uncertainties and extreme risk spillover in the energy markets a time varying copula based covar approach abstract in this paper we explore the impact of uncertainties on energy prices by measuring four types of delta conditional value at risk covar using six time varying copulas three different measures of uncertainty economic policy financial markets and energy markets are considered and the magnitude and asymmetric effects of their influence are investigated our results suggest that there generally exists negative dependence between energy returns and changes in uncertainty the risks of clean energy and crude oil returns are more sensitive to uncertainties in the financial and energy markets while the impact of economic policy uncertainty is relatively weak the upside and downside covars and covars demonstrate significant asymmetric effects in response to extreme uncertainty movement our findings therefore have important implications for energy portfolio investment

uniform vs discriminatory auctions with variable supply experimental evidence in the variable supply auction considered here the seller decides how many customers with unit demand to serve after observing their bids bidders are uncertain about the seller s cost we experimentally investigate whether a uniform or a discriminatory price auction is better for the seller in this setting exactly as predicted by theory it turns out that the uniform price auction produces substantially higher bids and consequently yields higher revenues and profits for the seller furthermore again as predicted by theory the uniform price auction yields a higher number of transactions which makes it also the more efficient auction format

testing the s s model the s s model has enjoyed tremendous popularity over the past decade it has been employed almost everywhere that discrete adjustment is observed today microeconomic rigidities are seen as an important influence on aggregate dynamics in this paper we quickly characterize the microeconomic evidence for the model to narrow the scope of our discussion we will focus our attention on real variables and we will comment on price inertia where appropriate we conclude that in spite of its popularity the evidence for the importance of the s s adjustment is surprisingly weak we argue that discrete adjustment is in and of itself of little macroeconomic interest to be important these frictions must coordinate agents to act together thereby exacerbating deviations from the neoclassical benchmark to date there have been few attempts at empirically identifying such interactions in the last section we present some results of our own we test one of the main implications of s s adjustment that a greater variance in the forcing process leads to more frequent adjustment using data on automobiles from the consumer expenditure survey we find that more variable income leads to less frequent adjustment we speculate that this correlation is indicative of a link between discrete adjustment and imperfect capital markets this interaction could provide an important role for s s frictions

uncertainty shocks and firm creation search and monitoring in the credit market abstract we develop a business cycle model where endogenous firm creation stems from two credit market frictions first entrepreneurs search for a lending relationship with a bank second an optimal debt contract with monitoring is implemented we analyze the interplay between both frictions and embed it into an otherwise standard business cycle model which we estimate with bayesian techniques we find that uncertainty shocks are a prime contributor to business cycle fluctuations in the us not only for macro financial aggregates but also for firm creation moreover we point out that the credit search friction dampens the financial accelerator mechanism because default may imply the end of the lending relationship

evaluating natural resource investments notwithstanding impressive advances in the theory of finance over the past 2 decades practical procedures for capital budgeting have evolved only slowly the standard technique which has remained unchanged in essentials since it was originally proposed see dean 1951 bierman and smidt 1960 derives from a simple adaptation of the fisher 1907 model of valuation under certainty under this technique expected cash flows from an investment project are discounted at a rate deemed appropriate to their risk and the resulting present value is compared with the cost of the project this standard textbook technique reflects modern theoretical developments only insofar as estimates of the discount rate may be obtained from crude application of single period asset pricing theory but see brennan 1973 bogue and roll 1974 turnbull 1977 constantinides 1978 the inadequacy of this approach to capital budgeting is widely acknowledged although not widely discussed its obvious deficiency is its the evaluation of mining and other natural resource projects is made particularly difficult by the high degree of uncertainty attaching to output prices it is shown that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such projects but also to determine the optimal policies for developing managing and abandoning them the approach may be adapted to a wide variety of contexts outside the natural resource sector where uncertainty about future project revenues is a paramount concern

securitized markets international capital flows and global welfare we study the effect of collateralized lending and securitization on the global supply of securitized assets welfare and international net and gross capital flows in a two country general equilibrium model with idiosyncratic investment risk the financial sectors in the two countries home and foreign differ by the collateral requirement for investment loans with home requiring lower margins in autarky home endogenously supplies more assets and enables more risk sharing upon financial integration capital flows from foreign to home leading to lower interest rates and an increase in the global supply of assets foreign enjoys substantial welfare gains through better risk sharing and portfolio reallocation while the welfare experience for home is ambiguous gross capital flows arise when agents face aggregate shocks to the expected payoff to investment projects but can collapse when shocks concern the variance of returns

