variability from exogenous economic fundamentals and none from extraneous factors intrinsic bubbles provide a more plausible empirical account of deviations from present value pricing than do the traditional examples of rational bubbles their explanatory potential comes partly from their ability to generate persistent deviations that appear to be relatively stable over long periods copyright 1991 by american economic association

the tail index of exchange rate returns in the literature on the empirical distribution of foreign exchange rates there is now consensus that exchange rate yields are fat tailed three problems however persist 1 which class of distribution functions is most appropriate 2 are the parameters of the distribution invariant over subperiods 3 what are the effects of aggregation over time on the distribution in this paper we employ extreme value theory to shed new light on these questions we apply the theoretical results to ems data

assessing the effects of co2 price caps on electricity investments a real options analysis abstract this paper uses real options modeling to assess the impact of different climate change policy instruments on investment profits and cumulative emissions in the electricity sector even though co 2 price caps or safety valves have been suggested as methods to limit uncertainty emanating from fluctuating prices of co 2 permits that would hurt the industry s profit and thereby also energy security our analysis shows that price caps set at a too low level are detrimental to the adoption of e g modern biomass fired capacity as a replacement for existing coal fired power plants we therefore conduct a series of experiments with different policy scenarios to analyze under which regime emissions are most effectively reduced with respect to co 2 price uncertainty it turns out that even for moderately rising co 2 prices fluctuations frequently lead to investment into carbon capture and storage ccs while investment is often not triggered in the face of deterministic co 2 prices

detecting periodically collapsing bubbles a markov switching unit root test this paper addresses the problem of testing for the presence of a stochastic bubble in a time series in the case that the bubble is periodically collapsing so that the asset price keeps returning to the level implied by the market fundamentals as this is essentially a problem of identifying the collapsing periods from the expanding ones we propose using a generalization of the dickey fuller test procedure which makes use of the class of markov regime switching models the potential of the new methodology is illustrated via simulation and an empirical example is given copyright 1999 john wiley sons ltd

on the frequency of large stock returns putting booms and busts into perspective textabstractnumerous articles have investigated the distribution of share prices and find that the returns are fat tailed nevertheless there is still controversy about the amount of probability mass in the tails and hence about the most appropriate distribution to use in modeling returns this controversy has proven hard to resolve as the alternatives are non nested we employ extreme value theory focusing exclusively on the larger observations in order to assess the tail shape within a unified framework we find that at least the first two moments exist this enables one to generate robust probabilities on large returns which put the recent stock market swings into historical perspective

the role of copulas in the housing crisis abstract due to its simplicity and familiarity the gaussian copula is popular in calculating risk in collaterized debt obligations but it imposes asymptotic independence such that extreme events appear to be unrelated this restriction might be innocuous in normal times but during extreme events such as the housing crisis the gaussian copula might be inappropriate this paper explores various copula specifications and finds that the degree to which housing prices are related based on the gaussian copula is too small compared with real housing price data

on rational bubbles and fat tails this paper addresses the statistical properties of time series driven by rational bubbles a la blanchard and watson 1982 using insights on the behavior of multiplicative stochastic processes we demonstrate that the tails of the unconditional distribution emerging from such bubble processes follow power laws exhibit hyperbolic decline more precisely we find that rational bubbles predict a fat power tail for both the bubble component and price differences with an exponent smaller than 1 the distribution of returns is dominated by the same power law over an extended range of large returns although power law tails are a pervasive feature of empirical data these numerical predictions are in disagreement with the usual empirical estimates it therefore appears that exogenous rational bubbles are hardly reconcilable with some of the stylized facts of financial data at a very elementary level

some evidence of speculative bubbles in the foreign exchange markets the authors propose that the poor performance of portfolio models is due to their exclusion of speculative bubbles they suggest a new unce rtainty bubble solution as opposed to a risk bubble solution discr etion is minimized because the trend of the bubble is an exact functi on of the structural parameters for three exchange rates the bubble augmented portfolio model passes the usual statistical tests and per forms better than its var equivalent in out of sample dynamic simulat ion when the model was reestimated with the bubbles removed and wit h ordinary dummies in place of the constrained trend the parameter e stimates were invariably insignificant copyright 1987 by ohio state university press

