a semiparametric approach to short term oil price forecasting abstract in this paper it is shown how the garch properties of oil price changes can be employed to forecast the oil price distribution over short term horizons the forecasting methodology is semiparametric and it is based on the bootstrap approach the results of an out of sample forecasting exercise carried out using the brent oil price series suggest that the forecasting approach can be used to obtain a performance measure for the forward price in addition to compute interval forecasts for the oil price

quality based competition profitability and variable costs we consider the impact of variable production costs on competitive behavior in a duopoly where manufacturers compete on quality and price in a two stage game in the pricing stage we make no assumptions regarding these costs other than that they are positive and increasing in quality and no assumptions about whether or not the market is covered in the quality stage we investigate a broad family of variable cost functions and show how the shape of these functions impacts equilibrium product positions profits and market coverage we find that seemingly slight changes to the cost function s curvature can produce dramatically different equilibrium outcomes including the degree of quality differentiation which competitor is more profitable the one offering higher or lower quality and the nature of the market itself covered or uncovered our model helps to predict and explain the diversity of outcomes we see in practice something the previous literature has been unable to do

equilibrium in auctions with entry the authors model entry incentives in auctions with risk neutral bidders and characterize a symmetric equilibrium in which the number of entrants is stochastic the presence of too many potential bidders raises coordination costs that detract from welfare the authors show that the seller and society can benefit from policies that reduce market thickness i e the relative abundance of buyers their analysis extends well known revenue equivalence and ranking theorems but also demonstrates that variations in the auction environment affect optimal policies e g reservation prices in ways not anticipated by models that ignore entry copyright 1994 by american economic association

a weak form evaluation of the efficiency of the rotterdam and italian oil spot markets abstract we examine whether the efficient market hypothesis can be applied to the rotterdam and italian oil markets by analysing the log price changes observed in those markets for monthly data during the period january 1980 to december 1987 the objective is to investigate the leptokurticity in observed distributions of low price changes the stable paretian distributions have been used to test the leptokurtic distributions

multidimensional incentive compatibility and mechanism design abstract incentive compatibility conditions are characterized in general for problems in which several goods are to be allocated and agents types are multidimensional two questions of monopoly pricing under multidimensional uncertainty are then analyzed first we find the optimal nonlinear pricing scheme when the monopolist knows only the distribution of an arbitrarily parameterized family of demand curves and second we solve for the optimal bundling policy for a multiproduct monopolist

a price setting newsvendor problem under mean variance criteria the single product single period newsvendor problem with two decision variables namely price and stock quantity is considered the performance measure in addition to the expected revenue includes the variance of the income scaled with a risk parameter we present conditions for the concavity of this risk sensitive performance measure and the uniqueness of the optimal solution for both risk averse and risk seeking cases under the additive demand model and compare the results to others previously published these conditions are introduced in terms of the lost sales rate elasticity furthermore we provide numerical examples that aim to endorse the theoretical results herein explained

quality investment and price decision in a risk averse supply chain abstract in this paper we investigate quality investment and price decision of a make to order mto supply chain with uncertain demand in international trade due to volatility of orders from buyers the supplier and the manufacturer in the supply chain are subject to financial risk in contrast to the general assumption that players in a supply chain are risk neutral in quality investment and price decision we consider the risk averse behavior of the players in three different supply chain strategies vertical integration vi manufacturer s stackelberg ms and supplier s stackelberg ss the study shows that both supply chain strategy and risk averse behavior have significant impacts on quality investment and pricing compared to a risk neutral supply chain a risk averse supply chain has lower same and higher quality of products in vi ms and ss respectively also we derive the conditions under which the supply chain strategy is implemented in a decentralized setting a numerical study is used to illustrate some related issues

the risk averse and prudent newsboy the effects of risk and risk aversion in the single period inventory newsboy problem are examined comparative static effects of changes in the various price and cost parameters are determined and related to the newsboy s risk aversion the addition of a random background wealth and of an increase in the riskiness of newspaper demand are also examined although many of the comparative effects generally are ambiguous some fairly simple restrictions on preferences and or risk increases are shown to lead to qualitatively deterministic results

the carry trade and fundamentals nothing to fear but feer itself the carry trade is the investment strategy of going long in high yield target currencies and short in low yield funding currencies recently this nave trade has seen very high returns for long periods followed by large crash losses after large depreciations of the target currencies based on low sharpe ratios and negative skew these trades could appear unattractive even when diversied across many currencies but more sophisticated conditional trading strategies exhibit more favorable payos we apply novel within economics binary outcome classication tests to show that our directional trading forecasts are informa tive and out of sample loss function analysis to examine trading performance the critical conditioning variable we argue is the fundamental equilibrium exchange rate feer expected returns are lower all else equal when the target currency is overvalued like traders researchers should incorporate this information when evaluating trading strategies when we do so some questions are resolved negative skewness is purged and market volatility vix is uncorrelated with returns other puzzles remain the more sophisticated strategy has a very high sharpe ratio suggesting market ineciency

time varying risk aversion an application to energy hedging abstract risk aversion is a key element of utility maximizing hedge strategies however it has typically been assigned an arbitrary value in the literature this paper instead applies a garch in mean garch m model to estimate a time varying measure of risk aversion that is based on the observed risk preferences of energy hedging market participants the resulting estimates are applied to derive explicit risk aversion based optimal hedge strategies for both short and long hedgers out of sample results are also presented based on a unique approach that allows us to forecast risk aversion thereby estimating hedge strategies that address the potential future needs of energy hedgers we find that the risk aversion based hedges differ significantly from simpler ols hedges when implemented in sample risk aversion hedges for short hedgers outperform the ols hedge ratio in a utility based comparison

the forward bias in the ecu peso risks vs fads and fashions abstract forward rates of european currencies against the private and official ecu exhibit a bias similar to the one found in other data the cumby obstfeld fama cof regression coefficients are systematically below unity and two thirds of them are negative we use the discount of the private ecu relative to the official ecu as a measure of market scepticism or mistrust in one view this sentiment is based on peso risk fears of realignments and possibly also the risk of a meltdown of the private ecu relative to the official one alternatively the discount just reflects fads and fashions dichotomizing the data on the basis of the size of the discount in the private ecu we find that the cof beta strongly depends on the degree of mistrust and that the negative cof coefficients are generated by typically less than 20 of the data but the pattern fits the fads and fashion view better than the peso theory if the sentiment factor contains a conventional risk premium at all then this risk premium is definitely not the one predicted by bansal bansal r 1997 an exploration of the forward premium puzzle in currency markets review of financial studies 10 369 403 nor is the sentiment factor proxying for huisman et al s huisman r koedijk k kool c nissen f 1998 extreme support for uncovered interest parity journal of international money and finance 17 211 228 transaction cost effects

