investing in energy conservation are homeowners passing up high yields abstract energy conservation is examined as an investment option for homeowners conservation technologies produce monetary benefits through reduced fuel costs calculations suggest that many conservation measures have rates of return significantly higher than alternative investments in stocks bonds and real estate yet the level of conservation activity is inconsistent with these high yields several barriers exist which inhibit investments in conservation it is perceived as risky and the cost of obtaining reliable information is high public policies to encourage conservation should focus on reducing the risk of purchasing energy saving devices by improving the accuracy of energy savings estimates

the hedge ratio and the empirical relationship between the stock and futures markets a new approach using wavelet analysis this paper examines the relationship between the stock and futures markets in terms of lead lag relationship correlation and the hedge ratio using wavelet analysis empirical results show that 1 there is a feedback relationship between the stock and futures markets regardless of time scales 2 wavelet correlation between two markets varies over investment horizons but remains very high and 3 hedge ratio and the effectiveness of hedging strategies increase as the wavelet time scale increases simulation for utility comparisons shows that hedging effectiveness depends not only on the time scale but also on the risk aversion coefficient of an individual investor

the effect of asymmetries on optimal hedge ratios there is widespread evidence that the volatility of stock returns displays an asymmetric response to good and bad news this article considers the impact of asymmetry on time varying hedges for financial futures an asymmetric model that allows forecasts of cash and futures return volatility to respond differently to positive and negative return innovations gives superior in sample hedging performance however the simpler symmetric model is not inferior in a hold out sample a method for evaluating the models in a modern risk management framework is presented highlighting the importance of allowing optimal hedge ratios to be both time varying and asymmetric

de noising option prices with the wavelet method financial time series are known to carry noise hence techniques to de noise such data deserve great attention wavelet analysis is widely used in science and engineering to de noise data in this paper we show through the use of monte carlo simulations the power of the wavelet method in the de noising of option price data we also find that the estimation of risk neutral density functions and out of sample price forecasting is significantly improved after noise is removed using the wavelet method

commercial bank offices and the mobilisation of private savings in selected sub saharan african countries the mobilisation of domestic savings has remained a thriving issue in discussions of ways and means of harnessing resources for development in africa this work attempts to examine the role of a deliberate policy of extending offices of banks to the rural areas in savings mobilisation efforts using ordinary least squares methods data from five african countries that have pursued this policy in recent times are examined to see if there is any significant relationship between the savings rate and their population per bank office ratio our results are consistent with the hypothesis that the extension of branch offices of banks to rural areas could help attenuate the poor savings performance in most african economies

interest rate policy taxation and risk abstract it is now an established orthodoxy that real interest rates should be positive raising the nominal interest rate above the rate of inflation however does not achieve a positive cost of borrowing if the interest cost of borrowing is tax deductible furthermore high rates of interest and inflation impose heavy risks on borrowers these points are illustrated with data from a sample of countries in eastern and southern africa they strengthen the case for preferring lower inflation to higher nominal interest rates as a way of making real interest rates positive

estimating the implicit price of energy efficiency improvements in the residential housing market a hedonic approach abstract in this study a hedonic price model has been used to examine the impact which efficiency improvements have on housing values our study represents an improvement over a previous attempt to examine this issue in that the independent variable used in our analysis is designed to reflect variation in structural efficiency levels among sample homes rather than variation in occupant lifestyles and preferences in addition a flexible functional form is used to prevent bias due to misspecification of the hedonic price equation the study results reveal that efficiency improvements are capitalized into housing prices in des moines iowa at the average efficiency level of homes in the sample an efficiency improvement which results in a 1 decrease in the level of expenditures necessary to maintain the house at 65 f in the average heating season will increase the expected selling price of the house by 11 63 the premium obtained for an equivalent efficiency improvement will be greater than 11 63 in a relatively efficient home and less than 11 63 in a relatively inefficient home without further information concerning the price expectations and discount rates utilized by des moines home buyers and the average remaining life of fuels saving investments in the sample it cannot be determined whether the housing market is pricing fuel savings efficiently regardless of whether or not the implicit price of fuel savings is the outcome of an efficient market information on this implicit price facilitates the estimation of an average resale value of fuel saving investments in addition the results of this study refute the hypothesis that efficiency improving investments are not capitalized into housing prices

