the valuation of american options with stochastic interest rates a generalization of the geske johnson technique the geske johnson approach provides an efficient and intuitively appealing technique for the valuation and hedging of american style contingent claims here we generalize their approach to a stochastic interest rate economy the method is implemented using options exercisable on one of a finite number of dates we illustrate how the value of an american style option increases with interest rate volatility the magnitude of this effect depends on the extent to which the option is in the money the volatilities of the underlying asset and the interest rates as well as the correlation between them

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

standard risk aversion this paper introduces the concept of standard risk aversion a von neumann morgenstern utility function has standard risk aversion if any risk makes a small reduction in wealth more painful in the sense of an increased reduction in expected utility also makes any undesirable independent risk more painful it is shown that given monotonicity and concavity the combination of decreasing absolute risk aversion and decreasing absolute prudence is necessary and sufficient for standard risk aversion standard risk aversion is shown to imply not only pratt and zeckhauser s proper risk aversion individually undesirable independent risks always being jointly undesirable but also that being forced to face an undesirable risk reduces the optimal investment in a risky security with and independent return similar results are established for the effect of broad class of increases in one risk on the desirability of or optimal investment in a second independent risk

economywide impacts of climate change on agriculture in sub saharan africa two possible adaptation scenarios to climate change for sub saharan africa are analyzed under the sres b2 scenario the first scenario doubles the irrigated area in sub saharan africa by 2050 compared to the baseline but keeps total crop area constant the second scenario increases both rainfed and irrigated crop yields by 25 for all sub saharan african countries the two adaptation scenarios are analyzed with impact a partial equilibrium agricultural sector model combined with a water simulation module and with gtap w a general equilibrium model including water resources the methodology combines the advantages of a partial equilibrium approach which considers detailed water agriculture linkages with a general equilibrium approach which takes into account linkages between agriculture and nonagricultural sectors and includes a full treatment of factor markets the efficacy of the two scenarios as adaptation measures to cope with climate change is discussed due to the limited initial irrigated area in the region an increase in agricultural productivity achieves better outcomes than an expansion of irrigated area even though sub saharan africa is not a key contributor to global food production rainfed irrigated or total both scenarios help lower world food prices stimulating national and international food markets

the impact of climate change on incomes and convergence in africa abstract climate change is projected to detrimentally affect african countries economic development while income inequalities across economies is among the highest on the planet however it is projected that income levels would converge on the continent hitherto there is limited evidence on how climate change could affect projected income convergence accelerating slowing down or even reversing this process here we analyze convergence considering climate change damages by employing an economic model embedding the three dimensions of risks at the country level exposure vulnerability and hazards the results show 1 with historical mean climate induced losses between 10 and 15 percent of gdp per capita growth the majority of african economies are poorly adapted to their current climatic conditions 2 western and eastern african countries are projected to be the most affected countries on the continent and 3 as a consequence of these heightened impacts on a number of countries inequalities between countries are projected to widen in the high warming scenario compared to inequalities in the low and without warming scenarios to mitigate the impacts of economic development and inequalities across countries we stress 1 the importance of mitigation ambition and africa s leadership in keeping global mean temperature increase below 1 5 c 2 the need to address the current adaptation deficit as soon as possible 3 the necessity to integrate quantitatively climate risks in economic and development planning and finally 4 we advocate for the generalization of a special treatment for the most vulnerable countries to access climate related finance the analysis raises issues on the ability of african countries to reach their sdgs targets and the potential increasing risk of instability migration across african countries of decreased trade and economic cooperation opportunities as a consequence of climate change exacerbating its negative consequences

evaluation of land use based greenhouse gas abatement measures in germany abstract agricultural production contributes 11 to the total german greenhouse gas ghg emissions we compare the efficiency of three different land use based ghg abatement measures in combination and as separately applied measures the production of short rotation coppices of feedstocks for biomethane production and peatland restoration we evaluate these options with respect to the following criteria cost efficiency ghg abatement costs abatement potential and impact on agricultural production we use the regional supply model raumis to investigate the different abatement measures at the sector and regional level up to a reduction of ghg emission of 25 1012 g co2eq peatland restoration is the most cost efficient option short rotation coppice allow some cost efficient mitigation also only at limited scale energy maize is only an option if high abatement targets should be met the joint implementation of several abatement strategies allows meeting specified targets at lower costs the crowding out effect between the options is limited the spatial analysis indicates measure specific regional competitiveness and application e g short rotation coppice in eastern and southern germany peat restoration in northern germany and energy maize production in central germany