the loss averse newsvendor game abstract this paper extends the standard newsvendor problem based upon risk neutrality to a game setting where multiple newsvendors with loss aversion preferences are competing for inventory from a risk neutral supplier we show that if the supplier allocates the total demand among the newsvendors proportional to their order quantities then there exists a unique nash equilibrium order quantity in this newsvendor game we also find that while the demand stealing effect increases the total order quantity of the newsvendors the loss aversion effect decreases the newsvendors total order quantity and if strong enough may lead to a lower total inventory level of the decentralized supply chain than that of an integrated supply chain

estimating and forecasting the real prices of crude oil a data rich model using a dynamic model averaging dma approach given that oil price fluctuations have been of great interest for macroeconomics in the recent years due to its important implications for future inflation economic growth and policy making the aim of this paper is to estimate and forecast west texas intermediate wti crude oil prices using a large monthly dataset that covers the period from march 1983 to december 2011 to achieve this aim forecasting with factor models offers a usual approach that utilizes large datasets however a forecasting model which simply includes all factors in state space equation and does not allow for time varying may be not suitable with a highly volatile market such as oil market to overcome these limitations an approach that accounts both for parameter and model uncertainty is employed in particular this study uses the dynamic model averaging dma approach suggested by koop and korobilis 2012 the key element of the dma approach is that it allows both for model and parameter to vary at each point of time by doing so the dma is robust to structural breaks empirical findings show that dma approach outperforms any other alternative model used in the forecasting exercise results also show that there is model but not parameter variation in this oil price forecasting exercise finally the findings suggest that the dma approach provides a better proxy of expected spot prices than future prices

using non linear methods to search for risk premia in currency futures abstract this paper uses currency futures prices to test the joint null hypotheses of rational expectations and absence of a time varying risk premium in the foreign exchange market we find no linear predictability in the logarithm of futures price changes either using its own past or past interest differentials also we establish that there is no non linear predictability in log price changes conditioning on its own past or past interest rate differentials thus if a time varying risk premium exists in currency futures market it is not related to its own past or past interest rate differentials

coordinating advertising and pricing in a manufacturer retailer channel abstract cooperative advertising is a practice that a manufacturer pays retailers a portion of the local advertising cost in order to induce sales cooperative advertising plays a significant role in marketing programs of channel members nevertheless most studies to date on cooperative advertising have assumed that the market demand is only influenced by advertising expenditures but not by retail price this paper addresses channel coordination by seeking optimal cooperative advertising strategies and equilibrium pricing in a two member distribution channel we establish and compare two models a non cooperative leader follower game and a cooperative game we develop propositions and insights from the comparison of these models the cooperative model achieves better coordination by generating higher channel wide profits than the non cooperative model with these features a the retailer price is lower to consumers and b the advertising efforts are higher for all channel members we identify the feasible solutions to a bargaining problem where the channel members can determine how to divide the extra profits

var as a risk measure for multiperiod static inventory models abstract this paper explores the possibility to use value at risk var in the context of inventory management var is being used more and more in financial management as a natural measure of the risk taken with a given position in the framework of inventory management it can work as well after having built a decision model where the choice concerns the quantity to be ordered to face a random demand in order to optimize the expected result an expected cost to be minimized or an expected profit to be maximized the model explores the probability distribution of the result both via analytical methods and via simulation methods the analytical exploration of this problem has originated a general method to deduce from inequalities for distribution functions which are based on the expected value related tail inequalities which are particularly useful for var problems where only one tail is involved

risk premia carry trade dynamics and economic value of currency speculation in this paper we derive the dynamics and assess the economic value of currency speculation by formalizing the concept of a trader inaction range we show that exchange rate returns comprise a time varying risk premium and that uncovered interest parity uip holds in a speculative sense the often cited forward bias puzzle originates from the omission of the risk premium in standard uip tests consistent with its popularity among market professionals the carry trade strategy can be rationalized as it systematically collects risk premia and generates economic value when applied in multi currency portfolios

product and price competition in a duopoly this paper examines the role of consumer preferences costs and price competition in determining the competitive product strategy of a firm in the model studied here there are two identical firms competing on product quality and price they face consumers who prefer a higher quality product to a lower quality product but differ in how much they are willing to pay for quality the consumers can also choose a substitute if they don t like the product price offerings of the two firms for the firms a higher quality product costs more to produce than a lower quality product the paper shows that the equilibrium strategy for each firm should be to differentiate its product from its competitor with the firm choosing the higher quality choosing the higher margin as well this differentiation however is not efficient that is it is possible to choose two other products and offer them at prices that cover their marginal cost and still satisfy consumers needs better in the aggregate a monopolist by contrast would differentiate his product line efficiently this suggests that cannibalization has different effects on product strategy than competition the paper also shows that if one firm enters the market first then it can defend itself from later entrants and gain a first mover advantage by preempting the most desirable product position

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

does oil move equity prices a global view many studies indicate that oil price shocks have an adverse effect on real output and hence an adverse effect on corporate profits where oil is used as a key input the present study examines whether and to what extent the adverse effect of oil price shocks impacts stock market returns to this end we analyse 35 datastream global industry indices for the period from april 1983 to september 2005 our findings indicate that oil price rises have a negative impact on equity returns for all sectors except mining and oil and gas industries generally these results are consistent with economic theory and evidence provided by previous empirical studies little evidence of any asymmetry is detected in the oil price sensitivities in light of our findings we recommend that international portfolio investors consider hedging oil price risk

value at risk and inventory control the purposes of this paper are two fold on the one hand we shall provide a decision analysis justification for the value at risk var approach based on ex post disappointment decision making arguments we shall show that the var approach is justified by a disappointment criterion in other words the asymmetric valuation between ex ante expected returns above an appropriate target return and the expected returns below that same target level provide an explanation for the var criterion when it is used as a tool for var efficiency design second this paper provides applications to inventory management based on var risk exposure although the mathematical problems arising from an application of the var approach tuned to current practice in financial risk management are difficult to solve analytically solutions can be found by application of standard computational and simulation techniques a number of cases are solved and formulated to demonstrate the paper s applicability