a theory of ambiguity credibility and inflation under discretion and asymmetric information this paper develops a positive theory of credibility ambiguity and inflation under discretion and asymmetric information the monetary policymaker maximizes his own politically motivated objective function that is positively related to economic stimulation through monetary surprises and negatively related to monetary growth the relative importance he assigns to each target shifts stochastically through time his current preference trade off is known to him but not to the public when choosing the state contingent path of money growth for the present and the future the policymaker compares the benefits from current stimulation with the costs associated with higher future inflation expectations current monetary growth conveys information to the public about future money growth because there is persistence in the policymaker s objectives although expectations are rational information is imperfect because monetary control procedures are imprecise as a result the public cannot correctly distinguish persistent changes of emphasis on different policy objectives from transitory monetary control errors the public becomes aware of changes gradually by observing past monetary growth credibility is defined in terms of the speed with which the public recognizes changes in the objectives of the policymaker credibility is lower the noisier monetary control and the more stable the objectives of the policymaker looser monetary control and a higher degree of time preference on the part of the policymaker induce him to produce higher and more variable monetary growth when the policymaker is free to determine the accuracy of monetary control he does not always choose the most effective control available in spite of the fact that monetary surprises always have an expected value of zero the reason is that ambiguous control procedures enable the policymaker to generate positive surprises when he cares more than on average about economic stimulation he leaves the inevitable negative surprises for periods in which he cares more about inflation prevention this result provides an explanation for the fed s preference for ambiguity recently documented by goodfriend 1986 the policymaker is more likely to pick more ambiguous control procedures the more uncertain his objectives and the higher his time preference the paper also provides a theoretical underpinning for the well documented crosscountry positive correlation between the level and the variability of inflation

energy tax credits and housing improvement this paper investigates whether federal and state tax credits allowed to households who make energy saving improvements to their residence lead to an increase in improvement activity a two period utility maximization model of household behaviour is used to determine the theoretical influence of tax credits energy prices and other factors on the optimal magnitude of conservation capital improvement regressions using various qualitative measures of conservation improvement as the dependent variable are estimated using household level energy consumption and improvement data consistent with evidence from earlier surveys the empirical results do not support the hypothesis that energy tax credits lead to more widespread or more extensive energy conservation improvement activity

the dynamics of stock index and stock index futures returns in rational efficiently functioning markets the returns on stock index and stock index futures contracts should be perfectly contemporaneously correlated this study investigates the time series properties of 5 minute intraday returns of stock index and stock index futures contracts and finds that sp however the effect is not completely unidirectional with lagged stock index returns having a mild positive predictive impact on futures returns

volatility uncertainty time decay and option bid ask spreads in an incomplete market this paper documents the fact that in options markets the percentage implied volatility bid ask spread increases at an increasing rate as the option s maturity date approaches to explain this stylized fact this paper provides a market microstructure model for the bid ask spread in options markets we first construct a static equilibrium model to illustrate the aforementioned phenomenon where risk averse and competitive option market makers quote bid and ask prices to minimize their inventory risk in an incomplete market with both directional and volatility risk we extend this model to multiperiods and show that the same phenomenon occurs there as well two new implications are generated a volatility level effect and a volatility variance effect these implications are empirically tested and the empirical results confirm the model s validity finally we document the importance of detrending the maturity effect by showing that the detrended percentage volatility spread explains future jump intensit

high frequency quoting short term volatility in bids and offers at subsecond horizons bids and offers in u s equity markets are more volatile than what would be implied by long term fundamentals to assess costs and consequences this paper suggests that traders random delays latencies interact with quote volatility to generate execution price risk and relative latency costs analysis of the behavior of quote setters suggests that this volatility is more likely to arise from recurrent cycles of undercutting similar to the edgeworth cycles found in product markets rather than mixed strategies of limit order placement