jump risks and the intertemporal capital asset pricing model the specification of the stochastic process for stock prices is an important assumption underlying most equilibrium and option pricing models in modern finance this is particularly true of the continuous time capital asset pricing models where it is assumed that asset prices follow diffusion processes with continuous sample paths see merton 1973a breeden 1979 grossman and shiller 1982 the extent to which the implications of these models generalize to discontinuous sample paths is an unanswered question in theoretical finance however the answer to this question is of more than just theoretical interest since accumulated empirical evidence appears to be inconsistent with the continuous sample path assumption see rosenberg 1972 oldfield rogalski and jarrow 1977 rosenfeld 1982 one purpose of this paper is to provide some answers to this question we do this by extending merton s 1973a intertemporal asset pricing model in the special case of a constant investment opportunity set to include discontinuous sample paths for asset prices the constant investment opportunity set assumption is imposed because we are interested in obtaining sufficient conditions under which an instantaneous capital asset pricing model capm results the extension of our model to a stochastic opportunity set is discussed briefly in the text this paper investigates an economy where stock prices follow a jump diffusion process the first part of the analysis derives a sufficient condition under which an instantaneous capm will characterize equilibrium expected returns the sufficient condition is that the jump component of a stock s return must be unsystematic and diversifiable in the market portfolio the second part of the paper is an empirical investigation of the satisfaction of this condition the evidence is seen to be inconsistent with the satisfaction of this hypothesis that is the market portfolio appears to contain a jump component

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

the accelerated binomial option pricing model this paper describes the application of a convergence acceleration technique to the binomial option pricing model the resulting model termed the accelerated binomial option pricing model also can be viewed as an approximation to the geske johnson model for the value of the american put the new model is accurate and faster than the conventional binomial model it is applicable to a wide range of option pricing problems

economy wide estimates of the implications of climate change sea level rise the economy wide implications of sea level rise in 2050 are estimated using a static computable general equilibrium model this allows for a better estimate of the welfare effects of sea level rise than the common direct cost estimates and for an estimate of the impact of sea level rise on greenhouse gas emissions overall general equilibrium effects increase the welfare costs of sea level rise but not necessarily in every sector or region in the absence of coastal protection economies that rely most on agriculture are hit hardest although energy is substituted for land overall energy consumption falls with the shrinking economy hurting energy exporters with full coastal protection gdp increases particularly in regions with substantial dike building but utility falls least in regions that protect their coasts and export energy energy prices rise and energy consumption falls the costs of full protection exceed the costs of losing land the results also show direct costs the usual method for estimating welfare changes due to sea level rise are a bad approximation of the general equilibrium welfare effects previous estimates of the economic impact of sea level rise are therefore biased

on jumps in common stock prices and their impact on call option pricing the black scholes call option pricing model exhibits systematic empirical biases the merton call option pricing model which explicitly admits jumps in the underlying security return process may potentially eliminate these biases we provide statistical evidence consistent with the existence of lognormally distributed jumps in a majority of the daily returns of a sample of nyse listed common stocks however we find no operationally significant differences between the black scholes and merton model prices of the call options written on the sampled common stocks

assessing agricultural trade policies options with the european union a brazilian perspective brazil has shown interest in agricultural trade negotiations at bilateral regional and multilateral levels this study addresses several important negotiations using the agricultural sector model capri common agricultural policy regional impact analysis to analyze liberalization scenarios between the european union and the mercosur countries focusing particularly on their impacts in brazil four possible agreements between europe and mercosur are simulated including a broader multilateral agreement proposed in the g20 the results suggest that a bilateral scenario involving larger tariff rate quota increase as called for by mercosur generates larger gains than accepting the european union proposal of 2004 or further multilateral trade liberalization based on the g20 proposal however much larger increases in tariff rate quotas for all products are not necessarily justified in all cases moreover brazil s production and export potential is limited by factors other than trade restrictions resume d auteur

the hotspots reference routes and research trends of marginal abatement costs a systematic review abstract as one of the most effective means of evaluating environmental policies marginal abatement costs macs have been adopted in a growing body of research this study characterizes the mac related literature from 1993 to 2018 on web of science based on a systematic review bibliometric analysis and mind mapping the results classify the research hotspots into influential factors methods and empirical applications the three most frequently mentioned influential factors are technical change discount rates and energy prices compared with top down models bottom up models including engineering model and expert based method are the most widely used improvements in the former focus on strengthening market behavior effect while those in the latter aim to overcome the weaknesses of negative costs and lack of interaction across measures mac applications focus on environmental policies with two new research areas recently emerging co benefits and sectoral abatement costs furthermore a reference route is proposed by summarizing the applicability of methods and matching relationships among influential factors methods and empirical problems finally potential research directions are summarized based on the identified research hotspots and a similar co word analysis in marginal cost field such as considering the effects of both multiple influential factors and the interaction among factors on maccs

gm free private standards and their effects on biosafety decision making in developing countries we provide a comprehensive review of international cases where gm free private standards set up by food companies in developed countries have influenced biosafety policymaking in developing countries we find 29 cases where private importers have directly or indirectly affected policy decisions in 21 countries most of the cases relate irrational fear of export losses to excessively precautionary decisions these cases are based on two generally misleading premises the belief that europe or japan represents the only market for exports and the perception that non gm segregation is infeasible or prohibitively costly in all situations our study also demonstrates the importance of information asymmetries across countries and agents and the role of risk aversion in seemingly irrational decision making the combination of these four factors helps us explain why presumed but unproven expected commercial losses still represents a significant impediment to biosafety policymaking in developing countries