technical note a risk averse newsvendor model under the cvar criterion the classical risk neutral newsvendor problem is to decide the order quantity that maximizes the one period expected profit in this note we consider a risk averse newsvendor with stochastic price dependent demand we adopt conditional value at risk cvar a risk measure commonly used in finance as the decision criterion the aim of our study is to investigate the optimal pricing and ordering decisions in such a setting for both additive and multiplicative demand models we provide sufficient conditions for the uniqueness and existence of the optimal policy comparative statics show the monotonicity properties and other characteristics of the optimal pricing and ordering decisions we also compare our results with those of the newsvendor with a risk neutral attitude and a general utility function

estimating oil price value at risk using the historical simulation approach abstract in this paper we propose using value at risk var for oil price risk quantification var provides an estimation for the maximum oil price change associated with a likelihood level and can be used for designing risk management strategies we analyse three var calculation methods the historical simulation standard approach the historical simulation with arma forecasts hsaf approach developed in this paper and the variance covariance method based on autoregressive conditional heteroskedasticity models forecasts the results obtained indicate that hsaf methodology provides a flexible var quantification which fits the continuous oil price movements well and provides an efficient risk quantification

optimal repeated purchases when sellers are learning about costs abstract a buyer repeatedly purchases some good suppliers privately learn their cost only upon producing at least once efficiency would imply sampling sellers until one is found with cost lower than a increasing with time reservation value then the good would be permanently purchased from the seller with lowest cost a sequence of second price auctions with participation premia and entry fees is shown to be both efficient and optimal for the buyer an alternative calls for price offers by informed sellers with compensations that increase in the offer in both cases the buyer subsidizes competition through participation premia or compensations journal of economic literature classification numbers d44 d83 l14

heterogeneous beliefs regret and uncertainty the role of speculation in energy price dynamics abstract this paper proposes to investigate the impact of financialization on energy markets oil gas coal and electricity european forward prices during both normal times and periods of extreme fluctuation by using an original behavioral and emotional approach with this aim we propose a new theoretical and empirical framework based on a heterogeneous agents model in which fundamentalists and chartists co exist and are subject to regret and uncertainty we find significant evidence that energy markets are composed of heterogeneous traders who behave differently depending on the intensity of the price fluctuations and the uncertainty context in particular energy prices are governed primarily by fundamental and chartist agents that are neutral to uncertainty during normal times whereas these prices face irrational chartist investors averse to uncertainty during periods of extreme fluctuations in this context the recent surge in energy prices can be viewed as the consequence of irrational exuberance our new theoretical model is suitable for modeling energy price dynamics and outperforms both the random walk and the arma model in out of sample predictive ability

pooling in dynamic panel data models an application to forecasting gdp growth rates in this article we analyze issues of pooling models for a given set of n individual units observed over t periods of time when the parameters of the models are different but exhibit some similarity pooling may lead to a reduction of the mean squared error of the estimates and forecasts we investigate theoretically and through simulations the conditions that lead to improved performance of forecasts based on pooled estimates we show that the superiority of pooled forecasts in small samples can deteriorate as the sample size grows empirical results for postwar international real gross domestic product growth rates of 18 organization for economic cooperation and development countries using a model put forward by garcia ferrer highfield palm and zellner and hong among others illustrate these findings when allowing for contemporaneous residual correlation across countries pooling restrictions and criteria have to be rejected when formally tested but generalized least squares gls based pooled for

an elasticity approach to the newsvendor with price sensitive demand we introduce a measure of elasticity of stochastic demand called the elasticity of the lost sales rate which offers a unifying perspective on the well known newsvendor with pricing problem this new concept provides a framework to characterize structural results for coordinated and uncoordinated pricing and inventory strategies concavity and submodularity of the profit function as well as sensitivity properties of the optimal inventory and price policies are characterized by monotonicity conditions or bounds on the elasticity of the lost sales rate these elasticity conditions are satisfied by most relevant demand models in the marketing and operations literature our results unify and complement previous work on price setting newsvendor models and provide a new tool for researchers modeling stochastic price sensitive demand in other contexts

a test for speculative bubbles in the sterling dollar exchange rate 1981 84 the u s dollar price of the u k pound sterling is tested for a speculative bubble defined as a period with a nonzero median in excessreturns a nonparametric procedure is developed which controls for data mining over the period of flexible exchange rates and finds a negative bubble in the excess return to holding sterling rather than dollar assets during the period 1981 84 possible interpretations arebootstrap equilibria rational bubbles nonsym metric fundamentals and nonrational expectations copyright 1986 by american economic association

demand signalling under unobservable effort in franchising linear and nonlinear price contracts we study the signalling strategy of a principal who is privately informed about its high demand potential to an uninformed risk neutral agent we analyze the model in the context of a contract between a franchisor and a franchisee we examine the distortions of a two part pricing scheme necessary to credibly inform the franchisee agent we also study whether the inability of the franchisor principal to observe the agent s effort moderates or exaggerates the distortions from the first best two part pricing scheme a surprising outcome is that even though the principal incurs greater signalling cost the magnitude of distortion in the two part scheme is smaller when service is unobservable than when it is not thus a signalling strategy employing the fixed and variable fees is harder to detect under moral hazard empirical studies failing to control for moral hazard may incorrectly conclude that signalling strategy does not occur we later consider a three part scheme to verify whether or not the schem

the component procurement problem for the loss averse manufacturer with spot purchase abstract this paper studies the purchasing behaviour of a loss averse engineer to order manufacturer who purchases a key component for his final product from a supplier under a single wholesale price contract with spot purchase opportunities where both the product demand and the component spot price are uncertain through newsvendor type of models we analyze several key issues including the effects of the manufacturer s loss aversion and the effects of demand and spot price uncertainties on the manufacturer s decision behaviour we find that the purchasing behaviour of the loss averse manufacturer differs from those of the risk neutral and risk averse ones specifically we identify some sufficient conditions under which the loss averse manufacturer may purchase a larger order quantity in advance when demand becomes more uncertain or when the price becomes more uncertain we also discuss the two wholesale price contract and show that fixing the emergency supply price may lead to a smaller order quantity

evaluating the risk premium in the u s a natural gas market evidence from low price regime abstractin recent years the u s a natural gas market has seen enormous changes the expectations of abundant supply of shale gas and the slow u s a economic recovery have pushed gas prices below us 4 mmbtu although shale gas is a new promising source of unconventional energy investors face uncertain investment plans in this study we investigate the risk premium by comparing behaviour before and after the change point in agents risk perception unlike traditional empirical research on risk premium we use the parametric two factor model of schwartz and smith 2000 to evaluate the implied risk premium term structure from futures prices traded on the new york mercantile exchange nymex we compare our findings with other empirical results and find that the change point lies at the beginning of the low price regime when we compare periods before and after the change point we observe that the risk premium changed not only in sign but also in magnitude

a multi product risk averse newsvendor with exponential utility function abstract we consider a multi product newsvendor using an exponential utility function we first establish a few basic properties for the newsvendor regarding the convexity of the model and monotonicity of the impact of risk aversion on the solution when the product demands are independent and the ratio of the degree of risk aversion to the number of products is sufficiently small we obtain closed form approximations of the optimal order quantities the approximations are as easy to compute as the risk neutral solution we prove that when this ratio approaches zero the risk averse solution converges to the corresponding risk neutral solution when the product demands are positively negatively correlated we show that risk aversion leads to lower higher optimal order quantities than the solution with independent demands using a numerical study we examine convergence rates of the approximations and thoroughly study the interplay of demand correlation and risk aversion the numerical study confirms our analytical results and further shows that an increased risk aversion does not always lead to lower order quantities when demands are strongly negatively correlated

testing the efficiency of the futures market for crude oil in the presence of a structural break the efficiency of the futures market for crude oil has been the subject of significant study with the basis regression representing a popular methodology however the parameters of this model are subject to a structural break casting doubt on any conclusion regarding the efficiency of the futures market to address this problem this article employs a simple generalization which is capable of testing the efficiency of a futures market in the presence of a structural break using this approach strong evidence of inefficiency is found in the one month futures contract for west texas intermediate for the period between 1985 and 2013 which is otherwise not detected

multi product newsvendor problem with value at risk considerations abstract we consider the single period stochastic inventory newsvendor problem with downside risk constraints the aim in the classical newsvendor problem is maximizing the expected profit this formulation does not take into account the risk of earning less than a desired target profit or losing more than an acceptable level due to the randomness of demand we utilize value at risk var as the risk measure in a newsvendor framework and investigate the multi product newsvendor problem under a var constraint to this end we first derive the exact distribution function for the two product newsvendor problem and develop an approximation method for the profit distribution of the n product case n 2 a mathematical programming approach is used to determine the solution of the newsvendor problem with a var constraint this approach allows us to handle a wide range of cases including the correlated demand case that yields new results and insights the accuracy of the approximation method and the effects of the system parameters on the solution are investigated numerically

testing the unbiasedness hypothesis in the forward foreign exchange market a specification analysis abstract this paper evaluates two popular regression methods of testing the unbiasedness hypothesis in the forward foreign exchange market for the 30 day canada united states forward foreign exchange market the evidence overwhelmingly indicates that it is inappropriate to treat the structure of the systematic and stochastic components of the test relations as constant over time hence conclusions inferred from parameter significance testing based upon full sample estimation can be very misleading accordingly we argue for a specification analysis of the test relations and more explicit modelling of market fundamentals

quality and competition in recent years the practitioner literature in operations management has seen a dramatic surge in articles on quality management it reflects the increased emphasis on quality by u s firms which has been attributed largely to increased competition faced by them the question of how quality is influenced by competitive intensity however has not received much attention either in the practitioner or the academic research literatures the notion of competitive intensity itself has not been defined precisely in this paper we develop formal models of oligopolistic competition to investigate whether equilibrium levels of quality increase as competition intensifies we consider three different competitive settings i asymmetric duopolistic competition where the dominant firm s intrinsic demand potential decreases ii a symmetric duopoly where the firms are precluded from cooperating in setting quality levels and iii symmetric oligopolistic competition where the number of firms increases we find that the relation between equilibrium quality and competitive intensity depends on what is understood by increased competition and in addition the relation is contingent on the values of parameters describing the cost and demand structure for the industry

impact of loss aversion on the newsvendor game with product substitution abstract this paper studies a newsvendor game in which two substitutable products are sold by two different retailers newsvendors with loss averse preferences each loss averse retailer facing stochastic customer demand and deterministic substitution rate will make an order quantity decision to maximize his expected utility since product substitution causes two retailers to make decisions in a competitive environment game theory is used to find the retailers optimal order quantities it is shown that under certain conditions there exists a unique nash equilibrium in the newsvendor game under a symmetry assumption each retailer s equilibrium order quantity is decreasing in the loss aversion coefficient and increasing in the substitution rate further if the effect of loss aversion on the order quantity is strong enough to dominate the effect of competition the total inventory level of a decentralized supply chain will be lower than that of a centralized supply chain numerical experiments are conducted to illustrate our results

the speculative efficiency hypothesis the hypothesis that forward prices are the best unbiased forecast of future spot prices is often presented in the economic and financial analysis of futures markets this paper considers the hypothesis independently of its implications for rational expectations or market efficiency and in order to stress this fact the term speculative efficiency is used to characterize the state envisaged under the hypothesis if a market is subject to efficient speculation the supply of speculative funds is infinitely elastic at the forward price that is equal to the expected future spot price the expected future spot price is a market price determined as the solution to the underlying rational expectations macroeconomic model although the paper is primarily concerned with testing this hypothesis in the foreign exchange market the methodology introduced in the paper is of general application to all futures markets this abstract was borrowed from another version of this item

pricing and the news vendor problem a review with extensions in the newsvendor problem a decision maker facing random demand for a perishable product decides how much of it to stock for a single selling period this simple problem with its intuitively appealing solution is a crucial building block of stochastic inventory theory which comprises a vast literature focusing on operational efficiency typically in this literature market parameters such as demand and selling price are exogenous however incorporating these factors into the mode l can provide an excellent vehicle for examining how operational problems interact with marketing issues to influence decision making at the firm level in this paper we examine an extension of the newsvendor problem in which stocking quantity and selling price are set simultaneously we provide a comprehensive review that synthesizes existing results for the single period problem and develop additional results to enrich the existing knowledge base we also review and develop insight into a dynamic inventory extension of this problem and motivate the applicability of such models