the handbook of international macroeconomics preface 1 introduction rick van der ploeg amsterdam 2 quantity constrained models of open economies neil rankin warwick 3 imperfect competition and open economy macroeconomics huw d dixon york 4 relative price movements in dynamic general equilibrium models of international trade david backus nyu patrick kehoe pennsylvania and finn kydland carnegie mellon 5 international fiscal policy coordination and competition assaf razin and efraim sadka tel aviv 6 capital taxation in the world economy a lans bovenberg tilburg 7 history of the international monetary system implications for research in international macroeconomics and finance barry eichengreen berkeley 8 on inflation unemployment and the optimal exchange rate regime george alogoskoufis athens 9 macroeconomic policy speculative attacks and balance of payments crisis pierre richard agenor and robert p flood imf 10 continuous time models of exchange rates and intervention giuseppe bertola princeton 11 stylized facts of nominal exchange rate returns casper g de vries leuven 12 partial versus general equilibrium models of international capital market equilibrium 13 sovereign debt kenneth kletzer santa cruz 14 growth and external debt daniel cohen cepremap 15 growth and deficits in an interdependent world index

stock market crashes as social phase transitions abstract stock market crashes are traumatic events that affect the lives of millions of people around the globe and have tremendous economic implications crashes are not only dramatic but often completely unexpected the 1987 crash for example was not induced by any obvious trigger even after the fact it is hard to find the reason for the crash why did the market crash in october rather than in september or december why did it crash at all to this day we lack satisfactory answers this paper shows that spontaneous market crashes can be explained by a social phase transition mechanism similar to statistical mechanics phase transitions investors heterogeneity plays the role of temperature and is key in determining the possibility and magnitude of the crash the analysis suggests that dramatic crashes are a robust and inevitable property of financial markets it also implies that market crashes should be preceded by an increase in price volatility as empirically observed thus market crashes like earthquakes are a fundamental and unavoidable part of our world however we can develop early warning systems that may help minimize the damage

testing for bubbles in exchange markets a case of sparkling rates this paper investigates the possibility that the observed deviations of major bilateral exchange rates from values implied by market fundamentals are a consequence of rational asset market bubbles when a new econometric methodology for detecting asset market bubbles is used the joint hypothesis of no bubbles and stable autoregressive processes for relative money supplies and real incomes is rejected for the dollar deutsche mark and dollar pound ratesusing monthly data over the period 1973 82 additional tests for coefficient stability and for lack of cointegration between exchange rates and market fundamentals suggest that the bubble findings must be interpreted with care

rational bubbles during poland s hyperinflation implications and empirical evidence abstract it has been argued that the polish hyperinflation at the end of the eighties was too excessive to be attributed to market fundamentals only in this paper a range of indirect non structural and structural tests for rational exploding deterministic and stochastic bubbles are carried out we adopt a new strategy based on the work of hall and sola 1993a which allows for the possibility of switching regimes in the time series properties of the data to allow for both indirect tests and structural tests for the presence of stochastic bubbles

study on carbon capture and storage ccs investment decision making based on real options for china s coal fired power plants in this paper a quadrinomial model based on the theory of real options is developed to evaluate the investment in carbon capture and storage ccs retrofitting for existing coal fired power plants in china uncertainties in carbon price fossil fuel price investment cost and government subsidy are considered an existing typical 600 mw supercritical pulverized coal fired scpc plant is taken as a case study to illustrate the proposed model and the effects of government subsidy under different scenarios on the critical carbon price to invest in ccs are analyzed the results indicate that the real options approach has an advantage over the application of traditional net present value npv method when handling uncertainty and government subsidy has significant effects on reducing critical carbon price for investment in ccs the critical carbon prices are 103 56 rmb ton with 100 subsidy and 217 95 rmb ton without subsidy while the current average carbon price is 85 2 rmb ton this means that the current trading environment is not positive enough to attract investment in ccs retrofitting these conclusions provide theoretical foundation for decision making of ccs investment and related policy making

institutional investors and stock market volatility statement of responsibility on t p reads xavier gabaix parameswaran gopikrishnan vasiliki plerou h eugene stanley