diversification strategies and adaptation deficit evidence from rural communities in niger summary the paper provides fresh empirical evidence on the adaptation process in niger rural communities using original longitudinal socio economic panel data merged with granular geo referenced climatic information we identify the main drivers and impacts of crop and labor diversification which constitute two livelihood strategies on moderating the adaptation deficit in doing so we account for the interdependence between the two diversification practices and potential reverse causality between welfare outcomes and diversification behavior moreover we condition the impacts of diversification on different sections of the welfare distribution to capture potential non linear effects our results reveal that the diversification has positive and significant welfare impacts when most vulnerable households rely on it as an adaptation strategy to mid run climate variability and as a coping strategy to short run market shocks at the same time our results find lower but still positive impacts for well endowed households that are likely to diversify their activity portfolio given the very limited presence of policy support we conclude that the rural nigerien communities are characterized by a large and autonomous adaptation response which constitutes a key leverage mechanism for policy makers we thus suggest government interventions aimed at supporting the most important diversification drivers but also aimed at straightening some channels such as network infrastructures or the promotion of local crop varieties which may have a greater potential in triggering diversification

currency hedging with options and futures abstract this paper examines the optimal hedging decision of a competitive exporting firm which faces concurrently hedgeable exchange rate risk and non hedgeable price risk we show that the hedging role of currency options is due to two distinct sources of non linearity i the multiplicative nature of the price and exchange rate risk and ii the marginal utility function of the firm in particular we show that a long put option position is optimal when the price risk is negatively correlated with the exchange rate risk and or the firm is prudent

cross hedging under multiplicative basis risk cross hedging price risk in an incomplete financial market creates basis risk we propose a new way of modeling basis risk where price risk and basis risk are combined in a multiplicative way under this specification positive prudence is a necessary and sufficient condition for underhedging in an unbiased market using the example of cross hedging jet fuel price risk with crude oil futures we show that the new specification is superior in describing the price series and that optimal cross hedges differ significantly from those derived under the traditional additive cross hedging model

jump diffusion option valuation in discrete time we develop a simple discrete time model to value options when the underlying process follows a jump diffusion process multivariate jumps are superimposed on the binomial model of cox ross and rubinstein 1979 to obtain a model with a limiting jump diffusion process this model incorporates the early exercise feature of american options as well as arbitrary jump distributions it yields an efficient computational procedure that can be implemented in practice as an application of the model we illustrate some characteristics of the early exercise boundary of american options with certain types of jump distributions jump diffusion processes are popular in option valuation models these processes were incorporated by merton 1976 into the theory of option valuation and constitute an important alternative to the lognormal diffusion process assumed in the black and scholes 1973 model in this paper we develop a tractable discrete time model for valuing options with these processes many authors have suggested that incorporating jumps in option valuation models may explain some of the large empirical biases exhibited by the black scholes model 1 however in many cases closed form solutions for valuing options are not available for example this is true when there is a positive probability of early exercise when the jump distribution is neither lognormal nor discrete or when the option is based on the term structure of interest rates see ahn and thompson 1988 and jarrow and madan 1991 in these important cases the model developed in this paper can be used to value options another aim of this paper is to provide a model which relies on only simple mathematics to price options with jump diffusion processes it is hoped that the key economic relationships underlying jump diffusion models are transparent in this model we provide enough details to make the procedure readily accessible

marginal abatement costs of greenhouse gas emissions from european agriculture cost effectiveness and the eu non ets burden sharing agreement abstract we propose a quantitative assessment of the marginal abatement costs mac of greenhouse gas emissions from european agriculture and analyze the implications of the non ets burden sharing agreement bsa for this sector this assessment is based on mac reduced forms the generic specification of which enables simple parameterization and numerical computations such mac curves are parameterized for each member state using the outputs of a detailed model of the european agricultural supply they are then used to compute total and marginal abatement costs involved by the bsa targets as well as the cost effective effort sharing the corresponding emission price and abatement costs the main findings are i flexibility mechanisms such as a cap and trade system for agricultural emissions could reduce the total costs of meeting the 10 eu abatement target by a factor two to three relative to the strict implementation of each country s target ii the corresponding equilibrium emission price is found to be 32 42 tco2eq depending on the assumption regarding business as usual emissions and iii a cap and trade system with allowances based on the bsa targets would involve substantial transfers from eu 15 countries to new member states an important share of which being made of hot air

multi stage product development with exploration value enhancing preemptive and innovation options abstract we provide a real options framework for the analysis of product development that incorporates research and exploration actions product attribute value enhancing actions with uncertain outcome as well as preemption and innovation options we derive two stage analytic formulas and propose a general multi period solution using a numerical lattice approach our analysis reveals that exploration actions are more important when the project is out or at the money near zero npv and less important for high project values in a multi stage setting exploration actions are important even for in the money projects when follow on actions exist that can enhance the expected value of the project with path dependency early actions are more valuable since they enhance the impact or reduce the cost of subsequent actions preemptive controls affecting rare event jump frequency and innovations that introduce positive jumps are more valuable for firms with higher frequency of competitive threats involving low volatility