market information and price volatility in petroleum derivatives spot and futures markets some new york evidence abstract this paper examines the relationship between petroleum futures trading market information and spot prices it tests the hypothesis that there is increased spot market information with futures trading of various petroleum derivatives for weekly data during the period january 1970 to july 1985 at the new york mercantile exchange increased market information with futures trading is indicated by the insignificance of coefficients of past prices in spot price regressions in periods with futures trading however the estimates of the coefficient of variation indicate that price volatility tends to increase with futures trading thus traders seem better informed with futures trading although the advantages of increased market information might potentially be undermined by increased price volatility as in the case of regular gasoline

on sales effort and pricing decisions under alternative risk criteria abstract in the literature different risk criteria are proposed for risk averse decision making but it is often unclear which risk criteria should be used and what their differences may be this study investigates this problem when a risk averse make to order firm decides its pricing and sales effort two factors affecting demand we consider alternative risk criteria commonly used in the literature namely expected utility theory eut mean variance mv mean semideviation ms value at risk var conditional value at risk cvar and loss aversion la we find that all of these criteria lead to similar qualitative behaviors regarding how risk loss averse decisions deviate from risk neutral ones a particularly interesting result is that the form of demand randomness i e additive or multiplicative can completely reverse the effect of risk loss aversion in certain cases we also find that the risk aversion models i e eut mv ms var and cvar are essentially equivalent in inducing the same set of optimal solutions under adverse market states however loss aversion is a mild version of risk aversion in that the la model can only lead to a subset of the solutions generated by other models these results may not be valid for other applications such as the newsvendor pricing problem so we can conclude that the relationship between alternative risk criteria is case sensitive and should be evaluated more carefully

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

newsvendor solutions via conditional value at risk minimization abstract in this paper we consider the minimization of the conditional value at risk cvar a most preferable risk measure in financial risk management in the context of the well known single period newsvendor problem which is originally formulated as the maximization of the expected profit or the minimization of the expected cost we show that downside risk measures including the cvar are tractable in the problem due to their convexity and consequently under mild assumptions on the probability distribution of products demand we provide analytical solutions or linear programming lp formulation of the minimization of the cvar measures defined with two different loss functions numerical examples are also exhibited clarifying the difference among the models analyzed in this paper and demonstrating the efficiency of the lp solutions

a note on pricing with risk aversion abstract we consider the pricing problem of a risk averse seller facing uncertain demand demand uncertainty stems from buyers valuations being privately observed by imposing very mild restrictions on the distribution of buyers valuations an increasing generalized failure rate distribution and the bernoulli utility function we show that a risk averse seller will unambiguously post a lower price than a risk neutral counterpart

risk perception in psychology and economics abstract the concept of rationality has been basic to most economic analysis its content has been successively refined over the generations as applied to the static world of certainty it has turned out to be a weak hypothesis not easily refuted and therefore not very useful as an explanation though not literally a tautology but recent decades have seen the development of stronger versions applied to a world in which time and uncertainty are real among its most important manifestations have been criteria for consistency in allocation over time the expected utility hypothesis of behavior under uncertainty and what may be termed the bayesian hypothesis for learning that is the consistent use of conditional probabilities for changing beliefs on the basis of new information these hypotheses have been used widely in offering explanations of empirically observed behavior though as not infrequently in economics the theoretical development has gone much further than the empirical implementation these hypotheses have also been used increasingly in normative analysis as a component of benefit cost studies therefore frequently referred to as benefit risk studies the value of reducing mortality rates from diseases for example has been studied by assuming that choice of occupations is made inter alia by comparing wage differences with mortality differences

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

combining mean reversion and momentum trading strategies in foreign exchange markets abstract the literature on equity markets documents the existence of mean reversion and momentum phenomena researchers in foreign exchange markets find that foreign exchange rates also display behaviors akin to momentum and mean reversion this paper implements a trading strategy combining mean reversion and momentum in foreign exchange markets the strategy was originally designed for equity markets but it also generates abnormal returns when applied to uncovered interest parity deviations for five countries i find that the pattern for the positions thus created in the foreign exchange markets is qualitatively similar to that found in the equity markets quantitatively this strategy performs better in foreign exchange markets than in equity markets also it outperforms traditional foreign exchange trading strategies such as carry trades and moving average rules

revisiting the relationship between spot and futures oil prices evidence from quantile cointegrating regression article i nfo since most real decisions depend upon current market states or whether it is advantageous to the participants themselves this paper revisits the relationship between spot and futures oil prices of west texas intermediate covering 1986 to 2009 with an innovative approach named quantile cointegration different to previous perspectives we target the issues of cointegrating relationships causalities and market efficiency based on different market states under different maturities of oil futures in our empirical analysis except for market efficiency long run cointegrating relationships and causalities between spot and futures oil prices have significant differentials among futures maturities and the performances of spot oil markets furthermore the response of spot prices to shocks in 1 month futures oil prices is much steeper in high spot prices than in low spot prices this phenomenon is consistent with the prospect theory kahneman and tversky 1979 in that the value function is generally steeper for losses than for gains

a benchmark solution for the risk averse newsvendor problem in this paper we derive the first order conditions for optimality for the problem of a risk averse expected utility maximizer newsvendor we use these conditions to solve a special case where the utility function is any increasing differentiable function and the random demand is uniformly distributed this special case has a simple closed form solution and therefore it provides an insightful and practical interpretation to the optimal point we show some properties of the solution and also demonstrate how it can be used for assessing the newsvendor utility function parameters

optimal search auctions abstract we study the design of profit maximizing single unit auctions under the assumption that the seller needs to incur costs to contact prospective bidders and inform them about the auction with independent bidders types and possibly interdependent valuations the seller s problem can be reduced to a search problem in which the surplus is measured in terms of virtual utilities minus search costs compared to the socially efficient mechanism the optimal mechanism features fewer participants longer search conditional on the same set of participants and inefficient sequence of entry

rational expectations risk and efficiency in energy futures markets abstract conditional on the hypothesis that energy futures markets are efficient or rational this paper uses fama s 3 regression approach to measure the information in energy futures prices about future spot prices and time varying premiums the paper finds that the premium and expected future spot price components of energy futures prices are negatively correlated and that most of the variation in futures prices is variation in expected premiums