in praise of rigidity the bright side of long term contracts in repeated trust games abstract we study a possibly repeated trust game between a principal and an agent whose skills are private information at the beginning of the relationship and later revealed to the principal the principal can commit to a long term relationship through a contract we show that such a commitment may be needed for trust furthermore the optimal length of the contract between the principal and the agent and the principal s payoff are not monotonic in both the probability that the agent is high skilled and the value of replacing a low skilled agent with a high skilled one

a test for speculative bubbles in the sterling dollar exchange rate 1981 84 the u s dollar price of the u k pound sterling is tested for a speculative bubble defined as a period with a nonzero median in excessreturns a nonparametric procedure is developed which controls for data mining over the period of flexible exchange rates and finds a negative bubble in the excess return to holding sterling rather than dollar assets during the period 1981 84 possible interpretations arebootstrap equilibria rational bubbles nonsym metric fundamentals and nonrational expectations copyright 1986 by american economic association

an uncertainty analysis of subsidy for carbon capture and storage ccs retrofitting investment in china s coal power plants using a real options approach abstract carbon capture and storage ccs is an attractive option to help reduce china s carbon emission this paper analyzes the impacts of subsidy for electricity generation on ccs retrofitting investment and carbon abatement in china s coal power plants considering the coaction of carbon market and subsidy policy to this end this paper builds up a real option model considering carbon prices electricity prices and coal prices uncertainties for decision of ccs investment we consider two important aspects whether to invest and when to invest i e ccs investment s potential and timing some major findings include 1 the impacts of subsidy on ccs investment and carbon abatement are affected by carbon market conditions initial carbon price can determine the magnitude of subsidy s impacts while carbon prices uncertainty level can determine subsidy s marginal impacts 2 subsidy from 0 01 to 0 05 kwh can raise ccs investment potential by 9 66 39 18 shorten ccs investment period by 0 39 1 95 years and bring carbon abatement potential of 0 10 1 89 gtco 2 considering different carbon market conditions 3 with the benchmark carbon market and affordable subsidies triggered ccs investments in coal power plants have an economical efficient carbon abatement potential up to 20 of china s carbon emission in 2030

fundamentals uncertainty bubbles and exchange rate dynamics abstract using a monetary model of exchange rate determination we study exchange rate dynamics with bubbles which depend on stochastic market fundamentals these dynamics can be either stochastically stable or unstable and either monotonic or non monotonic including cyclic in an extreme case they converge with probability one and exhibit cyclic movements implications for the analysis of time dependent regime shifts are also explored exchange rates with bubbles are likely to appear less volatile than the fundamentals in finite samples both the variance bounds and cointegration tests might thus be ineffective in testing the absence of bubbles under fundamentals uncertainty

pitfalls in testing for explosive bubbles in asset prices a number of studies e g robert j shiller 1981 olivier j blanchard and mark watson 1982 kenneth d west 1988 have argued that dividend and stock price data are not consistent with the market fundamentals hypothesis in which prices are given by the present discounted values of expected dividends these results have often been construed as evidence for the existence of bubbles or fads related arguments have been made with respect to gold bonds and foreign exchange a major problem with such arguments e g james hamilton and charles whiteman 1985 is that apparent evidence for bubbles can be reinterpreted in terms of market fundamentals that are unobserved by the researcher behzad t diba and herschel i grossman 1984 1988b and hamilton and whiteman 1985 have recommended the alternative strategy of testing for rational bubbles by investigating the stationarity properties of asset prices and observable fundamentals 1 in essence the argument for equities is that if stock prices are not more explosive than dividends then it can be concluded that rational bubbles are not present since they would generate an explosive component to stock prices 2 using unit root tests autocorrelation patterns and cointegration tests to implement this procedure diba and grossman 1988b p 529 state that the analysis supports the conclusion that stock prices do not contain explosive rational bubbles this paper shows that the above battery of tests is in fact unable to detect an important class of rational bubbles the point is demonstrated by constructing rational bubbles that appear to be stationary when unitroot tests are applied even though they are explosive in the relevant sense simulations show that when such bubbles are present stock prices will not appear to be more explosive than dividends on the basis of these tests even though the bubbles are substantial in magnitude and volatility the presence of rational bubbles in actual stock prices thus remains an open question