economy wide estimates of the implications of climate change human health we study the economic impacts of climate change induced change in human health viz cardiovascular and respiratory disorders diarrhoea malaria dengue fever and schistosomiasis changes in morbidity and mortality are interpreted as changes in labour productivity and demand for health care and used to shock the gtap e computable general equilibrium model calibrated for the year 2050 gdp welfare and investment fall rise in regions with net negative positive health impacts prices production and terms of trade show a mixed pattern direct cost estimates common in climate change impact studies underestimate the true welfare losses

eu climate policy up to 2020 an economic impact assessment in its fight against climate change the eu is committed to reducing its overall greenhouse gas emissions to at least 20 below 1990 levels by 2020 to meet this commitment the eu builds on segmented market regulation with an eu wide cap and trade system for emissions from energy intensive installations ets sectors and additional measures by each eu member state covering emission sources outside the cap and trade system the non ets sector furthermore the eu has launched additional policy measures such as renewable energy subsidies in order to promote compliance with the climate policy target basic economic reasoning suggests that emission market segmentation and overlapping regulation can create substantial excess costs if we focus only on the climate policy target in this paper we evaluate the economic impacts of eu climate policy based on numerical simulations with a computable general equilibrium model of international trade and energy use our results highlight the importance of initial market distortions and imperfections as well as alternative baseline projections for the appropriate assessment of eu compliance cost

does the current trade liberalization agenda contribute to greenhouse gas emission mitigation in agriculture abstract this paper contributes to the literature on the trade liberalization climate change nexus by investigating the impact of the current free trade agenda of the european union eu on the effectiveness of a possible greenhouse gas ghg reduction policy for its agricultural sector for the analysis we implement scenarios with a carbon tax on non co2 emissions and trade liberalization both individually and combined in capri a global partial equilibrium model for agriculture scenario results indicate that the simulated trade liberalization by itself has only modest effects on agricultural ghg emissions by 2030 pricing agricultural non co2 emissions in the eu triggers the adoption of mitigation technologies which contributes to emission reductions emission leakage however partially offsets the eu emission savings as production increases in less emission efficient regions in the world the combination of agricultural trade liberalization and carbon pricing increases emission leakage and therefore further undermines global mitigation gains our results hinge on the key assumptions that future trade agreements between non eu countries are not considered and that the climate actions are limited to the eu only despite these limitations we conclude that from a global ghg mitigation perspective trade agreements should address emission leakage for instance by being conditional on participating nations adopting measures directed towards ghg mitigation

genetic engineering and trade panacea or dilemma for developing countries abstract advocates of the use of genetic engineering techniques in agriculture contend that this new biotechnology promises increased productivity better use of natural resources and more nutritious foods opponents are concerned about potentially adverse implications for the environment and food safety in response to consumer reactions against genetically modified gm foods in some countries crop production is being segregated into gm and non gm varieties this analysis finds that world markets for maize and soybeans adjust well to these changes and also that developing countries will divert their trade patterns in response to preference changes in important trading partner countries

balancing productivity and trade objectives in a competing environment should india commercialize gm rice with or without china india is considering approving genetically modified gm rice but it fears losing rice exports to sensitive countries with import regulations on gm food and may wait for china to lead the way using a multiregion computable general equilibrium cge model we simulate the economic effects of introducing gm rice in india with or without china in the presence of labeling and import approval regulations of gm food in gm sensitive importing countries we find that the welfare gains with gm rice in india would largely exceed any potential export loss and that the segregation of non gm rice could help reduce these minor losses we also find no significant first mover advantage for india or china on gm rice the opportunity cost of segregation of non gm rice is much larger for sensitive importers than for india which suggests that these importers would have the incentive to pay for the cost of segregation

can private motor vehicle augmenting technical progress reduce household and total fuel use abstract this paper demonstrates the importance of modelling energy intensive household services in general and private transportation in particular as combinations of energy and other inputs initially a partial equilibrium approach is used to analyse private transport consumption as a self produced commodity formed by household vehicle and fuel use we particularly focus on the impact of private vehicle augmenting technical progress in this framework we show that household fuel use will fall if it is easier to substitute between vehicles and fuel in the household production of private transport services than it is to substitute between private transport and the composite of all other goods in overall household consumption the analysis is then extended through computable general equilibrium simulation to investigate the wider implications of similar efficiency improvements when intermediate demand prices and nominal income are endogenous the subsequent reduction in the price of private transport service not observable in market prices allows the wage measured relative to the cpi to rise whilst the wage relative to the price of foreign goods falls this simultaneously increases uk international competitiveness encouraging increased exports and reduced import penetration whilst allowing employment to rise this provides an additional supply side stimulus to production employment and household income