is the spot market for oil products efficient some rotterdam evidence abstract this paper presents evidence relating to the efficiency of the rotterdam market for oil products analysis of daily weekly and monthly price changes for gas oil during the period 1978 1983 results in the rejection of the efficiency hypothesis ie relative price changes have been serially dependent on the basis of this observation a very simple trading rule is developed this rule is tested out simulating market transactions during the first two quarters of 1984 the financial outcome of this game turns out to be rather rewarding

an analysis of intertemporal pricing for forward foreign exchange contracts an asset pricing model with an unobservable time varying risk premium is used to price forward foreign exchange contracts specifically the term spectrum of forward foreign exchange contracts is examined in order to focus on country specific and maturityspecific information the testable restrictions imposed by the model are consistent with both cross country and cross maturity forward contracts except at the short end of the maturity spectrum for cross country forward exchange rates this indicates that the intertemporal model is relatively robust in valuing forward contracts of different maturities and for different exchange rates but that it may fail when there are significant short term country specific shocks theoretical and empirical studies have demonstrated that the forward exchange rate incorporates a time varying risk premium in addition to an expected future spot exchange rate recent works by fama 9 and hodrick and srivastava 21 reveal the importance of the risk premium by showing that the variability in risk premiums exceeds the variability in expected change in spot exchange rates these results are very general in that they are based on the definition that equates the forward exchange rate to the expected future spot exchange rate and a risk premium term a logical but more demanding next step is to model and conduct specification tests of the risk premium itself the purpose of this paper is to use an intertemporal latent variable assetpricing model ilvm to examine the risk return characteristics of the term structure of forward foreign exchange contracts more specifically the ilvm is used to price various bilateral dollar forward exchange contracts for each maturity as well as the different maturities for each bilateral forward exchange contract the ilvm was first utilized by hansen and hodrick 16 and hodrick and srivastava 20 to examine forward exchange risk premiums the two studies are however confined to just one month forward exchange contracts in addition the studies yield conflicting results the application of the ilvm to other

the causal nexus between oil prices and equity market in the u s a regime switching model abstract the aim of this paper is to analyse the causal link between monthly oil futures price changes and a sub grouping of s p 500 stock index changes the causal linkage between oil and stock markets is modelled using a vector autoregressive model with time varying parameters so as to reflect changes in granger causality over time a markov switching vector autoregressive ms var model in which causal link between the series is stochastic and governed by an unobservable markov chain is used for inferring time varying causality although we do not find any lead lag type granger causality the results based on the ms var model clearly show that oil futures price has strong regime prediction power for a sub grouping of s p 500 stock index during various sub periods in the sample while there is a weak evidence for the regime prediction power of a sub grouping of s p 500 stock indexes the regime prediction non causality tests on the ms var model show that both variables are useful for making inference about the regime process and that the evidence on regime prediction causality is primarily found in the equation describing a sub grouping of s p 500 stock market returns the evidence from the conditional non causality tests shows that past information on the other series fails to improve the one step ahead prediction for both oil futures and stock returns

price delivery time guarantees and capacity selection this paper studies the impact of using delivery time guarantees as a competitive strategy in service industries where demands are sensitive to both price and delivery time we assume that delivery reliability is crucial and investment in capacity expansion is plausible in order to maintain a high probability of delivering the time guarantee a mathematical framework is proposed to understand the interrelations among pricing delivery time guarantee and capacity expansion decisions specifically an optimization model is developed to determine the joint optimal selection of these three important decision variables with an objective of maximizing the average net profit we characterize the optimal decisions and study their qualitative behaviors as various parameters change we further present a numerical example to illustrate how the results of our model can be used to provide useful managerial insights for selecting the best competing strategies for firms with different operating characteristics our model and results are also applicable to a make to order manufacturing environment

effects of speculation and interest rates in a carry trade model of commodity prices abstract the paper presents and estimates a model of the prices of oil and other storable commodities a model that can be characterized as reflecting the carry trade it focuses on speculative factors here defined as the trade off between interest rates on the one hand and market participants expectations of future price changes on the other hand it goes beyond past research by bringing to bear new data sources survey data to measure expectations of future changes in commodity prices and options data to measure perceptions of risk some evidence is found of a negative effect of interest rates on the demand for inventories and thereby on commodity prices and positive effects of expected future price gains on inventory demand and thereby on today s commodity prices

on the efficiency of futures markets another view abstract one definition of market efficiency holds that today s price of an item contains all the price information that there is about that item that is today s price contains information about people s expectations about the future however in estimating price equations analysts almost exclusively look to the past in developing price forecasting models this paper examines the question how do futures prices affect today s price for heating oil that is do futures markets add to the efficiency of markets by conveying information from the future to the present

the efficiency of the london metal exchange in this paper the three approaches available to test the hypothesis that the futures price is an unbiased predictor of future spot prices are utilized to analyze the efficiency of the london metal exchange for the period january 1975 december 1983 the first technique uses non overlapping observation and derives a test of this hypothesis using ols the second uses overlapping data and models explicitly the moving average process in the error structure using arma procedures the third uses a fiml technique to estimate a bivariate stochastic stationary process of the spot and futures prices and tests the unbiased predictor hypothesis in the form of complex non linear cross equation restrictions the results conform to the predictions of the unbiased predictor hypothesis regardless of the methodology and or data employed

market efficiency in agricultural futures markets market efficiency and unbiasedness are tested in four agricultural commodity futures markets live cattle hogs corn and soybean meal using cointegration and error correction models with gqarch in mean processes results indicate each market is unbiased in the long run although cattle hogs and corn futures markets exhibit short run inefficiencies and pricing biases models for cattle and corn outperform futures prices in out of sample forecasting results also suggest short run time varying risk premiums in cattle and hog futures markets

the implications of mean variance optimization for four questions in international macroeconomics abstract the hypothesis of mean variance optimization has powerful implications transcending particular methods used for variance covariance estimation 1 for conventional estimates of risk aversion substitutability between domestic and foreign securities is close to perfect in the sense that risk premiums are small in magnitude a few basic points and thus cannot explain much bias in forward rates 2 nevertheless as long as risk aversion is not zero foreign exchange intervention still affects the level of the exchange rate proportionately at least to asset supply changes 3 current account deficits also have effects 4 finally dollar depreciation should not be accompanied by appreciation of the mark against the franc