cyclical dynamics in idiosyncratic labor market risk is individual labor income more risky in recessions this is a difficult question to answer because existing panel data sets are so short to address this problem we develop a generalized method of moments estimator that conditions on the macroeconomic history that each member of the panel has experienced variation in the cross sectional variance between households with differing macroeconomic histories allows us to incorporate business cycle information dating back to 1930 even though our data do not begin until 1968 we implement this estimator using household level labor earnings data from the panel study of income dynamics we estimate that idiosyncratic risk is i highly persistent with an annual autocorrelation coefficient of 0 95 and ii strongly countercyclical with a conditional standard deviation that increases by 75 percent from 0 12 to 0 21 as the macroeconomy moves from peak to trough

volatility risk and economic welfare this paper examines the effects of time varying volatility on welfare i construct a tractable endogenous growth model with recursive preferences stochastic volatility and capital adjustment costs the model shows that a rise in volatility can decelerate growth in the absence of any level shocks in contrast to level risk which is always welfare reducing for a risk averse household volatility risk can increase or decrease welfare depending on model parameters when calibrated to u s data the model finds that the welfare cost of volatility risk is largely negligible under plausible model parameterizations

impact of economic uncertainty in a small open economy the case of chile we construct the first news based economic uncertainty index for chile which allowed us to rebuild 23 years of the history of economic uncertainty in the country and quantify its impact on the eco

fickle capital flows and retrenchment evidence from bilateral banking data abstract we empirically examine the response of cross border capital flows to economic uncertainty using bilateral banking flow data we show that while banks reduce their exposure to a foreign country when it becomes more risky they tend to increase their exposure to their home country in bad times a retrenchment to further understand this puzzle we examine how the differential response to foreign and domestic uncertainty is affected by country specific characteristics bilateral characteristics and crises our analysis suggests that most of the current theories based on either information asymmetries between foreign and domestic investors or institutional risk cannot explain bilateral data well on the other hand our results show that global crises have an asymmetric impact on the risk attitudes of banking institutions towards country specific uncertainty global crises make investors more risk averse towards foreign uncertainty but have no effect on the responsiveness to domestic uncertainty

can stock volatility be benign new measurements and macroeconomic implications we find nonsynchronized movements of two new measures of financial market uncertainty good and bad volatility which are based on the maximum and minimum stock prices within a month good bad volatility is associated with better worse expectations about the future economic situation and clearly signals acceleration deceleration in economic activity the var results indicate that i output employment and stock price plummet rapidly in response to a bad volatility shock while their responses to a good volatility shock are modest and ii bad volatility shocks explain the bulk of economic activity and stock price fluctuations in the medium run

the effect of uncertainty on investment evidence from texas oil drilling this paper estimates the response of investment to changes in uncertainty using data on oil drilling in texas and the expected volatility of the future price of oil using a dynamic model of firms investment problem i find that i the response of drilling activity to changes in price volatility has a magnitude consistent with the optimal response prescribed by theory ii the cost of failing to respond to volatility shocks is economically significant and iii implied volatility data derived from futures options prices yields a better fit to firms investment behavior than backward looking volatility measures such as garch jel c58 d92 g13 g31 l71 q31 the real options literature beginning with marschak 1949 and arrow 1968 and developed in bernanke 1983 pindyck 1991 and dixit and pindyck 1994 explains how firms should make decisions about investments that involve sunk costs real options theory views such investments as options in that at any point in time a firm may choose to either invest immediately or delay and observe the evolution of the investment s payoff a key insight is that the option to delay has value when future states of the world with positive returns to investing and states with negative returns are both possible even holding the expected future return constant at its present level thus in the presence of irreversibility and uncertainty a naive investment timing rule proceed with an investment if its expected benefit even slightly exceeds its cost is suboptimal because it does not account for the value of continuing to hold the option instead firms should delay irreversible investments until a significant gap develops between the investments expected benefits and costs moreover as uncertainty increases real options theory tells us that the incentive to delay should grow stronger and the gap between the expected benefit and cost necessary to trigger investment should widen while real options theory therefore prescribes how firms should carry out irreversible investments in uncertain environments it is not empirically well known