a note on the convergence of binomial pricing and compound option models the binomial pricing model of cox ross and rubinstein 2 and the compound option model of geske 3 are both elegant and self contained frameworks for the valuation of american options and related contingent claims each providing us with a distinctive valuation procedure flexible enough to be adapted to a wide variety of problems for american type options on assets with a prices following a lognormal diffusion process and b a continuous time exercise policy such as put options on individual stocks calls and puts on foreign exchange and calls and puts on futures contracts the binomial pricing model approximates both the stochastic process and the exercise opportunity set the latter by restricting exercise to a discrete set of dates the compound option model on the other hand approximates only the exercise opportunity set however it pays for this with a high price in computational requirements specifically with n exercise dates allowed multivariate normal probabilities of every order up to and including n must be evaluated in their article on the valuation of put options geske and johnson 4 provide an ingenious solution to this problem by applying acceleration techniques common in numerical analysis but new to the finance literature letting t be the time to expiration of the option and p the value of a compound option with exercise permitted at the n uniformly spaced dates t n 2t n t they generate the sequence of compound option values p1 p2 pn polynomial extrapolation is then used to estimate p lim n x oo pn they found this procedure to be very accurate over a limited sample of put options with low values of n though not discussed by geske and johnson the reasons for the effectiveness of acceleration techniques in a compound option model are apparent from a cursory examination an acceleration technique will perform best when the approximating sequence converges uniformly on the true value of the contingent claim and worst when convergence includes complex and unpredictable oscilla

the crash of ʼ87 was it expected the evidence from options markets transactions prices of s p 500 futures options over 1985 1987 are examined for evidence of expectations prior to october 1987 of an impending stock market crash first it is shown that out of the money puts became unusually expensive during the year preceding the crash second a model is derived for pricing american options on jump diffusion processes with systematic jump risk the jump diffusion parameters implicit in options prices indicate that a crash was expected and that implicit distributions were negatively skewed during october 1986 to august 1987 both approaches indicate no strong crash fears during the 2 months immediately preceding the crash attempts to explain what caused the stock market crashes around the world in october 1987 have suffered from the paucity of major economic developments occurring around that time that could have triggered the crashes shifting expectations regarding monetary policy foreign investors fears of a dollar decline increasing riskiness of assets none of these appeared major enough if present at all to explain the magnitude of the crashes and although portfolio insurance strategies could conceivably magnify the effects of a jump in fundamentals the initiating jump in fundamentals appears to be lacking

optimal bidding and hedging in international markets this paper examines the optimal bidding and hedging decisions of a risk averse contractor for a construction project abroad we show that currency options play no role as a hedging instrument when the contractor has a quadratic utility function however if the contractor is prudent currency options are used for hedging purposes prudence thus generates a hedging demand for currency options when foreign exchange exposure is uncertain contrary to the conventional wisdom we show that currency hedging may have perverse effects on the contractor s bidding behavior in a canonical example with negative exponential utility functions we demonstrate that the possibilities for the contractor to bid more aggressively in the absence of currency hedging are not factitious

estimating the market effect of a food scare the case of genetically modified starlink corn abstract in 2000 a genetically modified corn variety called starlink that was not approved for human consumption was discovered in the food corn supply to estimate the price impact of this event on the u s corn market we develop the relative price of a substitute method this method applies not only to the starlink event but also to rare events in other markets we find that the contamination led to a 6 8 discount in corn prices and that the suppression of prices lasted for at least a year

the real threat to gm crops in poor countries consumer and policy resistance to gm foods in rich countries abstract in most poor countries today farmers still plant no gm food or feed crops at all some are now planting gm cotton but gm food and feed crops have not yet been grown commercially anywhere in developing asia or the middle east and in only one african country south africa government authorities in most of these countries have not yet given farmers official permission to plant any gm food or feed crops superficially in most cases because of precautionary concerns about biological safety the more fundamental reason is now a fear that consumers in high income importing regions such as europe and japan will shun imports from any country that begins planting gm varieties the new eu regulation calling for strict labelling and traceability on all gm derived foods and feeds requiring a costly physical segregation of gm from non gm all the way up the marketing chain will further discourage the planting of gm crops in poor countries

the hedging role of options and futures under joint price basis and production risk this paper analyzes the optimal production and hedging decisions for firms facing futures price basis and production risk assuming futures and options can be used using constant absolute risk aversion utility and normal distributions the authors derive an exact solution and show that joint production and price risk lead to a hedging role for options risk averse firms that can use each hedging instrument will generally have higher expected output using iowa data for soybeans the parameters of the joint distribution of future prices cash prices and yields are estimated and the results are used to approximate optimal hedging decisions for soybean producers copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

on jump processes in the foreign exchange and stock markets exchange rates exhibit systematic discontinuities even after allowingfor conditional heteroskedasticity in the diffusion process the results are much more significant in theforeign exchange market than in the stock market which suggests differences in the structure of these markets finally this jump component is shown to explain some of the empirically observed mispricings in the currency options market the objective of this article is to analyze and compare the empirical distribution of returns in the stock market and in the foreign exchange market there are a number of reasons why a better understanding of the stochastic processes driving prices in these markets would be useful many financial models rely heavily on the assumption of a particular stochastic process while relatively little attention is paid to the empirical fit of the postulated distribution as a result models like option pricing models are applied indiscriminately to various markets such as the stock market and the foreign exchange market when the underlying processes may be fundamentally different the foreign exchange market for instance is characterized by active exchange rate man

can a water market avert the double whammy of trade reform and lead to a win win outcome abstract this paper focuses on the linkages between water and trade policies using morocco as a case this country is typical of many in that policy protects its import competing agricultural and industrial sectors while water in irrigated agriculture is priced below its marginal value product changing water policy without correcting for these other distortions leads to a more inefficient allocation of water on the other hand reforming trade policy alone can make farmers growing crops protected pre reform worse off using an intertemporal applied general equilibrium model we find that trade reform actually creates an opportunity to pursue water policy reform creating a water user rights market post trade reform not only compensates for the decline in farmers profits caused by the trade reform but also raises the efficiency of water allocation and hence benefits the economy as a whole

automatic responses of crop stocks and policies buffer climate change effects on crop markets and price volatility abstract climate change has the potential to affect crop prices and price volatility however the economic models used in prior assessments largely do not include known automatic stabilizing factors crop storage can stabilize prices and u s crop policy tends to provide support that moves opposite prices we quantify effects of circa 2050 climate forcing on the inter annual variability of u s corn belt corn and soybean yields using statistical crop models and climate scenarios from regional and global climate models climate change generally reduces mean yields and increases the inter annual variability of yields in the midwestern u s using these yield impacts and an economic model with automatic market stabilizers we find only modest increases in price volatility although individual producers and states are negatively affected by the yield reductions the aggregate effect for all corn and soybean producer returns can be positive because of price increases moreover agricultural policies based on price levels or revenue variation offset some of the impacts of market variation on farm income our results differ from other recent results and temper concerns that increasing climate instability necessarily translates to greater uncertainty about agricultural commodity uses including as food and biofuels in the near future

how costly is mitigation of non co2 greenhouse gas emissions from agriculture a meta analysis this text reviews the assessments of marginal abatement costs of methane and nitrous oxide emissions from agriculture we use agricultural emissions and the corresponding prices collected from 21 studies that have assessed abatement potentials and costs using various modeling approaches and assumptions we first highlight the implications of the modeling approach for marginal abatement costs harmonized abatement rates for three emission prices 10 20 and 50 2005 tco2eq are regressed on variables that reflect various modeling assumptions and study characteristics in a second step the emission price is introduced as an explanatory variable when controlling for a few key characteristics of the studies the models explain an important share of the observed variability in abatement rates the type of modeling approach is found to have a significant effect in particular we find that equilibrium models lead to higher abatement rates for a given price the flexibility in nitrogen use and its effect on crop yields also plays a significant role in lowering marginal abatement costs the results of the second step indicate that the price elasticity of the abatement rate is about 0 6 this estimate is found to be robust to several specifications and consistent with previous assessments covering other economic sectors

water competition through the water energy nexus assessing the economic impacts of climate change in a mediterranean context abstract the impacts of climate change on water resources availability are expected to be adverse especially in drier climate regions such as the mediterranean increased water scarcity will exacerbate competition for water resources not only between sectors but also between countries sharing transboundary river basins due to the mutual dependence of the energy sector on water resources and of the water services provision sector on energy inputs the water energy nexus is acknowledged as a major challenge for the near future with hydropower representing one of the most direct links in this nexus the aim of this paper is to assess the economy wide impacts of the concurrent effects of climate change driven impacts on water availability and the sectoral and regional competition for scarcer water resources in order to accomplish that goal an integrated modelling approach is developed where a computable general equilibrium model including raw water as a production factor is linked to times pt a bottom up model of the energy sector a case study is provided for the mediterranean country of portugal results for 2050 show that macroeconomic impacts are significant and encompass important inter sectoral differences that in turn depend on the degree of competition between sectors impacts are stronger when water consumption by spanish sectors is considered as this intensifies water scarcity in portugal thus the paper allows to gain insight in the broader water energy economy nexus and the additional costs that the dependence on water resources availability in transboundary river basins represents to an economy both aspects being of utmost importance for climate adaptation and energy policy making

pricing options with extendible maturities analysis and applications many common types of financial contracts incorporate options with extendible maturities this paper derives closed form expressions for options that can be extended by the optionholder and presents a number of applications including the valuation of american options with stochastic dividends junk bonds and shared equity mortgages we also derive closed form expressions for writer extendible options and discuss the writer s economic incentives for extending an out of the money option we apply these results to show that corporate debtholders have a strong incentive to extend the maturity of defaulting debt if there are liquidation costs we model and solve the debtholders optimal extension problem and show that the possibility of an extension can induce shareholders in highly levered firms to accept negative npv projects many common types of financial contracts and contingent claims incorporate options with extendible maturities for example a growing number of firms in many cases firms involved in leveraged buyouts are issuing bonds with maturities that can be extended at the firm s option options on real estate often allow the optionholder to extend the expiration date by paying an additional fixed amount to the option writer corporate warrants frequently give the issuing firm the right to unilaterally extend the life of the warrants a right that is often exercised in general any financial contract that could involve a rescheduling of payments a renegotiation of terms an early call or exercise provision or some similar type of flexibility over the timing of cash flows could be viewed as including an option with an extendible maturity this paper derives valuation expressions for extendible options examines the analytical properties of these prices and presents a wide variety of applications and examples in this analysis we distinguish between options that can be extended by the optionholder and options that are extended by the option writer since they differ fundamentally in their pricing implications focusing on the