rational expectations risk and efficiency in the london metal exchange an empirical analysis there now exists a number of studies which reject efficiency of the london metal exchange as a joint null hypothesis of rational expectations and risk neutrality in this paper we investigate the presence of time varying risk premia in a number of metal price series conditional on the assumption of rationality our findings include evidence to suggest that forward prices contain information on future spot prices over and above the information contained in current spot prices that there is some evidence of time varying premia in the forward prices for tin and zinc and that the behaviour of these premia are intuitively plausible in particular there appears to be significant covariation between risk premia and the expected spot price change

crack spread hedging accounting for time varying volatility spillovers in the energy futures markets crude oil heating oil and unleaded gasoline futures contracts are simultaneously analysed for their effectiveness in reducing price volatility for an energy trader a conceptual model is developed for a trader hedging the crack spread various hedge ratio estimation techniques are compared to a multivariate garch model that directly incorporates the time to maturity effect often found in futures markets modelling of the time variation in hedge ratios via the multivariate garch methodology and thus taking into account volatility spillovers between markets is shown to result in significant reductions in uncertainty even while accounting for trading costs copyright 2002 john wiley sons ltd

speculative efficiency and risk premium in the market for foreign exchange abstract i show that while the unbiasedness hypothesis does not hold for the deutsche mark u s dollar exchange rate market during the period 1979 1986 a risk premium cannot be detected either in light of this inconclusiveness regarding the true model specification of exchange rate movements the davidson and mackinnon approach of selecting models from amongst non nested models is used to show that a model with risk premium is closer to the true specification than a model that implies unbiasedness

optimal search auctions with correlated bidder types abstract we study optimal auctions when contacting prospective bidders is costly and the bidders values are correlated although full surplus extraction is in general impossible we can construct a search mechanism that fully extracts the surplus with an arbitrarily high probability

risk aversion in inventory management traditional inventory models focus on risk neutral decision makers i e characterizing replenishment strategies that maximize expected total profit or equivalently minimize expected total cost over a planning horizon in this paper we propose a framework for incorporating risk aversion in multiperiod inventory models as well as multiperiod models that coordinate inventory and pricing strategies we show that the structure of the optimal policy for a decision maker with exponential utility functions is almost identical to the structure of the optimal risk neutral inventory and pricing policies these structural results are extended to models in which the decision maker has access to a partially complete financial market and can hedge its operational risk through trading financial securities computational results demonstrate that the optimal policy is relatively insensitive to small changes in the decision maker s level of risk aversion

accounting for forward rates in markets for foreign currency absteract forward and spot exchange rates between major currencies imply large standard deviations of both predictable returns from currency speculation and of the equilibrium price measure the intertemporal marginal rate of substitution representative agent theory with time additive preferences cannot account for either of these properties we show that the theory does considerably better along these dimensions when the representative agent s preferences exhibit habit persistence but that the theory fails to reproduce some of the other properties of the data in particular the strong autocorrelation of forward premiums since the advent of flexible exchange rates in the early 1970s a large body of statistical work has established that forward rates for major currencies are not optimal predictors of future spot rates relevant evidence is reported in studies by baillie lippens and mcmahon 1983 bekaert 1991 bilson 1981 boothe and longworth 1984 cumby 1988 cumby and obstfeld 1984 fama 1984 gregory and mccurdy 1984 hansen and hodrick 1983 hodrick and srivastava 1984 and korajczyk and viallet 1990 a more complete list of references is provided by hodrick 1987 these papers indicate that returns from speculation in forward and spot currency markets are predictable and that the predictable components vary considerably over time a number of alternative explanations have been offered for the predictable variation in foreign currency market excess returns kaminsky 1988 korajczyk 1985 and krasker 1980 suggest that infrequent extreme events may make returns appear predictable in small samples the so called peso problem lewis 1989 argues that rational learning following infrequent changes in the process governing equilibrium prices can explain part of the ex post predictability of currency returns froot and frankel 1989 and froot and thaler 1990 examine the hypothesis that market forecasts of future spot

mean downside risk and mean variance newsvendor models implications for sustainable fashion retailing abstract newsvendor models have been well established for studying supply chain management problems with fashionable products in this paper we explore the mean downside risk mdr and mean variance mv newsvendor models under both the exogenous and endogenous retail price decision cases we first construct analytical models with the mdr and mv objectives we then show that the analytical solution schemes for both the mdr and mv problems are the same with the measures for sustainability such as the expected quantity of goods leftover the expected sales to expected goods leftover ratio the rate of return on investment and the probability of achieving a pre determined profit target we proceed to compare the levels of sustainability by the fashion retailers which employ the mean risk and the risk neutral models insights are generated

the impact of monetary regime changes some exchange rate evidence abstract lucas has argued that coefficient changes can be explained by changing expectations caused by the policy regime shifts this paper provides evidence consistent with the lucas critique using an efficient markets news framework kalman filter results show that surprise relative u s monetary expansion is associated both with periods of u s depreciation and appreciation i show that variables representing changes in monetary policy regimes can explain a substantial fraction of the movements in the time varying parameter

on the predictive accuracy of crude oil futures prices abstract this paper evaluates the predictive accuracy of 1 3 6 9 and 12 month ahead crude oil futures prices for 1991 01 2001 12 in addition to testing for unbiasedness a naive forecasting model is constructed to generate comparable forecasts as benchmarks our empirical findings reveal that futures prices and naive forecasts are unbiased at all forecast horizons however the 1 and 12 month ahead futures prices are the only forecasts outperforming the naive suggesting their potential usefulness in policy making continuing political instability of the middle east and the inability of opec to offset market sentiment among other factors may in the future adversely affect the predictive accuracy of the 1 and 12 month ahead futures prices accordingly caution must be exercised when utilizing such prices as a forecasting tool

unbiasedness and time varying risk premia in the crude oil futures market abstract this paper presents some empirical evidence on market efficiency and unbiasedness in the crude oil futures market and some related issues on the basis of monthly observations on spot and futures prices of the west texas intermediate wti crude oil several tests are carried out on the relevant hypotheses the evidence suggests that futures prices are neither unbiased nor efficient forecasters of spot prices furthermore a garch m 1 1 model reveals the existence of a time varying risk premium