energy tax credits and residential conservation investment evidence from panel data with kevin hassett using panel data on individual tax returns and variat ion in state tax policy we measure the impact of government tax policies to encourage residential conservat ion inves tment on the probabili ty of making these investments unl ike previous work we account for unobserved heterogenei ty in tastes for energy saving activities and its possible correlat ion with tax policy at the state level we find that controll ing for unobserved heterogenei ty is very important based on our preferred point est imate of the tax price coefficient a 10 percentage point change in the tax price for energy inves tment would lead to a 24 percent increase in the probabili ty of making an investment

estimation of the optimal futures hedge standard approaches to designing a futures hedge often suffer from two major problems first they focus only on minimizing risk so no account is taken of the impact on expected return second in estima ting the hedge ratio no allowance is made for time variation in the distribution of cash and futures price changes this paper describes a technique for estimating the optimal futures hedge that corrects these problems and illustrates its use in hedging treasury bonds with t bond futures copyright 1988 by mit press

downside risk and the energy hedger s horizon abstract in this paper we explore the impact of investor time horizon on an optimal downside hedged energy portfolio the optimal heating oil hedge ratio is first calculated for a variety of downside risk objective functions at different time horizons using the wavelet transform next associated hedging effectiveness is contrasted for a range of risk metrics with all metrics showing increasing hedging effectiveness at longer horizons moreover decreased hedging effectiveness is demonstrated for increased levels of uncertainty at higher confidence intervals while small differences in effectiveness are found across the different hedging objectives time horizon effects are found to dominate confirming the importance of the hedging horizon the findings suggest that while downside risk measures are useful in determining an optimal futures hedge encompassing negative returns hedging horizon and confidence intervals should also be given careful consideration by the energy hedger

simultaneously determined time varying hedge ratios in the soybean complex time varying hedge ratios are derived which account for the dynamic characteristics of prices in the soybean complex a multivariate generalized autogressive heteroskedastic mgarch model along with other conditional models is used to specify the relevant covariance matrix while the time varying representations of the variance matrix are statistically appropriateex anteand ex posthedging effectiveness indicate that they provide minimal gain to hedging in terms of mean return and reduction in variance over a constant conditional procedure whether similar findings arise from other applications of garch models to optimal hedging is a question for further research

dynamic cyclical comovements between oil prices and us gdp a wavelet perspective abstract in this paper we use wavelet analysis to investigate the cyclical comovements between crude oil prices and us gdp taking into account the decline in the volatility of us gdp growth that has occurred since the mid 1980s our main findings suggest that before 1984 q1 the crude oil prices were leading the us gdp cycle by 3 quarters and granger cause us gdp in contrast after 1984 q1 the crude oil prices were lagging the us business cycle and a reverse causality is found to run from us gdp to oil prices the multiscale granger causality tests globally corroborate theses results

housing market capitalization of energy saving durable good investments energy conservation in the residential sector depends in large measure upon the willingness of builders and homeowners to invest in the durable goods which result in an energy efficient house since these durable goods generally become attached permanently to the dwelling unit and since ownership of the unit is likely to change within the expected lifetime of the installed equipment the incentive to invest in conservation measures depends upon the efficiency of the housing market in capitalizing the financial benefits of future fuel savings this paper examines housing market efficiency in this regard by first estimating an hedonic price index with the annual fuel bill included as an explicit attribute of the structure then from the estimated hedonic price of a one dollar reduction in annual fuel costs and assumed fuel price escalation rates and remaining lifetimes of the equipment implicit housing market discount rates are calculated the relatively low estimated discount rates indicate that the housing market performs efficiently in capitalizing future fuel savings