auctions with variable supply uniform price versus discriminatory abstract we examine an auction in which the seller determines the supply after observing the bids we compare the uniform price and the discriminatory auction in a setting of supply uncertainty where uncertainty is caused by the interplay of two factors the seller s private information about marginal cost and the seller s incentive to sell the profit maximizing quantity given the received bids in every symmetric mixed strategy equilibrium bidders submit higher bids in the uniform price auction than in the discriminatory auction in the two bidder case this result extends to the set of rationalizable strategies as a consequence we find that the uniform price auction generates a higher expected revenue for the seller and a higher trade volume

economic uncertainty before and during the covid 19 pandemic abstract we consider several economic uncertainty indicators for the us and uk before and during the covid 19 pandemic implied stock market volatility newspaper based policy uncertainty twitter chatter about economic uncertainty subjective uncertainty about business growth forecaster disagreement about future gdp growth and a model based measure of macro uncertainty four results emerge first all indicators show huge uncertainty jumps in reaction to the pandemic and its economic fallout indeed most indicators reach their highest values on record second peak amplitudes differ greatly from a 35 rise for the model based measure of us economic uncertainty relative to january 2020 to a 20 fold rise in forecaster disagreement about uk growth third time paths also differ implied volatility rose rapidly from late february peaked in mid march and fell back by late march as stock prices began to recover in contrast broader measures of uncertainty peaked later and then plateaued as job losses mounted highlighting differences between wall street and main street uncertainty measures fourth in cholesky identified var models fit to monthly u s data a covid size uncertainty shock foreshadows peak drops in industrial production of 12 19

learning asymmetries in real business cycles when a boom ends the downturn is generally sharp and short when growth resumes the boom is more gradual our explanation rests on learning about productivity when agents believe productivity is high they work invest and produce more more production generates higher precision information when the boom ends precise estimates of the slowdown prompt decisive reactions investment and labor fall sharply when growth resumes low production yields noisy estimates of recovery noise impedes learning slows recovery and makes booms more gradual than downturns a calibrated model generates growth rate asymmetry similar to macroeconomic aggregates fluctuations in agents forecast precision match observed countercyclical errors of forecasters

confidence and the transmission of macroeconomic uncertainty in u s recessions abstractthis article studies the role of confidence in the transmission of uncertainty shocks during u s recessions i use smooth transition vector autoregression st var to examine the regime dependent effect of uncertainty shocks and a counterfactual decomposition to isolate the role of confidence when the economy is in different regimes recessions and non recessions i find that shutting down the confidence channel leads to greatly dampened and less persistent effects of uncertainty shocks especially during recessions i also find that the cross regime difference in the role of confidence can largely explain the cross regime short run difference in the effects of uncertainty shocks

adjustable supply in uniform price auctions non commitment as a strategic tool abstract in some uniform price auctions the auctioneer decides how much to sell after the bidding auctioneer expected profit and social welfare can each be strictly higher in all equilibria given such adjustable supply than in all equilibria given any fixed quantity and reserve price

option valuation of claims on real assets the case of offshore petroleum leases this paper extends financial option theory by developing a methodology for the valuation of claims on a real asset an offshore petroleum lease several theoretical and practical problems not present in applying option pricing theory to financial assets are addressed most importantly we show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset petroleum reserves the advantages of this approach over conventional discounted cash flow techniques are emphasized the methodological development provides important insights for both company behavior and government policy promising empirical results are reported

uncertainty capital flows and maturity mismatch abstract this paper explores a how the financial uncertainty generated by volatile international capital flows interacts with maturity mismatch on the balance sheets of nonfinancial firms to increase the volatility of output investment and total factor productivity tfp in emerging market economies i build a model of a small open economy in which financial frictions force firms to fund long term projects with short term debt in response to changes in the level of uncertainty regarding the availability of foreign borrowing firms adjust their long term investment contributing to the volatility of investment and output as well as generating endogenous fluctuations in aggregate productivity using data from a panel of major emerging markets i show that the volatility of portfolio debt flows negatively affects output by dampening investment while the volatility of equity flows which do not generate maturity mismatch has no effect consistent with the mechanism in the model the negative impact of capital flow volatility is larger at low levels of financial development and in industries with longer time to build lags my estimates imply that shocks to capital flow volatility account for one fifth of the excess output volatility of the emerging markets in my sample relative to a set of small open advanced economies

economic policy uncertainty and risk spillovers in the eurozone this paper focuses on the impact of economic policy uncertainty on risk spillovers within the eurozone and contributes to these two growing literatures to this end we adapt the two step procedure developed by adrian and brunnermeier forthcoming in the framework of financial systemic risk to the sovereign bond market accordingly we attempt i to measure the extent to which distress affecting one given country s sovereign spreads can affect the eurozone s bond market as a whole and then ii to identify the determinants of risk spillovers by estimating a panel data model with macroeconomic state variables and economic policy uncertainty epu indices introduced by baker et al 2013 as regressors epu indices considered concern the four largest eurozone countries i e germany france italy and spain as well as the united states the model is estimated with quarterly data for ten countries representing the bulk of debt issuances within the eurozone over a period ranging from q4 2008 to q2 2013 which is characterized by historically high dispersion of sovereign bond spreads either across time or across countries our results support the idea that economic policy uncertainty in the core economies of the eurozone i e germany and france as well as in the largest periphery countries i e italy and spain can create an environment likely to exacerbate the transmission of risk arising from abnormal developments of individual countries sovereign spreads to the eurozone bond market as a whole in this respect our results plead for larger effort of eurozone leaders to reduce the uncertainty surrounding their economic policy in periods of crisis not only to avoid adverse effects on their own economies but also to reduce the risk of a destabilization of the eurozone sovereign bond market as a whole

habit formation as a resolution to the equity premium puzzle what is in the data what is not the consumption based asset pricing model of lucas 14 defines a theoretical relationship between streams of consumption and equilibrium asset prices since data of both aggregate consumption and asset prices are available the theory can be tested empirical tests of the lucas model using standard time separable utility functions indicate mismatches between the theory and the data for example in the gmm generalized method of moments estimation of hansen and singleton 9 overidentifying constraints implied by the model were rejected mehra and prescott 16 demonstrated the difficulty of explaining a particular statistic the theoretical expected equity premium the yield differential between stocks and risk free bonds is much higher than the observed one if a standard utility function is used they called the mismatch the equity premium puzzle to improve the performance of the model several authors have relaxed the time separability of preferences in a stimulating paper constantinides 1 argued that the equity premium puzzle can be resolved through the assumption of habit formation the idea is that consumption in the past reduces utility in the present because it establishes habits his model can match the observed mean and the variance of both the equity premium and the consumption growth rate the match of the low moments is consistent with the bound tests of heaton 11 gallant hansen and tauchen 7 and hansen and jagannathan 10 on the other hand gmm estimations using monthly aggregate consumption of nondurable goods and leisure by eichenbaum hansen and singleton 3 and that using consumption of nondurable goods and durable goods by dunn and singleton 2 and eichenbaum and hansen 4 showed that if current utility depends on current and past consumption then current utility increases in past consumption i e consumption has local durability the opposite of that implied by habit formation a particularly strong result was obtained by gallant and tauchen 6 they estimated a general form of utility functions with a general law of motion of data and found that the source of the time non separability is local durability since it is known that local durability

auctions of divisible goods with endogenous supply abstract uniform price auctions are studied in which the seller may cancel part of the supply after observing the bids this feature eliminates many of the collusive seeming equilibria of the auction in equilibrium the seller always sells the full quantity

google it up a google trends based uncertainty index for the united states and australia we develop uncertainty indices for the united states and australia based on freely accessible real time google trends data our google trends uncertainty gtu indices are found to be positively correlated to a variety of alternative proxies for uncertainty available for these two countries var investigations document an economically and statistically significant contribution to unemployment dynamics by gtu shocks in the united states in contrast the contribution of gtu shocks to unemployment dynamics in australia is found to be much milder and substantially lower than that of monetary policy shocks

bidder behavior in multiunit auctions evidence from swedish treasury auctions we analyze a unique data set on multiunit auctions which contains the actual demand schedules of the bidders as well as the auction awards in over 400 swedish treasury auctions first we document that bidders vary their prices bid dispersion and the quantity demanded in response to increased uncertainty at the time of bidding second we find that bid shading can be explained by a winner s curse driven model in which each bidder submits only one bid despite the fact that the bidders in our data set use much richer bidding strategies third we explore the extent to which the received theories of multiunit auctions are able to offer insights into the bidder behavior we observe our empirical evidence is consistent with some of the predictions of the models of auctions that emphasize private information the winner s curse and the champion s plague while the models of multiunit auctions serve as useful guideposts our empirical findings also point to several new areas of research in multiunit auctions

the great crash and the onset of the great depression this paper argues that the collapse of stock prices in october 1929 generated temporary uncertainty about future income which led consumers to forgo purchases of durable goods that the great crash generated uncertainty is evidenced by the decline in surety expressed by contemporary forecasters that this uncertainty affected consumer behavior is shown by the fact that spending on consumer durables declined drastically in late 1929 while spending on perishable goods rose slightly this effect is confirmed by the fact that there is a significant negative relationship between stock market variability and the production of consumer durables in the prewar era

the uniform price auction with endogenous supply abstract this paper shows that low price equilibria in the uniform price auction with endogenous supply do not exist if the seller employs the proportional rationing rule and is consistent when selecting among profit maximizing quantities in a consistent subgame perfect equilibrium the walrasian quantities are traded at the walrasian price

fluctuations in uncertainty this review article tries to answer four questions i what are the stylized facts about uncertainty over time ii why does uncertainty vary iii do fluctuations in uncertainty matter and iv did higher uncertainty worsen the great recession of 2007 2009 on the first question both macro and micro uncertainty appears to rise sharply in recessions on the second question the types of exogenous shocks like wars financial panics and oil price jumps that cause recessions appear to directly increase uncertainty and uncertainty also appears to endogenously rise further during recessions on the third question the evidence suggests uncertainty is damaging for short run investment and hiring but there is some evidence it may stimulate longer run innovation finally in terms of the great recession the large jump in uncertainty in 2008 potentially accounted for about one third of the drop in gdp

real options or disaster risk distinguishing uncertainty effects on investment motivated by the fact that uncertainty shocks are a countercyclical phenomenon this article takes a deeper look at the nature of uncertainty shocks in times of crisis and its effect on the real ec

investment and demand uncertainty this paper investigates the effects of uncertainty on the investment decisions of a sample of italian manufacturing firms using information on the subjective probability distribution of future demand for firms products according to the entrepreneurs the results support the view that uncertainty weakens the response of investment to demand thus slowing down capital accumulation consistent with the predictions of the theory there is considerable heterogeneity in the effect of uncertainty on investment it is stronger for firms that cannot easily reverse investment decisions and for those with substantial market power we show that the negative effect of uncertainty on investment cannot be explained by uncertainty proxying for liquidity constraints

robust permanent income and pricing i suppose there exists an extremely powerful and if i may so speak malignant being whose whole endeavours are directed toward deceiving me rene descartes meditations ii 1

volatility and development why is gdp growth so much more volatile in poor countries than in rich ones we identify four possible reasons i poor countries specialize in more volatile sectors ii poor countries specialize in fewer sectors iii poor countries experience more frequent and more severe aggregate shocks e g from macroeconomic policy and iv poor countries macroeconomic fluctuations are more highly correlated with the shocks of the sectors they specialize in we show how to decompose volatility into these four sources quantify their contribution to aggregate volatility and study how they relate to the stage of development we document the following regularities first as countries develop their productive structure moves from more volatile to less volatile sectors second the level of specialization declines with development at early stages and slowly increases at later stages of development third the volatility of country specific macroeconomic shocks falls with development fourth the covariance between sector specific and country specific shocks does not vary systematically with the level of development we argue that many theories linking volatility and development are not consistent with these findings and suggest new directions for future theoretical work