flexible exchange rates prices and the role of news lessons from the 1970s recent experience with flexible exchange rate systems has led to renewed interest in the operation of foreign exchange markets as reflected in many recent studies of the principal determinants of exchange rates the 1970s witnessed the dramatic alteration of the international monetary system from a regime of pegged exchange rates which prevailed for about a quarter of a century since the bretton woods conference into a regime of flexible though managed rates as a consequence of the emergence of the new legal and economic system traders national governments and international organisations were confronted with new economic problems choices and instruments during the 1970s ex change rates fluctuated widely and inflation rates accelerated the international monetary system had to accommodate extraordinarily large oil related shocks which affected trade flows in goods and assets huge oil payments had to be recycled uncertainties concerning future developments in international politics reached new heights and the prospects for the world economy got gloomier these developments placed unprecedented pressures on the markets for foreign exchange as well as on other asset markets they were associated with a large slide in the value of the us dollar and resulted in speeding up the creation of new institutions like the european monetary system which provided the formal framework for the management of exchange rates among members

a general equilibrium model for industries with price and service competition this paper develops a stochastic general equilibrium inventory model for an oligopoly in which all inventory constraint parameters are endogenously determined we propose several systems of demand processes whose distributions are functions of all retailers prices and all retailers service levels we proceed with the investigation of the equilibrium behavior of infinite horizon models for industries facing this type of generalized competition under demand uncertainty we systematically consider the following three competition scenarios 1 price competition only here we assume that the firms service levels are exogenously chosen but characterize how the price and inventory strategy equilibrium vary with the chosen service levels 2 simultaneous price and service level competition here each of the firms simultaneously chooses a service level and a combined price and inventory strategy 3 two stage competition the firms make their competitive choices sequentially in a first stage all firms simultaneously choose a service level in a second stage the firms simultaneously choose a combined pricing and inventory strategy with full knowledge of the service levels selected by all competitors we show that in all of the above settings a nash equilibrium of infinite horizon stationary strategies exists and that it is of a simple structure provided a nash equilibrium exists in a so called reduced game we pay particular attention to the question of whether a firm can choose its service level on the basis of its own input characteristics i e its cost parameters and demand function only we also investigate under which of the demand models a firm under simultaneous competition responds to a change in the exogenously specified characteristics of the various competitors by either i adjusting its service level and price in the same direction thereby compensating for price increases decreases by offering improved inferior service or ii adjusting them in opposite directions thereby simultaneously offering better or worse prices and service

inventory control with an exponential utility criterion a base stock policy is shown to be optimal when a dynamic version of the news vendor model is optimized with respect to an exponential utility criterion

rationality of survey data and tests for market efficiency in the foreign exchange markets abstract this paper tests the rational expectations hypothesis reh and the market efficiency hypothesis meh in the foreign exchange markets using survey data on expectations our results show that the spot exchange rates expected exchange rates and the forward rates all follow a random walk process hence the cointegration theory is employed to test the reh and meh all the test statistics support the reh but fail to support the meh we use survey data on expectations to identify the causes behind this failure of the meh jel f31 g14

a risk averse competitive newsvendor problem under the cvar criterion abstract we study a risk averse newsvendor problem with quantity competition and price competition under the conditional value at risk cvar criterion we characterize the optimal quantity and pricing decisions under both quantity and price competition for quantity competition we consider two demand splitting rules namely proportional demand allocation and demand reallocation although competition always leads to overstocking interestingly it does not necessarily lead to a profit loss in certain competitive environments such as demand reallocation by avoiding reducing overstocking that results from competition under the risk neutral criterion for price competition we consider both additive and multiplicative demand we find that the order quantity sale price and the expected profit decrease in the degree of risk aversion further both high price sensitivity and competition intensity force decision makers to lower their prices however high price sensitivity always reduces the order quantity while competition can have the opposite effect

technical note price setting newsvendor problems with uncertain supply and risk aversion the price setting newsvendor problem which models the economic trade offs associated with uncertain demand of a perishable product is fundamental to supply chain analysis however in settings such as agriculture there is significant economic risk associated with supply uncertainty we analyze how risk aversion and the source of uncertainty demand and or supply affect tractability and optimal decisions we find that concavity of the objective function is preserved under the introduction of risk aversion if the source of uncertainty is demand but it is not necessarily preserved if the source of uncertainty is supply we identify a structural difference that explains this result and show that this difference can lead to opposing directional effects of risk aversion on optimal decisions

multiple maturities and time varying risk premia in forward exchange markets abstract this paper derives the necessary conditions for an intertemporal optimization problem faced by an international investor who can enter forward contracts of several maturity dates and simultaneously borrow in domestic money markets the model parameters are estimated and the overidentifying restrictions are tested using hansen s proposed gmm technique the restrictions are strongly rejected when forward premia are used as instruments the risk neutral specification is rejected when expenditures on non durables and services are used as the consumption measure possible explanations for these rejections are provided

full extraction of the surplus in bayesian and dominant strategy auctions we consider auctions for a single indivisible object in the case where the bidders have information about each other which is not available to the seller we show that the seller can use this information to his own benefit and we completely characterize the environ ments in which a well chosen auction gives him the same expected payoff as that obtainable were he able to sell the object with full information about each bidder s willingness to pay we provide this characterization for auctions in which the bidders have dominant strate gies and for those where the relevant equilibrium concept is bayesian nash in both set ups the existence of these auctions hinges on the possibility of constructing lotteries with the correct properties we consider the situation in which an agent the seller possesses one indivisible unit of a good to which he attaches no value but the good has value to a number of potential buyers and its transfer to one of them would increase social welfare in particular the transfer to the buyer with the highest valuation maximizes social welfare in this paper we completely characterize environments in which the seller can design an auction that will enable him to capture for himself the full increase in social welfare induced by the transfer of the good to the bidder with the highest willingness to pay if the seller had full information about the reservation prices of potential buyers his optimal selling strategy would be very simple he would announce a price equal or very close to the highest reservation value the optimal strategy for the bidder with the highest evaluation would be to accept the offer note that we are treating a situation in which the seller can commit himself to a price as a result of the exchange the utility of the seller increases by the full amount of the increase in social welfare and he has been able to fully extract the surplus in many circumstances however a seller has only imperfect knowledge of the buyers willingnesses to pay in this case he must find some mechanism or auction which will enable him to maximize his benefit from the sale of the object the auction literature starts with this observation and shows how the seller can by an astute choice of auction extract the largest possible fraction of the surplus in general the literature has shown that this proportion is strictly less than one in some circumstances the bidders will have information about each other which is not available to the seller for instance in auctions for petroleum drilling rights bidders know the results of geological tests which they have