generalized optimal hedge ratio estimation a generalized approach to estimating optimal hedge ratios on futures markets is developed the generalized approach is not difficult to apply and provides a framework for evaluating the appropriateness of conventional simple regression approaches to optimal hedge ratio estimation in an application to storage hedging of corn soybeans and wheat it is found that simple regression using price levels or returns leads to errors in optimal hedge ratio estimation but that simple regression using price changes provides reasonably accurate estimates

a positive theory of inflation and inflation variance a positive theory of inflation and inflation variance empirically inflation and the variance of inflation are positively associated this paper develops a model that provides a potential explanation for this relationship in terms of the incentives facing the policymaker in a discretionary equilibrium the model can also account for an empirical association between inflation and measures of real output instability there is however no direct causal link whatever from the average rate of inflation to either the variance of inflation or that of real output i introduction the debate over the use rules or discretion in monetary policy has been central to macroeconomics for many years e g simons 1963 lucas 1980 buiter 1980 recently kydland and prescott 1977 and barro and gordon 1983a b have identified discretion as the absence of policy commitment in a game between policymakers and the public they argued that discretionary policymaking will lead governments to create excessive inflation a policy of low inflation is not consistent with incentives facing governments and thus will not be believed by the private sector barro and gordon 1983a argue that this positive theory of monetary policy can help to explain many features of the trend rate of inflation in modern economies high and persistent rates of inflation a positive relationship between inflation and unemployment and the observed countercyclical behaviour of monetary authorities among others these models are based on the premise that there are significant costs to a high but fully anticipated rate of inflation another feature of inflation in modern economics however is the well documented fact that inflation and the variability of inflation are positively associated this phenomenon has been widely observed over different countries at different times 1 this has led researchers to question the feasibility of a steady and predictable positive rate of inflation the finding suggests that high rates of inflation may reduce the ability to forecast future inflation rates a high average inflation rate may add an unnecessary degree of uncertainty to individual decision making and lead to a misallocation of resources friedman 1977 suggests that this may cause output instability and possibly raise the average unemployed rate a related paper by logue and sweeney 1981 establishes that there is a positive relationship between inflation and the variability of economic growth for industrial countries given this perspective the welfare costs associated with inflation might be considerably higher than the traditional costs of anticipated inflation this paper extends the barro and gordon 1983a model of discretionary monetary policy to take account of the relationship between inflation and measures of inflation and output variability the extension focussed on is to model an endogenous wage indexing scheme in the labor market in the discretionary equilibrium wage setters not only form rational expectations of the future price level but also choose an optimal degree of wage indexation this extension to the basic model has the following properties of a discretionary equilibrium 1 there is a positive association between the mean rate of inflation and the magnitude of real disturbances in the economy as well as between the mean inflation rate and the degree of output instability in the economy 2 in an economy where real disturbances are relatively important there is a positive association between the mean rate of inflation and the variance of inflation the explanation behind these results is as follows the lower is the degree of wage indexation the greater is the incentive for monetary authorities to cause surprise inflation and hence the higher is the mean rate of inflation in a discretionary equilibrium but the degree of wage indexation is negatively related to the variance of real disturbances in an economy which is subject to both real and nominal disturbances

wavelet based option pricing an empirical study abstract in this paper we scrutinize the empirical performance of a wavelet based option pricing model which leverages the powerful computational capability of wavelets in approximating risk neutral moment generating functions we focus on the forecasting and hedging performance of the model in comparison with that of popular alternative models including the stochastic volatility model with jumps the practitioner black scholes model and the neural network based model using daily index options written on the german dax 30 index from january 2009 to december 2012 our results suggest that the wavelet based model compares favorably with all other models except the neural network based one especially for long term options hence our novel wavelet based option pricing model provides an excellent nonparametric alternative for valuing option prices