export and hedging decisions under revenue and exchange rate risk a note abstract this note analyzes optimal export and hedging decisions taken by a risk averse exporting firm which simultaneously faces hedgeable exchange rate risk and non hedgeable revenue risk abroad the separation property does not hold exports depend on preferences and expectations revenue uncertainty causes the firm to export less the optimal currency forward position can be divided into three components an expected revenue component a speculative component and a revenue uncertainty component

an integrated economic and distributional analysis of energy policies most public policies particularly those in the energy sphere have not only efficiency but also distributional effects however there is a trade off between modelling approaches suitable for calculating those impacts on the economy for the former most of the studies have been conducted with general equilibrium models whereas partial equilibrium models represent the main approach for distributional analysis this paper proposes a methodology to simultaneously carry out an analysis of the distributional and efficiency consequences of changes in energy taxation in order to do so we have integrated a microeconomic household demand model and a computable general equilibrium model for the spanish economy we illustrate the advantages of this approach by simulating a revenue neutral reform in spanish indirect taxation with a large increase of energy taxes that serve an environmental purpose the results show that the reforms bring about significant efficiency and distributional effects in some cases counterintuitive and demonstrate the academic and social utility of this approximation

integrating bioenergy into computable general equilibrium models a survey in the past years biofuels have received increased attention since they were believed to contribute to rural development energy security and to fight global warming it became clear though that bioenergy cannot be evaluated independently of the rest of the economy and that national and international feedback effects are important computable general equilibrium cge models have been widely employed in order to study the effects of international climate policies the main characteristic of these models is their encompassing scope global models cover the whole world economy disaggregated into regions and countries as well as diverse sectors of economic activity such a modelling framework unveils direct and indirect feedback effects of certain policies or shocks across sectors and countries cge models are thus well suited for the study of bioenergy biofuel policies one can currently find various approaches in the literature of incorporating bioenergy into a cge framework this paper gives an overview of existing approaches critically assesses their respective power and discusses the advantages of cge models compared to partial equilibrium models grouping different approaches into categories and highlighting their advantages and disadvantages is important for giving a structure to this rather recent and rapidly growing research area and to provide a guidepost for future work

the hedge value of international emissions trading under uncertainty this paper estimates the value of international emissions trading focusing on a here to fore neglected component its value as a hedge against uncertainty much analysis has been done of the kyoto protocol and other potential international greenhouse gas mitigation policies comparing the costs of achieving emission targets with and without trading these studies often show large cost reductions for all parties under trading compared to a no trading case we investigate the welfare gains of including emissions trading in the presence of uncertainty in economic growth rates using both a partial equilibrium model based on marginal abatement cost curves and a computable general equilibrium model we find that the hedge value of international trading is small relative to its value in reallocating emissions reductions when the burden sharing scheme does not resemble a least cost allocation we also find that the effects of pre existing tax distortions and terms of trade dominate the hedge value of trading we conclude that the primary value of emissions trading in international agreements is as a burden sharing or wealth transfer mechanism and should be judged accordingly

on the asynchronous approvals of gm crops potential market impacts of a trade disruption of eu soy imports due to their high protein content soybeans are important feedstuffs in the european union eu however the cultivation of soybeans using genetically modified gm varieties in non eu countries is increasing and the eu authorization of gm products takes longer than in other countries leading to an asynchronous approval between the eu and non eu countries that might induce soybean trade disruptions this paper uses an integrated modelling system to simulate argentina brazil and the united states ending soybean exports to the eu the impact on world trade and on the eu import prices of soy products is analysed with a computable general equilibrium model eu soy imports are shown to decline and the import price of soybeans in the eu increases the effects on eu agricultural markets are analysed based on a partial equilibrium model feed costs in the eu are found to increase with poultry and pork the most affected production and exports decline and imports increase however the effects of a trade ban are found to be less profound than in many other studies due to compensating substitution effects at various market levels increasing imports from third countries increasing domestic oilseed production and the use of other protein feeds

on the valuation of american call options on stocks with known dividends both the roll and the geske equations for the valuation of the american call option on a stock with known dividends are incorrectly specified this note presents the corrected valuation formula explains the misspecifications and provides a numerical example

the compound option approach to american options on jump diffusions abstract we derive analytical valuation formulas for compound options when the underlying asset follows a jump diffusion process we then apply these results to value extendible options american call options on stocks that pay discrete dividends and american options on assets that pay continuous proportional dividends numerical results are provided

empirical evidence on the trade impact of asynchronous regulatory approval of new gmo events abstract this paper focuses on the ex post empirical analysis of the trade impact of asynchronous regulatory approval of new genetically modified organism gmo events we contribute to the literature in three ways first we define indices to assess the extent of asynchronicity and the relative strictness of the gmo approval authorizations of 40 countries considering gmo regulatory developments between 2000 and 2012 regarding cotton maize and soybeans second we introduce indices that are country pair specific product specific and year specific in a gravity model to examine the trade impact of asynchronous regulatory approval across countries by grouping the countries according to the state of their national regulatory gmo frameworks we have an even more differentiated view on the trade impact of asynchronous approval that focuses not only on the existence of regulations but also on their restrictiveness the results from the gravity model show that asynchronous approval has negatively impacted trade flows of cotton maize and soybeans it is observed that both asynchronous approvals and the restrictiveness of importing countries regulations to address the importation of gmo products matter meaning those countries that have already adopted a comprehensive gmo regulatory framework and have policies to manage the importation of gmo crops tend to feel a higher negative impact on trade flows

water scarcity and the impact of improved irrigation management a computable general equilibrium analysis increasing water scarcity combined with an increasing demand for food and water for irrigation call for a careful revision of water use in agriculture currently less than 60 of all the water used for irrigation is effectively used by crops based on the new version of the gtap w model we analyze the effect of potential water savings and the welfare implications of improvements in irrigation efficiency worldwide the results show that a water policy directed to improve irrigation efficiency led to global and regional water savings but it is not beneficial for all regions the final effect on regional welfare will depend on the interaction of several different causes for instance higher irrigation efficiency changes opportunity costs and reverses comparative advantages modifying regional trade patterns and welfare for water stressed regions the effects on welfare are mostly positive for nonwater scarce regions the results are more mixed and mostly negative the results show that exports of virtual water are not exclusive of water abundant regions

nitrogen tax and set aside as greenhouse gas abatement policies under global change scenarios a case study for germany the ambitious climate policy objectives of the cop21 agreement require the design and the implementation of effective and efficient policy instruments the effectiveness and efficiency of agricultural abatement options depend on regional climate and natural conditions changes in the global economy global agricultural markets and regional agricultural production thus the assessment of abatement options requires consideration of the global scale the market scale and the regional producer scale we investigate two abatement options discussed controversially in literature both have been partially applied to reduce environmental pollution from agriculture a tax on nitrogen and the obligatory set aside of agricultural land our study provides an assessment of the ecological effectiveness and the economic efficiency of both abatement options under different global scenarios in our policy analysis we combine three applied policy simulation models to develop an integrated economic model framework this model framework considers the global the national and the regional scale and consists of the global general equilibrium model dart bio the partial equilibrium model capri and the regional supply model raumis in the different global scenarios the results show that both abatement options create relatively high marginal abatement costs and that the maximally reached abated greenhouse gas emissions represent only 15 of the quantity required to fulfill the policy targets compared to the obligatory set aside option the nitrogen tax is in both scenarios the more efficient policy with respect to impacts on production and environment a nitrogen tax is less forecastable than the obligatory set aside option our study illustrates the relevance of considering global economic and market change in the assessment of producer targeting environmental policies

export flexibility and currency hedging this article studies the behavior of an export flexible firm under exchange rate uncertainty we show that the separation theorem holds if selling exclusively in the domestic market is suboptimal even under the most unfavorable spot exchange rate otherwise the firm s optimal output depends on its preferences and on the underlying uncertainty we further show that the full hedging theorem holds only when the firm always finds it optimal to sell its entire output in the foreign market otherwise export flexibility introduces a convexity into the firm s foreign exchange risk exposure which calls for the use of currency options for hedging purposes

general equilibrium pricing of options on the market portfolio with discontinuous returns when the price process for a long lived asset is of a mixed jump diffusion type pricing of options on that asset by arbitrage is not possible if trading is allowed only in the underlaying asset and a risk less bond using a general equilibrium framework we derive and analyze option prices when the underlying asset is the market portfolio with discontinuous returns the premium for the risk of jumps and the diffusion risks forms a significant part of the prices of the options in this economy an attempted replication of call and put options by the black scholes type of trading strategies may require substantial infusion of funds when jumps occur we study the cost and risk implications of such dynamic hedging plans article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

evaluating irrigation investments in malawi economy wide impacts under uncertainty and labor constraints irrigation expansion is critical to increase crop yields and mitigate effects from climate change in sub saharan africa but the low profitability has led to little irrigation investments in the region so far using an integrated modeling framework we simultaneously evaluate the returns to irrigation arising from both economic and biophysical impact channels to understand what determines the profitability of irrigation in malawi our results confirm that the returns to irrigation cannot cover the costs in malawi while labor intensive irrigation expansion leads to unfavorable structural change in the short run the profitability hinges on low irrigated yields that fall far from expectations due to insufficient input use and crop management techniques on the other hand we find that the nonmonetary benefits of irrigation regarding higher food security lower poverty and reduced vulnerability to climate change make investments in irrigation worthwhile to improve the livelihoods of smallholders

taxing international emissions trading we investigate the efficiency and effectiveness consequences of emissions trading taxation a theoretical partial equilibrium model is developed showing that permits taxation distorts the equilibrium price and abatement efforts potentially counterintuitive conclusions concerning the tax revenue are also derived a cge model complements theoretical results suggesting that the change in the equilibrium permits price brought about by taxation can be significant finally we conclude that policy design based on cost effectiveness might lead to wrong conclusions the socially desirable design of emissions trading taxation requires homogenous tax rates applied to net sellers and no rebate rates allowed for net buyers