hierarchical organization and incentives abstract we study decentralization in public decision making as the possibility for local authorities to sign incentive contracts with local agents in a context of asymmetric information we first review some theoretical arguments put forward for the optimality of decentralized structures we then present a model of organization of incentive policy in the eu context where national authorities have better information on their agents but less bargaining power than central authorities at the community level we show the complementarities between both levels of regulation

one security many markets determining the contributions to price discovery when homogeneous or closely linked securities trade in multiple markets it is often of interest to determine where price discovery the incorporation of new information occurs this article suggests an econometric approach based on an implicit unobservable efficient price common to all markets the information share associated with a particular market is defined as the proportional contribution of that market s innovations to the innovation in the common efficient price applied to quotes for the thirty dow stocks the technique suggests that the preponderance of the price discovery takes place at the new york stock exchange nyse a median 92 7 percent information share although most of the classic paradigms in market microstructure concern a security that trades in a single centralized market such situations are becoming increasingly rare in practice fragmentation the dispersal of trading in a security to multiple sites has emerged as a dominant institutional trend this process is of concern to financial economists and regulators because price information and price discovery the impounding of new information into the security price arguably the most important products of a security market have many attributes of public goods as the process of fragmentation accelerates it may be important to determine where the price information and price discovery are being produced 1 this paper suggests a practical econometric approach to this problem the technique is illustrated with an application to u s equity markets many stocks listed on the new york stock exchange nyse trade concurrently on the regional exchanges and the national association of securities dealers national market system nasd nms since a share of ibm stock is the same security whether purchased on the midwest or pacific exchange this is a particularly clear instance of multiple markets nevertheless the expres

a note on interest parity and the supply of arbitrage funds the divergence of the actual forward premium on foreign exchange from that dictated by the principle of interest rate parity can arise from two separately identifiable causes 1 an equilibrium position as indicated by the interest parity principle has not been reached or 2 that the principle itself is not a correctly specified equilibrium condition it is the purpose of this note to offer a revised specification of the interest parity condition and to determine whether this version approximates more closely the actual premium as determined in the market it should be made clear however that this is a partial analysis and does not deal with the impact of other forces for example speculation on the forward premium as a result a complete model of the spot and forward markets for foreign exchange such as stein s 1965 is not attempted here in general the principle of interest parity maintains that in equilibrium

determination of the international maize price what is the growing role of brazil and ukraine this paper examines the relationships among maize prices for four countries to determine if newly emerging exporters brazil and ukraine influence the international price of maize our work focuses on each market s participation in the price discovery process rather than trying to determine a price leader we find that the united states plays the largest role in price discovery followed by argentina brazil and ukraine we also search for export thresholds and find that ukraine s contribution to price discovery rises slightly when an export threshold of 2 3 million tons is reached no export thresholds were found for brazil export thresholds for argentina were found but only have a minor impact on price relationships we also found that price relationships vary considerably across seasons of the year

the ethiopian commodity exchange and spatial price dispersion abstract in this article we study the impact of an institutional intervention on market efficiency in ethiopia more specifically we analyze to what extent the ethiopian commodity exchange ecx in combination with regional warehouses have contributed to a reduction in price spreads between regional markets our hypothesis is that warehouses connected to the ecx reduce the dispersion between export prices and local retail prices in different coffee growing areas as well as the dispersion between export prices and local retail prices in different coffee growing areas by doing so the ecx has the potential to improve the market efficiency to identify the causal effect we combine retail price data with information on the gradual rollout of warehouses connected to the ecx from 2007 to 2012 our results suggest that when two markets both have access to an operating warehouse the average price spread is 0 86 1 78 etb lower than it is for markets where at least one part lacks warehouse access this is a substantial reduction considering that the average price spread over the full period is 3 33 etb the main results are robust to various econometric specifications and our analysis thus suggests that local warehouses connected to the ecx have indeed improved market efficiency

price movements and price discovery in futures and cash markets r isk transfer and price discovery are two of the major contributions of futures markets to the organization of economic activity working 1962 evans 1978 p 80 and silber 1981 risk transfer refers to hedgers using futures contracts to shift price risk to others price discovery refers to the use of futures prices for pricing cash market transactions working 1948 wiese 1978 p 87 and lake 1978 p 161 the significance of both contributions depends upon a close relationship between the prices of futures contracts and cash commodities this paper examines the characteristics of price movements in cash or spot markets and futures markets for storable commodities section ii presents an analytical model of simultaneous price dynamics which suggests that over short intervals of time the correlation of price changes is a function of the elasticity of arbitrage between the physical commodity and its counterpart futures contract greater elasticity fosters more highly correlated price changes and thereby facilitates the risk transfer function the elasticity of supply of arbitrage services is constrained by among other things storage and transaction costs thus futures contracts will not in general provide perfect risk transfer facilities over short time horizons the essence of the price discovery function of futures markets hinges on whether new information is reflected first in changed futures prices or in changed cash prices hoffman 1932 pp 258259 the model in section ii provides a framework for analyzing whether one market is dominant in terms of information flows and price discovery in section iii we develop a model based on section ii which is appropriate for estimating the lead lag relationship between cash prices and futures prices section iv presents empirical estimates of the parameters of the model for seven different storable commodities wheat corn oats frozen orange juice concentrates copper gold and silver the cost of arbitrage between cash and futures differs across these commodities for this reason we are not surprised to find inter commodity differences in the correlation of short run price changes and in the substitutability of futures contracts for cash market positions with respect to the price discovery function of futures markets we find that while futures markets dominate cash markets cash prices do not merely echo futures prices there are reverse information flows from cash markets to futures markets as well

a comparison of petroleum futures versus spot prices as predictors of prices in the future abstract even though studies have indicated that the futures market leads the spot market in price discovery this paper hypothesizes that the predictive significance of each should be the same a number of different statistical tests are presented to test this hypothesis when deseasonalized data is employed the predictive significance of each series is found to be the same but when actual prices are employed futures prices did correctly anticipate the observed seasonal pattern

the relationship between spot and futures oil prices do structural breaks matter abstract this paper examines the effect of structural breaks on the spot futures oil prices relationship we explore the impact of structural breaks on four critical issues including cointegrating relationships market efficiency under the expectation hypothesis and the no arbitrage rule causalities and forecasting performance of futures oil volatility as far as our empirical results exhibit the structural break we detect endogenously causes some influences on these issues which is in sharp contrast to the conclusions of existing studies our findings offer some implications and suggestions to researchers investors and policymakers

default premiums in commodity markets theory and evidence we model the effect of nonperformance risk on forward and futures pricing and look for evidence of nonperformance risk in precious metals futures prices from the hunt brothers episode changes in default premiums are measured and related to the sequence of events in the metals markets during this period results suggest first that ex ante costs of nonperformance can be a significant priced factor in commodity markets and second that the arrival of new information is often associated with changes in these costs the evidence has implications for both theoretical and empirical research on commodity markets organized commodity markets offer traders an efficient medium in which to execute their hedging and speculative strategies in particular the markets have developed mechanisms that reduce the costs of nonperformance which would be substantial in the absence of an organized exchange devices such as margin requirements position limits daily marking to market price limit moves and the clearinghouse reduce the expected costs of distress and default in commodity markets while organized exchanges greatly reduce expected costs of nonperformance they do not eliminate such costs throughout the history of organized futures trading there have been many instances of markets collapsing or coming to the brink of collapse after a period of unusual trading activity the most prominent example in recent times is the near collapse of the new

an investigation of the determinants of profitability in new zealand manufacturing industries in 1986 87 the empirical investigation of the structure condust performance relationship has had to grapple with the problem that higher than usual profitability might arise from superior production efficiency or alternatively from markets subject to lower competitive pressures as such the nature of investigation has evolved over time to include the market power efficiency debate and the new industrial organisation emphasis on the joint determination of profitability and market structure the purpose of this paper is to present some new zealand evidence with a unique feature being to include a measure of firm level efficiency in a disaggregated model estimated using firm level data the results suggest both market power and efficiency play a role in determining profitability although efficiency dominates

reexamining intraday simultaneity in stock index futures markets abstract this note examines three empirical examples involving intraday dynamic relationships associated with stock index futures markets researchers often employ a vector autoregressive var model to analyze such high frequency transactions data while such a model can provide useful information regarding the nature of causal priority inherent in the data it is not the proper model to investigate the structural relationships of interest because it omits the contemporaneous interaction on the other hand a var model specification which is altered to incorporate simultaneity may enable the data to reveal the structural relationships of interest

an analysis of price discovery between bitcoin futures and spot markets abstract this paper analyzes the bitcoin price discovery process we collect data on futures and spot prices for the period december 2017 to may 2018 and compute hasbrouck s information share and gonzalo and granger s common factor component to quantify the contribution of each market to the price discovery process both measures coincide in suggesting that the bitcoin futures market dominates the price discovery process we also find that both prices are driven by a common factor that is given by a weighted combination of the futures and spot market finally we observe that deviations from the equilibrium condition equating the futures and spot log price have predictive ability for the return on the bitcoin spot price but not on the futures price

how smooth is price discovery evidence from cross listed stock trading abstract the adjustment to parity can be nonlinear for a cross listed pair convergence may be quicker when the price deviation is sufficiently profitable we propose a threshold error correction model ecm to gauge the market respective information shares of canadian listings traded on the toronto stock exchange tsx and the new york stock exchange nyse since dynamics may alternatively be gradual we further generalize the threshold framework to a smooth transition ecm the empirical implications are as follows first the tsx and the nyse appear to have integrated over time second parity convergence accelerates upon discounts on the cross listings on the nyse third we find a larger feedback from the nyse if the price gap exceeds the threshold required arbitrage return fourth informed traders tend to cluster on the nyse upon discounts on the cross listings fifth information share and threshold are affected by the relative degree of private information market friction and liquidity measures firm level characteristics and aggregate risks

incentives in principal agent relationships this article identifies some of the major issues that have been examined in the literature on incentives the article begins by discussing the frictions that lie at the heart of incentive problems next the principal s optimal response to these frictions is explored taking as given the characteristics of the agents with whom the principal interacts in a nonrepeated setting the design of individualized contracts contests and tournaments is analyzed then the principal s task of selecting the best agent is addressed and repeated agency relationships are considered

the role of trader positions in spot and futures prices for wti abstract we extend the analysis of causal relations between trader positions and oil prices and the process of price discovery by estimating a cointegrating vector autoregression cvar model that expands the cash and carry relation between spot and futures prices to quantify long and short run relations among oil prices trader positions interest rates and oil inventories results indicate that oil inventories and trader positions are needed to generate cointegration between spot and futures prices the presence of trader positions and oil inventories suggest that both play a role in price discovery furthermore the cointegrating relation for price loads into the equation for both oil prices and trader positions this suggests a bi directional simultaneous adjustment process between oil prices and trader positions this expands the unidirectional causal relation from oil prices to trader positions that is generated by previous studies additional results suggest that price discovery occurs in the market for heavily traded near month futures contracts but discovery for thin far month futures markets occurs in the spot market together these results suggest mechanisms by which speculation could affect oil prices but the results presented here are moot regarding their effects

how reliable are hog futures as forecasts the chicago mercantile exchange hog futures contract was revamped in 1997 and it is one of the largest futures markets for a nonstorable commodity the literature is divided on whether or not futures prices for nonstorables provide reliable forecasts of cash prices we find that from 1998 to 2004 the hog futures market was an unbiased predictor of cash prices copyright 2008 oxford university press

international price discovery in finnish stock index futures and cash markets abstract this paper investigates empirically how the information of the world s stock markets is reflected in the thin finnish stock index futures and cash markets the world wide returns seem to have a significant leading ability for predicting finnish stock index futures returns however this kind of causal relation is not observed between the world wide and stock market returns the finnish stock index futures returns then show significant granger causality with finnish stock market returns the stock market being the lagging one the relationship is improved by allowing the association between markets to be different for positive and negative returns the findings of this study suggest short selling restrictions and other market frictions to be a significant factor leading to a delay in the pricing process in the stock market

price discovery in energy markets abstract in this study we empirically analyze the price discovery process in the futures and spot markets for crude oil heating oil and natural gas using daily closing prices we use two different information share measures that are based on the methods proposed by gonzalo and granger 1995 and lien and shrestha 2014 both measures indicate that almost all the price discovery takes place in the futures markets for the heating oil and natural gas however for the crude oil the price discovery takes place both in the futures and spot markets as a whole our study indicates that futures markets play an important role in the price discovery process

the impact of us economic variables on bank of canada policy direct and indirect responses abstract the impact of us economic variables on canadian monetary policy is assessed using quarterly data for 1963 88 canadian monetary base growth is regressed upon the least squares predictors of 11 us and canadian variables using a generalized least squares procedure that permits isolation of i direct responses by the monetary authority to its expectations of the us variables and ii indirect responses to past us influences that impact upon the current fitted values of the canadian variables the results reveal significance of both direct and indirect us influences on canadian policy across fixed and floating exchange rate regimes

a reinterpretation of the modern theory of forward exchange rates the modern theory of forward exchange rate determination mt has been widely although not unanimously accepted as an improvement over the traditional interest rate panty theory irpi the latter theory contends that in equilibruim the forward rate f will equal except for transactions costs the interest panty forward rate f 1 covered interest arbitrage cia is a pnmary but as shall be seen not the only force insunng this equilibnum condition for the forward market for example if f exceeds f then covenng arbitrageurs borrow or forego lending in the domestic country purchase the foreign currency on the spot market lend abroad at the foreign interest rate and simultaneously sell the foreign currency including interest on the forward market these transactions cause f to decline and or f to increase until equilibnum is restored motivated in part by early empincal studies of the irpi which found evidence of apparent deviations of f from f and by the intuitively appealing argument that expectations or speculation can also influence f the mt suggests that the equilibrium forward rate is better explained as a weighted average of f and the expected

price discovery in oil markets a time varying analysis of the 1990 1991 gulf conflict abstract this study examines the behaviour of crude oil spot and futures markets in the uk and usa during the 1990 1991 gulf conflict the objective is to investigate the relative ability of spot and futures markets to impound information this is achieved with the use of a generalized model of price discovery which represents a synthesis of the two most commonly used methodologies in its field emphasis is placed on the time varying nature of price discovery relationships results indicate that such relationships are strongly temporal these findings offer new insights into the nature of relationships between spot and futures markets

hedging effectiveness of fertilizer swaps the fertilizer swaps market is a potential tool to protect against fertilizer price risk the swaps evaluated here are cash settled using the fertilizer index hedge ratios and hedging effectivenes

stock index futures mispricing profit opportunities or risk premia this paper reports empirical evidence on stock index futures pricing based on about four years of synchronous hourly data from the uk reported index values are based on firm quotes identified arbitrage opportunities are therefore actually exploitable and economically significant the analysis controls for cash market settlement procedures the results show that ex ante trading rules would have generated attractive profits after transaction costs and after the risks of dividend uncertainties marking to market and possible delays in execution are considered the far contract and the near contract tend to be mispriced in the same direction the mild tendency of futures to be overpriced in rising markets and underpriced in falling markets appears to be unimportant finally significant positive relationships are observed between the absolute magnitude of mispricing and time to maturity and between mispricing and index option implied volatility

assessing the role of futures position substitutability in a monthly slaughtered pork factor demand by us processors a cointegrated var model approach abstractthis article combines cointegrated var modelling with basic neoclassical production microeconomics in a new way that tests for and illuminates the empirical nature of the monthly us pork processing sector s factor demand for slaughtered pork statistical evidence strongly suggests that the us pork processing sector has a hicksian cobb douglas slaughtered pork demand that arises from applying shephard s lemma to the sector s cost function and that us pork processors treat slaughtered pork and related futures positions as close factor substitutes in the wake of major and ongoing futures market events and trends this study establishes and statistically tests a theoretical link between futures price movements and impacts on the underlying slaughtered pork market through monthly formation of us pork processors factor demand for slaughtered pork evidence suggests that demand agents shift between demands for the two substitutes based on movements in the slaughter futures price ratio that results in

how well does the weighted price contribution measure price discovery abstract the weighted price contribution wpc is a popular measure for price discovery this paper examines the theoretical properties and empirical performance of the wpc in sequential markets the benchmark used to judge the wpc is the information share is measure based on the variation of the efficient price we derive the asymptotic value of the wpc which is a complex combination of the unconditional means and variances of the returns of sequential markets under the assumption of normality we show that the wpc correctly converges to the is only when the returns are uncorrelated with zero means our theoretical predictions based on normality hold well in simulations and in empirical analyses of the overnight price discovery for the s p 100 index and its constituent stocks as the correlation between overnight and daytime returns increases the wpc deviates from the is substantially

a note on the predictability of finnish stock market returns evidence from stock index futures markets abstract this paper provides further evidence on the predictability of the finnish stock market returns the results show the significant role of index futures returns as an important vehicle in stock market return and volatility prediction

the missing link in budget models of nonprofit institutions two practical dutch applications the dutch government health insurance associations and research boards allocate budgets to nonprofit institutions hospitals universities based on general indicators inhabitants admissions or students with these budgets the top management of each institution the principal allocates the funds using general indicators to distribute the money further down to the base at the base of the nonprofit institutions the professionals the agents perform a spectrum of specific tasks tension around the budgetting process exists between top management and professionals this paper resolves the tension along the research lines of burton and obel 1995 by measuring in money terms the specific tasks of the professionals of universities and hospitals at the base and by reconsidering the theoretical background of the internal budget system the study also develops the missing link in an integral external and internal budget system by integrating the managerial and professional decisions or the input output decisions in one approach

regulated competition in health care with or without a global budget abstract a major dilemma with respect to market oriented health care reforms is that politicians strongly focus on cost containment in the sense of stabilizing the fraction of gross national product to be spent on health care however we can not exclude the option that more competition will yield higher total health care costs this might induce politicians to put a global budget on health care expenditures in this paper we focus on the question whether regulated competition in health care should not be combined with a global budget

oil price dynamics and speculation a multivariate financial approach abstract this paper assesses empirically whether speculation affects oil price dynamics the growing presence of financial operators in the oil markets has led to the diffusion of trading techniques based on extrapolative expectations strategies of this kind foster feedback trading that may cause considerable departures of prices from their fundamental values we investigate this hypothesis using a modified capm following shiller 1984 and sentana and wadhwani 1992 first a univariate garch 1 1 m is estimated assuming the risk premium to be a function of the conditional oil price volatility the single factor model however is outperformed by the multifactor icapm merton 1973 which takes into account a larger investment opportunity set analysis is then carried out using a trivariate ccc garch m model with complex nonlinear conditional mean equations where oil price dynamics are associated with both stock market and exchange rate behavior we find strong evidence that oil price shifts are negatively related to stock price and exchange rate changes and that a complex web of time varying first and second order conditional moment interactions affects both the capm and feedback trading components of the model despite the difficulties we identify a significant role played by speculation in the oil market which is consistent with the observed large daily upward and downward shifts in prices a clear evidence that it is not a fundamental driven market thus from a policy point of view given the impact of volatile oil prices on global inflation and growth actions that monitor speculative activities on commodity markets more effectively are to be welcomed

default risk in futures markets the customer broker relationship the traditional view of the futures clearinghouse as an insurer that eliminates the need for customers to evaluate default risk is inaccurate a clearinghouse member default in 1985 confirms that the clearinghouse only guarantees payment from member to member not from customer to customer or member to customer thus non defaulting customers are subject to losses as a result of the action of individuals with whom thay have no contractual obligations this study models the behavior of customers choosing a futures commission merchant fcm given the current legal position of the clearinghouse in a single period model with symmetric information customers can eliminate their exposure to defaults of other customers or of their fcm only by choosing to trade through boutique undiversified fcms in practice monitoring and rebalancing costs may impede the attainment of zero default risk however fcm diversification remains an important factor in customer choice of an fcm when setting capital requirements clearinghouses and government regulators need to consider the implications of diversification for both customer and market protection futures markets provide a well recognized service to the economy by allowing for broader access to the means for reducing risk futures markets are distinguished from forward markets largely by the role played by the clearinghouse and its members the clearinghouse has been viewed by telser and higinbotham 1977 black 1976 edwards 1983 and others as providing an important insurance function each trader need not worry about the risk of default by the other side of the contract because the clearinghouse presumably plays the short for every long and long for every short traders need only be concerned about the ability of the clearinghouse to live up to the terms on the futures contract one feature believed to enhance confidence in the clearinghouse is the requirement that margin be posted at the clearinghouse by each side of the contract see telser 1981 garbade and silber 1983 and brennan 1986 given daily resettlement on futures contracts if one side of the contract defaults the clearinghouse can close the position and use the margin to satisfy the other side of the contract in practice the clearinghouse requires only that the broker or futures commission merchant fcm post the margin and within some constraints leaves the fcm to set requirements with its own customers

futures markets cognitive ability and mispricing in experimental asset markets we study the effect of a futures market in which contracts maturing in the last period of the life of the asset can be traded our experiment has two treatments one in which a spot market operates on its own and a second treatment in which a spot and a futures market are active simultaneously futures markets lower spot prices but increase price volatility the futures markets themselves exhibit considerable overpricing individuals with higher cognitive reflection test crt scores achieve greater earnings and tend to sell in the overpriced futures market while traders with lower crt scores make purchases in the futures market greater average crt score among a group of traders is associated with better price discovery when no futures market is present but there is no such relationship in the presence of a futures market modified measures of crt which take into account different types of incorrect responses are introduced

the effect of the financial sector on the evolution of oil prices analysis of the contribution of the futures market to the price discovery process in the wti spot market abstract the aim of this article is to empirically measure the contribution of the futures market to the price discovery process in the spot market for benchmark crude oils specifically that for west texas intermediate wti for this purpose we test the hypothesis that the recent evolution of the financial markets has affected the future oil market so as to increase its contribution to the price discovery process of the spot market we modeled the relation between wti spot and future prices as a cointegration relation by using the kalman filter technique it was possible to obtain a time varying measure of the contribution of future markets to the price discovery mechanism the results show that in the case of wti the contribution of the futures market has been increasing especially between 2003 and 2008 and then again after the start of 2009 evidencing the growing importance of factors particular to the financial markets in determining oil prices in recent years during 2009 the spot prices adjusted to agents future expectations rather than to the current supply and demand conditions

money and politics in a small open economy a time series analysis indicates monetary growth and the gallup poll in canada are systematically related at electoral cycle periodicities 5 to 20 quarters under flexible exchange rates and demonstrates the absence of an electoral component in canadian monetary growth under fixed rates these results confirm empirically a widely accepted extension of the mundell fleming argument that monetary policy is effective only under flexible rates which to my knowledge has not before been directly investigated international constraints on the small open economy under fixed rates lead to the abandonment of monetary policy as an active instrument in electoral politics

budgets as dynamic gatekeepers most large organizations allocate resources by means of fixed budgets each subunit is normally entitled to spend a defined amount over a fixed period usually one year fixed budgets create clear incentives for subunits to control costs yet such arrangements create major incentives for dynamic inefficiency for example by encouraging subunits to exhaust their budgets toward the end of the fiscal year this paper develops a dynamic optimization model to examine the incentives fostered by budget systems it invokes the metaphor of physicians involved in a health care delivery system to examine incentives created by decentralized gatekeeping as a mechanism to control medical costs the paper also discusses some methods to reduce the incentives for dynamic inefficiency that fixed budgets create

a theory of price limits in futures markets abstract the existence of price limits in certain futures markets is explained by demonstrating that price limits may act as a partial substitute for margin requirements in ensuring contract performance their effectiveness is a decreasing function of the amount of information available to traders about the equilibrium futures price which is unobservable in the event of a limit move and the theory predicts that no limits will exist in the markets for financial futures actual limits are broadly consistent with the theory his interpretation plausible as it was was totally misleading with the dangerous verisimilitude of a theory which will fit all or nearly all the facts and yet more entirely miss the truth by a mere accident then would a frank perplexity heritage v sackville west