intergenerational redistribution in the great recession in this paper we construct a stochastic overlapping generations general equilibrium model in which households are subject to aggregate shocks that aect both wages and asset prices we use a calibrated version of the model to quantify how the welfare costs of severe recessions are distributed across dierent household age groups the model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages asset price declines hurt the old who rely on asset sales to nance consumption but benet the young who purchase assets at depressed prices in our preferred calibration asset prices decline more than twice as much as wages consistent with the experience of the us economy in the great recession a model recession is approximately welfare neutral for households in the 20 29 age group but translates into a large welfare loss of around 10 percent of lifetime consumption for households aged 70 and over

flexibility premium of emissions permits abstract investments in abatement technology are often characterised by irreversibility and significant implementation lags whereas emissions permits can be traded at any time as such abatement and emissions permit trading systems are hardly perfect substitutes we formally study the flexibility of emissions permits and propose a unified framework to rationalise the impact of both investment divestment lags and irreversibility in relation to the price of emissions permits using option pricing concepts we reformulate the technology adoption problem in terms of the technology s characteristics irreversibility and implementation lags and offer a conceptual quantification of the flexibility premium of emissions permits

adjustment of consumers durables stocks evidence from automobile purchases this paper tests an optimal s s rule in household durable purchases and examines directly the resulting aggregate expenditure dynamics the observed decision rule responds to income uncertainty and growth as predicted by an s s model resulting from transactions costs tests against liquidity constraints find that about half the households purchase according to an optimal s s rule aggregating the s s rule over households produces a cross section distribution of durables holdings the empirical distribution is similar to that predicted theoretically as is its response to aggregate shocks furthermore simulations of aggregate expenditure based on the household distribution exhibit dynamics consistent with those observed in the 1980s

uncertainty and consumer durables adjustment we characterize infrequent durables stock adjustment by consumers who also derive utility from non durable consumption flows in the presence of idiosyncratic income uncertainty the data we analyse include subjective future income uncertainty measures which we use as instruments in the estimation of relevant parameters of heterogeneous consumers dynamic adjustment problems the data feature two conceptually distinct sources of variation cross sectional heterogeneity of the sampled households dynamic problems and history dependent heterogeneity in their situation during the observation period we note that the latter should affect the likelihood but not the size of stock adjustment decisions and find broad support for theoretical predictions in formal selection controlled regressions based on this insight

income variance dynamics and heterogeneity recent theoretical work has shown the importance of measuring microeconomic uncertainty for models of both general and partial equilibrium under imperfect insurance in this paper the assumption of i i d income innovations used in previous empirical studies is removed and the focus of the analysis is placed on models for the conditional variance of income shocks which is related to the measure of risk emphasized by the theory we first discriminate amongst various models of earnings determination that separate income shocks into idiosyncratic transitory and permanent components we allow for education and time specific differences in the stochastic process for earnings and for measurement error the conditional variance of the income shocks is modelled as a parsimonious arch process with both observable and unobserved heterogeneity the empirical analysis is conducted on data drawn from the 1967 1992 panel study of income dynamics we find strong evidence of sizeable arch effects as well as evidence of unobserved heterogeneity in the variances

cross country evidence on the link between volatility and growth this paper presents empirical evidence against the standard dichotomy in macroeconomics that separates growth from the volatility of economic fluctuations in a sample of ninety two countries as well as a sample of oecd countries the authors find that countries with higher volatility have lower growth the addition of standard control variables strengthens the negative relationship the authors also find that government spending induced volatility is negatively associated with growth even after controlling for both time and country fixed effects copyright 1995 by american economic association

inflation dynamics and time varying volatility new evidence and an ss interpretation is monetary policy less effective at increasing real output during periods of high volatility than during normal times in this article i argue that greater volatility leads to an increase in aggregate price flexibility so that nominal stimulus mostly generates inflation rather than output growth to do this i construct price setting models with volatility shocks and show these models match new facts in cpi micro data that standard price setting models miss i then show that these models imply that output responds less to nominal stimulus during times of high volatility furthermore because volatility is countercyclical this implies that nominal stimulus has smaller real effects during downturns for example the estimated output response to additional nominal stimulus in september 1995 a time of low volatility is 55 larger than the response in october 2001 a time of high volatility jel codes e10 e30 e31 e50 d8 copyright 2014 oxford university press