implications of nonlinear dynamics for financial risk management this paper demonstrates that when log price changes are not iid their conditional density may be more accurate than their unconditional density for describing short term behavior using the bds test of independence and identical distribution daily log price changes in four currency futures contracts are found to be not iid while there appear to be no predictable conditional mean changes conditional variances are predictable and can be described by an autoregressive volatility model that seems to capture all the departures from independence and identical distribution based on this model daily log price changes are decomposed into a predictable part which is described parametrically by the autoregressive volatility model and an unpredictable part which can be modeled by an empirical density either parametrically or nonparametrically this two step seminonparametric method yields a conditional density for daily log price changes which has a number of uses in financial risk management

optimal policy instruments for externality producing durable goods under present bias abstract when consumers exhibit present bias the standard solution to market failures caused by externalities pigouvian pricing is suboptimal i investigate policies aimed at externalities for present biased consumers optimal policy includes an instrument to correct the externality and an instrument to correct the present bias either instrument can be an incentive based policy e g a tax on fuel economy or a command and control policy e g a fuel economy mandate under consumer heterogeneity a command and control policy may dominate an incentive based policy calibrated to the us automobile market simulation results suggest that the second best gasoline tax is 3 30 higher than marginal external damages the optimal price policy includes a gasoline tax set about equal to marginal external damages and a fuel economy tax that increases the price of an average non hybrid car by about 550 2200 relative to the price of an average hybrid car

mean reversion of standard poor s 500 index basis changes arbitrage induced or statistical illusion mean reversion in stock index basis changes has been presumed to be driven by the trading activity of stock index arbitragers we propose here instead that the observed negative autocorrelation in basis changes is mainly a statistical illusion arising because many stocks in the index portfolio trade infrequently even without formal arbitrage reported basis changes would appear negatively autocorrelated as lagging stocks eventually trade and get updated the implications of this study go beyond index arbitrage however our analysis suggests that spurious elements may creep in whenever the price change or return series of two securities or portfolios of securities are differenced mean reversion in stock index basis changes has been amply documented mackinlay and ramaswamy 1988 find significant negative first order autocorrelation in normalized intraday basis changes of the s p 500 index futures traded on the chicago mercantile exchange cme yadav and pope 1990 find similar behavior using financial times stock exchange ftse 100 index futures data from the london international financial futures exchange liffe as does lim 1990 using nikkei 225 index futures from the singapore international monetary exchange simex the trading activity of stock index arbitragers has been presumed to be driving this elastic realignment of stock index and index futures prices when the basis widens beyond its theoretical level arbitragers simultaneously sell index futures and buy the index portfolio pulling the difference between the futures and index

the influence of the international oil prices on the real effective exchange rate in romania in a wavelet transform framework article i nfo the purpose of this paper is to assess the empirical influence of oil prices on the real effective exchange rate in romania in a wavelet transform framework more precisely we investigate to what extent oil prices impact the real effective exchange rate in an eastern european transition country characterised by a low level of retail fuel prices and by an important growth rate of these prices as compared to the other eu countries for this purpose we use a discrete wavelet transform approach and scale by scale granger causality tests we find that oil prices have a strong influence on the real effective exchange rate in the short run but also for large time horizons these results are important considering the fact that in a classical granger causality linear framework for the entire sample we find that oil prices have no influence on the real effective exchange rate the findings remainrobust whenresampling the initial 1986 2009period orwhen weuse analternative continuous wavelet transform in addition we discover that mainly the positive shocks associated with an increase in oil prices have an impact upon the real effective exchange rate movements in the short and long runs

modeling asymmetric comovements of asset returns existing time varying covariance models usually impose strong restrictions on how past shocks affect the forecasted covariance matrix in this article we compare the restrictions imposed by the four most popular multivariate garch models and introduce a set of robust conditional moment tests to detect misspecification we demonstrate that the choice of a multivariate volatility model can lead to substantially different conclusions in any application that involves forecasting dynamic covariance matrices like estimating the optimal hedge ratio or deriving the risk minimizing portfolio we therefore introduce a general model which nests these four models and their natural asymmetric extensions the new model is applied to study the dynamic relation between large and small firm returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies