optimal taxation and finite horizon abstract within the blanchard blanchard o 1985 debt deficits and finite horizons journal of political economy 93 2 223 247 model we determine optimal capital and labor income taxation we discuss the conditions for non zero capital income taxation in the long term we make explicit the conditions for time consistent capital income taxation we clarify the role of finite horizon regarding second best optimal taxation

energy conservation investment do consumers discount the future correctly we argue that the apparently high discount rates attributed to investors making energy conservation investments are not irrational or the result of some market failure rather they may result from an investor recognizing that many conservation investments entail substantial sunk costs in the presence of these costs and uncertainty over future conservation savings consumers should use a higher hurdle rate for investment than if there were no uncertainty simulations suggest that the hurdle rate should be about four times greater than the standard rate an implication of our model is that tax subsidies for the purchase of conservation capital are likely to be ineffective we discuss alternative policy approaches which are more likely to increase energy efficient investment namely mandatory efficiency standards and energy taxes

metal volatility in presence of oil and interest rate shocks abstract this study uses three two factor volatility models of the garch family to examine the volatility behavior of three strategic commodities gold silver and copper in the presence of crude oil and interest rate shocks the results of the standard garch models suggest that gold and silver have almost the same volatility persistence which is greater than that of copper the cgarch estimates indicate that the short run transitory component of volatility converges to zero much faster for copper than for gold and silver in this sequence however the permanent volatility component demonstrates equally strong persistence in the long run for all three metals the egarch results suggest that the leverage effect is present and significant for copper only implying that gold and silver can be good investment in anticipation of bad times past oil shock does not impact all three metals similarly monetary policy and to leaser extent the oil shocks have calming effects on precious metals but not on copper if the t bill rate is used crises such as the 2003 iraq war heighten metal volatility these results have implications for derivatives valuations using gold as a reserve asset risk analysis and for the commodity exporting countries and commodity producing firms

technical evidence for assessing the performance of markets affecting energy efficiency abstract this paper focuses on the empirical basis for skepticism about the effectiveness of the market mechanism in promoting cost effective energy efficiency improvements we present a framework for evaluating engineering economic evidence on the diffusion of energy efficiency improvements and then present a series of examples within this framework that provide evidence for the existence of market imperfections related to energy efficiency we conclude with a challenge to economists policy analysts and technologists to take this empirical evidence seriously and sponsor further collaborative research in this area

options in the real world lessons learned in evaluating oil and gas investments many firms in the oil and gas business have long used decision analysis techniques to evaluate exploration and development opportunities and have looked at recent development in option pricing theory as potentially offering improvements over the decision analysis approach unfortunately it is difficult to discern the benefits of the options approach from the literature on the topic most of the published examples greatly oversimplify the kinds of projects encountered in practice and comparisons are typically made to traditional discounted cash flow analysis which unlike the option pricing and decision analytic approaches does not explicitly consider the uncertainty in project cash flows in this paper we provide a tutorial introduction to option pricing methods focusing on how they relate to and can be integrated with decision analysis methods and describe some lessons learned in using these methods to evaluate some real oil and gas investments

the efficiency paradox bureaucratic and organizational barriers to profitable energy saving investments abstract the paradox of why profitable energy saving investments are not undertaken continues to provoke debate the underlying phenomenon might be called the efficiency paradox because it represents a case in which business firms which are often presumed or taken axiomatically to be economically efficient make decisions that do not maximize profits new data from one of the us environmental protection agency s voluntary pollution prevention programs enables this paradox to be explored statistically the data show that both the level and variation in returns to lighting upgrade investments cannot be explained by standard economic models substantial gains in energy efficiency can be achieved without sacrificing profitability both economic and organizational factors account for some of the variation in observed returns to these investments but the results suggest a need for improved and more comprehensive theories of the investment behavior of firms and other organizations

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

oil and the macroeconomy since world war ii all but one of the u s recessions since world war ii have been preceded typically with a lag of around three fourths of a year by a dramatic increase in the price of crude petroleum this does not mean that oil shocks caused these recessions evidence is presented however that even over the period 1948 72 this correlation is statistically significant and nonspurious supporting the proposition that oil shocks were a contributing factor in at least some of the u s recessions prior to 1972 by extension energy price increases may account for much of post opec macroeconomic performance

market structure marketing method and price instability data for metals sold on commodity exchanges and at prices set by producers are used to test the relationship between the organization of markets and the behavior of prices on the production side the question is whether prices are more stable in concentrated industries and on the sales side the question is whether markets where buyers are consumers have more stable prices than those with consumers and speculators the recent increase in metal price instability is explained by changes in the market structure and organization variables foremost is increased reliance on commodity exchanges declines in concentration are of less importance

dependence and extreme dependence of crude oil and natural gas prices with applications to risk management abstract in this article we show how the copula garch approach can be appropriately used to investigate the conditional dependence structure between the crude oil and natural gas markets as well as to derive implications for portfolio risk management in extreme economic conditions using daily price data from january 1997 to october 2011 our in sample results show evidence of asymmetric dependence between the two markets the crude oil and gas markets tend to comove closely together during bullish periods but not at all during bearish periods moreover taking the extreme comovement into account leads to an improvement in the accuracy of the out of sample value at risk forecasts

short term variations and long term dynamics in commodity prices in this article we develop a two factor model of commodity prices that allows meanreversion in short term prices and uncertainty in the equilibrium level to which prices revert although these two factors are not directly observable they may be estimated from spot and futures prices intuitively movements in prices for long maturity futures contracts provide information about the equilibrium price level and differences between the prices for the short and long term contracts provide information about short term variations in prices we show that although this model does not explicitly consider changes in convenience yields over time this short term long term model is equivalent to the stochastic convenience yield model developed in gibson and schwartz 1990 we estimate the parameters of the model using prices for oil futures contracts and apply the model to some hypothetical oil linked assets to demonstrate its use and some of its advantages over the gibson schwartz model

oil price shocks and the dispersion hypothesis recent research by david lilien shows that a significant fraction of aggregate unemployment can be explained by the dispersion of employment growth across industries this paper presents two new results in this area first it is shown that a significant fraction of the variation in lilien s dispersion index is due to the differential impact of oil shocks across industries second and more important it is shown that once the dispersion in employment growth due to oil shocks is accounted for the residual dispersion has no explanatory power for unemployment

a neoclassical model of unemployment and the business cycle this paper investigates a general equilibrium model of unemployment and the business cycle in which specialization of labor plays a key role a rational expectations equilibrium with fully flexible wages and prices can exhibit unemployment in which the marginal product of employed workers exceeds the reservation wage of those who are without jobs workers are unemployed either because they are in the process of relocating for a better job or because they are waiting for conditions in the depressed sector to improve moreover seemingly small disruptions in the supplies of primary commodities such as energy could be the source of fluctuations in aggregate employment and can exert surprisingly large effects on real output

how high are option values in energy efficiency investments high implicit discount rates in consumers energy efficiency investments have long been a source of controversy in several recent papers hassett and metcalf argue that the uncertainty and irreversibility attendant to such investments and the resulting option value account for this anomalously high implicit discounting using their model and data we show that to the contrary their analysis falls well short of providing an explanation of this pattern

oil price shocks stock market economic activity and employment in greece abstract using a multivariate vector autoregression var approach this paper attempts to shed light into the dynamic relationship among oil prices real stock prices interest rates real economic activity and employment for greece the empirical evidence suggests that oil price changes affect real economic activity and employment oil prices are important in explaining stock price movements stock returns do not lead to changes in real activity and employment

oil and energy price volatility it is commonly believed that since the 1973 oil crisis oil and energy prices have been more volatile than other commodity prices this study examines monthly producer prices for thousands of products over the period january 1945 through august 2005 the results show that crude oil refined petroleum and natural gas prices are more volatile than prices for about 95 of products sold by domestic producers relative to crude commodities however crude oil prices are currently more volatile than about 65 of other products and oil price volatility first exceeded the median for crude commodities following the 1986 drop in oil prices

quantitative modelling of the eur chf exchange rate during the target zone regime of september 2011 to january 2015 krugman 1991 s target zone model for exchange rate dynamics has become the reference of a large part of this literature despite its simplicity and elegance empirical evidence has been lacking not least because it is difficult to capture the predicted non linear relationship between the observable exchange rate and the non observable fundamental value this is why we propose a different approach by inverting locally the relation between exchange rate and fundamental value we derive analytical expressions for the conditional volatility and the probability density as a function of the exchange rate this allows us to examine krugman s prediction directly from historical data and furthermore enables us to test the smooth pasting condition which is intimately related to the no arbitrage condition concretely we study the performance of the euro swiss franc exchange rate in the extraordinary period from september 6 2011 to january 15 2015 when the swiss national bank enforced a minimum exchange rate of 1 20 swiss francs per euro we show that the data are well explained by the theory and conclude that krugman s target zone model holds after all but apparently only under extreme and sustained pressure that pushes continuously the exchange rate very close to the boundary of the target zone

the impact of energy derivatives on the crude oil market we examine the effects of energy derivatives trading on the crude oil market there is a common public and regulatory perception that derivative securities increase volatility and can have a destabilizing effect on the underlying market consistent with this view we find an abnormal increase in volatility for three consecutive weeks following the introduction of nymex crude oil futures while there is also evidence of a longer term volatility increase this is likely due to exogenous factors such as the continuing deregulation of the energy markets subsequent introductions of crude oil options and derivatives on other energy commodities have no effect on crude oil volatility we also examine the effects of derivatives trading on the depth and liquidity of the crude oil market this analysis reveals a strong inverse relation between the open interest in crude oil futures and spot market volatility specifically when open interest is greater the volatility shock associated with a given unexpected increase in volume is much smaller

evaluating energy efficiency investments accounting for risk in the discounting process a prominent feature of the literature regarding the economics of energy conservation is the debate over the existence and nature of the so called efficiency gap a frequent subject of debate is whether consumers apply a reasonable discount rate when evaluating the future benefits of energy efficiency measures a key aspect of the discounting debate is the manner in which consumer attitudes toward risk are accounted for when discounting this paper suggests that an appropriate approach to incorporating risk into the evaluation of energy efficiency projects would yield higher net benefits to such projects than standard evaluation techniques we argue that analysing the purchase of fuel saving capital as though it were a standard investment in a physical asset obscures an important feature of the decision rather than deciding whether or not to invest in an asset with an uncertain future benefit stream the consumer is actually choosing between two future cost streams each of which is uncertain this seemingly minor change in perspective has important implications for how the risk associated with fuel saving capital should be brought into the discounting process an example based on lighting technologies is used to illustrate the principles discussed

analytical pricing of discretely monitored asian style options theory and application to commodity markets we compute an analytical expression for the moment generating function of the joint random vector consisting of a spot price and its discretely monitored average for a large class of square root price dynamics this result combined with the fourier transform pricing method proposed by carr and madan carr p madan d 1999 option valuation using the fast fourier transform journal of computational finance 2 4 summer 61 73 allows us to derive a closed form formula for the fair value of discretely monitored asian style options our analysis encompasses the case of commodity price dynamics displaying mean reversion and jointly fitting a quoted futures curve and the seasonal structure of spot price volatility four tests are conducted to assess the relative performance of the pricing procedure stemming from our formulae empirical results based on natural gas data from nymex and corn data from cbot show a remarkable improvement over the main alternative techniques developed for pricing asian style options within the market standard framework of geometric brownian motion

a utility based approach to energy hedging abstract a key issue in the estimation of energy hedges is the hedgers attitude towards risk which is encapsulated in the form of the hedgers utility function however the literature typically uses only one form of utility function such as the quadratic when estimating hedges this paper addresses this issue by estimating and applying energy market based risk aversion to commonly applied utility functions including log exponential and quadratic and we incorporate these in our hedging frameworks we find significant differences in the optimal hedge strategies based on the utility function chosen

oil and the macroeconomy when prices go up and down an extension of hamilton s results in an important paper hamilton 1983 demonstrated a strong correlation between oil price changes and gross national product growth in u s data however his study pertained to a period in which all the large oil price movements were upward and thus it left unanswered the question whether the correlation persists in periods of price decline moreover the price variable he used was somewhat distorted by price controls in the 1970s this note investigates whether hamilton s results continue to hold when the sample is extended to include the recent oil market collapse and the oil price variable is corrected for the effects of price controls particular attention is given to the possibility of asymmetric responses to oil price increases and decreases as suggested in the structural employment literature loungani 1986 davis 1987 hamilton 1988 like hamilton i based my investigation on the gnp equation in sims s 1 980b six variable quarterly vector autoregressive model